China's Governance Crisis

MORE THAN MUSICAL CHAIRS

Predicting the outcome of China's upcoming leadership succession has become a popular parlor game in certain Washington circles. The curiosity aroused by the transition is understandable, given the huge stakes involved for the world's largest country. If all goes well, the Chinese Communist Party (CCP) is scheduled to select a new and younger leadership at its Sixteenth Party Congress this fall. The incumbent CCP general secretary, 76-year-old Jiang Zemin, may step down and be replaced by China's Vice President Hu Jintao, who is 59. The all-powerful Politburo Standing Committee will see most of its members retire, as will the important Central Committee. In addition, Chinese Premier Zhu Rongji is to step down in March, and Li Peng, the leader of the National People's Congress (the country's legislature), may be heading for the exit as well.

In a country ruled largely by man, not law, succession creates rare opportunities for political intrigue and policy change. Thus, speculation is rife about the composition, internal rivalries, and policy implications of a post-Jiang leadership. The backgrounds of those expected to ascend to the top unfortunately reveal little. By and large, the majority of new faces are technocrats. Some have stellar resumes but thin records; other front-runners boast solid experience as provincial party bosses but carry little national clout.

In any case, conjectures about the immediate policy impact of the pending leadership change are an exercise in futility, because Jiang will likely wield considerable influence even after his semiretirement. A truly dominant new leader may not emerge in Beijing for another three to five years. And regardless of the drama that the succession process might provide, a single-minded focus on power plays in Beijing misses the real story: China is facing a hidden crisis of governance. This fact ought to preoccupy those who believe that much more is at stake in Beijing than a game of musical chairs.

The idea of an impending governance crisis in Beijing may sound unduly alarmist. To the outside world, China is a picture of dynamism and promise. Its potential market size, consistently high growth rates, and recent accession to the World Trade Organization have made the Middle Kingdom a top destination of foreign direct investment ($46 billion in 2001), and multinational corporations salivate at the thought of its future growth. But beneath this giddy image of progress and prosperity lies a different reality -- one that is concealed by the glitzy skylines of Shanghai, Beijing, and other coastal cities. The future of China, and the West's interests there, depends critically on how Beijing's new leaders deal with this somber reality.

DOT COMMUNISM AND ITS DISCONTENTS

China's current crisis results from fundamental contradictions in the reforms that it has pursued over the past two decades -- a period that has seen the amazing transformation of the communist regime from one that was infatuated with class struggle to one obsessed by growth rates. This "dot communism," characterized by the marriage of a Leninist party to bureaucratic capitalism with a globalist gloss, has merely disguised, rather than eliminated, these contradictions. But they are growing ever harder to ignore. The previously hidden costs of transition have begun to surface: Further change implies not simply a deepening of market liberalization but also the implementation of political reforms that could endanger the CCP's monopoly on power.

These emerging contradictions are embedded in the very nature of the Chinese regime. For example, the government's market-oriented economic policies, pursued in a context of autocratic and predatory politics, make the CCP look like a self-serving, capitalistic ruling elite, and not a "proletarian party" championing the interests of working people. The party's professed determination to maintain political supremacy also runs counter to its declared goals of developing a "socialist market economy" and "ruling the country according to law," because the minimum requirements of a market economy and the rule of law are institutionalized curbs on political power. The CCP's ambition to modernize Chinese society leaves unanswered the question of how increasing social autonomy will be protected from government caprice. And the party's perennial fear of independently organized interest groups does not prepare it for the inevitable emergence of such groups in an industrialized economy. These unresolved contradictions, inherent in the country's transition away from communism, are the source of rising tensions in China's polity, economy, and society.

During the go-go 1990s, the irreconcilable nature of these contradictions was obscured by rising prosperity and relative political tranquility. Economically, accelerating liberalization and deepening integration with the world marketplace produced unprecedented prosperity, even though some tough reforms (especially those affecting the financial sector and state-owned enterprises, or SOEs) lagged behind. Politically, the ruling elite drew its own lesson from the collapse of Soviet communism ("It's the economy, stupid") and closed ranks behind a strategy that prioritized economic growth and left the political system untouched.

