Growing Imbalances in Society and Polity

Excerpt from China’s Trapped Transition - The Limits of Developmental Autocracy by Minxin Pei

Growing Imbalances in Society and Polity

The idea that severe structural imbalances have accumulated in China’s society and political system has gained currency within China.⁵⁹ Specifically, such imbalances refer to the rising inequality (socioeconomic, regional, and urban-rural), the growing tensions between the ruling elite and the masses, the erosion of values, and the simultaneous consolidation of an elite-based exclusivist ruling coalition and the increasing marginalization of weak groups, such as workers, peasants, and migrant laborers.⁶⁰ Because of these imbalances, some Chinese social scientists warn that enormous risks have built up in Chinese society. Citing rising public dissatisfaction, growing unemployment, and increasing inequality, Wang Shaoguang, Hu Angang, and Ding Yuanzhu argue that China has entered a new period of social instability. ⁶¹ Sun Liping, a sociologist, has identified such imbalances as contributing to destabilizing social divisions in Chinese society.⁶² Unavoidably, such imbalances are reflected in rising tensions in state-society relations. Both aggregate-level data and press reports indicate a sharp rise in the number of incidents of collective protests, violent confrontations, and various forms of defiance and resistance against state authorities.⁶³

Obviously, as expressions of social discontent, such acts of protest are likely the product of the hardships suffered by groups hurt by economic transition, such as peasants and urban SOE workers. (Indeed, protests from these two social groups account for the majority of collective riots.) The rising frequency, scale, and intensity of collective protest and individual resistance also reveal the flaws in the Chinese political institutions that give rise to the buildup of such stress during transition. The breakdown of the system of political accountability governing agents of the state is likely one of the key causes of rising state-society tensions in the Chinese context. State agents who routinely abuse their power and perpetrate acts of petty despotism create victims every day, personify state predation, and bring ordinary citizens into direct contact with state oppression. Private grievances accumulated in such a system are more likely to find violent expressions when institutional mechanisms for resolving them—such as the courts, the press, and government bureaucracies—are unresponsive, inadequate, or dysfunctional.

Additionally, the CCP’s resistance to democratic reforms results in the lack of effective channels for political participation and interest representation, creating an environment in which groups unable to defend their interests are forced to take high-risk options of collective protest to voice their demands and hope for compensatory policies. The totality of such institutional flaws contributes to a systemic propensity toward violent collective protests even in the absence of organized social interests.⁶⁴ The accumulation and increase of state-society tensions bode ill for political stability in China, especially because the dynamics that generate such tensions trap the ruling CCP in an almost hopeless dilemma. As the CCP’s initial resistance to political reform has aggravated state-society tensions, rising tensions increase the risks that any such reform could get out of control, thus deterring the CCP from undertaking it. This political paralysis further fuels state-society tensions as individual and collective grievances continue to accumulate, compounding risks of future reform.

These difficult challenges and deeply embedded structural problems in China’s closed political system and partially reformed economy further cast into doubt whether China can sustain its dynamic economic modernization. To address this question in this book, I will first explore, at the theoretical level, the causes and dynamics of a trapped transition. The theoretical framework developed will then guide the four empirical chapters that examine the pathologies created by partial political and economic reforms in China.

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ONE

Why Transitions Get Trapped: A Theoretical Framework

IN PROBING the underlying causes and dynamics that have contributed to the emergence of a partial reform equilibrium that exhibits, metaphorically speaking, the distinct characteristics of a trapped transition, we now turn to three sets of theoretical literature: democratization, economic reform, and the state. By applying the theoretical insights from the literature, we can better understand the logic of trapped transitions and the political and institutional mechanisms through which market and political transitions under autocratic rule lose momentum and direction.

