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Shanghai's Pudong District, built from only the late 1990s, has become a symbol of China's economic prowess. Image by Boris Kasimov available at Flickr.com under CC license.

10:27 am | 27. December 2019

Efficient China

One of the most persistent myths about China is that its system works with great efficiency, enabling concerted action and long-term planning. But such rosy assessments overlook key costs – not least to the rights and protection of citizens.

By Hui Zhou

For some, words like “paralysis” and “gridlock” have become synonymous in recent years with political decision-making in the European Union and many of its member states. There is an abiding sense in certain circles, whether among politicians, academics or ordinary voters, that shortsightedness and political wrangling in the representative democracies of Europe has kept leaders from making decisive choices. For some, China, with its apparent ease in mobilizing people and resources to define and accomplish necessary tasks, provides a practical example of a system that can cut through the nonsense and get straight to solutions.

Key Points:

China’s centralized governance is sometimes seen as a major advantage. But this overlooks the immense costs and two key questions: How does the system derive its huge resources? Why does the government enjoy such powers of enforcement?

High taxation, low benefits. If non-tax revenues collected by the government are considered in addition to formal categories of tax, China’s tax burden is likely 35 percent to 40 percent of GDP, surpassing many high-welfare European countries. Yet, the quality of public service and social security lag far behind standards in Europe.

Low human rights standards. Unfairness in China’s welfare system, lack of access to healthcare (particularly for those without urban registration), forced land acquisition and violent property demolition and other common problems lower the cost of development for China’s government.

Debt for development. Since the 1990s, local Chinese governments have rapidly built a "GDP machine" that leverages borrowing for development. This has led to huge level of so-called implicit debt. Of the 29 provincial-level administrative divisions in China for which statistics were available, 21 had debt levels exceeding 150 percent.

One vocal proponent in support of China’s way, for example, has been Jørgen Randers, a Norwegian professor of climate strategy who is also a member of the Club of Rome, an organization comprising a range of experts and current and former politicians addressing key global issues.

Randers was one of the authors of the 1972 report The Limits of Growth, which was commissioned by the club to look at humanity's ecological footprint. In an update to that report published in 2012 (PDF here), Randers was bullish about the role of China and the efficacy of its centralized system, predicting that it would become the future world leader owing to the ability of its “strong government” to lead on issues like climate change.

At one point, Randers writes in his report: “I think we will see 40 years down the line that it was the Chinese who did, in the end, solve the climate problem for us – through collective action. They will produce the electric cars and the technologies we will need, and they will implement them in China through centralised decisions.”

Randers has repeatedly emphasized in his interviews in recent years that China has institutional advantages and efficiency that western countries do not have. China, he says, can concentrate power to make decisions. Meanwhile, China has the willingness and the ability to direct resources and investment towards the necessary fields. Randers has spoken of Chinese Communist Party as an “enlightened dictatorship” capable of ruling “above the popular mandate.”

U.S. entrepreneur Elon Musk, the founder and CEO of two companies valued at over 100 billion US dollars,has praised Chinese efficiency in much the same way. “China's progress in advanced infrastructure is more than 100 times faster than the U.S.," Musk wrote in a 2018 post on Twitter, accompanied by a short video about how a railway station in China could be built within nine hours.

Early 2019, while meeting China’s Premier Li Keqiang, Musk again praised the speed and efficiency of China’s development, and said that it was hard to imagine that anywhere else a car factory could be completed and opened in such a short time like the Tesla plant in Shanghai.

Such praise of Chinese efficiency generally focuses on two aspects: first, that the Chinese government has ample resources to put in; and secondly, that the Chinese government has formidable powers of administrative enforcement, which are not restricted by such forces as public opinion.

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Elon Musk praises China's speedy building of infrastructure in a 2018 Twitter post

But there are two crucial questions we should think seriously about before we reach conclusions about the Chinese experience and extend it to possible lessons for the world. First, where does all of this money come from? And second, why does the government enjoy such powers of enforcement. 

Before we answer these key questions, it is impossible to draw conclusions about whether or not these administrative superpowers are really solutions to the problems the world faces.

Following the Money

Let’s begin first with the key question of where the resources of the state come from.

The results of China’s 40-year opening and reform policy are certainly eye-catching. Brand new high-speed trains, cities glittering with modern buildings, sprawling subway systems – all of these are apparent wonders people take delight in talking about. Official data has shown that China’s urbanization rate jumped from 30 percent in 1996 to 60 percent in 2018. In 2017, China’s completed infrastructure investment was nearly 2.6 trillion dollars, about 21 percent of the nation’s GDP. Aside from domestic investments, China has directly invested over 90 billion dollars from 2013 to 2018 in countries that are part of its “Belt and Road Initiative,”the massive global development strategy that is a centerpiece of China’s foreign policy. The major part of these infrastructure investments are government projects.