This strategy worked for a decade. Within the regime, conservatives who opposed market reforms were marginalized. China's pro-democracy movement, which peaked with the Tiananmen Square protest in 1989, also waned after its leadership was decapitated through exile or imprisonment. The resulting tranquility ended the polarized debate between liberals and conservatives of the 1980s. But ironically, this shift also silenced those at both ends of the ideological spectrum who would have cried that the emperor had no clothes. Thus, the regime escaped pressure to adopt deeper political reforms to relieve the tensions produced by the contradictions of dot communism. With rising wealth and loose talk of a "China century," even some skeptics thought the CCP had managed to square the circle.

The incompatibilities between China's current political system, however, and the essential requirements of the rule of law, a market economy, and an open society have not been washed away by waves of foreign investment. Pragmatists might view these contradictions as inconsequential cognitive nuisances. Unfortunately, their effects are real: they foreclose reform options that otherwise could be adopted for the regime's own long-term good. To be sure, China's pragmatic leaders have made a series of tactical adjustments to weather many new socioeconomic challenges, such as the CCP's recent outreach to entrepreneurs. But these moves are no substitute for genuine institutional reforms that would reinvigorate and relegitimize the ruling party.

THE BUBBLE BURSTS

In retrospect, the 1990s ought to be viewed as a decade of missed opportunities. The CCP leadership could have taken advantage of a booming economy to renew itself through a program of gradual political reform built on the rudimentary steps of the 1980s. But it did not, and now the cumulative costs of a decade of foot-dragging are becoming more visible. In many crucial respects, China's hybrid neo-authoritarian order eerily exhibits the pathologies of both the political stagnation of Leonid Brezhnev's Soviet Union and the crony capitalism of Suharto's Indonesia.

These pathologies -- such as pervasive corruption, a collusive local officialdom, elite cynicism, and mass disenchantment -- are the classic symptoms of degenerating governing capacity. In most political systems, a regime's capacity to govern is measured by how it performs three key tasks: mobilizing political support, providing public goods, and managing internal tensions. These three functions of governance -- legitimation, performance, and conflict resolution -- are, in reality, intertwined. A regime capable of providing adequate public goods (education, public health, law and order) is more likely to gain popular support and keep internal tensions low. In a Leninist party-state however, effective governance critically hinges on the health of the ruling party. Strong organizational discipline, accountability, and a set of core values with broad appeal are essential to governing effectively. Deterioration of the ruling party's strength, on the other hand, sets in motion a downward cycle that can severely impair the party-state's capacity to govern.

Numerous signs within China indicate that precisely such a process is producing huge governance deficits. The resulting strains are making the political and economic choices of China's rulers increasingly untenable. They may soon be forced to undertake risky reforms to stop the rot. If they do not, dot communism could be no more durable than the dot coms.

THE PARTY'S OVER

The decline of the CCP began during the rule of Mao Zedong, as the late leader's political radicalism, culminating in the madness of the Cultural Revolution (1966-76), deeply damaged the ruling party. The ascent of Deng Xiaoping and his progressive reforms slowed this process, as economic gains, the end of mass repression, and the expansion of personal freedoms partially repaired the CCP's tarnished image.

But Deng's pro-market reforms produced a different set of dynamics that began to corrode the CCP's support. As economic reform deepened, large segments of Chinese society became poorer (such as grain-producing farmers and workers in SOEs). The revenue-starved state was unable to compensate these losers from reform. Consequently, the CCP had little means to secure the political support of these disaffected groups beyond exhorting self-sacrifice and making empty promises of better times ahead.

Some members of the ruling elite also converted their political power into economic gains, building and profiting from patronage machines. In one survey, about two-thirds of the officials being trained at a municipal party school said their promotion depended solely on the favors of their superiors; only five percent thought their own efforts could advance their careers. A ruling party fractured from within by such personalized patronage systems is hardly capable of building broad-based support within society.