Economic Development and Political Change

Most studies of the impact of economic development on political change suggest a robust link between rising levels of economic well-being and the openness of the political system, and between changing social structures and the emergence of political competition.¹ Historical examples of democratization and more recent cases of democratic transition in several fast-growing East Asian societies (South Korea, Taiwan, and Thailand) further bolster the hope that China could follow a similar evolutionary path toward political openness. The absence of substantive movement toward such openness in China—even after twenty-five years of economic reform that have produced one of the economic miracles in history—does not necessarily negate the key theoretical assumptions of the relationship between economic development and democracy. For one, China’s rapid economic growth started on a relatively low base. The per capita GDP was US$151 in 1978 and US$769 in 1999, based on the exchange rate. It is likely that despite more than two decades of sustained high growth, China’s economic development may not have reached a level sufficiently high enough for democratic transition to occur. This makes China lie outside the “democratic transition zone” hypothesized by Samuel Huntington, who found that non-democratic countries with per capita GDP of US$1,000 to $3,000 were more likely to liberalize or democratize.² Judging by per capita GDP on a purchasing power parity basis, however, China may have entered the transition zone in the late 1980s.³

In addition, several factors unique to China may also explain why a movement toward democratic transition has failed to materialize. China’s huge size and enormous regional disparities in economic development constitute an extra hurdle because the growth of social forces, considered essential for the emergence of democracy, is uneven across regions. The costs of organizing and coordinating countrywide collective action can be prohibitive, especially in the context of authoritarian repression and underdeveloped communications infrastructure. The institutions, practices, and collective mentality of China’s quasi-totalitarian regime pose another, and definitely tougher, obstacle to progress toward democracy. In all former communist countries, transition toward democracy has occurred only after a sudden breakdown of the old regime. Historically, no communist regime has ever completed an evolutionary process of democratic transition. This suggests that transitions from communist regimes to democracy gradually managed by the old regime itself may be infeasible because the overwhelming advantages possessed by the regime over potential opposition groups would give the ruling elites no incentives to exit power, even through a negotiated process. The growth of autonomous, organized social forces is more difficult in such a system even when economic development may have created a large number of individuals with middle-class socioeconomic attributes. Democratic transition can occur most likely as a result of regime collapse because when the ruling elites are eventually forced to undertake even limited political reforms, the regime may have become so enfeebled by misrule and politically delegitimized that it no longer possesses the capacity to manage a gradual opening.

The slow progress in democratic reform in China may thus be better explained by theories of democratic transition that focus on the political choices made by the ruling elites as the immediate and direct causes of regime change. After all, theories based on economic development and social structures may best explain the social and economic contexts in which democratic institutions may emerge and function, but are not helpful in identifying the timing and exigencies of the transition. Proponents of the crucial role of the decisions made by the ruling elites in the authoritarian regime maintain that democratic transitions per se have little to do with the social structure or levels of economic development.⁴ Rather, such transitions take place only when the ruling elites make the crucial decision to withdraw from power, even though the political contexts in which such decisions are made vary from regime to regime.⁵ From the perspective of choice-based theories, we may even posit a perverse short-run negative relationship between rising levels of economic development and democratic transition: everything else being equal, the ruling elites may have less incentive to withdraw from power because rising prosperity makes their political monopoly more valuable.

More important, the authoritarian ruling elites can reap political gains from increasing economic growth because such growth helps legitimize their rule and vindicate their policies. Contrary to the assumption that high economic growth can create more favorable conditions for political opening, rising prosperity can actually remove the pressure for democratization, and frustrations with the slow speed of economic reform may force leaders to seek political reform.⁶ Indeed, such appears to be the case with the Chinese experience, as the following chapter on political reform will show. During the reform era, the CCP’s senior leadership was most concerned about political reform only when economic reform appeared to have stalled and growth performance was deteriorating. This was the case with Deng’s promotion of an agenda of political reform in 1986 when his economic reform initiatives were stymied by bureaucracy and growth began to falter.⁷

A short-term impact of rising economic prosperity on democratization also grants the ruling elites more material resources to strengthen their repressive capacity and co-opt potential opposition groups, especially counterelites. For example, the CCP’s efforts to co-opt the intelligentsia and the private entrepreneurs—the former being the leading opposition group in the 1980s and the latter a likely challenger to the party’s power in the future—were highly successful in the 1990s mainly because the rapid growth gave the CCP the economic means of political co-optation.

