The transformational process in the People’s Republic of China during the assessment period was characterized by a continuation of economic reforms under less favorable conditions. While the effects of the Asian economic crisis limited the government’s scope of action, it conversely resulted in an accelerated pace of reform in China. Measures that had previously been postponed for political reasons were speeded up, even in the difficult area of financial sector development. Political reforms were limited to reorganization within the administrative system and a consolidation of the village elections that were introduced in the 1980s to narrowly defined experiments with competitive elections at the village level and within the Communist Party of China (CPC). Even with the change to a new generation of leaders, the CPC’s uncurbed claim to leadership prevents the transformation to a democratic political regime.
The period under consideration coincides roughly with the period between the CPC’s 15th and 16th Party Congresses. Modifications in the Party’s position and its program show that the CPC continues to try to adapt to evolving economic and social circumstances by including new social groups but that it wishes to follow the path to a market economy while maintaining its claim to leadership. The Party Congress in November 2002 showed signs of giving up core elements of Marxist-Leninist ideology such as the elimination of private property, the obliteration of the private commercial class, the struggle against the “capitalist class,” and the dominance of publicly held property. At the same time, the CPC leadership continues to be grounded in Leninist organizational principles, in particular, the personal sovereignty of the party in the cadre system. The Chinese leadership is convinced that it can accomplish the transformation to a globally oriented market economy and foster a middle-class society while functioning within political institutions that are essentially Leninist.
2. History and characteristics of transformation
The economic transformation process in the People’s Republic of China was initiated following the end of the Cultural Revolution in 1976. This period was characterized by a strong desire for consolidation in the economic and political arenas. The economic reforms took place under difficult structural conditions, but reformers were able to build on a number of advantageous existing conditions for reform not present in other transition countries or only present to a limited extent. China was ready for a process of catch-up development and a planned economy that was made possible by, among other things, a high proportion of persons employed in agriculture and a low proportion in the government sector.
On the political level a basic consensus in favor of economic reform had developed; however, it was accompanied by a clear rejection of political liberalization. Bureaucratic resistance to transformation was weaker in China than in the Soviet Union or Russia. Moreover, the People’s Republic of China was able to mobilize support from an impressive number of overseas Chinese. Based on these factors China chose a reform strategy that was characterized by gradual and experimental reform measures, a two-track course of action, and decentralized implementation.
In addition, the Chinese reform politicians counted on opening special economic zones for foreign investors and adopted an export-oriented development strategy. The reforms were accompanied by a noticeable improvement in the standard of living for large segments of the population as well as fundamental social pluralization. According to official figures, between 1980 and 2000 China’s gross domestic product grew on an average of just under 10 % in conjunction with inflation rates that were stabilizing at a low level.
At the same time, China’s admission to the WTO at the end of 2001, which was a result of the successful economic reforms and China’s strengthened position in international business and politics, drew attention to persisting problems with the Chinese economic reforms. Recently, there has been a critical assessment of the actual successes and questions as to the sustainability and permanence of these reforms. Moreover, the downside to the economic reforms has been increasing income disparity with concomitant social destabilization as well as corruption, which is undermining existing state institutions and resulting in legitimacy problems for the CPC.
Until now the political institutions have been able to adapt to the new demands of the evolving economic policy, even if a clear distinction between direct state control, active state management, and passive adaptation has been difficult. However China’s attitude toward a political transformation in the form of political liberalization and democratization, has remained negative. During the period under consideration, the “third” leadership generation under Jiang Zemin and Zhu Rongji did not introduce a systematic transition to a democratic regime founded upon the rule of law. The democratic movement and political dissidents have been marginalized since the suppression of the 1989 student protests and there is no possibility for effective action in the public arena.
3. Examination of criteria for democracy and a market economy
In the political sphere, the People’s Republic of China exhibits great transformation deficits. Serious and persisting human rights violations and the suppression of political opposition detract in no small measure from transformation successes in the economic area and in the reduction of poverty.
3.1.1 Political organization
(1) Stateness: In the People’s Republic of China there are no state identity problems; the state monopoly on the use of force is for the most part assured. With the significant exception of the “renegade province” Taiwan and the recurring flare-ups of separatist aspirations in Xinjiang and Tibet, defining citizenship and who qualifies as a citizen is not a politically relevant issue. Under the constitution all citizens possess the same citizen rights, and the constitution grants ethnic minorities a limited right of self-government. There is separation of church and state, but it stands in a frequently conflict-ridden relationship as is made clear in the suppression of the Falun Gong movement.
