This is the second installment of an occasional series on China's transformation that Stratfor will be building upon periodically.
In the previous installment in this series, we looked at the role of the 2008-2009 global financial crisis in reshaping China's external environment and its government's policy priorities in subsequent years. Our chief interest was in the complex interplay of external and internal forces in shaping the Chinese government's decision-making process and guiding China's trajectory more generally.
In this installment, we turn our attention inward and to the present. As Stratfor has written before, the beginning of a slowdown in China's property sector in March 2014 ushered China into a new stage in its evolution. Throughout the 1990s and 2000s, while the country's economy grew rapidly, the most salient questions around China were fundamentally economic. Since 2014, however, questions about China's future have begun moving from the economic toward the political. The question is no longer whether its longtime growth model, based on low-cost exports and investment, is sustainable. Rather, it is whether and how the government can maintain political order as the economy shifts, as Beijing hopes it will, from one growth model to a new one. In short, can the Chinese government and the Communist Party adapt quickly and effectively enough to China's new economic reality to stay in power?
Before we consider the challenges facing China's governing institutions, it is useful to outline some key concepts and examine prior cases in which states struggled to close the gap between themselves and the rapidly changing societies they governed. Doing so will help clarify what is at stake for China's leaders as they embark on a period of political reform against a backdrop of profound social and economic change. It will also shed light on how China's recent efforts at political reform reflect or differ from prior cases and whether the current reform measures are likely to succeed. And, returning to questions outlined in the first installment of this series, once we have established what political reform within China entails, we can begin to consider how these internal evolutions will reverberate outward, affecting both China's external behavior and its strategic environment.
What Political Reform Means
Any attempt to understand political reform in China today must begin by asking why China's leaders seek to reform its political institutions. As Stratfor has argued, the Communist Party's fundamental goal in implementing political reforms — a term encompassing everything from the anti-corruption campaign to efforts to improve rule of law, environmental protection and social services — is to ensure the continued legitimacy of their rule. For decades, that legitimacy rested on the promises of universal employment and a moderately wealthy society enabled by China's economic boom.
As long as the government met these conditions for the majority of the population (particularly the politically crucial urban coastal constituencies), many of the problems, inefficiencies and inequities in China's governance could be — and largely were — overlooked by its populace with the assumption that they would eventually be corrected. But with the economy's slowdown, these promises are becoming increasingly untenable. This process has forced China's leaders to seek new foundations for the legitimacy of their government and the Communist Party's control over it.
What the current efforts for political reform all point to is a broad consensus among China's leaders that the future legitimacy of their rule rests in their ability to provide what political scientist Francis Fukuyama calls high-quality governance. This involves the state's ability to collect and fairly redistribute income along with institutions' ability to operate with a large degree of freedom from political interference. Faced with an increasingly well-educated and urbanized consumer society, and pressed by the need to compete globally as a producer of high value-added manufactured goods as well as financial and other services, Beijing needs to implement a variety of measures to govern effectively. Not only does Beijing strive to increase quality of life (for example, by improving air quality, food and workplace safety, and ordinary citizens' ability to earn returns on their savings), it also seeks to incentivize industrial upgrading, innovation and entrepreneurship. The former goals are difficult enough, because they will almost certainly impose higher costs on the state-owned banks and enterprises that remain the backbone of China's economy — a tough sell at a time when profit margins for many of these enterprises are hovering at or below zero. And incentivizing the kinds of investments and industrial upgrades that stimulate economic growth will require much more profound changes to China's political institutions, not to mention its education system and business climate.
Scholars and policymakers almost unanimously agree that strong protection for physical and intellectual property rights are essential building blocks for wealthy societies and advanced industrial economies. There is less consensus on the conditions under which such protections can take root. One school, embodied in Daron Acemoglu and James A. Robinson's Why Nations Fail: The Origins of Power, Prosperity, and Poverty, maintains that protecting property rights and thus encouraging research and development, innovation and entrepreneurship requires first establishing democratic or inclusive political institutions with built-in checks (such as a strong and independent judiciary) on the government's power. Another school, which includes Fukuyama and has its roots in Samuel Huntington's Political Order in Changing Societies, disagrees about the importance of democracy in developing a prosperous society. Adherents of this second school affirm that a country needs fair and impartial adjudication of civil disputes and strong protection for individual property and other rights to move from a low value-added to a high value-added economy, but they argue that inclusive or democratic political institutions are not essential to this process.
In his 2013 essay, "What is Governance?" Fukuyama outlines two essential conditions of effective governance: high state capacity and a high degree of bureaucratic autonomy. The first describes the state's ability to tax citizens' income and to efficiently, effectively and fairly redistribute that income in the forms of physical infrastructure, social services and other public goods. The second describes the ability of a country's administrative institutions to set long-term goals and experiment without much political interference. In Fukuyama's conception, bureaucratic autonomy without strong state capacity is a recipe for weak and kleptocratic institutions, while strong state capacity without bureaucratic autonomy subjects the policymaking process to political whims — as during the Maoist era — and makes protection of property and other individual rights more difficult.