Yet, however salutary to the autocratic regime’s rule, rising economic prosperity can provide, at best, a short-time lift to the prospects of such regimes because of the self-destructive political dynamics inherent in an autocracy caught up in rapid socioeconomic change. To an extent, most ruling elites are aware that economic development will result in the emergence of powerful challengers to power and probably the loss of the political monopoly. Such a realization would prompt the agents of the regime to increase their discount rate for future income from the monopoly and, consequently, intensify their efforts to maximize current income while maintaining a high level of repression to deter challengers. In addition, the collapse of a foreign regime with similar characteristics may make fears of losing one’s own power even more acute and real. The net effects of the combination of a growing sense of long-term insecurity and the demonstration effects of a fallen fellow autocracy may be those akin to a run on the bank, with agents rushing to cash in their political investments in the regime, quickening the collapse of the regime’s authority.⁸

Intriguingly, one can find some evidence of a rising discount rate in the behavior of China’s ruling elites. In Chinese press stories of officials punished for corruption, many officials openly admit that they have lost faith in communism and in the CCP, and that their corrupt actions were prompted by their fear of the future. Some high-ranking officials have even resorted to superstition to help them predict the future. Hu Changqing, a deputy governor of Jiangxi executed for corruption, reportedly told his son (who had already immigrated to North America) that “one day China will be no more ... But with two nationalities, we will have insurance.” (Hu got every member of his family false identity papers and passports.) Hu Jianxue, the party secretary of the city of Tai’an in Shandong, privately told his subordinates that “Socialism is a dead-end.”⁹

Li Zhen, the head of the provincial tax bureau in Hebei province who was executed in 2003 for accepting tens of millions of yuan in bribes, confessed to his interrogators: 

After the collapse of the Soviet Union, many former senior Soviet officials had to work as security guards and peddle pancakes on the street. I wrongly thought that, rather than losing everything once the party’s power is gone, I should start making economic preparations [accumulating wealth] when I still have power—just to be ready for the worst.

Li’s worries were shared by another official, a deputy county party secretary in an unnamed province, who said:

The disintegration of the Soviet Union at the end of 1991 made me lose my faith. I thought it was hard to say whether the CCP could survive and avoid the same fate! Two months later, Deng Xiaoping’s speech on his southern tour was published, I wrongly thought that the market economy China was going to build was the same as the free economy that followed the Soviet disintegration. Free economy means freely grabbing money. So I used my power to grab money aggressively.¹⁰

Empirically, the rising discount rate for future gains from membership in the ruling elite is reflected in the corruption by younger officials. If the discount rate remains constant, fewer younger officials will run the risk of getting caught for corruption because they can afford to wait and, in return, will probably receive greater total returns on their political investments. Prior to the 1990s, official corruption was frequently associated with the so-called fifty-nine phenomenon (officials approaching the mandatory retirement age of sixty were more tempted to break the law). But in recent years, government statistics show that increasingly younger officials were caught for corruption. In 2002, for example, 19.3 percent of the officials prosecuted for bribery were younger than thirty-five; 29 percent of the officials prosecuted for abuse of power were younger than thirty-five. This percentage is higher than that of the CCP officials of the same age group.¹¹ Among the top local officials and government agency chiefs (the so-called yibashou, or number-one leaders) caught for corruption in Henan province in 2003, 1,773 (or 43 percent) were ages forty to fifty, compared with 1,320 (or ³²percent) in the over-fifty age group.¹²

These two hypotheses—rising prosperity tends to blunt the pressures for political reform but also fuels official corruption—are, in fact, consistent with the developments in China in the 1990s. During that decade, amid unprecedented economic prosperity, the ruling CCP’s resistance to democratic reform grew more determined just as official corruption became increasingly virulent.

Theories of Economic Reform

Economic reform in countries in the former Soviet bloc, China, and Vietnam has proceeded along two distinct routes. In the former Soviet bloc, the pace of economic transition was unusually fast, as was the scope of such transition. Thus, such transitions have often been characterized as “big bang.”¹³ In contrast, economic reform in China and Vietnam has taken a more gradual and deliberate pace, and the scope of such reform was initially limited. In the literature on economic and regime transitions in communist systems, whether one approach is superior to another remains a heated and unsettled controversy.

Proponents of gradualism maintain that gradual reform has three principal advantages.

