Bobo Lo

What can we learn from China's modernisation?

If the 'China model' has little to offer Russia or the West, there are still important lessons to be drawn from the Chinese experience of modernisation.

At a time of economic and political crisis across much of the West, state capitalism has emerged as the latest fashion in modernisation. Western as well as non-Western commentators speak of the demise of the Washington consensus of democratic liberalism, and the emergence in its place of a Beijing consensus, defined by top-down modernisation. According to this narrative, the West has lost the battle of ideas as well as of growth rates; the shift in the global centre of gravity toward Asia marks a normative as well as an economic and strategic transformation. The East is taking advantage of the irrevocable decline of the West to supplant its influence, institutions, and values.

This discourse is striking for several reasons, the most notable being that it is based on a series of misconceptions and half-truths. A mythology has arisen that is profoundly at odds with the actual experience of modernisation in countries such as China. People speak of borrowing from the 'China model', but are largely ignorant about what this means. In-stead, they are operating from an idealised - and essentially fictional - template.

Four myths of state capitalism

In fact, there is much that we can learn from China. But it is unfortunate that the story of its modernisation has been reduced to crude stereotypes and even caricature. Four myths, in particular, have emerged as 'truth'.

Myth no.1: The China model represents a cohesive approach to tackling the challenges of modernisation.

There is no single 'China model'. Since the beginning of the reform era in 1978, China has tried many approaches to development. First, there was the break-up of the commune system, whereby the Communist Party allowed peasants to sell their surplus produce for individual profit. Then the 1980s saw a significant devolution of economic decision-making powers to the provinces, along with limited political liberalisation. Following the June 1989 suppression of the Tiananmen demonstrations, the Party cracked down on political and economic freedoms. But after Deng Xiaoping's 'southern tour' in 1992, during which he advocated opening up the economy, the remainder of the decade proved to be a golden period for Chinese capitalism. Small and medium-sized enterprises (SMEs) flourished and became the principal driver of national growth. Meanwhile, Beijing initiated a root-and-branch reform of China's moribund state-owned enterprises (SOEs), and negotiated the country's accession to the World Trade Organization. More recently, since 2003 Hu Jintao's path of 'scientific development' has seen a renewed emphasis on the themes of social equality and the leading role of SOEs in the economy.

What this record demonstrates is that there is no timeless set of prescriptions to the challenges of modernisation. Instead, the past 35 years have highlighted a wide range of often contradictory policies. This lack of consistency is evident even today. There are significant differences between the SME-driven capitalism of China's coastal provinces, the much greater influence of SOEs in the industrial northeast, and the dirigiste and authoritarian management in major urban centres such as Chongqing -the province of the ousted Bo Xilai.

Given this confusion, it is absurd to pretend that the China model represents a cohesive body of economic thinking. Tellingly, this myth is much more widespread in the West - and Russia - than it is in China. One of the reasons why the Chinese do not seek to spread the gospel of a 'Chinese economic model' is that they do not believe that such a thing actually exists, at least not in a form that can be usefully applied in other countries.

Myth no.2: Only the state can develop and implement a strategic vision of the national interest.

The Chinese Communist Party (CCP) has cultivated the image of wise and far-sighted leadership, the opposite of Western democratic governments which are constantly deflected by the need to pander to demanding electorates and powerful business interests. That it should engage in such myth-making is hardly surprising; to a greater or lesser extent, all governments pretend to have a coherent 'strategic vision'. What is astonishing, however, is that so many Western commentators have imbued the Chinese leadership with mythical qualities of clear thinking and single-mindedness.

This is bogus on several counts. First, the record of Chinese modernisation since the death of Mao emphatically disproves the notion of an omniscient party managing reform in a steady and systematic fashion. As the multiplicity of 'China models' indicates, there have been huge, and sometimes involuntary, fluctuations in economic and social policy.

Second, Chinese decision-making is certainly not immune from popular pressures. The Communist Party may not be democratically accountable, but it remains acutely sensitive to public discontent, especially when this has the potential to lead to serious social instability. It is only too aware that throughout Chinese history ruling dynasties have fallen whenever they have lost popular legitimacy; the most common form of regime change has been peasant rebellion, caused by intolerable hardships.

