China's economic boom has dazzled investors and captivated the world. But beyond the new high-rises and churning factories lie rampant corruption, vast waste and an elite with little interest in making things better. Forget political reform. China's future will be decay, not democracy.
Business people talk about China's being simultaneously the world's greatest manufacturer and its greatest market.
But before we all start learning Chinese and marvelling at the accomplishments of the Chinese Communist Party, we might pause a moment. Upon examination, China's record loses some of its lustre: While Western investors hail China's strong economic fundamentals -- a high savings rate, a huge labour pool and powerful work ethic -- they gloss over its imperfections.
China's economic performance since 1979, for example, is less impressive than those of its East Asian neighbours, such as Japan, South Korea and Taiwan, during comparable periods. Its banking system is saddled with non-performing loans and is probably the most fragile in Asia.
A comparison with India is especially striking. In six major industrial sectors (ranging from autos to telecom), from 1999 to 2003, Indian companies delivered rates of return on investment that were 80% to 200% higher than their Chinese counterparts.
Behind the glowing headlines are fundamental frailties rooted in the Chinese "neo-Leninist" state. The Maoist state preached egalitarianism, but the neo-Leninist state practises elitism, draws its support from technocrats, the military and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital -- all vilified under Maoism. Neo-Leninism has rendered the ruling party more resilient, but has generated self-destructive forces. In particular, it is spawning a dangerous mix of crony capitalism, corruption and widening inequality.
After a quarter-century of gradual reform, has China transformed its command economy into a genuine market economy? Not nearly as well as most people would guess. Though China was one of the earliest socialist economies to begin serious reform, recent data on the country's regulation, international trade, fiscal policy and legal structure place it in the bottom third of 127 countries surveyed for economic freedom -- below most Eastern European countries, India and Mexico, and all China's East Asian neighbours, save Burma and Vietnam.
An incestuous relationship between the state and major industries can doom developing countries, and China is more susceptible than most. The combination of authoritarian rule and the state's economic dominance has bred a virulent crony capitalism, as the ruling elites convert their political power into economic wealth and privilege at the expense of equity and efficiency. The World Bank estimates that, between 1991 and 2000, almost a third of investment decisions in China were misguided. The Chinese central bank's research shows that politically directed lending was responsible for 60% of bad bank loans in 2001-02.
China has already paid a heavy price for the flaws of its political system and the corruption it has spawned. Its new leaders, though aware of the depth of the decay, are taking only modest steps to correct it. For the moment, China's strong economic fundamentals and the boundless energy of its people have concealed and offset its poor governance, but they will carry China only so far. Someday soon, we will know whether this system can pass a stress test: a severe economic shock, political upheaval, a public health crisis or an ecological catastrophe.
China may be rising, but no one really knows whether it can fly.