LOWER INITIAL COSTS AND GREATER SUSTAINABILITY: The big-bang approach may create too many losers at the same time. In addition, a big-bang approach entails enormous compensation costs, which the government may have no credible means to pay. As a result, losers from big-bang reforms tend to oppose them fiercely, making them politically less sustainable. By comparison, gradual reform, through improving efficiency in certain sectors first, can produce more overall social benefits. Since the number of losers from partial reform is limited and the costs of compensation are manageable, the government has greater credibility in its commitment to compensating the losers, which can enhance the political sustainability of reform.¹⁴

GREATER FLEXIBILITY: As captured by Deng’s alleged axiom, “crossing the river by feeling for the stones,” the essence of gradualism is “learning by doing” and reform through experiments. Reformers may not find the best policy mix, but they may seek “second-best” solutions that yield immediate efficiency gains.¹⁵ Gradualism allows decision makers to target certain sectors for breakthrough reforms and acquire valuable knowledge for applying reform to other sectors. Most important, gradualism allows reformers to make—and correct—policy errors and avoid costly mistakes that can fatally undermine the support for reform. Over time, market forces can gain strength and become dominant in influencing decision making and the allocation of resources.¹⁶

CONSTITUENCY OF REFORM: Gradualist reformers can use the classic strategy of divide and rule by creating beneficiaries of reform first and using them as constituencies for further reform.¹⁷

Gradualism has many risks, however. First, its record in reforming state-socialist economies is dismal. In Eastern Europe, the gradualist approach to reform in the 1970s and 1980s was generally considered a failure. Most scholars of Soviet-style planned economies argue that only a comprehensive, not a piecemeal, approach could transform such economies. ¹⁸ Second, a gradualist approach suffers from the lack of complementarity among various reform measures. Some reform measures that are implemented cannot be fully effective without other accompanying reforms. János Kornai argues, for example, that implementing some reforms over others in a piecemeal fashion could backfire and discredit the entire process of economic liberalization. Initial reforms that are carried out sluggishly and inconsistently would likely preclude the success of future reforms.¹⁹

The lack of complementarity can distort markets.²⁰ Gradual or partial reforms also create new rent-seeking opportunities for the politically connected groups to double-dip by taking advantage of both the new opportunities offered by the market and the rents provided by the old unreformed system. These groups typically rely on their administrative power to create new monopolies and barriers to trade, resulting in lower output, efficiency losses, and fragmented markets.²¹

Finally, the ultimate cconomic costs of transition can be very high if gradualism allows the ruling elites to make selective withdrawals, initially from sectors with low rents while holding on to sectors with high rents. Allocation of resources will remain inefficient. By concealing the information from the public, rulers can often hide the costs of such gradualist reforms, especially through hidden public obligations and bad debts in state-controlled banking systems. (Such concealment is much easier if the country begins the reform with practically no debt load, as China did in 1979.) China’s approach to reforming state-owned enterprises is an apt example. The CCP treated SOEs as its last bastion of rents and patronage, and maintained them on life-support through fiscal subsidies and bank credits during the reform era. As a result, the allocation of China’s scarcest resource—capital—was severely distorted. Although SOEs contributed to only a third of China’s GDP toward the end of the 1990s, they consumed two-thirds of the domestic investment capital.²² In addition, two decades of massive subsidies to loss-making SOEs saddled Chinese public finance with huge hidden obligations.²³

Gradualism in economic reform may be more likely to fail when it is undertaken without accompanying reforms that restructure the key political institutions that define power relations and enforce the rules essential to the functioning of markets, such as security of property rights, transparency of government, and accountability of leaders. An implicit, but vital, assumption of gradualism is that reformers are expected to build political coalitions to push for such institutional changes to safeguard the fruits of economic reform as well as to sustain its progress. In reality, however, the feasibility of building such coalitions is rarely assured. This assumption is particularly problematic when gradualism is undertaken by a regime that possesses overwhelming initial advantages vis-à-vis societal forces, such as private capital and organized civic interests. In such a system, proreform coalitions are more likely to emerge within the regime, rather than between the regime and society, because either organized societal interests were practically nonexistent after years of quasi-totalitarian rule or the neoauthoritarian regime does not allow the emergence of such groups out of fear of their potential threat.

