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    Greater China
     Mar 5, 2011

China: When the party is over
By Benjamin A Shobert

WASHINGTON - Every country has them, the internal paradoxes that both define its rise and equally seem ready to portend its fall.
The American system of government, namely the unique and delicate balancing act between the state and federal government, while something most now take for granted, was to outsiders for many years an internal disagreement and foundational incompatibility that would finally lead to dissolution of the Union. And, in fairness to those critics, as the Civil War so powerfully illustrated, it almost did.

It should come as no surprise that other countries face similar internal dilemmas; where something they deem to be an essential part of their success seemingly brings with it a set of problems

that those outside the country believe might well limit the country's future. Perhaps nowhere today is this tension more obvious than in China, where an insecure central government believes its legitimacy rides largely - if not wholly - on its ability to deliver significant improvements in the economic welfare for its citizens.

Even critics of China admit that the government has been very successful at fulfilling its part of this bargain. But this same success has both created new problems while also accentuating existing ones, such that many outside the country have begun to wonder how much longer the Chinese Communist Party's ability to stay in control can continue. Chief among these problems are China's rising income inequality and the fragile political institutions which exist for disaffected Chinese citizens to raise concerns and seek appropriate redress.

In late February, the US-China Economic and Security Review Commission (USCC) held a hearing to look at exactly these concerns, or as the commission stated, to "examine the social, economic, and political roots of protest in China and the Chinese Communist Party's response; the major challenges to stability in China; and implications for the United States".

Charted to look at how China's internal and external policies might impact US national security, the USCC has a unique interest in monitoring China's "Internal Dilemmas" and making recommendations to congress as to how American policy needs to adjust to reflect China's political realities.

As convened by the USCC, the panelists represented a group of experts on the specific question of how China manages the ongoing tensions between its political philosophy and economic reforms. Some who participated in the hearing clearly believe Beijing is fast approaching a moment in time when it can no longer hide behind economic growth as a stop-gap measure to more meaningful political reform.

Yet others who testified pointed to research which suggests that, while Chinese do harbor resentments and frustrations over political corruption and income inequality, they still see a bright future for themselves, and as such remain invested in maintaining the status-quo. While those who testified held a range of opinions, most agreed that the simple calculus post Tiananmen has been that the average Chinese will tolerate Beijing's heavy hand as long as the country's leadership can continue to deliver an improved standard of living.

As Yukon Huang, now with the Carnegie Endowment and formerly the World Bank director for China testified, "China's reform program over the past three decades has been predicated on the assumption that economic liberalization should precede political liberalization." And, it is worth noting, America's policy towards China has been predicated on the belief that the former will ultimately lead to the latter, an assumption now very much being reconsidered in Washington.

Critics of China believe the country faces at least three short-term challenges which have the potential to introduce political turmoil into the country: rising income inequality, too little meaningful political reforms, and China's national economic bubble getting popped. During the USCC hearing, the first two received the most attention, perhaps because each captures the intertwining of economics and politics that has animated so much of China's emergence into and embrace by the global community.

Among the most interesting research presented at the late February hearing was from Dr Martin Whyte, a sociology professor at Harvard University, and author of Myth of the Social Volcano. Whyte's analysis manages to both acknowledge the frustrations of China's rural and urban people while placing their frustrations in a global context against the backdrop of other industrialized nations as well as other post-socialist economies.

The results are, to put it mildly, not what one might expect. As Whyte testified about his research, "[it] challenges the widespread belief, within China and among many foreign analysts, that citizen anger over rising inequality increasingly threatens CCP rule".

Whyte acknowledges the fundamental question those who believe income inequality will trip up China's political stability when he asks, "Do Chinese citizens feel that the rising inequalities produced by post-1978 market reforms have made their society so unfair that CCP rule should no longer be tolerated?"

And Whyte has a clear response: "... my answer to this question is a resounding 'no!' Whatever popular grievances Chinese citizens have - and they are considerable - most accept the more unequal post-socialist order in which they now live as more fair than unfair, and as providing ample chances for the industrious and ambitious to raise their living standards and improve the lot of their families." And, to Whyte's way of looking at this question, "... for the most part current patterns of inequality constitute more a source of stability rather than instability for the regime".

How could this be? As Whyte and others who testified point out, the standard measure of income inequality known as the Gini coefficient, "went from an estimated Gini of 0.28 or less as the reforms were launched to 0.47 in 2007 - in other words, inequality of incomes across China has almost doubled in the post-Mao era."