But where does all that money come from?

Taxes and Fees Without Consultation

China’s financial revenue expanded rapidly in the past decades, corresponding to the fast growth of China. Every year, the growth rate for financial revenue has been higher than the GDP growth rate, and the growth is also much faster than the increase of personal income. According to data from the National Bureau of Statistics (NBS), Chinese urban households’ disposable income increased 9.41 times from 1994 to 2017, but during the same period tax revenues increased 27.16 times – and this does not even include non-tax income, land leasing revenue (this is revenue for land sales], extra-budgetary revenue, and social security income.

The results of China’s 40-year opening and reform policy are certainly eye-catching. . . . But where does all that money come from?

 

So, what exactly is the Chinese government’s total income?

The results differ widely depending on how we make the statistical calculations. The government often claims that China’s tax burden is low in comparison to other countries internationally, but this claim factors in only government income from those payments clearly identified as “tax.” However, one thing about the Chinese government’s fiscal system is that the tax burden is not just about tax — and the sources of government revenue are extremely complicated.

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Source: Caixin Media. 

An Tifu, a finance expert, concluded in 2010 that aside from fiscal revenue or budgetary income (also called in Chinese “first-tier income,” of which the principle part is tax), Chinese government revenue also includes extra-budgetary revenue (“second-tier income”), and non-institutional revenue (“third-tier income”), as well as revenue from land sales (“land financing”), and so on. Aside from 18 nationally recognized categories of regular tax – the primary source of budgetary income – there are thousands of other names used in jurisdictions across the country for collecting fees, fines, funds, apportionment, and other income, comprising extra-budgetary income.

These non-tax revenues are not only legion in terms of types and categories, but also translate into vast amounts.

According to data from 2017, if we only calculate macro tax burden by the narrowest definition (tax/GDP), China’s rate is 17.5 percent. Yet the disclosed macro tax burden in a broader sense (general government revenue/GDP) is as high as 27.6 percent. According to analyses from multiple parties (for example, An Tifu, 2010), China’s generalized tax burden is 35 percent to 40 percent of GDP if other real government revenues are added, reaching and even surpassing many high-welfare European countries. Yet, the quality of public service and social security lag far behind standards in Europe.

The 18 Types of "Regular Tax" in China: 

Taxes on Goods and Services: value-added tax (增值税), sales tax (消费税), business tax (营业税), vehicle purchase tax (车辆购置税), customs tax (关税)

Income Tax: corporate income tax (企业所得税), personal income tax (个人所得税)

Property and Use Tax: land appreciation tax (土地增值税), property tax (房产税), urban land-use tax (城镇土地使用税),  arable land occupation tax (耕地占用税), contract tax (契税), resource tax (资源税),  vehicle and vessel use tax (车船税), stamp tax (印花税), urban maintenance and construction tax (城市维护建设税),  tobacco tax (烟叶税) and tonnage tax (船舶吨税).

Behind these surging government revenues that depress the incomes of China’s residents looms the fact that tax collection in China is fundamentally undemocratic and not subject to rule of law.

The irregularity of taxation complements the reality that the government's legislation and administration powers are not divided and that the people have no democratic power.

From the perspective of the central government, the 18 regular taxes were originally published in the form of administrative regulations of the State Council, rather than formal legislation by the legislature. The National People's Congress, which is nominally responsible for legislative taxation, is nothing more than a rubber seal and lacks the function of representative democracy. The public has no power and channels to participate in the decision of taxation and the determination of tax rates.

From the perspective of local governments, since the tax-distribution reform in 1994, “high-quality taxes,”a term often used to refer to forms of tax that provide stable and dependable revenue, have all been collected by the central government. As local economic growth has been a core calculation in the index of promotion of officials within the system, local governments at all levels have tried every means to “scrape and scramble” for various sources of revenue.

Local governments at all levels have tried every means to “scrape and scramble” for various sources of revenue.

 

As a result, the commercialization of public services has become a common phenomena – meaning that citizens and businesses are paying out of pocket, in addition to the formal tax burden, for the government to do its job and provide basic services. To provide one example, expenses related to public services should be accounted for in the government budget, but many local governments impose additional administrative fees on municipal services such as the installation of street lamps and building of roads.

Debt for Development

The obsession with GDP growth as a performance indicator for local government officials has also resulted in the creation of a whole system of investment financing as officials seek the means to stimulate GDP.

GDP growth targets account for a large share of the performance assessments conducted for local officials in China. GDP increases are all about trade, consumption, and investment. The growth of trade and consumption is difficult to achieve in the short-term, as they depend on  market conditions and people's income. Therefore, investment has become the most important means for officials to stimulate local GDP growth, and the investment projects with the most political points and potential value all generally have to do with infrastructure.

