China's Reforms At 30: Challenges and Prospects (Series on Contemporary China)

CHINA’S REFORMS AT 30 Challenges and Prospects

Series on Contemporary China

(ISSN: 1793-0847)

Series Editors: Joseph Fewsmith (Boston University) Zheng Yongnian (East Asian Institute, National University of Singapore)

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Series on Contemporary China – Vol. 15

CHINA’S REFORMS AT 30 Challenges and Prospects edited by

Dali L Yang

University of Chicago, USA

Litao Zhao

East Asian Institute National University of Singapore, Singapore

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British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library.

CHINA’S REFORMS AT 30: CHALLENGES AND PROSPECTS Series on Contemporary China — Vol. 15 Copyright © 2009 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher.

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Chapter

Contents Introduction

vii

Dali Yang and Litao Zhao 1. How to Sustain China’s Growth Miracle?

1

Eswar S. Prasad 2. China’s Mounting External Imbalances: Trade, Foreign Investment and Regional Production Sharing

19

Sarah Y. Tong and Yi Zheng 3. China’s Protest Wave: Political Threat or Growing Pains?

41

Andrew G. Walder 4. The 17th Party Congress and the CCP’s Changing Elite Politics

55

You Ji 5. Diminishing Demographic Dividends: Implications for China’s Growth Sustainability Ding Lu v

93

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vi Contents

6. Towards Universal Coverage: China’s New Healthcare Insurance Reforms

117

Edward Gu 7. A New Perspective in Guiding Ethnic Relations in the 21st Century — “De-politicization” of Ethnicity in China

137

Rong Ma 8. Is There an Asian Value? Popular Understanding of Democracy in Asia

167

Tianjian Shi About the Authors

195

Index

199

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Chapter

Introduction Dali Yang and Litao Zhao

The year 2008 marks the 30th year of China’s reform era.1 By any measure, it has been a remarkable three decades for China and the world.Thirty years ago, China languished as a closed economy with several hundred million people living in abject poverty.Today, it is a major engine for world economic growth and boasts of a rising middle-class and the world’s largest foreign exchange reserves. One cannot talk about world trade without mentioning China. While direct trade between China and the United States was minimal at the end of the 1970s, today it would take the American consumer extraordinary perseverance and ingenuity to live without goods “Made in China”.2 Though China celebrates 30 years of near-double-digit economic growth, the mood in China is not nearly as festive as the fireworks at

1 Here we are following conventional wisdom and date the start of the reform era from the Third Plenum of the 11th Party Central Committee held in December 1978. We recognize, however, that other perspectives on the start of the reform era exist. 2 Sara Bongiorni, A Year Without “Made in China”: One Family’s True Life Adventure in the Global Economy, New York:Wiley, 2007.

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the Beijing Olympics seem to indicate. China has come a long way in the transition from state socialism to a modern market economy and there have been significant increases in terms of both individual and national wealth as well as national power.Yet, there is also considerable reflection on where China has fallen short and how China should do better. In laying out a vision for building a well-off society (xiaokang shehui) by 2020, China’s leaders have emphasized the need to shift from an all-out pursuit of economic growth to more balanced development, which means less income inequality, less regional disparity, more social justice, better protection of the disadvantaged, more energy efficiency and more environment-friendly development. Maintaining a high level of economic growth remains important, but the pattern of growth should shift from urban-biased to broad-based, from fixed investment-driven to domestic consumptiondriven. With one-party rule as the bottom line, the CCP (Chinese Communist Party) is redefining its policy priorities to better tackle socioeconomic issues arising in the process of transition. To take stock of China’s accomplishments over the past three decades and to consider the challenges it still faces, the East Asian Institute at the National University of Singapore convened an international conference on China: The Next Decade in 2007. The conference was part of a series of lectures and conferences held to commemorate the East Asian Institute’s 10th anniversary. The chapters in this volume are selected from the papers presented at the conference, except for the contributions by Eswar Prasad and Sarah Tong and Yi Zheng.With eight papers divided evenly on China’s economic, social and political development, we believe this volume offers a balanced yet in-depth assessment of the challenges facing China in the next decade. Economic reform has been central to China’s reform agenda in the past three decades.Yet, China’s very economic success, especially its reliance on export-oriented growth, has engendered new complexities for policymakers. Take the issue of foreign exchange reserves. In 1993, the Chinese government had to sharply devalue the Chinese currency because it had virtually run out of foreign exchange. Since then, however, China’s foreign exchange reserves have ballooned to

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Introduction ix

some US$1.5 trillion (as of the end of 2007) and the hefty reserves have become a symbol of China’s trade prowess, a sign of trade imbalances, and a potential source of liability for China’s foreign exchange managers. In Chapter 1, Eswar Prasad makes the case that China has reached the point where reforming its exchange rate regime should become a priority. Prasad notes that China’s tightly controlled foreign exchange regime has hindered financial sector development and lowered real rates of return for households. He suggests that it would be in China’s own self-interest to shift to a flexible exchange rate. Exchange rate flexibility is a prerequisite for an independent monetary policy, which in turn is a prerequisite for financial institutions to operate in accordance with market principles. Exchange rate flexibility, in connection with a more independent monetary policy and a more market-driven banking system, will likely better prepare China’s economy for internal and external shocks. The impact of China’s rise to the ranks of the world’s leading trading nations is the subject of Chapter 2 by Sarah Tong and Yi Zheng. In particular,Tong and Zheng highlight China’s role in global production networks. On the one hand, China buys heavily from neighboring economies for further processing and assembly. In this process, while China has become the center of regional production networks, it has nonetheless accumulated a large trade deficit with its neighboring economies. On the other hand, products made and assembled in China based on imported inputs from the region are destined for export to the United States and the European Union, resulting in mounting trade surplus on the Chinese side. Tong and Zheng conclude that as China remains competitive in labor-intensive industries, China’s trade imbalance with its major trading partners will persist for years to come. China’s breakneck growth has not only given rise to external imbalances, but has also been accompanied by unbalanced development domestically. Despite the continued leadership of the CCP, China has over three decades transformed itself from one of the most egalitarian economies to one of the most unequal in Asia. Even though various welfare measures have been introduced in recent years, protection for the vulnerable remains minimal. Meanwhile,

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x Dali Yang & Litao Zhao

rapid economic growth has come at the expense of the environment. In response to various injustices as well as corruption, there has been a sustained rise in strikes, protests and riots. It therefore behooves us to ask whether China is facing a revolution of rising expectations and whether the large number of “mass incidents” poses a significant political challenge to the Communist Partycontrolled regime. Andrew Walder addresses this issue in Chapter 3. He analyzes the causes of recent protest waves, disaggregating them into three broad categories depending on whether they are related to the decline of the previously dominant state industrial sector, the expropriation of farmland for non-agricultural development, or the rapid commercial real-estate development in urban areas. He notes that by and large the recent protests do not involve politically strategic populations, such as rank-and-file Party members, government officials and white-collar workers and professionals who are winners in the recent rapid economic expansion. Except for purchasers of apartments, few of the protest groups are located in politically strategic regions or enterprises. In sum, the recent waves of protest are a response by scattered pockets of the population in a period of rapid structural change and are unlikely to culminate in a serious political threat to the CCP. Not that China’s leaders are taking any chances. Despite all the talk about promoting democracy and the rule of law, the Chinese leadership has invoked various measures including the presence of widespread social pressures to justify taking a tight rein. Politically, the ruling oligarchy in the CCP has paid special attention to leadership succession, crucial to the survival and vitality of any organization. At the 17th Congress of the CCP held in late 2007, leadership reshuffle for the next five years and beyond topped the agenda as the Chinese leadership begins to prepare for the post-Hu Jintao/Wen Jiabao era. In Chapter 4,You Ji dissects the political significance of the 17th Party Congress. You argues that since the death of Deng Xiaoping, China’s elite politics has been shifting from one ruled by a supreme leader to one where informal politics and deepening institutionalization prevail. You suggests that a consensus has emerged among Party elites that all should rally behind the successor regardless