Third, as the Bo Xilai scandal has demonstrated so graphically, the actions of the Chinese party-state frequently belie the Confucian (and Communist) ideal of selfless, enlightened governance. While corruption has not yet attained the exceptional levels of Russia, the fusion of political power and special interests remains very strong. This skews decision-making in ways that have very little to do with the duty of a larger national interest. Suffice to note here the cosy lending arrangements between China's banks and its SOEs, which have significantly reduced the incentives to improve productivity and efficiency.

Myth no.3: The China experience demonstrates the superiority of statist, top-down modernisation.

This is the most pernicious myth of all. The success of Chinese modernisation has come not because the Communist Party has reinforced its control over the economy, but because it has done almost the exact opposite. Since 1978, China has gone from being a completely state-owned economy to one where SMEs account for 65 per cent of GDP and 80 per cent of employment. With the exception of the state enterprise reforms of the late 1990s, virtually every major economic change has been bottom-up. Thus, agricultural reform occurred because a small number of peasants were willing to risk the wrath of the authorities by retaining surplus produce for private profit. In the 1990s, China's SME sector expanded exponentially as a result of the individual initiative of millions of would-be entrepreneurs. By contrast, the Party's top-down attempts to address systemic problems, such as worsening corruption, widening income inequalities, and environmental degradation, have been conspicuously unsuccessful.

In fact, the Party's greatest achievement during the reform era has been to get out of the way of progress. It was smart enough, for example, to realise that the rural commune system was unsustainable if China was to feed itself. Similarly, in the 1990s Deng Xiaoping understood that the Party needed to encourage private enterprise, and open the country to Western technology and investment, if China was to modernise. Despite reservations about the subversive nature of such influences, Deng recognised that China - and the Party - had no choice. Liberalisation was crucial to economic growth and, by extension, to the CCP's continuing legitimacy.

At the same time, the Chinese leadership has been careful to appropriate the mythology of modernisation. It has talked up the Party's strategic role, while in practice 'leading from behind', and improvising where necessary. But we should be under no illusions: the Party has presided over, rather than directed, China's transformation.

Myth no.4: Chinese modernisation has been successful because the Communist Party has pursued a gradualist approach to reform.

One of the enduring cliches of recent times is that China has modernised more successfully than Russia because it introduced reforms gradually, with due regard for their social and political    consequences. In other words, it undertook evolutionary change, in contrast to the 'shock therapy' of the Yeltsin administration.

This assessment is hopelessly flawed, not least because the failure of Russia's economic reforms in the 1990s was less a case of 'too much, too soon', than of 'too little, too late'. But the most egregious fiction is that China's reform process has been gradual and incremental. The reality is that China has undergone a revolutionary transformation. A once completely state-owned economy is now driven largely by SMEs. Mao's 'iron rice bowl' of cradle-to-grave social welfare has been systematically dismantled. One of the most egalitarian societies in the world has become one of the most unequal, with a Gini coefficient far in excess of that of developed countries. And an overwhelmingly rural society has undergone a process of mass urbanisation, as a result of which more than half the population now lives in towns and cities.

This transformation has been largely positive. In particular, the rise of some 300 million people from grinding poverty is a truly remarkable achievement. But it is simply untrue - and morally bankrupt - to pretend that there have not been huge costs and plenty of casualties along the way. For example, the restructuring of state enterprises resulted in 46 million lay-offs between 1996 and 2001 - a 'shock therapy' infinitely more shocking than Yeltsin's tepid reforms. (It is sobering to think that if a proportionate downsizing were to occur in Russia today, it would entail the loss of around 5 million jobs.) However one assesses China's modernisation, one thing is clear: it has been neither gradual nor smooth.

Six principles of highly effective modernisation

But if the 'China model' has little to offer Russia or the West, there are still important lessons to be drawn from the Chinese experience of modernisation.

