Has China Fallen into a Trapped Transition?

On March 30, 2006, the Carnegie Endowment for International Peace hosted a meeting entitled “Has China Fallen into a Trapped Transition?” The event marked the launch of a book by Minxin Pei, Senior Associate and Director of Carnegie’s China Program, called China’s Trapped Transition: The Limits of Developmental Autocracy (Harvard University Press, 2006). Carnegie President Jessica Tuchman Mathews moderated the discussion.

IMGXYZ466IMGZYXIn his remarks, Minxin Pei argued against the dominant view that economic growth will lead to political liberalization in China. In the short term, strong economic growth could diminish the chance of political liberalization because the increased popularity of the local elites would decrease popular pressure for change. In the context of an authoritarian regime that is deeply entrenched in the economic system, economic growth raises the value of political power, which makes the ruling elites even less willing to part with their power. Furthermore, through a process Dr. Pei terms “illiberal adaptation,” the ruling elites can adapt to the political and economic consequences of economic growth in ways that diminish, rather than increase, the prospect for political liberalization. For example, ruling elites learn to co-opt elites or use technology to control the populace.

Dr. Pei also argued against the prevailing view that the gradualistic economic reform strategy being employed in China is more efficient than “shock therapy.” After more than two decades of gradualism, China is still a state-dominated economy, rather than a market economy. The historical record of gradualism throughout the world is “abysmal.” Moreover, analysts tend to believe that the purpose of economic reforms is to increase economic efficiency when they should approach the issue from a “regime survival” perspective. Elites are most concerned with whether economic reforms will enhance or reduce their political control. In addition, the Chinese state is still very entrenched in the economy. It is not willing to liberalize certain sectors because it is afraid that doing so would hurt the patronage system. In short, economic reform in this kind of political system will inevitably hit a wall when it reaches the point at which further reforms diminish the ruling regime’s power and threaten its survival. Gradualist economic reform will also fail in China because it does not account for the difference between state interests and the interests of agents of the state.

Finally, Dr. Pei argued against the conventional wisdom, which holds that the Chinese model is very similar to the East Asian or “developmental state” model. He argued that the developmental model, which maintains that a very strong state should be in charge of developing a state’s economy, is the exception, not the rule. Four changes during the 1990s fundamentally altered the Chinese state. First, property rights and administrative power were decentralized, giving local elites great discretion in disposing of state property. These local elites disposed of the property in ways that benefited themselves, not the state. Second, after 1989, the ability of the state to oversee local elites decreased. Since the local elites did not have to fear retribution for their actions, they felt no sense of accountability. Third, new “exit options” became available. Rather than pursuing a lifetime of government work, Chinese citizens could pursue opportunities in business or move abroad. This change decreased their stake in the system over the long-term and increased their incentive to maximize their personal income in the near-term. This led to very dramatic changes in the behavioral and organizational norms of the elites and the political system. In this way, China became a decentralized predatory state.

In conclusion, Dr. Pei argued that there is enormous uncertainty when trying to understand how a complex system like the Chinese state functions. Nevertheless, analysts should not expect that continued economic growth will fix the challenges he identified because economic growth is part of the problem, not the solution. Today, the strength of China’s economic fundamentals hides many problems, such as high environmental and welfare costs. Once this fundamental growth disappears, China may prove to be in a far worse position that most analysts assume. The only way for this trapped transition to end is through another crisis that allows for the development of a new political configuration. Even a crisis, however, may prove to be a necessary, but not sufficient, condition.

Summary prepared by Danielle Cohen, Junior Fellow with the China Program at the Carnegie Endowment for International Peace.