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Introduction xi

of one’s “factional” affiliation. Seen in this light, the 17th Party Congress and its initiatives represent another step to hold the Party together and in power. Besides political and social changes, demographic change is also an important factor affecting China’s long-term prospects. In Chapter 5, Ding Lu offers a demographic perspective on China’s growth sustainability. In the past three decades, China’s economy has benefited from an abundant supply of cheap labor.As the Chinese population is ageing rapidly, such a “demographic dividend” is likely to diminish quickly. The proportion of China’s population aged 15–64 is projected to peak around 2015 and to decline thereafter.This change will undermine China’s comparative advantage in labor-intensive exports. Lu reviews different proposals for tackling this emerging new challenge, and suggests that China should capitalize on what he calls a “second demographic dividend” as demand for assets to support old-age consumption is likely to motivate the working population to save more, invest more and work more efficiently. After the SARS outbreak in 2003, China’s leaders recognized the need to pay more attention to social development. Concerted efforts have been made to reduce peasant burdens and to expand the social safety net to rural residents, workers in the non-state sector, and non-working populations in the cities. In Chapter 6, Edward Gu provides a timely update on China’s new healthcare insurance reforms. China has established three public health insurance schemes — one for the working population in the cities, one for the non-working population in the cities, and one for rural residents. Launching a new round of healthcare reforms in early 2008, the Chinese government will increase public spending on healthcare and may consolidate the three public health insurance schemes into a three-tier public health insurance system, with an ultimate goal of expanding basic health security to the entire population. In this connection, significant reforms to improve the delivery of healthcare services are also being considered.The changes in the Chinese government’s health policies as well as welfare policies in general will in time result in a significant redefinition of China’s frayed social contract.

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Dali Yang & Litao Zhao

Another dimension of China’s dynamic state–society relationship is ethnicity. While ethnic minorities comprise a relatively small percentage of the total population, they nonetheless number more than 100 million. In recent years, China’s leaders have invoked the need to combat terrorism to highlight the challenges from Turkic separatists in Xinjiang. In Chapter 7, Peking University Professor Rong Ma proposes that China learn from its own historical heritage for ways to maintain good ethnic relations. Over thousands of years, China has developed a tradition of “culturalization” in dealing with ethnic relations. According to Ma, the tradition of culturalization helped produce a united-pluralistic polity with a huge population that was culturally assimilated and economically integrated until the late Qing dynasty.This tradition was interrupted, however, when the CCP took control and began to adopt the ethnic policy of the former Soviet Union in the 1950s. The Soviet-style ethnic policy has served to accentuate ethnic differences and led to the “politicization” of ethnic minorities. In Ma’s view,“politicization” reinforces the identity of individual ethnic minorities at the cost of a unified national identity.As an advocate of nation building, Ma calls for the Chinese government to adjust its rigid ethnic policies and return to the traditional strategy of “culturalization”. In the final chapter,Tianjian Shi uses survey data to assess public attitudes towards democracy in mainland China by comparing them with those in other Asian societies, including Hong Kong and Taiwan. While democracy is a widely accepted value, Shi makes some interesting inferences about the popular understanding of democracy in Asia. He suggests that Asian values seem to exist as far as democracy is concerned. In particular, Chinese on mainland China were of the view that they are already enjoying much democracy, while the people on Taiwan thought that there was more democracy than they wanted. To many Chinese, a democratic government is a government “for the people”, not necessarily a government elected “by the people”.Thus, the Chinese public’s commitment to “democracy” does not lead to a straightforward rejection of authoritarian regimes. The existence of such public attitudes towards democracy thus raises provocative questions about the prospects for democratization in China.

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Introduction xiii

In putting this volume together, we are indebted to Professor Wang Gungwu, Director of the East Asian Institute at the time of the Conference and now the Institute’s Board Chairman, for his past 10-year stewardship of the Institute; Professor John Wong, Research Director of the Institute, for helming the anniversary celebrations and conference; Lian Wee Li and James Tan, for their excellent coordination of the conference; and Jessica Loon, for copyediting the chapters. We are also grateful to our contributors for their timely contributions.

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Chapter

1 How to Sustain China’s Growth Miracle?* Eswar S. Prasad

The Chinese economy has delivered a remarkable performance over the last two decades, with annual GDP growth averaging nearly 10 percent.The particular combination of macroeconomic and structural policies that has generated this growth has clearly “worked” well. But rapid growth can hide, or in some cases even exacerbate, a number of deeper problems. For instance, the financial sector is in poor shape and has distorted domestic demand; the patterns of investment financing could lead to a resurgence of non-performing loans (NPLs) in the future and, by fueling a build-up of excess capacity * Earlier versions of this paper were presented at the American Enterprise Institute, the China Banking Regulatory Commission, the People’s Bank of China, the China Center for Economic Research at Peking University, the EBRD, the Reserve Bank of India and the Peterson Institute. The author would like to thank Philip Levy, Justin Lin, Luo Ping, Li Ruogu, Andrew Sheng and numerous other colleagues for useful discussions and comments. He would also like to express his gratitude to Sun Tao for help in obtaining some of the data used in this paper. Rahul Anand provided able research assistance. 1

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2 Eswar S. Prasad

in some sectors, could generate deflationary risks in the medium-term. Meanwhile, in the short-term, some of the pressures are becoming evident in other forms such as asset price booms (in the equity markets, in particular). The sustainability of growth — while an important concern — may not even be the key problem. There are indirect and subtle costs to the current growth model that deserve attention. For instance, tight management of the exchange rate has been facilitated by financial repression and a relatively closed capital account. This has, among other things, meant very low real rates of return for households, who save a lot and have few investment opportunities other than domestic bank deposits. These policies have also curtailed financial sector development, leading to inefficient intermediation of domestic capital. There are clearly large welfare costs associated with these constraints. The growth strategy has involved a number of policy distortions and constraints that have greatly reduced the room for policy maneuver in case any big shocks should hit. Such shocks could come from internal sources (e.g., loss of confidence in the banking system, social instability generated by rising inequality) or external sources (e.g., international capital market crises, a collapse of external demand, US trade sanctions, flaring-up of tensions over Taiwan, etc.). Monetary policy is typically the first line of defence against such shocks but, with monetary policy constrained by the objective of maintaining a tightly managed exchange rate, it can at best play a very limited role. There appears to be room for fiscal maneuver since the explicit levels of fiscal deficit and government debt are quite low, but this may be deceptive as there are large contingent liabilities in the state-owned banking system and huge unfunded pension liabilities. The financial system is still dysfunctional in many ways and may not be deep or robust enough to withstand a significant shock. So what should China do to prepare itself to deal with shocks and make growth more balanced and sustainable? The banking system should be made more robust and driven by market principles, and the

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How to Sustain China’s Growth Miracle? 3

financial system should be broadened to create alternative sources of funding for firms and alternative investment opportunities for households and firms. The state-owned enterprise sector needs to be further corporatized by hardening budget constraints. There is a need for a better social safety net and a better system for delivery of social services. Many of these reforms are interrelated and trying to implement these reforms in isolation is not an effective way to proceed. For instance, stable macroeconomic policies and a well-developed and efficient financial sector are essential ingredients for balanced and sustainable growth. In turn, these two intermediate objectives would be helped by an effective monetary policy and further capital account liberalization, and with a flexible exchange rate as a prerequisite. Ignoring these linkages — for instance, trying to push forward with banking reforms while holding monetary policy hostage to an exchange rate objective — makes an already difficult reform process even harder. Similarly, financial repression has kept the real price of capital cheap and, along with subsidized energy and land prices, shifted production towards capital-intensive methods. This works at cross-purposes with the authorities’ goal of boosting employment growth and facilitating the transition of rural unemployed and underemployed to employment in manufacturing and services. Ultimately, the essence of the policy debate can be framed in terms of the pace and sequencing of reforms required to turn these strengths into forces that allow the growth miracle to be sustained and to reduce the risks of its being derailed by shocks.