1. Liberalise the economy.

The key to China's success has been economic and social liberalisation on an epic scale. The economic emancipation of hundreds of millions of Chinese has been the decisive factor in transforming a predominantly agrarian backwater into the world's fastest growing economy. This has been paralleled by a huge expansion in personal freedoms. Although China remains an authoritarian political system, with considerable powers of repression, the vast majority of the population enjoys rights and opportunities unprecedented in the country's history.

From time to time, the Party has attempted to put the state back into 'state capitalism'. But for the most part, it has been pragmatic enough to realise that SMEs, despite their apparent ideological unsoundness, hold the key to national pros-perity and social stability. SMEs are also the vanguard of China's growing influence in the world. For all the notoriety of China's energy corporations, it is the low-cost manufacturing exports of SMEs that have had the greatest impact on the global economy.

2. Decentralise decision-making.

Despite the appearance of central direction, notably in the form of 5-year plans, the CCP has devolved most decision-making powers to the provinces. These in turn delegate authority and responsibility to the city, county, township, and village levels. Some sectors of the economy, such as banking, financial services, and natural resources remain under Beijing's tight control. But overall the Chinese economy works as a decentralised system, an important reason why there are substantial variations in the 'China model' across different provinces.

Decentralisation has its problems. As the latest scandal in Chongqing has shown, provinces can become individual fiefdoms, in which the nexus between local bureaucracies and special interests lends itself to chronic corruption. Nevertheless, this semi-autonomous arrangement has been a vast improvement on the over-centralised system under Mao, in which the oppressive hand of the Party crushed individual initiative and ensured China's continuing backwardness. The reform era has shown that decentralisation is critical to modernisation. Conversely, Putin's Russia proves that (over-)centralisa-tion is a real brake on reform.

3. Reform from the bottom up.

The Chinese experience has also demonstrated that real reform - and transformative change - is far more likely to come from the bottom up than from the top down. With the exception of the restructuring of the SOEs, the major landmarks in China's modernisation - agricultural reform, the spectacular growth of SMEs, the proliferation of ties with foreign companies, the growth of Special Economic Zones (SEZs) -have come about because of local pressure, not central direction. The case of the SEZs is especially instructive. The CCP's generally light touch has paid major dividends, in con-trast to Russia where such zones have consistently under-performed because of oppressive levels of corruption and bureaucratic meddling.

It is instructive to compare the success of economic liberalisation in China with the sad fate of political reforms. Whereas the former has flourished because the state has largely butted out, the latter have withered on the vine precisely because the Party has been determined to 'control' democratisa-tion, even at the very lowest (village) level. This confirms a fundamental truth, namely, that authoritarian regimes naturally incline to the status quo, leaving the real drivers of change to come from below.

Bottom-up reform and the decentralisation of decision-making represent tacit recognition of the limits of state power. Even in a one-party state such as China, micro-management is simply not feasible. A key difference between the Chinese Communist leadership and the Putin regime in Russia is that the former has absorbed this lesson, while the latter continues to believe that it can govern effectively through an illusory 'power vertical'.

4. Be bold.

China's transformation has come about because leaders such as Deng Xiaoping and Zhu Rongji (premier from 1998 to 2003) recognised the need for radical change to drag China into the modern age. Of course, this radicalism was far gentler than Mao's Great Leap Forward (which led to the death by starvation of 30 million people between 1959 and 1962) or the Cultural Revolution (1966-76). Nevertheless, Deng and Zhu acted decisively because they judged - correctly - that China had passed the point where it could afford 'step-by-step' reform, which would inevitably be clogged up by bureaucratic and political obstacles. Accordingly, they were prepared to take social and ideological risks: allowing the expansion of private enterprise, growing income disparities, mass consumerism, and the disintegration of the social welfare system.

Current Party leader Hu Jintao has been notably more conservative in his approach to reform, but even today the Party continues to preside over transformative change, reflected in rapid urbanisation, the greatest consumption boom in history, and the reorientation of the Chinese economy toward domestically driven growth. The Party continues to talk up social justice and stability, but in the meantime change is proceeding at breakneck speed. The obverse of the Chinese lesson is demonstrated by Putin's Russia: cautious, 'incremental' reform is tantamount to no reform at all.