The low feasibility of forming and sustaining a grand proreform coalition encompassing both progressive elements inside the regime and organized societal interests not only increases the uncertainty of gradualist reforms, but also provides the entrenched interests inside the regime an inherent advantage. Such interests can always invoke the threat of further reform to the viability of the regime to block initiatives designed to institutionalize the rules and norms of the market, further liberalize the economy, and curb the predatory power of the state. Since reformers within the regime are unable to form alliances with societal groups—which would benefit from such institutional reforms—they often experience great difficulty in overcoming such opposition to reform that is phrased by their opponents in terms of regime survival, rather than economic or policy rationality. Moreover, antireform elements within the regime can use private deals to co-opt members of newly influential social groups, such as private entrepreneurs, thereby creating a government-business collusive network that makes participation in the antireform coalition far more attractive than an uncertain alliance with the proreform forces.²⁴

Due to such a balance of political power, which favors the ruling elites, gradual political opening under a postcommunist autocratic regime is likely to be highly uncertain and subject to frequent reversals. In sum, three unfavorable factors are set against a process of gradual political opening that parallels gradual economic reform. First, the initial conditions provide the ruling elites an overwhelming advantage in political organization, patronage, and coercive power. Second, the process of selective withdrawal creates strong incentives for the ruling elites to defend their last strongholds of economic and political privileges. Third, gradualism allows the ruling elites to co-opt new social elites and form an exclusionary network that divides the opposition, while creating an incentive structure that rewards cooperation with the antireform elements and penalizes opposition to such elements.

Gradualism, Chinese Style

Despite the potential pitfalls of gradualism, the experience of China’s economic transition seems to suggest the opposite: gradualism has been a resounding success in China. In fact, the consensus view has so overwhelmingly endorsed China’s gradualism that Thomas Rawski claimed in 1999 that “We are all gradualists now.”²⁵ Such an assessment is mainly based on the consistently high output growth the country has achieved since it began economic reform in the late 1970s. Compared with the large fall in output in the transition economics in Eastern Europe and the former Soviet Union, China’s rapid output growth seems to vindicate its gradual approach to economic reform. A leading textbook on economic transition, which cites the Chinese experience as the most robust example of the gradualist model, claims that such a model is “more complete and adequate” than the big-bang approach, otherwise known as the “Washington consensus.”²⁶ Specifically, economists who have given high marks to China’s gradualist approach have singled out several key incremental institutional reforms as reasons for its success in introducing market forces and incentives without causing disruptions in output.²⁷ One such reform was the use of dual prices for the same goods; one price was set by the government and the other determined by market forces. This measure of limited market liberalization was deemed, economically, “Pareto-improving” and, politically, palatable to opponents of economic reform. It was “reform without losers.”²⁸

Another important example of gradualist institutional innovations cited was the township-and-village enterprises (TVEs). By Western standards, the property rights of the TVEs were poorly defined because they were owned by local governments. Political constraints in China, including both ideological prejudices against private property and the absence of the rule of law, prevented the emergence of purely private firms at the initial stage of the transition. Rural township governments, rather than the central state, managed to overcome these political constraints and established TVEs that performed more efficiently than state-owned firms because the interests of the TVE managers and local politicians were more closely aligned, and because TVEs contributed significantly to the budgets of township governments.²⁹

In addition, China’s gradualist approach has had several unique features. First, it has allowed Chinese leaders fully to exploit the structural advantages provided by favorable initial conditions. These included a relatively decentralized economic decision-making system; a political structure conducive to regional competition; a relatively small proportion of the labor force employed in the state sector; a less distorted industrial structure compared with the former Soviet bloc; and a significant nonstate sector.³⁰

Second, Chinese reformers quickly responded to peasant demands to dismantle the communes and implemented breakthrough reforms in the country’s most critical economic sector: agriculture. The initial success of the rural reforms built a crucial proreform constituency. The surpluses generated by the reform allowed rural governments to invest in new manufacturing businesses, which eventually became a critical source of local public finance.³¹ Thus, while China’s overall pace of reform may be gradual, its rural reform was decidedly big-bang.

Third, perhaps the most important feature of China’s approach is the strategy of “growing out of the plan,” the main thrust of which was to grow a nonstate sector rapidly along the side of the state sector.³² Unlike the former Soviet bloc countries that experienced sharp falls of output after adopting the big-bang approach, this strategy allowed China to increase its output rapidly, thus increasing overall social benefits and generating the financial means to compensate the losers of reform. More critically, the same strategy avoided making immediate losers of those groups with entrenched interests in the state sector (state bureaucracy and workers). This would have led to a potentially debilitating political battle and undermined support for reform.