INVESTMENT-LED GROWTH One dimension of the Chinese growth story that is of particular relevance in the context of the arguments in this paper is the composition of growth. Investment in physical capital has been a major contributor to growth during this decade, in some recent years accounting for nearly two-thirds of nominal GDP growth. Private

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4 Eswar S. Prasad

consumption, by contrast, has made a much smaller contribution to growth.1 One consequence of the investment-heavy expansion has been the relatively slow employment growth.2 Indeed, during the period 2000–2005, growth of total non-agricultural employment averaged only 3 percent per annum, compared to average non-agricultural GDP growth of about 9.5 percent. Why has investment growth been so strong? A substantial fraction of this investment in China has been financed by credit provided by state-owned banks at low interest rates. Indeed, cheap capital has played a big part in skewing the capital:labor ratio and holding down employment growth.3 Recent increases in the base lending rate have been far too small to raise the real price of capital to a meaningful level for an economy that is experiencing annual real growth of over 10 percent (Figure 1.1). In addition, local governments provide subsidized land in order to encourage investment.And energy prices continue to be administered and made available to enterprises at prices below international levels. A lot of the recent investment has also been financed through retained earnings of profitable firms, which ought to be more defensible on the basis of economic criteria. However, even here the picture is not clear. Profitable state enterprises were not, until very recently, required to pay dividends to the state. This suggests that such investment may have been spurred by the minimal rates of return on bank deposits which made even marginal investment projects seem in the money. The risk, of course, is that such high rates of investment in industries with favorable demand conditions may be leading to a build-up of excess capacity in those very industries; this

1

For details on the composition of growth, see Aziz, Jahangir, 2006, “Rebalancing China’s Economy: What Does Growth Theory Tell Us?”, IMF Working Paper 06/291; and Lardy, Nicholas, 2006, “China: Toward a Consumption-Driven Growth Path”, Policy Brief 06-6, Peterson Institute for International Economics (Washington, DC). 2 For detailed calculations, see the chapter by Brooks in Prasad, Eswar (editor), 2004, “China’s Growth and Integration into the World Economy”, IMF Occasional Paper No. 232. 3 See Aziz (2006).

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How to Sustain China’s Growth Miracle? 5 14

12

Base Lending Rates

10

Base Deposit Rates 8

6

4

2

0 Jan-89

Jan-91

Jan-93

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

Fig. 1.1 Base Lending and Deposit Rates (1-year rates, in percent) Source: CEIC.

could become evident if there were adverse demand shocks in the future.4 While investment has been high, national savings have been even higher, with both household and corporate savings rising in recent years. The uncertainties engendered by the transition to a market economy, the limited availability of instruments to borrow against future income to finance purchases (major durable goods, housing, etc.), and the lack of international portfolio diversification opportunities have all contributed to high household savings.5 Financial system repression has meant that there are few alternatives to funnelling these savings into deposits in the state-owned banking system. 4 Goldstein, Morris, and Nicholas R. Lardy, 2004, “What Kind of Landing for the Chinese Economy?”, Policy Brief No. PB04-7, Institute for International Economics (Washington, DC). 5 Chamon, Marcos, and Eswar Prasad, 2008, “Why Are Saving Rates of Urban Households in China Rising?”, IMF Working Paper No. 08/145.

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6 Eswar S. Prasad

Households willingly hold bank deposits despite weaknesses of the banking system because of implicit deposit insurance provided by the government. This provides abundant liquidity for banks to expand credit which, because of the distorted incentives faced by lenders, largely finances investment by state enterprises. State enterprises that do make profits are not required to pay dividends, encouraging them to plough retained earnings (which are counted as enterprise savings) back into investment. Thus, the investment boom in recent years has been fuelled by cheap credit and overoptimistic expectations of future demand growth in sectors that are doing well at present.

MACROECONOMIC POLICIES China has had a relatively stable exchange rate relative to the US dollar since 1995. Since 2001, the exchange rate has been kept from appreciating only by massive intervention in the exchange market. In tandem with sustained high export growth and a burgeoning current account surplus that is likely to hit 12 percent of GDP in 2007 (Table 1.1), this is indicative of a substantially undervalued currency. Figure 1.2 shows that, despite an appreciation of the renminbi versus the US dollar since June 2005, the real effective exchange rate of the renminbi is now below its recent peak in 2002 (largely due to the US dollar’s depreciation against other major currencies). Resisting pressures for exchange rate appreciation has fuelled a surge in the accumulation of international reserves since 2001 (Figure 1.3). Table 1.2 shows that, during the period 2001–2004, inflows of speculative capital (in anticipation of eventual renminbi appreciation) accounted for most of the pick-up in the pace of reserve accumulation relative to the period 1998–2000. During 2005–2006, speculative inflows shrank but the slack was more than taken up by a dramatic surge in the trade balance, which doubled the rate of reserve accumulation that had been seen during 2001–2004. The inflows resulting from these factors have added to the liquidity in the banking system and further complicated the control of credit growth.

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Table 1.1 The Balance of Payments (in billions of US dollars) 2001

2002

2003

2004

2005

143.4 15.0

149.8 14.7

158.3 14.6

168.9 14.1

218.7 16.5

295.2 20.3

412.2 25.1

618.6 32.0

825.6 1072.6 1338.7 36.8 40.8 —

Change in international reserves

34.9

6.4

8.5

10.5

49.8

76.5

117.0

206.3

207.0

247.0

266.1

A. Current account balance (in percent of GDP) Merchandise trade balance (in percent of GDP)

37.0 3.9 46.2 4.9

31.5 3.1 46.6 4.6

21.1 1.9 36.0 3.3

20.5 1.7 34.5 2.9

17.4 1.3 34.0 2.6

35.4 2.4 44.2 3.0

45.9 2.8 44.7 2.7

68.7 3.6 59.0 3.1

160.8 7.2 134.2 6.0

249.9 9.5 217.7 8.3

162.9 — 135.7 —

B. Capital account balance FDI, net

21.0 41.7

−6.3 41.1

5.2 37.0

2.0 37.5

34.8 37.4

32.3 46.8

52.7 47.2

110.7 53.1

63.0 67.8

10.0 60.3

90.2 51.0

C. Errors and omissions, net

−22.3

−18.7

−17.8

−11.9

−4.9

7.8

18.4

27.0

−16.8

−12.9

13.1

−63.2

52.3

Gross international reserves (in percent of GDP)

2006

2007

Memorandum Items: Non-FDI capital account balance (including errors and omissions) −42.9 Nominal GDP

953

−66.1 1019

−49.6 1083

−47.4 1198

−7.4 1325

−6.7 1454

23.9 1641

84.6 1932

−21.6 2244

2626

—

Sources: CEIC, IFS and author’s calculations. Notes:The data for 2007 are end-June data. The non-FDI capital account balance is the capital account balance minus net FDI plus net errors and omissions.

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1999

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1998

How to Sustain China’s Growth Miracle? 7

1997

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8 Eswar S. Prasad 14

Real Lending Rate (deflated by PPI) 12

Real Lending Rate (deflated by CPI) 10

Real Deposit Rate (deflated by CPI)

8

6

4

2

0 Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

-2

-4

Fig. 1.2 Real Lending and Deposit Rates (1-year rates, in percent) Source: CEIC and author’s calculations. Note: Real rates calculated by deflating the nominal rates by twelve-month trailing CPI or PPI inflation.