Since the 1990s, local Chinese governments have rapidly built a "GDP machine" that leverages borrowing for development. Here is how the machine works:

First, the government establishes a local government financing vehicle (LGFV) as a corporate entity, and into this it injects state capital from land, transport, utilities and other sources. The LGFV then mortgages these assets in order to seek capital. Once they have capital, LGFVs will use this for development, for example to build infrastructure (and sometimes vanity projects and speculative ventures), in order to achieve asset appreciation. Financial institutions can then package the debt into financial products for investors. In recent years, LGFV bonds sold to the international market as high-yielding securities have gained in popularity. In the end, the government behind the LGFV and the financial institutions share in the revenue.

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However, these LGFVs do not themselves have much in terms of actual assets and income, and the financing relies solely on government power. Legally, these companies are independent legal persons, but in reality, the government appoints their heads, while the local party and government organs command the investment direction and capital flow.

With the government in charge of local affairs, financing has been easy. These platforms have also become cash machines for local governments that operate outside the financial management and budgeting system. The huge debt they rack up also becomes “implicit government debt,” meaning debt that does not appear as local government debt on the books of the local authorities. The term “implicit government debt” first appeared in a meeting of China’s elite Politburo on July 24, 2017. Experts say that, in theory, implicit debt cannot be regarded as local government debt with compliance, as they are generated through actions outside of regulations (such as mortgages or letters of commitment) or through disguised debt (the faking of government purchases and so on).

At present, there is still no unified standard for identifying implicit government debt, so even the total amount of debt remains a mystery. Estimations of various types of local debt generally come to between 30 and 50 trillion yuan, or 4.3 to 7.1 trillion US dollars.

For example, Zhang Xiaojing, deputy director of the National Institute for Finance and Development of the Chinese Academy of Social Sciences, estimated in 2017 that the current debt of local government financing vehicles in China stood at around 30 trillion yuan. The S&P Global rating reported in 2018 that the implicit debt of Chinese local governments can be as high as 40 trillion yuan (about 5.8 trillion US dollars), or perhaps even higher.

In May 2018, He Wei, deputy director of the NPC Financial and Economic Committee, also mentioned the number 40 trillion. Professor Bai Chong’en of Tsinghua University has estimated that the correct number is about 47 trillion. If this debt figure was to be calculated as a ratio of China’s 2017 GDP along with other known forms of debt, China’s debt-to-GDP ratio would be 72.3 percent. This is far above what some economists would consider the red line, although there have been debates about how much debt is actually too much debt.

Calculations at the local level are even more staggering. According to expert analysis in 2018, although records showed explicit local government debt-liability ratios at the provincial level in China – calculated as local government debt over local government finances – standing just above 70 percent, this rises to more than 200 percent when implicit government debt is factored in. Of the 29 Chinese provinces for which statistics were available, 21 had debt levels exceeding the International Monetary Fund warning line of 150 percent. Only Tibet and Inner Mongolia were below 100 percent, and Tianjin, the highest, is approaching 600 percent. He Wei also admitted: "Our government credit is very poor, it may even be worse than companies . . . . Many local governments can't even repay interest."

Printing Money, Leasing Land

How could the government repay huge debts and how could it continue to invest in development? Without a government bankruptcy mechanism or an open financial environment, overprinting currency has become a thirst-quenching spring. China’s money supply was 1.53 trillion yuan in 1990 and reached 85.16 trillion in 2011, increasing 59 times in 21 years. In the same period, the total amount of US money supply increased by only 1.99 times. The broad-sense money supply of RMB in 2018 reached 173.99 trillion yuan, an increase of 112 times over 38 years from 1990, according to the data of the People's Bank of China.

All of this money is issued through public investment and loans. Take, for example, the government’s “Four Trillion” investment plan, a quantitative easing and stimulus plan which was aimed at coping with the 2008 financial crisis. These funds flowed into infrastructure construction led by state-owned enterprises and governments at all levels and became an important source of income.

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New residential buildings go up in Dalian, Liaoning province. Photo by CEphoto, Uwe Arana, available at Wikimedia Commons under CC license.

Meanwhile, the LGFVs mentioned previously were the main bearers and beneficiaries of monetary excess. Following the 2009 “Four Trillions” milestone, easing and stimulus policies were introduced successively, one after the other, and substantial sums of money poured into the market in the form of investment. Since then, China’s economic growth has been declining, with overcapacity and soaring debts. In addition, the distribution of money has been uneven. Institutions and individuals who were given priority to the funds benefited from the higher purchasing power of money to make a profit, while the income and savings of ordinary people shrank accordingly, leading to a further widening of the gap between the rich and the poor.