Why does Whyte see this as a source of stability when others who testified, namely Yukon Huang, see this as a potential source of instability? Huang testified that, "Even with rapid growth, widening disparities are now threatening the fabric of society and aspects of the development process are leading to more conflicts on an individual as well as group basis."

The research Whyte shared as part of his USCC testimony sheds light on this disagreement. It shows that, while the income inequality in China is a real problem, it is taking place against the backdrop of a Chinese economy which is still creating new opportunities and as such, while income inequality may be a concern, it is a manageable one so long as incomes manage to continue rising.

When looked at from a purely empirical perspective, Whyte's research shows that those Chinese dissatisfied with the country's income inequality were actually "about the same as the percentage of Western Germans, British, and Japanese who felt income gaps were excessive ... and much lower than the share of residents of most other post-socialist societies who think income gaps in their societies are excessive".

On the whole, Whyte believes that while "Perceptions that national income gaps are too large are common around the world, Chinese citizens do not stand out as especially angry about such gaps, despite the sharp increase in income inequality in the PRC. And most Chinese do not view the inequalities in their immediate environments as unreasonable." But critics point towards China's ongoing problems with corruption as further cause of public resentment, to which Whyte testified that "China's record of sustained economic growth, job creation, and poverty reduction for more than three decades likely discourages Chinese citizens from seeing pursuit of individual and family prosperity as a zero-sum game, in which corrupt officials and business owners profit at the expense of everyone else."

Yet if this is the case, and the Chinese have such a sanguine attitude towards income inequality and political reform, what explains the tens of thousands of protests every year which occur throughout the country? Dr Elizabeth Economy, author of The River Runs Black and director of Asia Studies at the Council on Foreign Relations, believes that the significance of these protests should not be overlooked.

According to Economy, "The roots of protest in China rest in the systemic weakness of the country's governance structure. A lack of transparency, official accountability, and the rule of law make it difficult for public grievances to be effectively addressed and encourage issues such as inflation, forced relocation, environmental pollution, and corruption to transform from otherwise manageable disputes to large-scale protests."

Vocalizing these frustrations is being made easier by the Internet, which Economy believes allows "individual complaints to go viral in a matter of minutes, gaining widespread popular support across gender, age, profession and provincial boundaries". As many have pointed out, China's ruling party has largely benefited by its control of the Internet, but the day could come when it might find its very survival threatened by a wildfire of dissent spread through a medium it had used so effectively as a propaganda device. The question at hand for the USCC is whether any of the short-term issues facing China hold the potential to light such a fire.

To the extent China's model only works so long as economic growth can be delivered, then Dr Steven Dunaway, an adjunct senior fellow for international economics at the Council on Foreign Relations, believes that yes, such tinder does exist. Dunaway sees two problems that are likely to impact China's economy, and thereby negatively impact the internal politics of the country.

First, "China's economic model with its heavy reliance on investment and exports to generate growth will not be able for much longer to continue to deliver rapid growth," and second, "China's political system is likely to continue to create hurdles that will adversely affect the ability of the economy to grow rapidly."

The second criticism is of particular importance to the USCC's hearing. Thus far, China's political system has managed to create incentives for capital to flow into the country and then, in what could admittedly not always be the most efficient of manners, ultimately manage to get out of the way of capitalists trying to deploy that capital within the country. But Dunaway believes those days could be over: "... there are more fundamental, underlying political issues that will make it difficult for China to pull off the needed rebalancing of its economy. It is not clear whether development of a more market-oriented economy is compatible with the views of the Chinese Communist Party regarding how it wishes to maintain control over the country."

Just as America reached a moment in time when long-standing tensions erupted and had to be resolved - at times through the courts, at times through politics, and at times through bloodshed - China may be reaching a moment when it can no longer deliver the economic growth it has promised to its citizens.

When this happens, as it inevitably will for China just as it has for every other high growth country around the world, China's leadership would do well to heed the advice of Yukon Huang who testified at the USSC hearing that "Venting one's frustrations in ways that are perceived to be taken seriously by the authorities are as important as actually resolving an issue."

Whether China's leadership is secure enough to allow such dissent, or whether as Dr Economy fears "the Chinese leadership itself is not confident about its continued ability to manage the pervasive social unrest and discontent it confronts" could well determine not just how China continues to evolve, but whether China's partners around the world continue to trust and invest in the country.

Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses bring innovative technologies into the North American market.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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