China, in contrast to other developing countries that encompass large geographic areas, has well-developed administrative structures that extend over the entire country. They exhibit a differentiated budget structure, but the conflicts among the various levels of administration permit only a partially efficient collection and allocation of government resources. Given its serious fiscal management problems, there is only limited assurance of the Chinese government’s ability to act financially responsibly over the medium and long term. It is doubtful whether the tasks of government can be fulfilled sensibly and to the extent necessary with the resources available. The complicated and problematic mechanism of intergovernmental equalization between the individual Chinese provinces contributes to the problem.
(2) Political participation: According to the constitution of 1982, the People’s Republic of China is a socialist state under the democratic dictatorship of the people. The formal political organization of its institutions corresponds to the model of a centralized socialist party dictatorship. In this context, there are no elections on the central government level that fulfill the minimum requirements of a general electoral system or constitute competitive elections. In recent years limited opportunities for participation have developed on the local level. Political rulers are recruited from the CPC, which reflects the organizational principles of a cadre party. The personnel and organization of the CPC continue to be the main pillars for the ruling system of the People’s Republic of China. Relevant opposition parties are prohibited.
Freedom of assembly is not guaranteed, and independent groups are unable, or are able only with great difficulty, to develop in the face of the CPC and its subordinate organizations’ claim to be the sole legitimate representative. Thus we cannot speak of freedom of association as an independent civil right. Freedom of expression exists only within narrow limits and important media are state-owned or under state control. In the economic arena, however, there are signs of growing latitude for the free and critical expression of opinion. This is juxtaposed with efforts for control of the internet and other new media.
(3) Rule of law: In the People’s Republic of China the Leninist principle of the concentration of power persists in contrast to a separation of powers. There is no guarantee of civil rights. The position of power and claim to leadership by the CPC and its cadres ensure de facto the right of unlimited intrusion by state actors in legal affairs and even in economic life. In terms of constitutional reality, the CPC stands above the constitution and above the people. Thus there is no binding rule of law upon government powers and no control of the powers in relation to government actors.
In particular, the administration of justice is subject to the influence of state representatives through the supervisory committees of the CPC and through the recruitment process for judges. In accordance with conventional legal views, the courts are primarily charged with maintaining public order and assisting in the enforcement of government power. The common problem of poorly qualified judges is to be remedied through new national examination requirements. A trend toward greater legal certainty and restrained political bias of the judiciary is evident, particularly in the area of commercial law, but these developments are countered by the blatant corruption in the judiciary.
3.1.2 Political patterns of behavior and attitudes
(1) Institutional stability: The questions of stability and the acceptance of democratic institutions cannot be answered meaningfully for the People’s Republic of China since democratic institutions have not been established in the country.
(2) Political and social integration: Effective and comprehensive integration of interests will not be achieved through the party system. The democratic parties that exist alongside the CPC have no political significance and are controlled by the CPC. Interests are increasingly represented by the authoritarian system of associations and mass organizations. Both the number and variety of associations have increased sharply since the beginning of the economic transformation. However since 1989, their establishment and approval has been increasingly controlled and regulated by the state. Furthermore, influence and control by the government limits the autonomy of the associations depending upon their strategic importance for the political authority of the CPC. The establishment of independent labor unions is prohibited. An increase in social protests and unrest has been noted.
There are no reliable empirical studies on the attitude of society toward democracy. Sociopolitical factors, such as the absence of liberal constitutional traditions and the lack of positive experiences in dealing with political competition give rise to public skepticism. With respect to existing social capital, China profits from the existence of strong loyalties within large families and from family-based entrepreneurial, social and business structures. Outside the family boundaries in the cities there are growing numbers of self-help and neighborhood assistance organizations, initiatives, and collaborations that are devoid of a primary political objective.
3.2 Market economy
The People’s Republic of China has made considerable progress in its transformation to a market economy. Moreover, the reforms accompany vigorous economic growth. However, significant risks remain that could call into question the transformation achievements that have already been realized.
3.2.1 Socioeconomic level of development
The development of key economic indicators demonstrates that China has realized great development successes, although significant inequities in the distribution of income and assets have arisen. Large segments of the population are precluded from participating in economic life and the fruits of the economic reforms due to poverty and educational deficits. In particular the disparities in regional and urban versus rural development have grown more severe in recent years and demand decisive political countermeasures. At this time there is already substantial movement of population within China between urban and rural areas.
3.2.2 Market and competition
The establishment of equally competitive opportunities and a uniform market structure has made significant headway relative to the previous centralized economy. However, distortions and delays continue due to selective liberalization measures, and fundamental deficits still remain. For example, there is no assurance of equal treatment for different business structures: Government-owned enterprises, private companies, and companies with foreign investment may all encounter different regulation with respect to management practice, taxation and banking. These areas in particular reflect the incomplete privatization and commercialization of state-owned businesses. There is no uniform competition policy to provide clear objectives and industries that are important nationally are exempted from the principles of general industrial policy.