Aside from these debt-driven cash machines and monetary injections, land financing has become another unique characteristic of extra-budgetary government income in China. Because local governments control land supply as well as the zoning and planning process, they have been able to earn huge revenues from land sales for commercial development. In 2017, the national ratio of fees from the sale of land-use rights of state-held land (which can be designated for development) to general local government revenues was .55, meaning that more than half of local government revenues were derived from the sale of land.

Aside from these debt-driven cash machines and monetary injections, land financing has become another unique characteristic of extra-budgetary government income in China.

 

Suppressing Human Rights Costs

Another "advantage" of China's urbanization and infrastructure construction is the low human rights standards facing laborers in Chinese society, and lack of protection of rights to the land that both finances and accommodates urban development. Forced land acquisition and violent demolition (essentially, the taking of land without due process or fair compensation standards), are common tactics used by the Chinese government to reduce costs in acquiring development resources. Such tactics are rare in democratic countries, and they reflect the extreme vulnerability in particular of China’s “rural” class, many of whom have lived as migrant workers in urban areas, where labor is in demand, for even several generations.

On this question of vulnerability, some may ask, doesn’t the Ministry of Human Resources and Social Security claim that China has built the world's largest pension security network, with a participation rate of 90 percent, and a health insurance network with a 95 percent participation rate?

This is a complete whitewash of the huge injustices of China's public welfare system. China's social security network is a system with great differences not only between urban and rural areas, but also among different regions and social levels. This system is “welfare that enlarges, rather than reduces, the gaps," it can be called "negative welfare" (a term preferred by Chinese economic historian Qin Hui).

In general, many of the welfare benefits in China flow quite brazenly toward privileged groups: The public benefits enjoyed by government cadres and civil servants are higher than that of ordinary people. Welfare for city residents is higher than for rural residents under China’s household registration (hukou) system: a two-class system that divides citizens into urban and rural population – even if these so-called “rural” Chinese are living more or less permanently in urban areas. Central enterprises and state-owned enterprises likewise receive higher benefits than private enterprises, and developed regions enjoy higher assistance than underdeveloped regions. This unfair welfare system not only fails to achieve fairness in redistribution, but it actually inflicts harm on the disadvantaged in order to support the advantaged, which leads to regressive distribution.

According to the statistics of the State Council's Poverty Alleviation Office in 2016, households that are poor due to illness account for 42 percent of the total number of poverty-stricken households, involving more than 7 million people. Personal direct payments account for 70 percent of China's total health care costs. Even accomplished white-collar workers in big cities are forced to sell their houses for treatment when their family members have serious diseases, a common and helpless move. Meanwhile, according to the National Bureau of Statistics, only 17 percent of the 280 million migrant workers who made great contributions to urban construction, have urban medical insurance. Most of them find it difficult to seek medical care at their work place, and can only return to their rural homes when they are seriously ill; the middle class option — selling a house — is not available to them.

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Graph by Tse Yuet Ching. 

In addition, the so-called “new rural social pension insurance” – the term “new rural”referring policies to address issues facing Chinese classed as “rural” under the hukou system – has been referred to as a social endowment insurance” for rural residents. But in reality, relying on this insurance to support the elderly post-retirement is impossible. It is calculated at the lowest contribution rate. After retirement, one will receive just 81 yuan per month, or about 1,000 yuan per year. In 2018, the per capita annual disposable income of rural residents in China was 14,617 yuan, which means that the replacement rate of pension to income is less than 7 percent.

The gap between the rich and the poor expands with economic development under an unfair redistribution system. Xie Yu, an academician of the National Academy of Sciences in the United States, and Zhou Xiang, an assistant professor at Harvard University, calculated in their paper "Income Inequality in Today's China" that the Chinese Gini coefficient in 2012 was about 0.53-0.55. The same coefficient estimated by the Southwestern University of Finance and Economics is as high as 0.62, meaning there is a huge gap between the rich and the poor. Official estimates from the National Bureau of Statistics are generally lower than those offered by experts, holding at just below the 0.5 level. The NBS estimate reached an all-time high of 0.491 in 2008 and stood at 0.468 in 2018. But the growing trend of inequality since the early 1990s is clear.

As I indicated earlier, the low insurance of migrant workers is just one aspect of China’s so-called "low human rights advantage" that has attended the country’s breakneck economic development.

The Perils of the Deficit Economy

The government can obtain funds from extra-budgetary channels such as implicit debt and land finance, use capital injections to repay debts through over-issuing currencies, and reduce labor costs with discriminatory policies, making bold investments in development possible.

Randers, the Norwegian professor of climate strategy, has said himself in an interview with Chinese media that “taking concerted action requires a great deal of investment, and the public is the actual bearer of these costs.” Heavy taxation, massive borrowing, land financing, currency overprinting and human rights violations have already caused a series of profound consequences, and the negative effects are gradually becoming apparent.

