Economic Analyses Fail To Mention That China Is A One Party State

WASHINGTON – When it comes to judging China’s economic policies, Western policy-makers and experts are careful to limit their analysis to strictly economic data. The broader illiberal political context in which economic policy decision are taken in China is simply ignored, as if it did not matter.

China is an autocracy

Case in point, former US Secretary of the Treasury Hank Paulson in a recent The Financial Times op-ed piece provided a sober and totally predictable list of things that China should do in order to reform its economy. He dis so without ever mentioning the fact that China is ruled by a one party state whose self-preservation interests may not be in line with good economics.

More recently, Martin Wolfe, economics columnist for the FT provided a competent, well nuanced analysis of what could be some kind of a mounting Chinese debt crisis. He pointed out that too much debt-financed investment and slow growth indicate that much of this investment is poorly allocated. This means uncollectable debt and huge losses down the line. He concludes with a predictable “Yet reform must come –and the sooner the better”.

Communist Party not mentioned

Wolfe’s analysis is terse and cogent. Except for one thing. In his long and detailed piece in which he makes some comparisons between the US debt crisis and what may become a Chinese debt crisis he never points out that America is a democracy and China is a one party state. As if this were just some minor detail!

In his piece he mentions Chinese authorities and policy-makers. But you cannot find the expression “Chinese Communist Party” anywhere in his article. In fact, the proverbial visitor from outer space could very well conclude that the United States and China are very similar countries that faced or are about to face very similar economic problems.

Well, not so. America is a democracy and China is an autocracy. Why is this relevant? it is relevant because in a democracy, messy politics notwithstanding, there is open debate about issues and the possibility to put different people in charge through a legitimate constitutional process.

In democracies we can have change

In the US case, rightly or wrongly, in November 2008 the American voters decided that the Republican policy-makers were in large part responsible for the enormous financial collapse the country was experiencing and so they voted them out of office. Barack Obama was elected President in large measure because the Republicans had created or at least had failed to prevent the epic Wall Street meltdown.

Monopoly of power creates different dynamics

Today’s China, while possibly facing similar issues, is an entirely different story. The Chinese Communist Party is the self-appointed governing agent and the sole steward of the economy. The Party rules because it has outlawed any organized political opposition. But the Party also knows that a way to prevent any future organized alternative to its rule is in delivering sustainable economic growth. Indeed, to the extent that most Chinese people see their conditions improving thanks to the able economic stewardship provided by the government, there are no strong motives for complaints.

Growth as a political imperative

For this reason, the pursuit of economic growth, no matter at what price, is a political imperative for China’s leaders. And this is probably why, even though the party leaders probably know better, facing an unwelcome economic slowdown, China’s leaders allowed an unprecedented avalanche of debt-financed investments, many of which are likely to be ill-advised. And what’s the reason for this risky policy, likely to generate capital losses? Because more and more investments seem to be the only antidote against an economic slow down that may have nefarious political implications.

Simply stated, this investment binge is politically motivated. The Chinese Communist Party needs more growth in order to reconfirm its role as wise and capable economic guide for the country.

Indeed, the prospect of new social tensions caused by slow growth and possibly increased unemployment is very unpleasant. In order to avoid it, China’s leaders tried to improve the economy by pushing forward new investments, (hence new activities and more employment), even though many of them are destined to collapse.

Political factors

In the end, here is the issue. While it is true that all politicians want to take credit for a growing economy and in many instances will do their best to unwisely manipulate the economy in order to delay bad outcomes for which they will be blamed, in China the political leadership must deliver growth, at all costs because most likely its very survival depends on it.

Therefore, it is no surprise that, confronted with a slow down,   the Chinese leaders decided to artificially grow the economy by pushing forward more and more investments. Losing a lot of money on bad loans seems to be more palatable than confronting  mounting political discontent caused by a slower economy.

Self-preservation more important than good economics

In the end, here is the simple truth. Autocracies would like to deliver economic growth that will keep the masses happy. However, when in trouble, autocracies are more likely to engage in unwise economic policies if they see them as the best tool to consolidate their grip on power.

It would be good for policy-makers and economists to point out this simple truth. Democracy is good. Autocracy is good only for the autocrats.


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