5. Adapt to circumstances.

One of the striking achievements of the Communist Party post-Mao has been its ability to reinvent itself in response to changing circumstances. Whereas Mao imposed his vision, often with disastrous consequences (Great Leap Forward, Cultural Revolution), the modern CCP has adopted a generally flexible and undogmatic approach. Particularly since the early 1990s, it has been good at identifying what the people want - reasonable stability, economic growth, personal opportunity and space - and allowing them to realise these aspirations. From time to time, the leadership laments the decline of socialist values, but in practice it has done very little to foist these onto the population. It is only too aware that today's supreme god is materialism, not Marxism-Leninism, and that propitiating its demands is key to the Party's longevity.

6. Freshen up the leadership.

Adapting to change is not only about policy-making, but also policy-makers. After the super-concentration of power under Mao during the Cultural Revolution, the Party has done everything to prevent this happening again. First, it has made the transition from arbitrary personalised rule to institutionalised collective leadership. With each political succession, the position of China's leader has become progressively less 'paramount' - from Mao to Deng to Jiang Zemin to Hu Jintao. Hu's designated successor, Xi Jinping, will be weaker relative to his colleagues in the Politburo Standing Committee (PSC) than any of his predecessors. It is worth noting in this connection that the main 'defect' of the disgraced Chongqing party chief, Bo Xilai, was not corruption or even his authoritarian methods, but an all too obvious personal ambition. With the memory of Mao still so vivid, there was growing anxiety about the possibility of another authoritarian charismatic rising to dominant power.

Of course, collective leadership can degenerate over time into stagnation - as occurred in the Soviet Union during the Brezhnev era (1964-82). The difference, however, is that PSC members are limited to serving a fixed two-term, 10-year period. This not only prevents the concentration of power in a single individual, but also ensures a regular political succession based on the influx of younger talent coming up through the ranks. The contrast with the Putin regime could scarcely be greater. Under 'Chinese rules', Putin would have retired - permanently - in 2008, while other senior figures such as Igor Sechin and Sergei Ivanov would also have left the scene years ago. Instead, with no such restrictions in place, the Russian political system has become increasingly personalised and ossified. Such sclerosis is directly antithetical to modernisation, since the ruling elite fears that change would threaten its commercial interests and hold on power.

A cautionary conclusion

Much of the discussion in the West about China's modernisation tends to be heavily coloured by normative bias. On the one hand, there are those who see China as offering a new model of governance. They cling to a utopian vision of stable economic growth and social order, in contrast to the 'anarchy' of democratic capitalism. Typically, advocates of this view swallow the mythology of a 'China model', and ascribe to Chinese policy-makers a wisdom and sense of moral compass that bear little resemblance to reality. On a more nakedly self-interested level, some authoritarian regimes look to the ex-ample of China as quasi-intellectual justification for the imposition of ever more 'order' and the concentration of political power.

On the other hand, many Western policymakers and thinkers are desperate to prove a diametrically opposite thesis - that an authoritarian regime such as China's cannot possibly be sustained in a post-modern century. They proceed from a sense of liberal evangelism, and the belief that democracies are by their very nature more stable and functional than non-democracies. Events, they argue, will eventually punish the authoritarian unrighteous. Unfortunately, in today's world this smacks of wishful thinking. Moral disapproval is not a reliable basis for making analytical judgments. If it were, then the confident predictions about the imminent demise of the Chinese Communist Party in the wake of the 1989 Tiananmen massacre would have been vindicated. Instead, the global financial crisis has revealed plenty of exceptions in both directions: some liberal democracies are more functional and stable than others, while authoritarian regimes too vary hugely in competence and effectiveness.

Normatively driven assessments of one kind and another are all the more unhelpful because they tend to be based on misconceptions and lazy stereotypes. That China is an authoritarian political system is not in doubt. But, paradoxically, the secret of its success has been the extraordinary degree of economic and social liberalisation that has taken place over the past three decades. Ultimately, this is the real lesson of the Chinese experience. Yet it is one that will continue to be ignored as long as advocates and critics alike believe in the mirage of a 'China model' of state capitalism.