Of course, China’s gradualist approach has its critics. Some believe that the success of China’s reform has been overstated, especially given the hidden costs of deteriorating public finance, the slow pace of structural reform, and the inefficient allocation of capital.³³ Others argue that China’s superior economic performance during transition is largely due to the country’s structural factors or initial conditions—such as a less distorted industrial structure, smaller state subsidies, and a more restrictive state-socialist welfare system—and not to better policies or institutional innovation.³⁴ In addition, skeptics believe that economic distortions tend to increase in a partially reformed economy, citing China’s well-known problem of local protectionism and the fragmentation of internal markets as examples of massive economic distortions.³⁵

Implicit in the arguments presented by the skeptics of China’s gradualist approach is their belief that gradualism will ultimately fail. They reason that China will eventually exhaust the advantages generated by its favorable initial conditions, and the market distortions embedded in an incremental approach will slow down economic growth. In the absence of constitutional transition (or democratic transition) in China, the same skeptics worry that the process of economic transition can be “hijacked by state opportunism” and be exploited by the ruling elites to consolidate their hold on power, at the expense of the long-term interests of society.³⁶

The assessment of China’s economic performance by its own economists shows a surprising degree of nuance and demonstrates a deep understanding of the benefits and limits of gradualism. Two themes dominate the discussion by Chinese economists concerning the country’s reform strategy. First, like their Western counterparts, Chinese economists clearly recognize the country’s achievement in output growth during the reform era, and a majority of them share the belief that this gradualist strategy is a more appropriate approach for China. They point to the rapid improvement in the standard of living, the pace of industrialization, the growing links with the world economy, and the increasing influence of market forces as evidence of the success of the gradualist strategy.³⁷ Second, they also understand the limits of gradualism in transforming the deeply embedded institutions of a planned economy. In particular, they arc acutely awarc of the so-called salient systems contradictions—or the constant frictions and incompatibilities between the emerging market institutions and the powerful influence of the old system.

To use the blunt language of an official assessment, “markets in capital, land, technology, and labor” arc underdeveloped; the government has only “incomplete capabilities in macroeconomic management” and has failed to “form a system of public finance... and transform fundamentally the management mechanisms of state-owned enterprises.” Reform is threatened by the “emergence of special interest groups within certain government departments and the weakening of the state’s capacity” and by “the influence of local protectionism.”³⁸ Wu Jinglian argues that, judged by the changes in the allocation of economic resources, China has not yet passed its reform test. He believes that the state-owned economy has not been fundamentally reformed or restructured and that capital is, to a very large extent, allocated by the government via administrative means.³⁹ Fan Gang, a well-known proponent of gradualism, admits that gradualism carries huge costs, especially in terms of efficiency losses, continuing price distortions (due to the controls imposed by the government on key inputs), soft budget constraints, and monopoly.⁴⁰

Even the CCP Central Committee’s assessment of China’s progress in economic reform in late 2003 painted a picture full of difficult challenges ahead. According to the communiqué of the third plenum of the CCP’s 16th Central Committee, “China’s economic structure is not rational, the redistributional relationships have not been smoothed, peasants’ income growth remains slow, contradictions of employment are growing salient, resource and environmental pressures are increasing, and the aggregate competitiveness of the Chinese economy is not strong.”⁴¹

The most serious threat to the viability of China’s gradualist approach, however, is the weakness of the institutions critical to the functioning of a market economy. Such institutions include, among other things, a modern legal system and a constitutional order that can protect private property rights and enforce contracts, as well as a political system that enforces accountability and limits state opportunism. A quarter century after China began its transition to a market economy, these institutions remain relatively underdeveloped. It is worth noting that, starting in 2001, Wu Jinglian began to emphasize the rule of law, rather than market forces, as the key to China’s future success. He publicly declared that, without completing the necessary political reforms, which would be required to strengthen the institutional foundations of a market economy, China risked falling into the “trap of crony capitalism.” ⁴² Reflecting on the evolution of his own thinking, Wu admitted that Chinese economists like him were naive at the beginning of reform. They thought that “once the practices of a planned economy were jettisoned and a set of market-based relationships was established, everything would be smooth-sailing.” But the problems that emerged twenty-five years into China’s transition cannot be solved by “pure economics.” “Although a market economy is gradually emerging in China, problems such as social anomie, rising inequality, and rampant corruption are getting worse.” Wu concluded that a “good market economy should be built on the foundations of the rule of law.”⁴³

