The rise of predatory state

Dr. Arvind Gupta was Director General at the Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • December 08, 2009

    Managed Chaos: The Fragility of the Chinese Miracle by Prem Shankar Jha, Sage Publications India Pvt Ltd., New Delhi, 2009, pp186, Rs.495.

    In a span of thirty years, China has been transformed from a poor developing country into a global power. It is expected to emerge as the world’s largest economy by 2030, surpassing the United States. China has become the biggest financier of the American debt. It has emerged relatively unscathed from the recent global economic crisis. China’s political, military and economic clout has increased thanks to rapid economic growth. It owes this transformation to the double digit economic growth experienced in the last thirty years.

    The world has been so amazed by the miracle of Chinese economic growth that it would be almost heresy to suggest that China’s economy has vulnerabilities that could cause major instabilities. People seem to have taken for granted that China will continue to grow at ten per cent indefinitely. As if, China is beyond the laws of economics.

    Prem Shakar Jha’s book challenges this view. Jha takes a critical look at the Chinese economic miracle and detects a number of fragilities in China’s political economy that have the potential of not only derailing the Chinese miracle but also causing some fundamental changes within the country. He analyses a vast array of economic data of Chinese origin, refers to a number of Western studies and scans Chinese media reports to conclude that all is not well with the Chinese economy. Although he does not take an alarmist view, he leaves the reader with a distinct feeling that China’s economy could enter a turbulent phase.

    Jha is a renowned Indian journalist, author and commentator. He has several books to his credit. He carried out the research for this book at the Fairbank Centre for East Asian Research, Harvard University. His research was funded by the Observer Research Foundation, New Delhi.

    He makes eight major points in the book:

    First, the Chinese growth model has not only generated social disharmony but also huge strains on the environment. China’s growth has been inefficient and wasteful. Therefore, countries like India should not simply emulate the Chinese model of economic growth.

    Second, a large portion of China’s double digit growth during 1978 to 1995 remains ‘unexplained”. Almost half of China’s ten per cent growth rate cannot be accounted for. Even the Japanese and South Korean growths of previous decades have an unexplained component, though the proportion for China is much higher. Part of the reason for this anomaly is the lack of “reliability of the raw data on which the Chinese GDP estimates are based” (p. 18). The provincial and local authorities have been routinely inflating achievements, as was brought out in the 2005 census (p. 21).

    Third, China suffered a major slowdown or recession in 1996-2001. This has been described in the Chinese media as a soft landing of the Chinese economy. During this period, the overheated Chinese economy crashed, jobs were lost, many banks went bust and factories were closed down. The author examines an array of statistics to conclude that several economic indicators of this period, particularly unsold commercial homes, consumption of primary inputs used in manufacturing like energy, rolled steel, cement, and soda ash point to a collapse of demand which led to a slow down in the economy (Table 4.2, p. 29). The data brings out a sharp “disconnect between the GDP growth and the consumption of key inputs” (p. 28). According to unofficial figures, the GDP was growing while all inputs were showing a declining trend!

    Fourth, the Chinese economic growth model has resulted in the rise of “cadre capitalism”. Jha devotes five chapters in the book to discuss the various dimensions of China’s political economy. The chapter on “cadre capitalism” describes how China diluted socialism as the vast mass of the cadres of the Chinese Communist Party (CCP) turned into capitalists. State owned enterprises were privatised, a new class of entrepreneurs developed. Unlike in Russia and other East European countries where the collapse of state planning led to massive disruptions, in China communist party cadres turned into entrepreneurs and entrepreneurs joined the communist party. However, what took place in China was not privatisation in the true sense. What changed was that the decisions to invest were decentralised to local party units. These units took decisions without accountability – they were not accountable to the risks of investment as would be normal in a capitalist economy. If the investment turned bad, the state financial institutions – the banks – were always there to bail them out. As a result the Chinese banking system was saddled with mountains of bad debt. Ironically, the number of state owned enterprises (SOEs) actually increased during the “privatisation” drive. In 1978 there were 78,000 SOEs, and by 2004 there were 113,800 (p. 33). The number of non-state enterprises owned by the local authorities rose to 7.87 million between 1978 and 1998. This was the result of the decentralised economic decision making in China as a result of the reforms. Much of China’s growth has come from the decentralisation of economic decision making.

    Fifth, the party bosses at the provincial, prefecture, township and village levels made money in the process of decentralisation. They acquired unprecedented powers over investment decisions free from the dictates of accountability and transparency. As a consequence, there was massive rise in nepotism, bribery, extortion, kickbacks and corruption. Many local party units became too strong for the centre to control. In the last two decades there has been a kind of tug of war between the local and central party organisations for control over economic resources and economic decision making. The sacking of Shanghai party secretary Chen Liangyou and the busting of the “Shanghai gang” by the central leadership in 2004 was a manifestation of local units beginning to challenge the authority of the central party organs.

    Sixth, closely linked to the emergence of cadre capitalism is the rise of the ‘predatory state’. This is perhaps the most serious and damning criticism of the Chinese growth model. Local party bosses, in order to maximise their gains, have often taxed peasants heavily while keeping their wages low. In some provinces peasants had to pay up to 149 taxes and levies to local authorities to support their extravagant life styles. The local authorities have also fudged figures to retain taxes with them which they normally should have transferred to the centre. There has been a sharp rise in cases relating to extortion and corruption. As a result discontent among the poorer people has grown. This is reflected in the sharp rise in the number of protests and demonstrations throughout China. The number of protests rose ten-fold from 8,700 in 1993 to 87,000 in 2005 and the number of participants rose twenty-fold.

    Seventh, the Chinese economic model has led to the migration of tens of millions of peasants to the cities for jobs. Migratory workers have been subject to a variety of discriminatory laws besides being exploited for low wages. They are also subjects of extortion and torture by local police for non-compliance of rules and procedures. Education for children is expensive and health facilities are not available. This has led to an acute rise in discontent in China which the party is trying to control.

    Eighth, China’s unplanned, and uneven growth has also led to severe social tensions which the party is trying to control. Party leaders are aware of these problems that have accumulated over the years. Hu Jintao, recognising the gravity of the situation, has placed an emphasis on building a “harmonious society” where democracy, the rule of law, and equity prevail.

    The shift of emphasis to harmonious growth is an attempt to address the social problems caused by relentless economic growth over the years. It remains to be seen whether China will succeed in doing so. But the uneven growth, exploitation of peasants and migrant workers, the rise of corruption and destruction of the environment to maintain high economic growth are some of the factors that make China’s growth fragile. What is most significant is that the character of the party has also changed over the years. This opens up possibilities for political changes in China in the future.

    The incisive analysis of the vulnerabilities of the Chinese economy presented in this book is supported by a mass of statistics and data. Jha’s research is thorough and derives from Western and Chinese studies. Managing Chaos is a serious work. The book is essential reading for those trying to understand the Chinese economic miracle.