As a fall-out of government debt, corporate debt and trade wars, government financial risks have risen continuously. Since 2018, nearly 200 P2P lending platforms have “detonated” – the term in Chinese for their collapse – and cases of bond default increased sharply. The stock market has suffered continual shocks pushing share prices down. Owing to China's special economic structure, this trend does not necessarily point to a future “Minsky moment” of bond market collapse – a sudden collapse of asset prices precipitated by debt or currency pressures. However, economist Hu Weijun believes that the Chinese-style debt problem is backgrounded not by market failure, as in the classic “Minsky moment,” but rather lack of real market mechanisms altogether – and so the risks appear in different form.

The government's implicit guarantee ensures that funds continue to flow into local governments and state-owned enterprises. On the one hand, their return on investment is continuously decreasing, and there are obvious problems such as overcapacity and inefficient construction. On the other hand, private enterprises cannot access enough funding and are entangled in hostile competition. The entire economy is distorted by government investment, and capital allocation efficiency is declining.

In terms of livelihood, the government's massive borrowing and large-scale printing of banknotes is looting ordinary people with inflation. Enterprise costs have risen and employment pressures have increased. The low human rights standard is brewing bigger and more complex social, economic and political risks. A big question mark hangs over the sustainability of China's economic development achievements.

However, even if the cliff is not far away, the Chinese government could not possibly stop operating the economy in this way. Since 2010, China's GDP growth rate has continued to slow down, and in the third quarter of 2019, it has fallen to a record low of 6 percent. Aside from large-scale investment in infrastructure, there is no other immediate way to put a floor under the economic trend indicated by GDP.

The "debt for development" approach cannot stop, and the target has changed to "borrowing for the economy." In 2019, in response to the downward economic pressure, the Chinese government decided to increase the fiscal deficit rate in a more relaxed fiscal policy and continue to substantially increase local government special bonds. According to preliminary estimates by relevant research institutions, the newly added fixed assets investment was expected to reach 3.8 trillion yuan in 2019, thus expanding the overall fixed asset investment scale to about 67 trillion yuan. But although the cumulative growth rate of infrastructure investment was expected to rebound to over 6 percent, accelerated approvals failed to boost investment growth, and fixed asset investment slowed to 5.4 percent in the first eight months of 2019.

Administrative Superpowers

Such an economic system is only possible when the government has extensive enforcement powers, which brings us to the second question. How has China managed to maintain such superpowers? The basic answer to this question is simple. The party-state system in China has excluded civil society from political decision-making.

China’s ruling party, the CCP, relied on the Soviet Union’s military support to establish the political power of the party-state. Under the party-state system, the ruling party exercises absolute power. It fully represents the nation in exercising sovereignty, and it thoroughly controls the state apparatus. The actual sovereignty of a party-state belongs to the party – quite unlike the constitutional state, in which sovereignty belongs to the people. In the party-state system, a citizen wanting to participate in politics must first become a party member or even a cadre in order to enter the party’s community of shared-interest.

Since the establishment of its power, the Communist Party of China has virtually destroyed China’s original spontaneous society led by scholars, clans and business elites – much like a lawnmower slicing through the wild grass. This has happened through successive waves of repression, including land reform, the anti-rightist movement, the people’s commune movement, the Socialist education movement, and the Cultural Revolution.

Political scholar Tang Tsou has written that China's transformation in the 20th century was from a traditional authoritarian political system to a modern totalitarian political system, and the excessive expansion of state power harms society. Zhou Qingzhi, a professor at the Chinese Academy of Social Sciences, has pointed out that at present, China still governs in a unified way with top-down control and mobilization of society and resources. Therefore, a modern sense of civil society has not yet been cultivated, and social autonomy cannot develop.

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A July 2012 article in the overseas edition of the CCP’s official People’s Daily newspaper is called (bottom left), “Where Are China’s True Challenges?” The article talks about the danger of human rights lawyers and dissidents.

After reform and opening up, civil society re-emerged to some extent. But it faced hostility from the ruling group. In July 2012, the overseas edition of the People’s Daily, the party’s official newspaper, published an article saying that human rights lawyers, underground religions, dissidents, online opinion leaders, and vulnerable groups are at the core of “creating conditions for change” and are infiltrating Chinese society through a “bottom-up” approach. The government regards independent social actors as an invading enemy. This is logically consistent with its consistent actions of suppressing and even eliminating civil society.