60

1600

Monthly Changes 50

Stock of Reserves

1400

1200 40 1000

30

800

600 20 400 10 200

0

Ja n-

95 Ju l -9 5 Ja n96 Ju l -9 6 Ja n97 Ju l -9 7 Ja n98 Ju l -9 8 Ja n99 Ju l -9 9 Ja n00 Ju l -0 0 Ja n01 Ju l -0 1 Ja n02 Ju l -0 2 Ja n03 Ju l -0 3 Ja n04 Ju l -0 4 Ja n05 Ju l -0 5 Ja n06 Ju l -0 6 Ja n07 Ju l -0 7

0

Fig. 1.3 Foreign Exchange Reserves: Flows and Stocks (in billions of USD)

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How to Sustain China’s Growth Miracle? 9 Table 1.2 A Decomposition of the Recent Reserve Build-Up (in billions of US dollars) Annual Averages

Increase in foreign reserves Current account balance Capital account balance FDI, net Errors and omissions, net Non-FDI capital account balance (including errors and omissions)

Changes

1998– 2000 (1)

2001– 2004 (2)

2005– 2006 (3)

2001–2004 − 1998–2000 (2) − (1)

2005–2006 − 2001–2004 (3) − (2)

8.5

112.4

227.0

103.9

114.6

24.4

41.9

205.4

17.5

163.5

0.3

57.7

36.5

57.4

−21.2

38.5 −16.1

46.1 12.1

64.1 −14.9

7.6 28.2

17.9 −26.9

−54.4

23.6

−42.4

78.0

−66.0

Sources: CEIC, IFS and author’s calculations. Notes:The non-FDI capital account balance is the capital account balance minus net FDI plus net errors and omissions.

Why have these inflows not led to rampant inflation? The answer lies in the ability of the People’s Bank of China (PBC) to sterilize these inflows. Such sterilization usually quickly runs into limits in most emerging market economies. Government bonds that are used to soak up liquidity have to offer increasingly high yields to convince domestic economic agents to hold them, leading to ever-increasing costs to the budget. In China, private saving rates (both household and corporate) continue to be very high; most of these savings invariably flow into the banking system since there are few alternatives. This has made the banks flush with liquidity, particularly at a time when they are under pressure to hold down growth in credit. Moreover, banks have an incentive to hold PBC bills rather than increase their lending since corporate lending, for instance, carries a capital

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6

PBC 3-month

PBC 1-year

US 3-month

US 3-year

5

4

3

2

1

0 Apr-03

Jul-03 Oct-03 Jan-04 Apr-04

Jul-04 Oct-04 Jan-05 Apr-05

Jul-05 Oct-05 Jan-06 Apr-06

Jul-06 Oct-06 Jan-07

Fig. 1.4 PBC Bill Rates vs. US Treasury Yields (in percent, annualized)

requirement of 100 percent while no capital needs to be put aside for lending to the government. So there is a great deal of demand for PBC bills even at relatively low interest rates. This means that, at the margin, sterilization is essentially a moneymaking operation for the PBC (abstracting from the effects of changes in the exchange rate). Figure 1.4 shows how the present configuration of interest rates in China and the US generates this “profit” from the PBC’s sterilization operations. But such a cost-benefit calculation can be deceptive. The lack of exchange rate flexibility not only reduces monetary policy independence, it also hampers banking sector reforms. The inability of the PBC to use interest rates as a primary tool of monetary policy implies that credit growth has to be controlled by blunter and non-marketoriented tools, including targets/ceilings for credit growth as well as “non-prudential administrative measures” (which effectively amount to moral suasion). This vitiates the process of banking reform by keeping banks’ lending growth under the administrative guidance of the PBC rather than letting it be guided by market signals. This constraint has also perpetuated large efficiency costs via provision of cheap

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How to Sustain China’s Growth Miracle? 11

credit to inefficient state enterprises.6 The incidence of these and other costs of banking system inefficiency are not obvious, but they may ultimately be borne by depositors in the form of low (or negative) real returns on their saving.7 The management of capital flows has been another crucial component of macroeconomic policy. Extensive capital controls, along with tax benefits and other incentives, have been used to promote inward FDI, while other forms of inflows, especially portfolio debt, have been discouraged.8 Capital controls have also played an important role in protecting the banking system from external competition by restricting the entry of foreign banks and by making it harder to take capital out of the country. The limited development of debt and equity markets means that the state-owned banking system is effectively the only major game in town, for both borrowers and savers. China’s approach to exchange rate policy and capital account liberalization may be indicative of a desire to maintain stability on the domestic and external fronts. And the large stock of foreign exchange reserves resulting from these policies may serve as insurance against vulnerabilities arising from a weak banking system. But the policy distortions needed to maintain this approach could generate imbalances, impose potentially large welfare costs, and become a source of instability.

PATH TO REFORMS It is not easy to isolate specific policies to deal with particular problems identified aforesaid. Indeed, the reform process appears to have 6

Dollar, David, and Shang-Jin Wei, 2007,“Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China”, IMF Working Paper 07/9. 7 In July 2007, the benchmark one-year deposit rate was raised to 3.33 percent and the tax rate on bank interest income was cut from 20 percent to 5 percent. The effective after-tax deposit rate is now 3.16 percent, which is still below the current rate of CPI inflation. 8 Prasad, Eswar, and Shang-Jin Wei, 2007, “China’s Approach to Capital Inflows: Patterns and Possible Explanations”, in Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, ed. by Sebastian Edwards (Chicago, IL: University of Chicago Press).

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Eswar S. Prasad No independent interest rate policy

Domestic macro management harder

Resource misallocation Unbalanced growth led by exports, investment

Large current a/c surpluses, more capital inflows

Financial sector reforms more complicated

Risks 1. Inflation/overheating in the short-term 2. Deflation + new NPLs in the medium-term 3. Asset price bubbles 4. Trade sanctions if trade surplus widens

Inflexible exchange rate

Fig. 1.5 Lack of Exchange Rate Flexibility Complicates Macro Policy and Reforms

reached a stage where the traditional approach of undertaking incremental reforms in isolation from others may not work well anymore.9 Given the prominence of China’s exchange rate regime in discussions about China-US bilateral relations as well as the issue of global current account imbalances, currency policy provides a good illustration of the interconnectedness of various reforms. What are the costs of an inflexible exchange rate? Figure 1.5 lays out some of the connections. The main point is that an inflexible exchange rate, while not the root cause of imbalances in the economy, requires a large set of distortionary policies for its maintenance over long periods. It is these distortions that — through multiple channels — hurt economic welfare and could, over time, shift the balance of risks in the economy. Flipping this around makes it easier to see why exchange rate flexibility matters for China. It is not necessarily because it will directly have a large or lasting impact on problems such as the US-China trade

9

For more on this point, see Blanchard, Olivier, and Francesco Giavazzi, 2005, “Rebalancing Growth in China: A Three-Handed Approach”, MIT Department of Economics Working Paper 05/32; and Prasad, Eswar, and Raghuram Rajan, 2006, “Modernizing China’s Growth Paradigm”, American Economic Review,Vol. 96, No. 2, pp. 331–336.

