Dateline: Hong Kong
Despite China’s recent experience with high economic growth, some questions arise about whether its policies & institutions impose a binding constraint upon continued success.

To its credit, Beijing recognizes private property, allows private profit seeking & the Communist Party invites businessmen to join its ranks. But China’s corporatist state regulates business enterprises to the disadvantage of truly-private firms or those that operate principally in the domestic sector.

Given the limits of expressions of individuality and undermines individual rights and freedoms, “authoritarian capitalism” aptly describes China’s approach to development. Whereas, communist regimes contrived to have an economy without prices, authoritarian capitalism presides over a market-like economy with few guarantees of individual freedoms & rights.

While authoritarian capitalism shares similarities with “authoritarian socialism”, it has not draw the same criticisms. This is interesting since these systems have similar likelihoods of failure.

Recent success with economic growth has made China’s regime seem to be a model for other single-party regimes to follow in Asia or elsewhere. But a Panglossian view overlooking the long-run costs of authoritarian capitalism is fraught with peril.

Accepting China’s authoritarian capitalism as a viable development model reflects a presumption that economic & political liberties are not interdependent. Similar reasoning induced promoters of authoritarian socialism (communism) to overlook its internal & fatal contradictions.

Indeed, the collapse of communism suggests that ignoring the importance of incentives & repressing individual freedoms eventually undermines sustainable economic growth. While authoritarianism can bring short-run economic gains as in China today or the heady days of Soviet experiments, there are logical & economic limits to these results.

One set of problems associated with China’s authoritarian capitalism arises from a tendency for commerce to be politicized & politics to be commercialized. The politicization of commerce occurs when success or profitability depends more on relationships with the ruling party than the efficient use of scarce resources.

The commercialization of politics involves actions by the ruling party to develop its own sources of revenues through business transactions. These activities include privileged, insider access to economic data that benefit the party whereby party functionaries & cadres enjoy private gains. At the same time, “cronyism” emerges whereby camp-followers & sycophants of the ruling party receive special favors or protections. In Chinese communities, this reliance upon connections is known as “guanxi”.

Despite impressions to the contrary, China’s authoritarian capitalism involves extensive economic interventions. Most obvious is a highly-interventionist foreign exchange policy to support industrial policies that target specific industries as part of an export-led economic growth strategy. And Beijing directs bank loans, investment funds & subsidies toward areas of economic activity that comport with policy objectives rather than commercial logic.

These policies have made China highly-dependent upon foreign investment funds or technology or both & on export for most of its growth. Dependency on outsiders is exacerbated by institutional arrangements that work against domestic entrepreneurs to provide an indigenous source of economic growth.

In the post-reform period, China’s economy has benefited from increased efficiency & productivity from disappearing distortions & irrationalities of central planning. More recently, economic growth has come from increased government spending or directed lending with state-owned enterprises (SOEs) being the prime beneficiaries. But “input-driven” growth driven by increased labor and capital inputs eventually runs up against the law of diminishing returns.

Meanwhile, diverting resources to SOEs with subsidies & artificially-cheap inputs undermines private-sector development & continues the imbalances introduced by export-led growth. For example, the massive & expanding stock of foreign reserves held by Beijing should invite alarm as an indicator of suppressed development of the domestic sector of the economy.

China could gain from increased productivity based on inventiveness & free thinking. Yet, its policies of authoritarian capitalism suppress individualism & intellectual freedom that undermines the independence of entrepreneurs as well as their access to capital.

China’s regime seems unwilling or unable to modify policies & institutions that make them dependent upon the financial capital or the creativity & inventiveness of other countries. In the long run, economic arrangements associated with authoritarian capitalism are unlikely to provide the levels of high economic performance recorded in recent years.

Meanwhile, China’s authoritarian capitalism is accompanied by the politicization of crime & the criminalization of politics. Crime is politicized with selective prosecutions & executions motivated by an urge to remove political challenges or challengers rather than eradicate a public menace. The success of this tactic is reinforced by the fact that political officials face few external checks & balances.

Politics in China is criminalized given that organized opposition to the regime is absolutely not tolerated. But refusing to allow political dissent eventually leads to greater social & political instability. Public dissent & political debate offers a “safety valve’ for the release of social tensions. By contrast, allowing dissenters to demonstrate publically or start & join political parties or vote current leaders out of office certainly provides stability to democratic regimes.

Blindness to the shortcomings of the intricate and extensive elements of their development strategies has left the leadership in Beijing open to a potentially-serious political crisis. But instead of the forces of modernization that prompt political change in China, it may be that its economic structures fail first.

On the one hand, entrenched dependencies with developed economies are a serious long-run challenge. On the other hand, the incentive structures of China’s authoritarian capitalism impede the emergence of local entrepreneurs or researchers conducting original research.

Of more immediate concern is that China’s economy exhibits classic symptoms of “bubbles” driven by loose credit policy, vigorous stimulus spending & the logic of export-led growth. Regardless of Beijing’s tight controls, there is no reason to expect that the record of centuries of collapsing bubbles can be changed. As such, the question of bursting or deflating speculative bubbles is a matter of when, not if.

China’s leadership knows that monetary tightening and reduced deficit spending are necessary. And the State Council called for rebalancing consumption and investment back in 2003. Even so, economic imbalances have worsened.

Beijing anguishes over slower economic growth leading to social unrest from increased unemployment but rising inflation could also bring social unrest. Coping with these economic imbalances is like having a “tiger by the tail” in that any move involves very high risks.

Continued reliance on exports for growth requires propping up exporters to keep employment high as a key to social stability. But this undermines economic restructuring & efficiency-enhancing steps by the export sector that would push up unemployment.

As Beijing pressures producers to keep prices low rather than reduce their workforce, their profit margins shrink and they demand subsidies. Domestic consumption is crimped by subsidies and is also dampened by an inflated exchange rate that deters imports. All this perpetuates the trade imbalances that lead to a dangerously-larger pool of foreign reserves.

While China should enjoy rising economic fortunes and more global political influence, it is naïve to extrapolate recent economic performance as an indicator of future success. As it is, the contradictions of China’s economic policies within a framework of authoritarian capitalism will undermine its future economic growth prospects.

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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