China: a "market economy" - but not capitalist?

I was struck last year by this comment from economist James Galbraith (Rich World, Poor World by James Galbraith The American Prospect 04/08/06 issue) about China:

What is the Chinese secret? The other day, the distinguished Russian economist S. Menshikov put it to me this way, “Well, it’s because they are communists, you see.”

More precisely, China has adopted markets without capitalism; it has not had broadly open, speculative markets for capital assets and land. The result is that you usually have to make something in order to get rich. So companies produce and produce, flood the markets with goods, accept low profit margins, improve quality, and hope to strike gold by exporting to the West. If they have losses, as they often do, these may be covered by borrowing from China’s rotten, state-owned banks, protected by capital control. Workers thrive on the glutted market for goods. Meanwhile, the richer local governments finance themselves with land rent and spend the proceeds on infrastructure at an incredible pace. The system looks like capitalism to the naked eye. But it is not capitalism; it’s an outgrowth of what was there before. What was communism has become, one might almost say, Galbraithian - private affluence, with much less public squalor than one finds elsewhere in the Third World.

Galbraith's father John Kenneth Galbraith wrote about how American Cold Warriors came to consider China an honorary capitalist country when it effectively allied with the United States beginning in the Nixon-Kissinger against the Soviet Union. Given the coverage China gets in both the popular and business press, I would guess that most Americans would say that China has a Communist government of some kind but has adopted a capitalist economy. But that formula doesn't really describe what's happening.

Der Spiegel's English-language page also addressed this  question this week in Does Communism Work After All? by Andreas Lorenz and Wieland Wagner Der Spiegel International Online 02/27/07:

But five-year plans are only one side of the coin in China's vast realm. The other is a wildly unfettered capitalism geared solely toward naked profit. And when it comes to turning a profit, hardly anything seems sacred anymore, not even for China's communists. The Great Hall of the People in Beijing is a case in point. If the National People's Congress doesn't happen to be in session or President Hu isn't using the magnificent building - with its more than 300 rooms and enormous paintings depicting scenes from the revolution - to receive foreign dignitaries, the government simply rents it out. Recently, US automaker Ford used the building to unveil its latest line of car models, and fast food giant Kentucky Fried Chicken opted for the elegance of the Great Hall to hold a meeting of its more than 2,100 Chinese restaurant managers.

Ironically enough, while economists in Europe and the United States advocate "less government" and "open markets" as a response to globalization and the Chinese challenge, the Marxist-Leninist party that rules China blatantly avails itself of every advantage of capitalism while steadfastly refusing to give up state control over the economy. (my emphasis)

The current (March 2007) American Prospect has a cover story, The Emperor's New Clothes by James Mann, on China, addressing whether prosperity will increase pressure for political liberalization in China. (The article is temporarily behind subscription at this writing.) Man is skeptical on that point. But he reminds us how China came to be an "honorary capitalist" country:

The notion of a China on the road to political liberalization has taken hold in the United States because it has served certain specific interests within American society. At first, in the late 1970s and the 1980s, this idea benefited the U.S. national-security establishment. At the time, the United States was seeking close cooperation withChina against the Soviet Union, so that the Soviet Union would have to worry simultaneously about both countries; the Pentagon wanted to make sure the Soviet Union tied down large numbers of troops along the Sino-Soviet border that might otherwise have been deployed in Europe. Amid the ideological struggles of the Cold War, though, cooperation with China's Communist regime was politically touchy in Washington. And so the notion that China was in the process of opening up its political system helped smooth the way with Congress and the American public.

In the 1990s, after the Soviet collapse, the idea of a politically changing China attracted a new constituency, one even more powerful than the Pentagon: the business community. As trade and investment in China became ever more important, American companies found themselves repeatedly beset with questions about why they were doing business with such a repressive regime. The paradigm of inevitable change offered multinational corporations the answer they needed. Not only was China destined to open up its political system, but trade, the theology held, would be the key that would unlock the door. It would lead to political liberalization and to democracy, with or without the support of the Chinese leadership. Accordingly, no one outside China needs to do anything, or even think much about the subject. Why bother to protest a crackdown or urge China to allow political opposition if you know that democracy, by the inexorable laws of history, is coming anyway?

The trouble is, the entire paradigm may turn out to be wrong.