Why No Autocracy Has Opted for the Big Bang

The focus on output growth, incremental institutional change, and the merits and flaws of the gradualist approach misses a key issue: the connection between an authoritarian regime and the type of economic strategy it is forced to adopt. To be sure, most researchers recognize the role played by political constraints on the course of economic reform. Gérard Roland, for example, identified two such constraining factors. First, the uncertainty of outcomes, especially in terms of the distribution of costs and benefits of reform, constrain policymakers and hamper their ability to build proreform coalitions. Second, “complementarities and interactions among reforms” also matter because individual reform measures rarely produce their intended effects without other complementary measures. In political terms, implementing a reform package deemed, at least economically, as having a higher degree of complementarity (so that various components of the reform work better with each other) may actually undermine reformers. Such a package can hurt more entrenched interests and, at the same time, galvanize their opposition to change.⁴⁴ Implicit in the complementarity constraint is the assumption that this type of constraint forces reformers to adopt a gradualist or incremental approach to divide and conquer the opposition.

Proponents of gradualism seem to have overlooked the greatest political constraint on economic reform: an authoritarian regime’s fear of losing power during reform most likely far outweighs its worries about encountering opposition to such reform. The most important political logic that drives economic reform under autocracy is not one based on a Machiavellian calculation of coalition-building, but one that is centered on regime survival. According to this perspective, authoritarian regimes facing the choice between reform and a crisis-ridden status quo—as was the case in the immediate aftermath of the Cultural Revolution in China—must choose between two unpalatable options. Maintaining a deteriorating status quo will most likely threaten the regime’s survival both in the short term and for the long run.

However, to the extent that complete market-oriented reforms will eventually deprive the regime of the resources it needs to buy support from interest groups, an authoritarian regime’s long-term survival will also be at risk—even though its short-term prospects may brighten as a result of economic reform. In addition to status-quo bias, which threatens regime survival, and gradualist reform, which increases risks to the regime’s long-term survival should it truly succeed, there is a third threat: a big-bang reform.⁴⁵ A big-bang approach may not only mobilize opposition from various quarters simultaneously, but it could also force the authoritarian regime to relinquish its control over vital economic resources so quickly that it would also lose its grip on political power.

This is why all authoritarian regimes in history, including the most promarket Pinochet regime in Chile, have shunned the big-bang approach to economic reform.⁴⁶ Instead, all authoritarian regimes that have been forced to undertake economic reform have opted for the gradualist strategy, with the state maintaining tight control in vital sectors (Vietnam in the 1990s, Indonesia under Suharto, Taiwan under the Kuomintang, South Korea in the 1960s, and Mexico under the PRI [revolutionary party]). Revealingly, the big-bang approach was embraced only in those countries where the authoritarian regimes had been overthrown, including the former communist regimes in Eastern Europe that had tried various forms of gradualism before.

What makes gradualism a favored strategy for authoritarian regimes embarking on economic reform? The political logic of gradualism is both compelling and straightforward. Few authoritarian regimes can rely on coercion alone to maintain power. Most autocracies mix coercion with patronage to secure support from key constituencies, such as the bureaucracy, the military, and business groups. In the Chinese case, for example, the state controlled more than 260,000 enterprises, with total assets valued at 16.7 trillion yuan in 2001 (or 177 percent of GDP).⁴⁷ The patronage that the control of these assets can underwrite is the key to the CCP’s survival. The centerpiece of such a vast patronage system is the regime’s ability to secure the loyalty of supporters and allocate rents to favored groups. The CCP appoints 81 percent of the managers of SOEs and 56 percent of all enterprise managers. 

The corporate governance reforms implemented since the late 1990s did little to change this patronage system. In the restructured large and medium-sized SOEs—which were ostensibly transformed into share-holding companies—the party secretaries and the chairmen of the board were the same person in about half the firms. In the 6,275 large and medium-sized SOEs that had been classified as restructured as of 2001, the party committee members of the prerestructured firms became the board of directors in 70 percent of the restructured firms. Altogether, the CCP had 5.3 million officials—about 8 percent of its total membership and 16 percent of its urban members—who held executive positions in SOEs in 2003.⁴⁸