It is worth noting that mass political campaigns, a previous hallmark of the CCP's prowess, have virtually vanished from the Chinese political scene. An obvious explanation is that such campaigns tend to be disruptive and lead to political excesses, as they did during the Mao years. A more likely cause, however, is that the CCP no longer possesses the political appeal or the organizational capacity required to launch such campaigns even when it desires them (as was the case during Beijing's efforts to contain pro-democracy dissidents in the late 1980s and the Falun Gong spiritual movement in the late 1990s). Increasingly, when faced with direct challenges to its authority, the CCP can rely only on repression rather than public mobilization to counter its opponents.

IMMOBILIZED

The extent of the CCP's decline can be measured in three areas: the shrinkage of its organizational penetration, the erosion of its authority and appeal among the masses, and the breakdown of its internal discipline. The organizational decline of the CCP is, in retrospect, almost predetermined. Historically, Leninist parties have thrived only in economies dominated by the state. Such an economy provides the economic institutions (SOEs and collective farms) that form the organizational basis for the ruling party. By pursuing market reforms that have eliminated rural communes and most SOEs, the CCP has fallen victim to its own success. The new economic infrastructure, based on household farming, private business, and individual labor mobility, is inhospitable to a large party apparatus. For instance, an internal CCP report characterized half of the party's rural cells as "weak" or "paralyzed" in recent years. In urban areas, the CCP has been unable to penetrate the emerging private sector, while its old organizational base has collapsed along with the SOEs. In 2000, the CCP did not have a single member in 86 percent of the country's 1.5 million private firms and could establish cells in only one percent of private companies.

The CCP's organizational decay is paralleled by the decline of its authority and image among the public. A survey of 818 migrant laborers in Beijing in 1997-98 revealed that the prevailing image of the ruling party was that of a self-serving elite. Only 5 percent of the interviewees thought their local party cadres "work for the interests of the villagers," and 60 percent said their local officials "use their power only for private gains." Other surveys have revealed similar negative public perceptions of the CCP. A 1998 study of 12,000 urban and rural residents across 10 provinces conducted by the CCP's antigraft agency found that only 43 percent of respondents agreed that "the majority of party and government officials are clean," and that fully one-third said "only a minority of party and government officials are clean."

At the same time as public officials are losing respect, the party's ideological appeal has all but evaporated. Polls conducted by the official national trade union in 1996 showed that only 15 percent of the workers surveyed regarded communism as "their highest ideal," while 70 percent said that their top priority was to pursue individual happiness. Even members of the ruling elite are beginning, albeit reluctantly, to admit this reality. A poll conducted in 1998 among 673 CCP officials in the northeastern province of Jilin found that 35 percent thought the status and authority of government officials had declined.

At the heart of the CCP's organizational and reputational decline is the breakdown of its members' ideological beliefs and internal discipline. Cynicism and corruption abound. The sale of government offices by local CCP bosses was unheard of in the 1980s but became widespread in the 1990s. A 1998 survey of 2,000 provincial officials, conducted by the official antigraft agency, found that 45 percent of respondents thought such practices were continuing unabated.

Even more worrying, the CCP appears unable to enforce internal discipline despite the mortal threat posed by corruption, which has surpassed unemployment as the most serious cause of social instability. Recent official actions, especially the prosecution and execution of several senior officials, create the impression that the CCP leadership is committed to combating corruption. But a comprehensive look at the data tells a different story. Most corrupt officials caught in the government's dragnet seem to have gotten off with no more than a slap on the wrist. For example, of the 670,000 party members disciplined for wrongdoing from 1992 to 1997, only 37,500, or six percent, were punished by criminal prosecution. Indeed, self-policing may be impossible for a ruling party accountable to no one. According to a top CCP official, the party has in recent years expelled only about one percent of its members.