Mann writes that there is a practical problem with this. People who have a lot of unaccountable power are reluctant to give it up:

Indeed, it is precisely because the regime knows how restive and disenchanted the Chinese people are that it refuses to open up to any form of democracy. The Chinese leaders know that they could be thrown out of office if there were free and open elections. Democracy, or even an organization calling for future democracy, is a threat to the existing political and economic order in China. That is why the regime continues to repress all forms of organized dissent and political opposition. It is also why China's new class of managers and executives, who profit from keeping wages low, support the regime in its ongoing repression. (my emphasis)

But Mann in this article isn't analyzing the nature of China's economy. He's looking at the role of China in the international economic system and how that role relates to China's prospects for a more democratic government. Most Americans could probably agree in the abstract that we would like to encourage democracy and human rights in the world but also have as much free trade as possible. But that's at a very abstract level. Mann is essentially arguing that the US use trade prospects as tool to push China toward democratization:

The reexamination should apply to both U.S. political parties and to both poles of the ideological spectrum. On the Democratic left, we need people who will question the assumptions that it is somehow "progressive" to say that democracy doesn't matter or that it will automatically come to China some day. Such views aren't in the least bit progressive, liberal, or enlightened. Rather, they were developed by the Clinton administration to justify policies that would enable Bill Clinton to win corporate support. During the 1990s, there were other views concerning China within the Democratic Party - those of Nancy Pelosi, for example, and George Mitchell, who took strong stands on behalf of human rights in China. The Democrats rejected those alternative approaches a decade ago. They would do well to reexamine them now.

Within the Republican Party, we need political leaders willing to challenge the Business Roundtable mentality that has dominated the party's thinking on China for so long. If Republicans really care about political freedom, then why should they allow U.S. policy toward China to be dominated by corporate interests while the world's most populous country is governed by a single party that permits no political opposition? President Bush has been able to conceal his business-oriented approach to China behind a facade of hawkish rhetoric. Republicans should not allow this to happen again.

It's worth remembering in the context of this discussion that the neoconservatives and the Cheney-Rumsfeld type of just plain militarists with whom they make common cause see China as the long-term justification for maintaining a permanent war economy and a national-security state at home. The Project for a New American Century (PNAC) became well-known outside of policy-geek circles because of their hawkish proposals for Iraq eventually beingmade reality by the current administration. But PNAC viewed China as the main long-term competitor for the United States.

We can all agree that dictatorship is bad and democracy is good. But we need to also remember that war is evil. And we should be very reluctant to embrace avoidable wars as necessary evils. We need to be suspicious in the extreme of Cheney-like schemes to set up China or anyone else - including The Terrorists - as an inevitable villain that requires spending more than half the world's military budget for the rest of all our lives.

After having seen the cynicism of this administration in promoting war with Iraq, complete with war propaganda about how much we should care about the supposed democratic desires of the Iraqi people whose country Cheney and Rummy and Bush has turned into hell on earth for a large percentage of them, I've become more of a minimalist when it comes to forcing new ways of governing on other countries.

I lean much more toward using publicity and diplomatic means for highlighting basic human rights issues in the world, working as much as possible through the UN and other international institutions. But reducing the chances of war needs to be a higher foreign policy priority than bringing the blessings of American-style democracy to others in the world. Because the results of supposedly trying to do so in Iraq have been ugly. (It was the nonexistent "weapons of mass destruction" that we the justification for the war, especially the nonexistent nuclear weapons programs. But our occupation strategy was based in significant part on turning Iraq into a free-market democratic model. Though I'm very confident that neither Dick Cheney nor Rummy gave a rat's behind whether Iraq had a democracy or not.)

We need to have trade policies that make the preservation and development of American jobs a much higher priority. But I would rather see trade restrictions based as much as possible on economic and environmental concerns, to prevent the global trade system from becoming a race to the bottom in terms of wages, working conditions and environmental damage. It seems obvious to me that realistic priorities for nuclear nonproliferation, arms control and disarmament should override any purely economic concern in trade policy.

But a healthy mutual dependence on trade and investment with each other promises to reduce the danger of war in the future andthus decrease the chances that the dreams of future Dick Cheneys will become realities. That's a different matter than assuming that they will produce internal liberalization in China. We shouldn't send prisoners on "special rendition" to China to be tortured. But we don't need to let nuclear and conventional arms races blossom like a hundred poisonous flowers until someday, somehow, China becomes a Western-style democracy.

While we're at it, our economists and business journalists might want to look a little more closely at just how the Chinese "market economy" really works instead of assuming it's some kind of clone of the American way of capitalism.

Tags: china, james galbraith