This shows that China's national community structure is very different from that of constitutional states. Under a constitutional framework, no matter how different the demands of political parties and politicians are, the government and civil society agree that the constitution guarantees individual freedom, and the government's power is restricted by the constitution. By contrast, the Chinese Communist Party is a political community of the victorious. The party’s highest purpose is to maintain its elite existence and development, and there is no real will to accommodate or empower civil society. Any social organization or activity independent of the Communist Party is regarded as a threat to the Party and the state.

In short, the Chinese government's relationship towards civil society has long been antagonistic. The government treats spontaneous social organizations and those involved like adversaries, and adopts a strategy of constant vigilance and intimidation. This leaves the populace with no bargaining power and renders them unable to constrain their government. In addition to coercion, the government’s means include co-optation, intimidation, and bribery. Grassroots actors are constantly absorbed into the ruling system. Access to the system might grant privilege, but this comes at the cost of having to defend the ruling party. According to Zhou Qingzhi, politics in China has no true oppositional forces, but rather has only, within the party-led system itself, “[forces] of control and counter-control between political units, taking the form of a contest between power distribution and power concentration.” Those outside the system have almost no political rights independent of the CCP.

Therefore, the primary beneficiaries of China's national resources and coercion are the ruling clique and the government itself, or other factions and sub-groups in power. This ensures that the interests of those who rule are always guaranteed. The major undertakings defined by the government must also prioritize the interests of those who govern. The interests of the people, meanwhile, are the first to be sacrificed when there is a conflict with the interests of the government.

A typical example is China's most controversial infrastructure project, the Three Gorges Dam. Thanks to the great fondness China’s leaders have for mega projects that convey power and ambition, the government has in the case of this major hydroelectric project – which spans the Yangtze River and came at a cost of roughly 24 billion US dollars – completely ignored the hidden dangers of population relocation, corruption, environmental issues, geology and security issues that may be brought about by dam construction. It disregarded the opposition of experts and the public, and necessitated the forcible relocation of millions of people, leaving countless problems and risks in its wake.

But despite all of these problems and concerns, the profits generated by the project have never reached expectations. Meanwhile, the government has collected the so-called Three Gorges Dam Construction Fund, a levy on each household and company in China, with great secrecy about how these funds, which now come to hundreds of billions of yuan, have been used. On October 12, 2009, Beijing citizen Ren Xinghui submitted a request to the Ministry of Finance for disclosure of the income and expenditure of the Three Gorges Fund. The request, made under a new regulation on open government information passed in May 2008, was rejected.

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The Three Gorges Dam was built at an estimated cost of 24 billion US dollars. But attempts by Chinese citizens to understand its income and expenditure have been rejected by the government. Image by Kyla Duhamel available at Flickr.com under CC license.

In fact, all efforts at transparency around matters that touch directly on the personal interests of the ruling elite are all but impossible to push forward. Take, for example, the system for formal declaration and disclosure of assets belonging to Party and government officials, which was first raised as an important democratic measure in China in 1987, at a time when discussion of political reform was lively. More than three decades have passed since that time, and still there has been no follow up on the issue. The only procedure in effect for declaring and disclosing assets by officials is a matter of internal disciplinary regulations of the CCP, and these procedures are never open to the public.

Excluded from political decision-making, the Chinese left out of the political community become a mere financial resource for the ruling group through the taxes and fees as previously described. It becomes extremely difficult to make progress on policies that might advance the interests of the people if these policies entail an increase in costsor a reduction in benefits for the ruling group.

Take the medical and health industry as an example. For years, China’s expenditure as a percentage of GDP ranks lower than 100th in the world. According to World Bank data, when the world's average medical expenditure as a percentage of GDP increased from 8.9 percent in 2000 to around 10 percent in 2014, China's investment in 2014 was only 5.6 percent of its GDP, only just more than half of the world average. Meanwhile, the ratio of China's personal direct medical expenditure to the total medical burden is about twice the world average.

On the other hand, policies that are not conducive to civil society but are beneficial to the ruling group always receive sufficient support. The most notable example is the increase in spending on what is called “stability maintenance,” which involves essentially domestic policing at the local level to deal with cases unrest and protest arising from rapid economic development and social inequality.

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In recent years, spending in China for domestic security, including the People’s Armed Police (PAP), pictured above, has ballooned. Image by Michael Mooney available at Flickr.com under CC license.

Statistics show that in the past few decades of China's sustained and rapid economic development, the domestic “maintenance” costs, including suppression of dissidents and public protests have increased year by year, higher than military expenditures. According to the Chinese government's 2012 budget, public security, armed police, national security and other "public security expenditures" increased by 11.5 percent to 701.8 billion yuan. In 2019, the increase reached 1.40 billion yuan, bringing expenditures in this category to 5.9 percent of the national general public budget expenditure.

Those who are attracted by the imagined "efficiency" of China's governance see only the country’s achievements without the full social and political context, ignoring the costs and values behind this "efficiency."