Perhaps the greatest contributing factor to the CCP's political decline is, ironically, the absence of competition. Competition would have forced the party to redefine its mission and recruit members with genuine public appeal. But like monopoly firms, the CCP has devoted its energies to preventing the emergence of competition. Without external pressures, monopolies such as the CCP inevitably develop a full range of pathologies such as patronage systems, organizational dystrophy, and unresponsiveness. Moreover, one-party regimes can rarely take on the new competitors that emerge when the political environment changes suddenly. The fall of the Soviet bloc regimes and the defeat of similar monopolistic parties in the developing world (such as Mexico's Institutional Revolutionary Party) show that an eroding capacity for political mobilization poses a long-term threat to the CCP.

FAILING STATE?

In a party-state, the ruling party's weakness unavoidably saps the state's power. Such "state incapacitation," which in its extreme form results in failed states, is exemplified by the government's increasing inability to provide essential services, such as public safety, education, basic health care, environmental protection, and law enforcement. In China, these indices have been slipping over the past two decades. This decline is especially alarming since it has occurred while the Chinese economy has been booming.

Most of the evidence of the government's deteriorating performance is mundane but telling. Take, for example, the number of traffic fatalities (a key measure of a state's capacity to regulate a routine, but vital, social activity: transportation). Chinese roads are almost twice as deadly today as they were in 1985; there were about 58 road fatalities per 10,000 vehicles in 2000, compared to 34 in 1985. An international comparison using 1995 data shows that traffic fatality risks were much higher in China than in India or Indonesia. Indeed, China fared better only than Tonga, Bangladesh, Myanmar, and Mongolia in the Asia-Pacific region.

Although China has made tremendous progress in improving education, its recent performance lags behind that of many developing countries. China's education spending in 1998 was a mere 2.6 percent of GDP, below the average of 3.4 percent for low-income countries. In fact, China spends almost a third less on education than does India. As a result, access to primary and intermediate education is as low as 40 percent among school-age children in the country's poor western regions.

China's public health-care system has decayed considerably in recent years and compares poorly with those of its neighbors. According to the World Health Organization, China's health system ranked 144th worldwide, placing it among the bottom quartile of who members, behind India, Indonesia, and Bangladesh. China's agricultural population has been hit especially hard, as government neglect has led to a near-total collapse of the rural public-health infrastructure. According to the 1998 survey conducted by the Ministry of Health, 37 percent of ill farmers did not seek medical treatment because they could not afford it, and 65 percent of sick peasants needing hospitalization were not admitted because they could not pay. Both figures were higher than in 1993, when a similar survey was carried out. Poor health has become the chief cause of poverty in rural China; 40-50 percent of those who fell below the poverty line in 2000 in some provinces did so only after becoming seriously ill. Even more troubling, the crumbling public-health infrastructure is a principal cause of the rapid spread of HIV and AIDS in China. The UN warned in a recent study that "China is on the verge of a catastrophe that could result in unimaginable human suffering, economic loss, and social devastation."

State incapacitation also manifests itself in worsening environmental degradation. This problem poses perhaps the deadliest threat to China's continued economic development. About a third of the country suffers from severe soil erosion, 80 percent of wastewater is discharged untreated, 75 percent of the country's lakes and about half its rivers have been polluted, and nine of the ten cities with the worst air pollution in the world in 1999 were located in China.

China suffers huge direct economic losses from this environmental damage. The World Bank estimated in the mid-1990s that major forms of pollution cost the country 7.7 percent of its GDP. Beyond this measurable cost, environmental degradation, together with the collapse of much of the agricultural infrastructure built before the 1980s, may have exacerbated the effects of natural disasters. Grain losses resulting from natural disasters have more than doubled in the last 50 years, with most of the increase recorded in the 1990s.