Significant standardization is expected to take place in connection with adaptation to WTO principles. In the meantime, prices are almost without exception created by the market. However, access to essential input factors, most notably capital, is still somewhat subject to government control. This results in significant distortions of competitive positions. Interest rates are largely determined administratively. The financial system holds great systemic risks for the stability of the Chinese economy and is in need of further reform.
Most recently, the state banks that did not meet international standards of prudent regulation were released from their bad loans through the creation of asset management companies. Up to now there has not been an efficient allocation of financial resources regulated by free market criteria. The tentative and inconsistent actions by the government during the period under consideration reflect the highly explosive nature and complexity of reforms in the financial sector. The question remains whether and to what extent political consensus can be achieved regarding the configuration of competitive market reforms.
The integration of China into the international economy through foreign trade and direct foreign investment will continue to play an essential role for the country’s development. With additional liberalization measures that are anticipated in the process of implementing the WTO regulations, the Chinese government has exposed itself to a greater pressure to act, which is expected to increase the pace of growth and reform.
3.2.3 Stability of currency and prices
In recent years China’s economy has been struggling against deflationary tendencies in conjunction with continuing high, but decelerated growth between 1998 and 2000. In this climate, the government has pursued an expansive, growth-oriented fiscal policy, which has intensified the government’s budget deficit problems. Nevertheless, there is generally a consistent effort to maintain macroeconomic stability. The Central Bank cannot be deemed politically independent. The currency is not freely convertible. In recent times the Chinese Yuan has come under pressure for an upward revaluation; however, to date the Chinese government has rejected major modifications in the fixed exchange rate with respect to the US dollar.
3.2.4 Private property
Private property rights enjoy increasing respect through policy and administration, however protection by legal statute and court decisions continues to be inadequate. The privatization of state property is progressing. The long-term goal of property reform is to permit a number of forms of ownership to exist side-by-side. While private companies are contributing substantially to growth and the creation of jobs, they are not being treated equally with government-owned businesses with respect to private property rights.
3.2.5 Welfare system
The structures to adjust for the social consequences of the market economy introduction are inadequately developed. The establishment of a new social security system to meet evolving needs is progressing very slowly and is concentrated in urban regions. The unsolved challenges include the protection of the rural population through social security and long-term old-age pensions where demographic development is governed by birth control.
The reform policies of the past five years have been unable to establish equal opportunity across regions. Outside of the coastal provinces and in rural areas, access to education, government services, and the social safety net is narrowly restricted. An ambitious new regional policy for infrastructure development is intended to benefit the more rural western provinces.
Since the beginning of the reform process the Chinese economy has been growing on a historically exceptional, even if statistically overestimated, scale. With this comes an unemployment rate that is very likely higher than the official 3 % and without a developed social safety net results in significant social hardships.
Environmental protection concerns, which had been a low priority, have enjoyed greater political attention in recent years. However, the process of economic reform in general, has been based on extensive growth and has resulted in significant new environmental contamination. Environmental protection remains largely subordinated to growth.
Over the last five years, China has significantly increased government commitment to public education as well as its tolerance for private educational institutions. Here, as in the environmental area, a number of international cooperative efforts have developed.
(1) Democracy: During the period under consideration no important changes were noted that clearly aim toward democratization in the areas of state identity, political participation, and development of the rule of law. Progressive trends worth mentioning include: the introduction of comprehensive innovations during 2001 and 2002, particularly the judicial system’s implementation of judge examinations and court financing. The dialog with foreign countries on the rule of law was expanded. There are indications that economic legislation has increased the government administrative units’ adherence to regulations.
Political participation at the local level was strengthened and more recently, broader political reform experiments on the local level are under discussion. However, there is little indication that they will affect the core structures of the political system; rather, they aim to increase administrative efficiency and openness and decrease widespread corruption. Despite repeated campaigns to combat corruption, bribery, including the sale of public office, is a permanent part of the system.
A regressive trend that is working against liberalization and possible democratization is the increased control of internet access and content with measures ranging from the control and closure of internet cafés to agreements for voluntary restraints with international providers such as Google. The co-opting of up-and-coming social groups started by private entrepreneurs into the existing organization of the CPC makes the emergence of independent social organizations and structures seem unlikely. In all, significant reform measures on the part of the government and a clear commitment to democracy are still lacking.
(2) Market economy: The basic development indicators demonstrate strong improvement for the period under consideration, particularly the growth of the HDI from 0.681 in 1995 to HDI of 0.726 in 2000. The problem of increasingly unequal wealth distribution is reflected in the Gini coefficients. Overall the basic institutional conditions for free market trade improved during the period. Measured against the development of key macroeconomic figures the pace of the Chinese economy slowed down somewhat, at least between 1998 and 2000. Taking into account the less favorable underlying conditions, most notably the effects of the Asian economic crisis, it must be said that transformation management was successful in terms of economics. Still to be considered in the overall assessment are the existing risks to the sustainability of the successes, especially in the banking and public finance sectors.