But notions of efficiency and effectiveness should be subjected to greater scrutiny when they involve administrations where democratic values are not in play. If the government truly represents the interests of the people, its efficiency can be a matter of discussion and evaluation, and a key measure of efficiency is the extent to which the interests of the people are served by a given policy or action. However, if the government chiefly represents the interests of a group that is willing to subordinate the interests of others, and is hostile to civil society, greater “efficiency” can actually mean greater risk and insecurity for the people and society.

If the government chiefly represents the interests of a group that is willing to subordinate the interests of others, greater “efficiency” can actually mean greater risk and insecurity for the people and society.

 

With the Simon-Waldo exchange, an “acrimonious debate” ensued within academic circles in the United States from the early 1950s around questions  of effectiveness in public administration. In his approach, economist and political scientist Herbert A. Simon advocated logical positivism, attempting to describe administrative organizations "in a way that will provide the basis for scientific analysis." Political scientist Dwight Waldo, on the other hand, argued that the belief in efficiency as a key concept in science was an “obstacle to a fuller development of democratic theory in public administration.” Waldo advocated introducing the normative value of democracy into the theory and practice of public administration. In contrast to the idea that administration should be value-free, Waldo emphasized that “efficiency” too is a political value, and that it go directly against values like democratic participation.  

In China, no such debate about political values, including efficiency, is possible. The administration is not supported by constitutional democracy, and therefore there is a lack of normative principles. While the values compatible with democratic systems – such as public interest expression, openness, procedural justice, and so on – have long been advocated by reform-minded intellectuals in China, these have never emerged as priorities within the ruling elite.

A History of Coercive Power

Views about the general soundness and efficiency of China’s political and economic system also fail to take a broader historical view of the country’s coercive development methods.

One question China’s admirers rarely consider is why its coercive capacities were not admired in Europe and the West before China’s economic “reform and opening-up”? In light of this, it is perhaps helpful to review the historical trajectory of the Chinese government's coercive capabilities.

The First Thirty (1949-1978)

During the first 30 years of its existence, from 1949 to 1978, the People’s Republic of China (PRC) had immense coercive power, and fit what sociologist and political scientist Charles Tilly has called the coercion-intensive state.” In the first decade of the founding of the PRC, the Chinese government, with both military and political coercive capacities introduced from the Soviet Union, confiscated land resources and personal assets across the country, physically and politically eliminated all landlords, capitalists, and other regarded as enemies, effectively neutralizing all political opposition.

This was then followed by a set of paramilitary organizations and a Soviet-style planned economic system that reached deep into all corners of Chinese society. The government’s strong capacity for resource extraction and administrative coercion have allowed large-scale political movements to proceed without hindrance, including the the Great Leap Forward, the Down to the Countryside Movement (in which an estimated 17 million young people were forcibly removed from cities and sent to work in the countryside), and other initiatives and projects that proved damaging to the physical, social and economic well-being of the population.

The government's advantage over society allowed the ruling clique to disregard the most basic interests of the people, leading to devastating consequences. During the Great Chinese Famine of 1958-1962, a direct result of the Great Leap Forward and other misguided actions (including drawing farmers away from food production and into a mass-mobilized campaign of wasteful rural steel production, and organizing them into inefficient agricultural communes), brought the death of anywhere from 30 million to 45 million people. Even during this unfathomable crisis, the  Chinese government carried out substantial food export and foreign aid, perpetuating a myth of economic plenty.

China’s planned economy and relative isolation from the world during this time meant conditions were insufficient for the development of what Tilly calls a “capital-intensive” state form. This fact, combined with the tragedies leading through to the late 1970s, created conditions that were ripe for the emergence of the period of reform and opening.

Reform and Opening (1978-2012)

After the introduction of economic reforms in 1978, China was gradually incorporated into the world order and the international market. The planned economy crumbled, a process of administrative decentralization began, and the market and civil society experienced rapid development.

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Chinese leader Deng Xiaoping in 1976, just two years before the formal launch of the country’s reform and opening policy. Image from Dutch National Archives, available at Wikimedia Commons under CC license.

During this period, the Chinese government's coercive power was significantly dispersed and weakened compared to 1949-1978 period, and this relative weakening brought internal and external challenges. Although the government remained dominant, constraints on its actions were increased. This was especially pronounced in the aftermath of the Tiananmen incident in 1989, when Western economic sanctions and political isolation forced China to undertake deeper reforms and to move closer to the international community. This period was in many ways encapsulated by the Chinese saying, popular among Party leaders, that China needed to “hide its talents and bide its time, awaiting the right opportunity.” Meanwhile, China needed to focus on economic development, to “keep quiet while getting rich.”