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How to Sustain China’s Growth Miracle? 13 Monetary policy independence

Better macroeconomic management

Exchange rate flexibility

Balanced and sustainable growth

Safer capital account liberalization

Financial sector development and reforms

Fig. 1.6 Making the Right Connections

imbalance.10 Rather, the case for a flexible exchange rate rests on a deeper set of policy priorities, with the ultimate objective being balanced and sustainable growth in the longer term (Figure 1.6). An independent interest rate policy is the key tool for improving domestic macroeconomic management and promoting stable growth and low inflation. Monetary policy independence is, however, a mirage if the central bank is mandated to attain an exchange rate objective. Capital controls do insulate monetary policy to some extent, but they are notoriously leaky and tend to become increasingly less effective over time.11 Thus, a flexible exchange rate is a prerequisite for an independent monetary policy. Independent interest rate policy, in turn, is a key input for financial sector reforms. Using interest rate policy, rather than government 10 While Chinese currency appreciation by itself may not have much of an impact on global current account imbalances, it would be an important step towards resolving those imbalances since other Asian economies may be emboldened to allow their currencies to appreciate as well if China made the first move. 11 A crude way of measuring net flows through unofficial channels is to look at the errors and payments category of the balance of payments. Prasad and Wei (2007) document that, during periods of downward (depreciation) pressures on the renminbi — e.g., the Asian financial crisis period — errors and omissions were negative and large, suggesting significant capital flight. During 2003–2005, the errors and omissions turned into large positive numbers, reflecting speculative inflows in anticipation of renminbi appreciation. Gross unofficial flows could of course be much larger.

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directives, to guide credit expansion is essential to encourage banks to become more robust financial institutions. Fostering the commercial orientation of the banking sector in the absence of monetary policy tools to guide credit and money growth vitiates banking reforms. The argument that the financial system needs to be fully modernized before allowing currency flexibility therefore has it backwards. Indeed, durable banking reforms are likely to be stymied if the PBC’s ability to manage interest rates is constrained by the exchange rate objective. The PBC then has to revert to its old practice of telling state banks how much to lend and to whom, which hardly gives banks the right incentives to assess and price risk carefully in their loan portfolios.This makes banking reforms even more complicated than they already are. Another requirement for broader financial development is a stable macroeconomic environment, for which, again, good macroeconomic policies, including effective monetary policy, are necessary. On the flip side, the lack of effective macroeconomic management could generate risks via the financial sector. In the absence of room for maneuver on interest rates, liquidity flows into the economy could result in asset price bubbles, including in the real estate and stock markets.These markets could become vulnerable to sudden and unpredictable shifts in investor sentiment that could send them tumbling at the slightest provocation, with broader ripple effects through the economy. For developing the domestic financial sector, opening up of the capital account — to inflows as well as to outflows — could also serve as an important catalyst.12 Inflows can bring in technical expertise on developing new financial instruments, creating and managing risk assessment systems, and improving corporate governance. Indeed, using foreign strategic investors to improve the efficiency of domestic banks is a strategy the Chinese authorities see as playing a useful role in their overall reform effort. Allowing outflows would help increase efficiency by creating competition for the domestic banking 12

See Kose, M. Ayhan, Eswar Prasad, Kenneth Rogoff, and Shang-Jin Wei, 2006, “Financial Globalization: A Reappraisal”, IMF Working Paper 06/189.

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How to Sustain China’s Growth Miracle? 15

system and limiting the captive source of funds (bank deposits) that now keep domestic banks flush with liquidity. However, opening the capital account ahead of introducing greater flexibility in the exchange rate could pose serious problems in the future.13 Ultimately, stable macroeconomic policies and a well-developed and efficient financial sector are crucial ingredients for balanced and sustainable growth. Exchange rate policy is clearly not an end in itself but, as shown by the connections depicted earlier, has an important role to play in achieving these deeper policy reforms and also the ultimate objectives in terms of growth and welfare.

AN ALTERNATIVE MONETARY POLICY FRAMEWORK What could serve as a suitable alternative anchor for inflation expectations in place of a tightly managed exchange rate? Marvin Goodfriend and I have argued that China should adopt an explicit inflation objective — a long-run range for the inflation rate and an explicit acknowledgment that low inflation is the priority for monetary policy — as a new anchor for monetary policy.14 An inflation objective, coupled with exchange rate flexibility, would work best to stabilize domestic demand in response to internal and external macroeconomic shocks. Indeed, focusing on inflation stability is the best way for a monetary policy to achieve broader objectives such as financial stability and high employment growth. Over time, the inflation objective would provide a basis for currency flexibility. Thus, exchange rate reform will be seen as a key component of an overall reform strategy that is in China’s short- and long-term interests. 13 See Eichengreen, Barry, 2004,“Chinese Currency Controversies”, CEPR Discussion Paper 4375 (London, UK); Prasad, Eswar,Thomas Rumbaugh, and Qing Wang, 2005, “Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China”, China and the World Economy,Vol. 13, No. 4, pp. 3–20; and Yu, Yongding, 2007,“Ten Years After the Asian Financial Crisis:The Fragility and Strength of China’s Financial System”, manuscript, Chinese Academy of Social Sciences, Beijing. 14 Goodfriend, Marvin, and Eswar Prasad, 2007, “A Framework for Independent Monetary Policy in China”, CESifo Economic Studies,Vol. 53, No. 1, pp. 2–41.

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The time is right for making the switch — economic growth is strong and headline inflation is low.At the operational level, the PBC could continue its current approach to monetary policy, which includes setting targets for money and credit growth.The crucial difference would be to switch the strategic focus from the exchange rate to the inflation objective, which means that the currency could appreciate or depreciate in response to more fundamental economic forces such as productivity growth. This framework would subsume monitoring of monetary aggregates such as M2 and private credit, but directly targeting these aggregates is increasingly inappropriate for an economy that is undergoing rapid structural transformation and changes in the structure of its financial markets. A full-fledged inflation-targeting regime could serve as a useful long-term goal, but the approach I have outlined aforesaid is more practical for the foreseeable future and should deliver most of the benefits of formal inflation targeting. Two related points are worth noting. Independent interest rate policy requires a flexible exchange rate, not a one-off revaluation or a sequence of revaluations.A flexible exchange rate buffers some of the effects of interest rate changes, especially in terms of offsetting the temptation for capital to flow in or out in response to such changes. A one-off revaluation could solve this problem temporarily, but could create even more problems subsequently if interest rate actions in a different direction become necessary, or if investor sentiment and the pressures for capital inflows or outflows shift. Another crucial point is that exchange rate flexibility should not be confused with full opening of the capital account. An open capital account would allow the currency to float freely and be marketdetermined. But the exchange rate can be made flexible and the objective of monetary policy independence achieved even if the capital account is not fully open. A concern often expressed by Chinese policymakers is that, given the fragility of the domestic banking system, exchange rate flexibility could be disastrous. There are two possible factors behind this concern. One is that sharp changes in the value of the currency could destroy bank balance sheets. There is little evidence, however, that

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How to Sustain China’s Growth Miracle? 17

Chinese banks have large exposures to foreign currency assets (and/or external liabilities denominated in renminbi) that would hurt their balance sheets greatly if the renminbi were to appreciate in the short run. A more serious concern is that outflows of capital could starve the domestic banking system of liquidity by allowing domestic savers to take their money abroad. This is where the difference between exchange rate flexibility and capital account liberalization becomes especially important. There is no reason why, with even the moderately effective capital controls that are in place now, China could not allow for more exchange rate flexibility.A flexible exchange rate, even if it does not yield a “true” market equilibrium rate because capital flows are constrained, can allow for an independent monetary policy. And this flexibility does not by itself generate channels for evading controls on capital flows. In short, as a reason for not moving more quickly towards a flexible exchange rate, banking system weaknesses constitute a red herring.