BUSTING THE BUDGET

The central cause of the declining effectiveness of the Chinese state is a dysfunctional fiscal system that has severely undercut the government's ability to fund public services while creating ample opportunities for corruption. Government data misleadingly suggest that the state experienced a massive loss of revenue over the last two decades, as its tax receipts fell from 31 percent of GDP in 1978 to 14 percent in 1999. The truth, however, is quite different. Aggregate government revenue over the past 20 years has held steady at about 30 percent of GDP. What has changed is the massive diversion of revenue from the government budget; increasingly, income collected by the government is not listed in the official budget. At their peak in the mid-1990s, such off-budget earnings exceeded budgeted tax revenue by two to one.

Provincial and municipal governments are the primary beneficiaries of this system because it allows them to raise revenue outside the normal tax streams. Because local officials are more likely to get promoted for delivering short-term growth or other such tangible results, off-budget revenue tends to be spent on building local industries and other projects that do little to improve education, health, or the environment. Moreover, since normal budget rules do not apply to such revenue, officials enjoy near-total discretion over its spending. Consequently, corruption is widespread. Large portions of this off-budget money have been found stashed away in secret slush funds controlled by government officials. In 1999, the National Auditing Agency claimed to have uncovered slush funds and illegal expenditures that amounted to 10 percent of 1998's tax revenue.

An important consequence of this dysfunctional fiscal system is the near collapse of local public finance in many counties and townships, particularly in the populous rural interior provinces (such as Henan, Anhui, and Hunan). Although counties and townships provide most government services, they rely on a slim tax base, collecting only 20 percent of total government revenue. In 1999, counties generated revenue barely equal to two-thirds of their spending, and about 40 percent of counties can pay for only half their expenditures.

The fiscal conditions for township governments are even more precarious because townships have practically no tax base and must extract their revenue from farmers, mostly through inefficient and coercive collection. The responsibilities of providing public services while supporting a bloated bureaucracy have forced many township governments deeply into debt. For instance, a survey in Hunan in 2000 found that township debts equaled half the province's total revenue.

In most countries, the state's declining fiscal health portends more serious maladies. The problems of the rural provinces should serve as an urgent warning to Beijing because these are historically the most unstable regions in the country, having previously generated large-scale peasant rebellions. Indeed, it is no coincidence that these agrarian provinces (where per capita income in 2000 was about half the national average) have in recent years seen the largest increase in peasant riots and tax revolts. Left to their own devices, local governments will not be able to provide effective remedies. A workable solution will require reforming the flawed fiscal system at the top and restructuring local governments at the bottom to make them more efficient and responsive.

ANGER MANAGEMENT

The institutional decline of the ruling party and the weakness of the state have caused rising tensions between the state and society. The number of protests, riots, and other forms of resistance against state authorities has risen sharply. For instance, the number of collective protests grew fourfold in the 1990s, increasing from 8,700 in 1993 to a frightening 32,000 in 1999. The size and violence of such incidents have grown as well. There were 125 incidents involving more than 1,000 protesters in 1999, and the government itself admits that protests with more than 10,000 participants have become quite common. For example, in March 2002, more than 20,000 laid-off workers participated in a week-long protest in the northern city of Liaoyang. In rural areas, many towns have reported mob attacks by peasants on government buildings and even on officials themselves.

To be sure, rising social frustration results partly from the hardships produced by China's economic transition. In recent years, falling income in rural areas and growing unemployment in the cities have contributed to the rising discontent among tens of millions of peasants and workers. But the increasing frequency, scale, and intensity of collective defiance and individual resistance also reveal deep flaws in Chinese political institutions that have exacerbated the strains of transition. Social frustration is translated into political protest not merely because of economic deprivation, but because of a growing sense of political injustice. Government officials who abuse their power and perpetrate acts of petty despotism create resentment among ordinary citizens every day. These private grievances are more likely to find violent expression when the institutional mechanisms for resolving them (such as the courts, the press, and government bureaucracies) are inaccessible, unresponsive, and inadequate.