Crucially for China, by this definition effective governance does not have to be democratic to achieve high-quality administration, the efficient provision of public goods and fair adjudication of civil disputes. Indeed, as Fukuyama and Huntington both show, the world — and in particular, Asia — abounds with examples of states that achieved high-quality governance and correspondingly high incomes and quality of life under institutional structures that could scarcely be considered democratic. Perhaps the most famous example is Japan, which went from war-torn and impoverished to the world's second largest and second wealthiest economy in four decades under what amounted to a single-party state in which a small collection of elite civil ministries designed and enforced development policy. A similar narrative applies to South Korea, Taiwan and Singapore, all of which achieved not only fast-growing but also innovative and advanced manufacturing-based economies in the total or partial absence of democracy, largely by following Japan's example. Such conditions are not isolated to Asia. In the 19th century, the Prussian (and later German) state maintained a fast-growing economy at the leading edge technologically along with a highly effective civil bureaucracy without devolving power.
What Makes China Different
At the very least, this body of thought and these prior cases suggest that whatever myriad constraints there may be on China's capacity to reform and improve its political and administrative institutions, they are not grounded in its lack of multiparty elections. That said, there are important differences between contemporary China and Japan in the 1940s-1960s, South Korea and Taiwan in the 1960s-2000s, and Prussia in the 19th century.
First, they face different external economic and strategic environments. The transformations of Japan, South Korea and Taiwan (including both their initial industrialization and their shift up the value chain) all took place, to differing degrees, under the strategic umbrella of the United States and with active economic support from Washington in the context of the Cold War. The industrialization that China underwent decades ago occurred under similarly conducive circumstances, but today its environment is much more challenging, both economically and politically. Furthermore, China's current task is profoundly different and more difficult than mere industrialization: In an extremely short period of time, it must transform a colossal, internally diverse and fragmented economy from one dependent on low value-added manufacturing to one based on high value-added manufacturing and services. However, perhaps most relevant to our current discussion is the contrast between China's political institutions and those of non-democratic economic success stories such as South Korea. China possesses a relatively high capacity state, but its bureaucracy is comparatively less autonomous, especially in respects that are crucial for attaining high-functioning and impartial administration.
This difference is particularly sharp in the comparison between China and Japan during the post-World War II era. Although nominally an electoral democracy, Japan through the 1990s (and arguably to this day) was in fact a one-party state. However, as political scientist Chalmers Johnson and others have made clear, throughout this period it was not the party at the helm of that state, the Liberal Democratic Party, that actually had power. Rather, it was the autonomous civil bureaucracies that controlled the policymaking process and enjoyed significant independence from (and influence over) the electoral apparatus. Power belonged to the bureaucracies, which had their own highly institutionalized recruitment processes, and moved outward to the rest of the political structure.
Indeed, despite calls for stronger rule of law and judicial reform, all signs point to a strengthening of the Communist Party's control over the state under President Xi Jinping.
In China, by contrast, power resides not with the country's vast administrative bureaucracies, but with the Communist Party that oversees them and exerts almost complete control over internal recruitment and advancement. Indeed, despite calls for stronger rule of law and judicial reform, all signs point to a strengthening of the Communist Party's control over the state under President Xi Jinping. In addition to conducting an anti-corruption campaign that bolsters the Party's power, the president has put small, appointed groups that answer directly to him in charge of making economic and national security policy. All of this suggests that the policymaking process in China is becoming more centralized, more personalized and arguably more political.
This is not to suggest that Xi's measures will necessarily fail. By centralizing power the president may indeed preserve political order as China's economic slowdown deepens. But if Xi aims to achieve high-quality governance as a basis for the Communist Party's legitimacy, he is charting a new and untested path toward that goal. The scholarly consensus is that the most effective governments balance a strong state with an independent and apolitical bureaucracy; instead the president is making China's bureaucratic institutions even more politicized and beholden to dictates from Party leadership.
It is unclear how the centralization of economic policymaking under Xi and his "leading small groups," and the attendant sidelining of Premier Li Keqiang, the State Council and the technocratic bureaucracy they oversee (institutions that reached their apogee under the previous administration), will empower China's judicial and administrative systems to perform better. Likewise, it is unclear how and when the anti-corruption campaign, which has paralyzed China's bureaucracy and dramatically reduced its autonomy and willingness to experiment, will begin to have the reverse effect. For now, all signs point to a continued centralization and personalization of political power — a process that will be difficult to square with the growing need for better governance in a rapidly changing China.