CONCLUSIONS China has achieved remarkable economic progress in the last three decades. But a great deal of work remains to be done to make the economy resilient to large shocks, to ensure the sustainability of its growth, and to translate this growth into corresponding improvements in the economic welfare of its citizens.This is a good time for pushing forward with some of those essential reforms. External pressure can play a helpful role in this reform process, but only if it is placed in the right context. For instance, the debate in the US about the Chinese exchange rate regime has been distorted in some ways and made political rather than substantive when placed in the narrow context of the US-China trade balance. There is an important strategic (and educational) element related to reframing the exchange rate issue in a broader context. This is where external pressure from the international community can be helpful, not in the form of threats but by reorienting the discussion in a fashion that brings into sharper focus the linkages between

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currency reform and other core reforms on which there is broad consensus within China. Furthermore, working with the Chinese to develop deadlines for achieving specific policy goals would be useful if done in a collaborative rather than confrontational manner. These intermediate steps could serve as concrete guideposts for the reform process and help break down internal resistance to the reforms. Commitments that the Chinese made in the context of accession to the World Trade Organization, for instance, have helped to galvanise internal reforms. In China — as in any other country — there are some groups that stand to lose disproportionately from certain reforms, even if those reforms may be hugely beneficial overall. This is precisely where external pressure, if applied judiciously, can be helpful in generating enough momentum to help the forces that are predisposed towards undertaking reforms. A confrontational approach, on the other hand, could well prove counterproductive by bolstering the forces opposed to reform and allowing them to paint certain reforms as being detrimental to China and in the interests only of other countries. Ultimately, as far as Chinese reforms are concerned, there is a set of shared interests between policymakers in China, the US and elsewhere. For it is deep and enduring reforms that promote sustained and balanced growth in China that are in the best interests of both China and the world economy.

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Chapter

2 China’s Mounting External Imbalances: Trade, Foreign Investment and Regional Production Sharing Sarah Y. Tong and Yi Zheng

CHINA’S RECENT SURGE IN WORLD TRADE As China’s economy grew at nearly 10 percent a year in the past 28 years, from 1978 to 2006, China has also fast emerged as a global trading power in recent years, with total merchandise trade growing at an average annual rate of 17 percent. Following China’s formal accession to the World Trade Organization (WTO) in 2001, trade expansion accelerated to 28 percent a year between 2001 and 2006. According to WTO statistics, in the 1970s and 1980s, China’s share in total world trade was merely around 1 percent.1 That number went up to 2.6 percent in 1993 and further to 4.1 percent in 2001. From 2001 to 2006, China nearly doubled its share in world trade to reach 7.2 percent. Since 2004, China has overtaken Japan to become the 1

Source:WTO (World Trade Organization), 2007, International Trade Statistics 2007 (http://www.wto.org/english/res_e/statis_e/its2007_e/its07_toc_e.htm). 19

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Sarah Y. Tong & Yi Zheng 75% 64%

65%

60% 52%

50%

43% 39%

40%

38%

30% 23%

25% 13% 10%

0% 1978 1980 1985 1990 1995 2000 2001 2002 2003 2004 2005 2006

Fig. 2.1 China’s Trade to GDP Ratio, 1978–2006

world’s third largest trading nation, following the United States (12.1 percent of world total) and Germany (8.2 percent of world total). To a large extent, the recent surge in trade is the direct outcome of China’s continuous efforts in trade liberalization and active tradepromoting policies, favoring particularly export. More importantly, China’s formal entry into the WTO in 2001 facilitated another round of trade liberalization which has led to a new wave of trade expansion. Between 2001 and 2006, China’s exports and imports grew at an average annual rate of 29.6 percent and 26.9 percent, respectively, significantly higher than their previous levels of 6.8 percent and 8.2 percent in 2001. Consequently, China’s trade to GDP ratio increased rapidly and substantially, from 10 percent in 1978, to 40 percent in 2000, already a high level for a large economy, to hit 65 percent in 2006 (Figure 2.1).This is considered a rather high level for a large economy, when compared to some other large economies such as the United States (22 percent) and Japan (28 percent).2 2 Source: Calculated from data obtained from the World Trade Organization (trade figures) and the World Bank (GDP figures). It should be noted that as the world’s third largest economy, Germany also has a high degree of trade to GDP ratio which reached 70 percent in 2006.

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China's Mounting External Imbalances 21

China’s recent rise as a world trading power carries considerable global as well as regional impact. On a global scale, China is among the largest in world merchandise trade, ranked #3 in world merchandise import and export. China has also become a key player in world trade in commercial services, ranked #8 in export and #6 in import. At a regional level, China’s economy is increasingly integrated with economies in Asia, trading intensively with Japan, the four Asian Newly Industrialized Economies (NIEs),3 as well as members of the Association of Southeast Asian Nations (ASEAN). China has increasingly become the region’s important engine of growth. China’s rapid trade expansion has exerted significant effects on world trade, with mounting trade surplus in recent years. According to China’s Custom Statistics, it has sustained an overall trade surplus in the past two decades, since 1990 (except in 1993).While the relative size of China’s trade surplus to total trade had been mostly modest, it is showing acceleration in recent years. Between 1990 and 2004, trade surplus to total trade was less than 6.0 percent. In 2005 and 2006, however, trade surplus reached 7 percent and 10 percent of total trade, respectively. Consequently, China’s trade performance and related policy issues were a topic of constant debate, due largely to its threefold annual increase in trade surplus in 2005 and another over 70 percent annual increase in 2006 to reach US$177.4 billion (Figure 2.2).4 As expected, China’s rise as a large trading nation has met with both applause as well as some degree of unease. Over the years, China has been pressured to tackle its huge trade surplus and to reform its exchange policy. Some economies in East and Southeast Asia were also concerned with the “hollowing out” of industries important to their export and growth, such as consumer electronics and hard disk drives. Over time, however, the “hollowing out” appears to have bottomed out and its adverse effects on these economies have been 3 Asian

NIEs include Hong Kong, Korea, Singapore and Taiwan. China’s trade surplus continued to surge through 2007 and hit a record of US$238.2 billion in the first 11 months of the year. It was estimated that trade surplus for 2007 would reach US$250 billion (China Daily, 1 January 2008).

4

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Sarah Y. Tong & Yi Zheng 238

1200

Export

Import

250

Balance, right scale

1000

177

800

200

150 102 100

600 40

400 9 200

8

17 4

5

12

44 29

24

23

30

25

32

-12

0

50

0

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 *

-50

Fig. 2.2 China’s Trade Performance, 1990–Nov. 2007 (US$ billion)

largely offset by the enormous and growing demand for raw materials and intermediate goods from China. Instead, there have been growing efforts by East and Southeast Asian countries to facilitate further regional economic integration, in which China is welcome as an important driving force.

CHANGING COMPOSITION OF CHINA’S TRADE China’s steady growth in trade and its brisk emergence as a global trading power after its WTO accession has been accompanied by significant structural changes. First, while the number of its trade partners increased significantly throughout the world, China has significantly intensified its trade relations with Asian economies. Moreover, as overall trade accelerates, China is gradually diversifying its traded products, from primary goods to labor-intensive manufacturers, and further to more capital-intensive goods with medium and high technology content. It is important to note that foreign investments and their related export activities, particularly in process trade, most notably in the 1990s, have played a crucial role in these structural changes.