The Chinese government was able at this time to build up its financial strength, thanks in great part to economic and technical support from Europe and United States, which had already begun in 1972 through the Four Three Program, an industrial technology importation plan. The country’s growing economic and technical strength helped in turn to justify authoritarian rule, giving the regime greater flexibility.

At the same time, the price of accepting help was compliance with international standards of government behavior; otherwise, aid might have been retracted at any time, the government facing international sanctions similar to those after 1989.

Only during this period, in fact, did the Chinese government begin making inroads in terms of legitimacy, and to enable the consistent emergence of positive values. The relatively loose political environment during this period, combined with a booming domestic economy and lively international trade,  prompted rapid developments in media, law, scientific research, culture and communications (including the internet).

Even in the absence of real efforts at political reform, a prevailing wind of more liberal values during the reform and opening period allowed civil society in China to use Western countries as an example to constrain the behavior of the government. One of the most prominent examples was the 2003 Sun Zhigang Incident, in which the beating death of a young college graduate in police custody provoked widespread public discussion that eventually led to the abolition of domestic laws on police detention and repatriation of rural migrants in China’s cities. 

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Protesters in the city of Xiamen in 2007 protest the building of a chemical plant near a residential district. Such protest actions have become extremely rare since 2012. Image by Zola available at Wikimedia Commons under CC license.

When we compare the first three decades under the CCP with the period of reform and opening, we can readily see that strong coercive capacity does not guarantee effective governance. From 1949 to 1978, during a period when the Chinese government was under the thumb of a powerful leader and could act with vigor and impunity to pursue its political programs, there was no need to consider the people’s interests. Conversely, during the reform and opening period, when various factors (including international aid and pressure) forced the Chinese government to act with greater restraint, the interests of the people had to be considered to some extent, even as abuses were widespread. 

History seems to teach the lesson that unrestrained administrative powers can lead to disastrous consequences. But apart from constitutional democracy, are there other ways to fundamentally guarantee that a strong government will not turn into an oppressor?

The New Era (2012 – )

In recent years it has become clear that China is entering a new phase of leadership. Xi Jinping’s rise to power in late 2012 has been followed by a series of reforms to concentrate power. As a result, the governing power of the Chinese government – both in terms of resources and coercion – has grown in an unprecedented manner. The already very weak constraints on the government we saw in the era of reform and opening have largely been removed.

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China’s top leader, Xi Jinping, disembarks with his wife, Peng Liyuan, in 2013 to attend a meeting of APEC. Photo by APEC 2013 posted to Flickr.com under CC license.

The government’s control of capital and capacity for fiscal extraction have increased to a level unseen in the reform era, and the state-owned economic sector has advanced while the private sector faces greater and greater obstacles – so that credit, for example, now flows more easily to inefficient SOEs than to more productive private firms. Intervention in the market by administrative power is also now more pronounced. As China’s stock markets faltered in 2015, the government stepped in to prop markets up. In the midst of volatility in January 2017, the government again intervened, having state-owned investors purchase shares to steady the market.

In terms of administrative coercion, the government’s oppression of civil society has increased rapidly in recent years, to the point that civil society actions have virtually disappeared in China. During his first year as General Secretary, Xi Jinping launched a widespread crackdown on the internet and social media, targeting one of the most important tools for discussion and activism. In 2016, the government went after prominent human rights lawyers and activists, even televising their trials and supposed confessions, publicly casting dissidents as enemies in a way reminiscent of the pre-reform era. The campaign against civil society has swept up women’s rights advocates, public health advocates, environmental activists, labor activists and many others. In 2019, authorities cracked down on the Unirule Institute of Economics an independent think thank that promoted free-market economic theories.  

Ideological controls on teaching staff at universities have also strengthened, even with the set up in some universities of special departments to monitor the political ideas of professors and instructors. In 2015, education authorities ordered new limits on the use of foreign textbooks in universities amid fears of the spread of “Western values.”

As for external constraints, the Chinese government has gradually shifted from a position of strategic compliance to one of strategic challenge in dealing with the international order.

All of these changes elicit concern from many Chinese. Where are government superpowers taking the country? If we talk about “efficiency,” what goals are served by this efficiency – and who stands to benefit?

Europeans who imagine that a more powerful government after the fashion of China’s might work more concertedly to deal with today’s challenges, from climate change to innovation, should consider both the origins and the real costs of such a system. They should ask themselves if these are prices they are willing to pay – in terms not just of economic performance but also of personal rights and freedoms.

 

China Myths

Perceptions of China are often driven by frames, or myths, that hinder our understanding of the facts. Where do these myths come from? And what assumptions are we making when we employ them? 

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Efficient China

27. December 2019
Author
Hui Zhou

Hui Zhou is a political scientist who previously worked at several think-tanks in China. He is currently pursuing his PhD studies in the United States.