To the extent that a big-bang strategy reduces economic distortion and hence an authoritarian regime’s ability to create and allocate rents, that regime’s ability to retain political support will be undermined drastically. Under the logic of political survival, the advantages of gradualism appear self-evident to authoritarian regimes. Unlike the big bang, gradualism allows the ruling elites to protect their rents in vital sectors and use retained rents to maintain political support among key constituencies. Under gradualism, the regime is assured of its ability to decide where it wants to surrender rents and to whom such rents will be given. Retaining this ability is of paramount political importance. If a regime can choose the sectors to liberalize, the same political logic dictates that it should first liberalize sectors where rents are relatively low and less concentrated. Giving up low-rent sectors means that the regime suffers, at most, minor loss of patronage. Liberalizing sectors in which rents are not highly concentrated is unlikely to encounter determined opposition. In the Chinese case, reforms in agriculture, consumer retail, and light industry fit this logic very well.

It is a more tricky issue to decide to whom the regime should turn over the rents from these liberalized areas, if we assume partial reform and residual rents in these sectors, as is often the case. It is possible that, once liberalizing reforms are implemented fully, rents may disappear completely. As a result, rent reallocation is no longer an issue. But as residual rents are a common feature of transition economies, an authoritarian regime engaged in economic reform must decide which groups should have access to the residual rents. Again, based on the political logic of survival, authoritarian regimes tend to favor nonthreatening groups and groups that can be co-opted. Foreign investors, for example, can be a nonthreatening group because their primary motive is profit, not power. Domestic private entrepreneurs, however, may pose more direct long-term threats.

That is perhaps why, as of 2003, indigenous private Chinese firms still faced high, if not impossible, barriers to entering about thirty sectors, such as banking, insurance, securities, telecommunication services, petro-chemicals, automobiles, and other industries deemed critical by the government.⁴⁹ In contrast, the Chinese government welcomed foreign firms to enter many of the same industrial sectors. China has favored foreign investors not solely because they can supply capital and technology, but also because of the CCP’s fear of domestic private capital. ⁵⁰ Indeed, as Yasheng Huang’s groundbreaking research shows, foreign direct investment surged into China mainly thanks to the Chinese state’s discrimination against domestic private firms.⁵¹

The regime’s ability to protect and reallocate rents under gradualism allows the ruling elites to retain the resources to co-opt new social elites and groups that may threaten their authority. Under gradualism, market reforms tend to be incremental and create imperfect competition in the interim. Because of this, the government maintains significant residual control even in areas where liberalization has already taken place. The ruling elites can parcel out the residual rents in these areas to new groups targeted for co-optation. Politically, such co-optations can help shore up the social base of support for the regime even as it alienates its traditional allies. In the Chinese case, gradualism has apparently generated political dividends not only in growth-enhanced legitimacy, but also in the CCP’s success in co-opting emerging private entrepreneurs and a large segment of the new urban middle class, such as professionals and select members of the intelligentsia who have been recruited into the government.⁵²

However, gradualism ultimately becomes untenable because of rent dissipation by insiders. At the aggregate level, an authoritarian regime that is successful in protecting the major sources of its rent should be able to extend its longevity. It can use the rent to maintain its base of support, provided that it keeps rent dissipation by insiders at a manageable level. But both theory and experience show that rent protection and dissipation go together. Few regimes are capable of protecting their rents for long, while preventing their insiders from dissipating the same rents. In a transitional environment marked by high uncertainty for the members of the ruling elites, weak enforcement of rules, and low accountability, rent dissipation by insiders is likely to increase because insiders have both the means (monopolistic political power) to appropriate the rent to themselves and the motivations to do so (fear of an uncertain future).

The combined effect of rent protection and dissipation is the coexistence of aggregate inefficiency, financial deterioration, and insider corruption, as illustrated by the three case studies in Chapter 3. In other words, a self-destructive logic is embedded in a gradualist reform strategy adopted by an authoritarian regime obsessed with survival. As proponents of gradualism have argued, such a strategy may make a lot of sense, especially given the historical contexts marking the transition to a market economy in former socialist countries. Such a strategy assumes, however, that agent opportunism will be held in check, although literature on gradualism has not specified how. In reality, agent opportunism—the main reason for rent dissipation by insiders—is a common problem in transition economies. In the context of gradualism under autocratic rule, state or regime opportunism further encourages agent opportunism as the policies of the authoritarian regime provide its agents with the chances to appropriate rents. Because the authoritarian regime relies on the same agents to maintain its power, it becomes almost powerless in combating agent opportunism and containing rent dissipation.