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China's Mounting External Imbalances 23

Since China’s economic liberalization and opening, trade with Asian neighbors has been a crucial part of China’s trade expansion, with Hong Kong, the key channel to access to foreign investment and to the world market, playing a crucial role. From the mid-1980s to the early 1990s, exports to Hong Kong accounted for between 30 percent and 45 percent of mainland China’s total exports.5 The relative importance of Hong Kong has since decreased and, in 2006, exports to Hong Kong made up 15 percent of the total. On the other hand, exports to the rest of Asia have remained a vital part of China’s trade growth, accounting for about one-third of its total since the early 1990s. More significantly, Asia has become an increasingly important source of China’s imports. In 1993, imports from Asia, excluding Hong Kong, made up 50 percent of China’s total imports.That share has gone up to 65 percent in 2006. Trade with China’s neighboring economies, including Japan, Korea, Taiwan and member states of ASEAN, are particularly important and made up about 25 percent of China’s total exports and 50 percent of total imports. Over time, China has had trade partners across the globe.This evolving regional structure in trade has been accompanied by substantial structural changes and technological upgrading in its traded products. The development started in the production and trade of textile and clothing in the mid-1980s, and by the early 1990s, it was already wellentrenched in this sector. At that time, half of China’s clothing exports came from processing activities of mostly foreign-invested enterprises (FIEs) in coastal China.This has allowed China to transform its trade from primary concentrated goods to labor-intensive manufactured goods,making China the world’s largest exporter of apparel in the early 1990s. Structural changes in China’s trade continued in the 1990s alongside economic reshuffling in Asian NIEs. Investment by firms in China’s neighbors accelerated,due partly to rising cost in their source countries 5

It is important to note that a large portion of mainland China’s exports to Hong Kong were in fact designated for other markets, particularly the US and EU. Since 1993, efforts have been made by the Chinese authority to identify such trade and to record according to their final destination. However, it is difficult to know how successful these efforts are.

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60%

49%

50%

Machinery & Transport Equipment 40%

40% 35%

35%

34%

46%

42%

31% 29%

29%

27%

27%

28%

27%

25% 21%

51%

34%

30%

19%

50%

37%

30%

20%

50%

25%

Textile & Footwear 24% 22%

22%

20% 18%

17%

17%

2005

2006 2007*

16%

10% 1992

1993

1994

1995 1996

1997

1998

1999

2000

2001

2002

2003 2004

Fig. 2.3 Export of “Textile & Footwear” & “Machinery & Transport Equipment” Shares in Total, 1992–Nov. 2007

and attractive policy measures adopted by the Chinese government. More significantly, investment from advanced economies, including the US, Europe and Japan, also began to increase considerably.These new investments have helped to expand China’s trade in products that are more capital- and technology-intensive, most noticeably in electrical machinery. Such investment strategies have helped firms in more developed economies to maintain their global competitiveness by shifting to China the segments of production in which they were losing their comparative advantage. The rapidly expanding commodity composition in China’s trade is therefore closely related to the expansion process trade. On one hand, the export of traditional labor-intensive goods continues to be important.The export of textile and footwear6 accounted for more than a third of total exports in the early 1990s and has since gone down to less than 20 percent (Figure 2.3). On the other hand, the export 6

Includes products under HS Sections XI (Textiles and Textile articles) and XII (Footwear, Headgear, Umbrella, Sun umbrellas,Walking-sticks, Seat-sticks, made therewith;Artificial flowers;Articles of human hair).

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China's Mounting External Imbalances 25

of many capital-intensive goods with more technological sophistication has increased more rapidly. The export of machinery and transports equipment,7 which made up less than 20 percent of the total in the early 1990s, accounted for about half of the total in 2006. In 2006, “Electrical Machinery” and “Power Generation Equipment” stood as the top two products in China’s total export, while the value of “Apparel and Clothing” is much less (Table 2.1). China’s export of high-technology products accounted for 29 percent of its total exports, up from 6.5 percent in 1997.8 The important role of foreign investment and process trade is also reflected in their growing contribution to China’s trade expansion. In the past decade, process trade9 made up more than half of China’s total export and about 41 percent of China’s total import. More importantly, process trade is the main contributor of China’s rising trade surplus. As shown in Figure 2.4, China’s trade excluding “process trade” is often in the red while surplus from “process trade” has surged rapidly in recent years.

DECOMPOSING CHINA’S SURGING TRADE IMBALANCES As China expands its total trade in both size and breadth,there is a growing trend of imbalances in favor of exports over imports, especially

7

Includes products under HS Sections XVI (Machinery and mechanical appliances; Electrical equipment; parts thereof sound recorders and reproducers, Television image and sound recorders and reproducers, and parts and accessories of such articles), XVII ( Vehicles, aircraft, vessels and associated transport equipment), XVIII (Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; clocks and watches; musical instruments; parts and accessories thereof), and XIX ( Arms and ammunition; parts and accessories thereof ). 8 Gaulier, Guillaume, Francoise Lemoine and Deniz Unal-Kesenci, 2006, “The Emergence of China and Its Impact on Asian Trade”, background paper for An East Asian Renaissance: Ideas for Economic Growth by Indermit Gill and Homi Kharas (eds.), The World Bank. 9 Includes processing and assembling, and processing with imported materials. Foreign-invested firms are the key contributors to processed trade as they made up about 85 percent of imports for process and processed export in 2006.

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Sarah Y. Tong & Yi Zheng Table 2.1 Top Ten Items in China’s Trade, 2006 Export

1 2 3 4 5 6 7 8 9 10

Electrical machinery and equipment Power generation equipment Apparel Iron and steel Optical and medical equipment Furniture and bedding Inorganic and organic chemicals Toys and games Plastics Footwear and parts thereof

227.0 186.0 89.0 52.0 33.0 28.0 23.0 22.6 22.2 21.8

Total

969.0

Import 1 2 3 4 5 6 7 8 9 10

US$ billion

US$ billion

Electrical machinery and equipment Power generation equipment Mineral fuel and oil Optical and medical equipment Plastics Inorganic and organic chemicals Ore, slag and ash Iron and steel Copper and articles thereof Vehicles and parts other than train

219.0 109.0 89.0 59.0 38.0 36.0 32.0 27.0 17.1 17.0

Total

791.6

% in total 23.4 19.2 9.2 5.4 3.4 2.9 2.4 2.3 2.3 2.2

% in total 27.7 13.8 11.2 7.5 4.8 4.5 4.0 3.4 2.2 2.1

in the post-WTO era. More significantly, China has accumulated seemingly unsustainably large and quickly mounting surpluses with two of the world’s most important economies, the United States and the European Union. In 2006, China’s trade surplus with the two reached US$144.2 billion and US$91.6 billion, respectively, representing annual growth rates of 25 percent and 31 percent.This has not only fuelled increasing criticism of China’s trade practices and exchange rate policy, but also resulted in new protectionist measures from these economies.

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China's Mounting External Imbalances 27 300 Process Trade

Non-Process Trade

Overall Trade Surplus

200

100

0 1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007*

-100

Fig. 2.4 Trade Imbalance for Process Trade, 1993–Nov. 2007 (US$ billion)

It is useful, however, to examine more closely the sources of such growing trade imbalances. In fact, as a large developing country and a newly emerged player in global trade, China has served as the platform for last stage processing and assembly of an increasing volume of final goods mostly from its Asian neighbors for export to Europe and North America. Between 1993 and November 2007, trade surplus from process trade outsized China’s overall trade surplus by 30 percent on average. The triangular trade pattern is reflected most evidently by China’s shifting bilateral trade imbalances with its main trading partners in the West and in Asia.While China’s trade surpluses with the US and the EU have increased substantially in recent years, China has accumulated growing trade deficit with many of its Asian neighbors. Indeed, bilateral trade between China and the US has expanded more than sevenfold over the past decade, from US$35 billion in 1994 to US$262 billion in 2006. United States is China’s number one export market and the second largest trading partner. From the US perspective, China had become the second largest source of US merchandise imports in 2005 and accounted for over 14 percent of US import. More significantly, as China’s bilateral trade expands, China’s trade

