China’s cloudy future – I

First Published: 2015-11-07

China’s hope of resuming more sustainable market-based economic growth may be belied

China’s current economic slowdown is now well known, but its political implications for the future of the Leninist Chinese Communist Party (CCP) – which has ruled China for the last 66 years – remain cloudy. In this column I speculate on its future in the context of China’s millennial past.

Given its secure borders, relatively abundant resources, and a large population, China has in much of the past been able to develop without any international intercourse. China’s major economic problem has been that its heartland is an agricultural region with about one-third of the arable land per person as the rest of the world. Foreign and inter-regional trade can overcome these limits to raising per capita incomes, and there have been three major periods since the 11th century when such an opening has led to accelerated growth.

Thereafter, once the industrial revolution led to Promethean growth (with rising per capita income), this insularity meant relative poverty, with China remaining an agrarian economy undergoing Smithian growth (with stagnant per capita income) as it had for millennia. But it allowed centralised control and the maintenance of order and internal unity. Though trade through the northern Silk Route continued and allowed some foreign influences and the creation of some wealth, this could be easily managed.

China’s second opening was with the Opium Wars and the "carving up of the Chinese melon" by foreign powers in the second half of the 19th century. This destabilised China. For, trade made the coastal regions wealthy whilst the subsistence farmers in the Han interior remained poor. The newly enriched leaders in the coast had an interest in intensifying relations with the foreign powers which made them wealthier, increasing the regional wealth and income disparity between the coast and the interior. "In due course, foreigners allied with Chinese coastal merchants and politicians became more powerful in the coastal regions than the central government. The worst geopolitical nightmare of China came true. China fragmented, breaking into regions, some increasingly under the control of foreigners, particularly foreign commercial interests. Beijing lost control of the country" ("The geopolitics of China", Stratfor Analysis, 25 March 2012).

Mao Zedong’s three-fold aim, after the CCP’s victory in the civil war, was to recentralise China, to end the massive inequality between the coastal region and the rest of Han China, and to expel the foreigners. He was reverting to China’s classic insular policy, and accepting the inevitable result: China would become equal but remain extraordinarily poor.

After the fall of the Gang of Four in the 1970s and Deng Xiaoping’s rise to paramountcy, he took a gamble. He was worried that without opening up China he could not meet the domestic pressures that were building up for a rise in living standards. Also the technological gap that was opening up with Chinese insularity threatened its security. Deng believed that he could avoid the destabilising of China by his "Open Door Policy" as the preceding one had done in the pre- Communist period "by maintaining a strong central government, based on a loyal army and Communist party apparatus. His successors have struggled to maintain that loyalty to the state and not to foreign investors, who can make individuals wealthy. That is the bet currently being played out."

To date, Deng’s bet has paid off handsomely. Through the "Open Door Policy", China has become the workshop of the world and the second largest global economy. But, as in the previous periods when China opened up, regional disparities have widened: the coastal region has become wealthy, the interior remains poor. This in part explains the Bo Xilai affair and its denouement. Mr Bo recognised this disparity and espoused a return to Maoist policies which proved immensely popular in his relatively backward interior satrapy of Chongqing. Given his connections to the section of the army his father had commanded, he clearly posed a threat of becoming a regional Maoist warlord shattering China’s unity. He and his associates, including those in the army, were purged in traditional Communist fashion.

The second consequence of these regional disparities is that, the CCP is now trying to make the interior also a land-based trading hub, distinct from the sea-based coastal hub, as it was in the old imperial days, when the Silk Road provided trading opportunities through Central Asia. This, I conjecture, is the main motivation for the push for linking Eurasia through the New Silk Road, besides also providing an alternative route for transporting the natural resources China still needs, from the choke points in the Malacca Straits and Indian Ocean. It also allows China to utilise its excess capacity in its infrastructure industries.

Whilst globalisation has greatly benefitted China, for a Leninist party obsessed with centralised control, it also makes China dependent on the outside world. In fact, the economic road map laid out at the CCP’s Third Plenum in 2013 called for both a "decisive role" for markets and a "dominant role" for the state. Hence policymakers "find themselves squeezed between the Scylla of the market and the Charybdis of state control". The future of this tussle will be decided by President Xi Jinping, and state control will win. For, "China’s president does not exactly leave the impression of being willing to leave things to chance. He is all about control: of his party, of the media and doubtless of the economy too. When push comes to shove, state intervention is likely to prevail over what must look like a reckless dabbling with market forces by their technocrats". (David Pilling: "China’s push-me-pull-you policies leave the world reeling", FT, 27 August 2015).

This means that China’s hope of resuming more sustainable market-based economic growth maybe belied. What does this mean for the future of the CCP, its likely future foreign policy and therefore for China? These are questions I take up in my next column.

First published at the Business Standard and posted here with the kind permission of the author.

Deepak Lal is the James S. Coleman Professor Emeritus of International Development Studies at the University of California at Los Angeles, professor emeritus of political economy at University College London, and a senior fellow at the Cato Institute. He was a member of the Indian Foreign Service (1963-66) and has served as a consultant to the Indian Planning Commission, the World Bank, the Organization for Economic Cooperation and Development, various UN agencies, South Korea, and Sri Lanka. From 1984 to 1987 he was research administrator at the World Bank. Lal is the author of a number of books, including The Poverty of Development Economics; The Hindu Equilibrium; Against Dirigisme; The Political Economy of Poverty, Equity and Growth; Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-Run Economic Performance; and Reviving the Invisible Hand: The Case for Classical Liberalism in the 21st Century.

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