Table: Development of socioeconomic modernization indicators
Sources: Human Development Report 2002 and 2000, Gini coefficient according to NBS, quoted in the China Daily
Table: Development of macroeconomic fundamentals (1998-2002)
* unofficial estimates show significantly higher figures; **preliminary information.
Sources: National Bureau of Statistics: China Statistical Yearbook 2002, IMF Financial Statistics 2002, ADB, World Bank, Heilmann 2002.
5. Evaluation of transformation management
5.1 Level of difficulty
From an economic perspective the People’s Republic of China had already achieved significant transformation successes in 1998. It was possible to continue building on its development status as a country with medium income and an improved societal level of education, while taking into account the above-mentioned problems of exclusion due to poverty and regional differences in development.
While good general conditions for a successful transformation continued to exist (minimal significant ethnic conflicts for the country overall, well-developed state administration with strength to take action when crises arise, and potential for growth), the level of difficulty of the remaining economic reform measures increased prior to and during the period under consideration and is judged to be high. This includes the reform of the financial sector, particularly the state banks and the closely related reform of the remaining government-owned enterprises. The crisis-prone regional and international economic development has increased the pressure on the Chinese government to take action. This became clear during the phase immediately following the Asian economic crisis, as reform measures that had previously been delayed for political reasons had to be carried out under more difficult economic conditions.
At the same time the level of difficulty also increased because of growing social tensions, manifested in mounting social unrest and decreasing societal respect for the functionary class due to abuse of authority and corruption. Additionally, it remains to be seen to what extent the legitimacy of the CPC has diminished generally, or is threatened to be further diminished, if the social costs of reform for the workers reach government-owned businesses.
5.2 Reliable pursuit of goals
The Chinese government’s reliability in achieving its goals while structuring its economic reforms was generally high. This reflects the central government’s comparatively strong ability to act and to implement its objectives. In the 1990’s the fundamental market economy orientation of the reform policy was no longer questioned even when politically sensitive reform measures were postponed. The government is pursuing long-term development objectives and also formulating them clearly. The most recent example involves setting a target to achieve a four-fold increase in income from 2000 to 2020. In their pace and control of the flow of the reforms, however, it appears that the social adjustment costs and the associated potential for political pressure are taken more into account than the systemic risks.
Most notably, long-term fundamental environmental safeguarding is not a priority compared with the orientation to growth objectives. The implementation of the reforms is taking place comparatively consistently but is associated with high adjustment costs for a number of population groups, which in light of the lack of social welfare mechanisms, are being compensated inadequately. With its accession to the WTO China strengthened its commitment to a basic market economy system both externally and internally. This was intended to increase the reliability of expectations, not in the least for the sake of foreign investors. However, sources of fierce foreign policy conflict, such as Taiwan, that have elicited the threat of military might are detrimental to this. It remains doubtful whether the strategy of economic transformation without democratization can succeed over the long term and how serious the associated political risks may be.
5.3 Effective use of resources
The current status of budget policy and the system of fiscal management in the Peoples’ Republic of China make the effective use of resources in the reform process to date appear questionable. Strategic decisions in the reform of government property relations have resulted in a substantial uncontrolled outflow of funds. Government funds are frequently distributed according to political considerations.
In the area of lending the state and the economy are still so closely intertwined that it appears virtually impossible to distinguish government debt from the loans of government-owned enterprises and the state banks. An additional alarming sign during this period has been the practice of granting additional loans to government-owned enterprises with dubious financial and entrepreneurial viability and the concomitant amassing of new loans with uncertain likelihood of repayment.
The budget process is complicated and not accessible for public review. It does not permit effective control of expended funds to a degree that can be deemed an efficient use of tax money. The indebtedness of the Chinese state increased significantly during the period under consideration. Stronger fiscal planning capacities and an effective system of auditing controls are in progress. Personnel management in government administration will soon be subject to new reform measures that aim for a leaner administration and higher qualifications for the employees. The structure of the government agencies and ministries also offers the potential for cost reductions and further dismantling of duplicated structures. However, professional streamlining criteria are often subordinated to political considerations or the institutional interest in retaining power.
There are particular deficiencies in establishing uniform access to government social services, as well as in the areas of education and infrastructure. One of the main reasons for the obviously inefficient use of resources is the widespread corruption, which has resulted in a concurrent loss of legitimacy and inability of the government to act. There are no consistent legal regulations and no independent monitoring authorities for combating corruption. As a result there are fundamental deficiencies in open public access to government action.
5.4 Governance capability