In rural China, where institutional rot is much more advanced, the tensions between the state and the peasantry have reached dangerous levels. In a startling internal report, the Ministry of Public Security admitted that "in some [rural] areas, enforcement of family-planning policy and collection of taxes would be impossible without the use of police force." In some villages, peasant resistance has grown so fierce that local officials dare not show their faces; these areas have effectively became lawless.

The most important source of this anger is the onerous tax burden levied on China's most impoverished citizens. The effective tax rate in 1996 for the agrarian sector (excluding village enterprises) was estimated at 50 percent. In fact, collecting taxes and fees has become practically the only task performed by public officials in rural areas, consuming 60-70 percent of their time. In some areas, local officials have even recruited thugs in their collection efforts; such practices have resulted in the illegal imprisonment, torture, and even deaths of peasants who are unable to pay. What has irked the peasantry even more is that their high taxes appear to have brought few government services in return. The combination of high payment, heavy-handed collection, and inadequate services has thus turned a large portion of the rural population against the state. Recent polls conducted in rural areas found that peasants consistently identify excessive taxes and fees as the most important cause of instability.

Significantly, relations between the state and society are growing more tense at a time of rising income inequality. To be sure, the reasons behind this process are extremely complex. Although the most important causes of overall inequality are the growing rural-urban income gap and regional disparities, the level of income inequality within regions and cities has been rising at an alarming pace as well. Recent surveys have found that inequality has become one of the top three concerns for the public. In the context of rampant official corruption, this rising inequality is likely to fuel public ire against the government because most people believe that only the corrupt and privileged can accumulate wealth. Such a perception is not off the mark: one academic study estimated that illegal income contributed to a 30 percent increase in inequality during the 1980s.

The absence of pressure valves within the Chinese political system will hamper the regime's ability to reduce and manage state-society tensions. Recent reforms, such as instituting village elections and improving the legal system, have proved inadequate. The CCP's failure to open up the political system and expand institutional channels for conflict resolution creates an environment in which aggrieved groups turn to collective protest to express frustrations and seek redress.

The accumulation of state-society tensions will eventually destabilize China, especially because the dynamics that generate such tensions trap the CCP in a hopeless dilemma. Rising tensions increase the risks that any reforms, even implemented as remedies, could trigger a revolution. Alexis de Tocqueville first observed this paradox: repressive regimes are most likely to be overthrown when they try to reform themselves. This sobering prospect could deter even the most progressive elements within the CCP from pursuing change.

THINK AGAIN

Remedying China's mounting governance deficits should be the top priority of the country's new leaders. At present, these problems, brought on by the contradictions of dot communism, are serious but not life-threatening. If the new leadership addresses the institutional sources of poor governance, the CCP may be able to manage its problems without risking a political upheaval. The unfolding succession drama, however, will get in the way of meaningful change in the short term. Proposing even a moderate reform program could jeopardize a leader's political prospects. Moreover, undertaking risky reforms would require a high level of party unity -- unlikely from a leadership jockeying for power.

Thus, China's governance deficits are likely to continue to grow and threaten the sustainability of its economic development. The slow-brewing crisis of governance may not cause an imminent collapse of the regime, but the accumulation of severe strains on the political system will eventually weigh down China's economic modernization as poor governance makes trade and investment more costly and more risky. The current economic dynamism may soon fade as long-term stagnation sets in.

Such a prospect raises questions about some prevailing assumptions about China. Many in the Bush administration view China's rise as both inevitable and threatening, and such thinking has motivated policy changes designed to counter this potential "strategic competitor." On the other hand, the international business community, in its enthusiasm for the Chinese market, has greatly discounted the risks embedded in the country's political system. Few appear to have seriously considered whether their basic premises about China's rise could be wrong. These assumptions should be revisited through a more realistic assessment of whether China, without restructuring its political system, can ever gain the institutional competence required to generate power and prosperity on a sustainable basis. As Beijing changes its leadership, the world needs to reexamine its long-cherished views about China, for they may be rooted in little more than wishful thinking.