No Real Economic Reforms In China The Communist Party needs to control the economy, in order to stay in power

WASHINGTON – Former Treasury Secretary Henry Paulson, with all his government and Goldman Sachs private sector expertise, (he was CEO prior to joining the Bush administration), is incapable of openly recognizing the obvious when it comes to China. In a WSJ op-ed piece, (China’s Best Bet: Doubling Down on Reform, Not Stimulus, April 14, 2015), Paulson discusses China’s difficult predicament. No, China is not imploding. But it faces an uncertain future.

The old model is no longer working

The old export-oriented statist model did wonders for thirty years; but now foreign markets are saturated, and China’s price are going up. The old formula can no longer deliver the incredible 10% economic growth, year after year. Paulson correctly points out that China could embrace a new path, based on the market. Privatize all the State Owned Enterprises, (SOEs), and all the banks. Allow competition and a market-based, more efficient allocation of capital. Yes, this might work.

Statist country

Except for one thing. Notwithstanding a good measure of private enterprise, China remains a state-controlled economy. And this is not by accident. The Chinese Communist Party believes (correctly) that its control over the economy is an essential component of its ongoing effort to retain control over the country.

Put it differently, the ability to control all the banks, the telecoms, the oil companies, the steel conglomerates, and much more gives the Communist Party a strong grip on the country.

Control is not about efficiency

The other side of the coin is that an unaccountable, unelected political elite is generally a poor steward of the economy. And this is because when a political group, even if led by self-described technocrats, is managing economic assets without any market pressure, it will do so to reach political, rather than economic, ends.

And so, here is why Paulson’s theoretically sound suggestions about openness, privatization, competition and more are essentially meaningless in China. Of course, the Chinese Communist Party would like to devise a new formula that would yield more growth. But it wants to do this without losing direct control over all the strategic assets it controls.

And this is about the same as declaring that you really want to be sober, but you still want to drink large amounts of wine and beer. You cannot have both.

The autocracy wants to stay in power

Here is the thing. There are very few examples in history of autocracies that consciously embrace a reform path that will inevitably lead to their self-liquidation. The Soviet Union under Michail Gorbachev ended up doing exactly that. But this was the unintended consequence of what was supposed to be an effort at  rejuvenating he old Soviet regime.

It may be possible that China’s leaders at some point will understand that they cannot keep this game going for ever. May be one day they will recognize that it is time to create the foundations of a pluralistic society. But I see no signs of any of that, for the time being, anyway.

Lower rates of growth, but a solid grip on power

Given all this, my hunch is that between a slower rate of growth, (due to built-in economic inefficiencies, caused by state controls), with a strong grip on the economy and therefore on power, and higher growth but at the price of losing control, the instinct of China’s leaders is to keep control, for as long as possible, even though this may lead to lower growth, and possibly stagnation. “Setting the economy free”, as Paulson recommends, really means setting the country free.

A great idea, whose time, however has not come.

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