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Sino-EU Trade Balance

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Sino-US Trade Balance

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80 70 59

43

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28 19 7

5

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0 2002

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Fig. 2.5 China’s Trade Surplus with the US and the EU, 2000–Nov. 2007 (US$ billion)

surplus will increase at a much faster pace. According to China’s Custom Statistics, China’s annual trade surplus with the US grew from US$7.5 billion in 1994 to US$28.1 billion in 2001, equivalent to an annual growth of over 20 percent. Following China’s WTO accession, Sino-American trade surplus soared further to US$144 billion in 2006.10 Similar to the case of Sino-American trade, China’s trade imbalance with the European Union has experienced a similar increasing trend since the late 1990s, albeit at a lower magnitude. China-EU trade surplus has increased by an average annual rate of 40 percent since 1997 to reach US$92 billion in 2006 (Figure 2.5). Since July 2005, China has moved slowly and gradually to allow its currency, the renminbi, to appreciate against the US dollar. However, renminbi exchange rate against the euro has in fact depreciated due to the euro’s significant strengthening against the dollar. As a result, since 2006, China’s trade with these two economies has shown some new development. In 2006, China’s trade surplus with the EU had increased faster ( by 31 percent) than that with the US ( by 26 percent). During the first 11 months of 2007, China-US and China-EU trade surpluses reached US$149 billion and US$122 billion, 10 The

trade deficit figure according to US sources is significantly higher, amounting to US$232 billion in 2006. This is due to a number of reasons including different calculation methods and the treatment of transit trade through Hong Kong.

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respectively, up by 14 percent and 31 percent over the same period in 2006.In October and November 2007,China’s trade surplus with the EU was US$27.4 billion, only 10 percent less than that with the US, which was US$30.6 billion. It is quite possible that with the renminbi’s continuing appreciation against the dollar and depreciation against the euro, China’s trade surplus with the EU will soon match that of the US. On the other hand, China’s trade expansion with its Asian neighbors has demonstrated a different tendency. As bilateral trade grows, China is purchasing heavily from its neighboring economies and becoming significantly more important as an export market for the region. Between 2000 and 2006, the share of export to China in total Asian exports increased from 7 percent to 11 percent.The increase is more remarkable for China’s nearby neighbors.The share of export to China in its total exports increased from 9 percent to 17 percent for Japan, and from 13 percent to 22 percent for the four East Asian Traders.11 Consequently, China has accumulated increasing trade deficit with its neighboring economies.The Chinese mainland is now the largest trading partner for Taiwan and the second largest for Japan. China is also the largest export market for Korea. In 2006, China’s trade deficits with Japan, members of ASEAN, Korea and Taiwan reached US$24 billion, US$18 billion, US$45 billion and US$66 billion, respectively12 (Figure 2.6).

11 The

four East Asian Traders include Hong Kong, Singapore, South Korea and Taiwan. Unlike its trade with other Asian economies, the Chinese mainland has consistently maintained large trade surplus with Hong Kong to reach US$112 billion in 2006. Trade surplus with Hong Kong is due mostly to the much larger amount of outward transit trade than that of inward transit trade through Hong Kong. In fact, most Chinese exports to Hong Kong are ultimately directed to third markets, mainly to the United States and European Union. According to Lemoine and Unal-Kesenci (2004), almost 85 percent of China’s exports to Hong Kong are reexported, one-third of which is directed to the United States and one-fourth to the European Union.This has also been the key reason for the discrepancies in bilateral trade figures between those reported by China and those by the US and EU. In general, it is likely that China’s trade figures underestimated the trade imbalance with the two trade partners, while those from US and EU tend to overestimate the imbalances. Lemoine, Francoise and Deniz Unal-Kesenci, 2004, “Assembly Trade and Technology Transfer: The Case of China”, World Development,Vol. 32, No. 5, pp. 829–850.

12

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300 239

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-100

with Japan with ASEAN -200 1993

1994

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2007*

Fig. 2.6 China’s Trade Imbalances with Key Trade Partners, 1993–Nov. 2007 (US$ billion)

China’s WTO accession in 2001 has evidently further strengthened its export competitiveness, the key to China’s surging trade surplus. On one hand, WTO membership has improved export conditions for Chinese products, which enjoy low production cost, improved productivity and favorable government policies. On the other hand, China’s WTO commitments also provide foreign firms with a more accommodating investment environment and a large and more open domestic market.The combination of these two has determined the changing dynamics of China’s trade in both geographic distribution and product upgrading. Indeed,the main contributors to China’s trade surplus have changed considerably over the years. During the first eleven months of 2007, China’s overall trade surplus hit a record high of US$238.2 billion, contributed chiefly by both labor-intensive goods where China continued to enjoy significant comparative advantage (textile and Clothing, miscellaneous manufactured articles, and footwear), as well as products of medium to high degrees of capital and technology intensity (machinery and mechanical appliances, vehicles, aircraft and vessels). In fact, products under the categories of “textile” and “machinery and mechanical appliance” stand as the two biggest sources of

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China’s trade surplus, followed by products under “furniture, toys and games, base metal and footwear”. This pattern is the outcome of China’s two-pronged trade strategy. First, China encourages trade of labor-intensive manufactures to capitalize on its comparative advantage of an abundance of low-skilled labor. On the other hand, much effort has been devoted to upgrade its production and export towards the higher end of the value chain. China has been able to maintain its competitiveness in traditional labor-intensive industries whilst widening its surplus of sophisticated manufacturing products. The emergence of sophisticated manufacturing goods as key contributors to China’s rising trade imbalances reflects the intensification of a deeply entrenched production network in Asia. Lower trade and transportation cost as well as possible production fragmentation enables goods to be produced in different locations across national borders. China, due to its trade-facilitating policies, abundant and cheap labor force, and good physical infrastructure, has become a key link in this complex production arrangement.

SPECIALIZATION AND PRODUCTION SHARING IN ASIA As production process is fragmented across countries along the value chain, a “triangular” trade pattern has emerged with China at the center and between producers of intermediate goods and final consumers. In this chain, China serves as an export platform for firms located in the relatively more advanced Asian economies which export intermediate goods to their affiliates in China for assembling and shipping to key export markets, such as the US and EU. As is expected, one main source of China’s trade imbalances with the US and EU, as well as China’s trade deficit with its Asian neighbors, is the trade in such goods as consumer electronics and machinery that often involve multinational corporations’ (MNC) local affiliates in China. In 2006, for example, the largest contributor of China-US trade imbalance came from goods under the category of “Electrical machinery, machinery, and mechanical appliance” — US$71 billion, which is

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larger than the combined trade surplus of goods in the following four categories. On the other hand, trade of “Electrical machinery, machinery, and mechanical appliance” is also the largest source of China’s trade deficit with Japan, Korea,Taiwan and Malaysia.The situation is in sharp contrast to that of a decade ago. In 1994, the most important sources of China-US trade surplus were: first, “Footwear, feather articles, artificial flowers, etc.”; second,“Toy and sports equipment, and furniture”; and third,“Textile and textile articles”.Trade of these products involved a much lower degree of production sharing between China and its Asian neighbors.This suggests strongly that it is essential to evaluate the role of China in international trade in a broader regional perspective. Asia was the major input for China’s processing industries where Japan and Asian NIEs provided more than two-thirds of these imports.13 China’s recent expansion in foreign trade is associated with rapidly growing intra-regional trade. During the last decade, while the share of Asia in world trade in manufactured products remained relatively stable, intra-Asia trade had grown at an accelerated pace. Between 2000 and 2004, the share of export to China in Asia’s total exports increased from 6 to 10 percent.At the same time, intra-Asia trade in China’s total increased from 13 percent in 1993 to 22 percent in 2004.14 The importance of process trade, especially with Asia, in China’s trade expansion can be demonstrated more clearly by examining its import of intermediate goods from its Asian neighbors. Between 2001 and 2004, China’s import of intermediate goods from its Asian neighbors increased by 24 percent a year on average, more than doubling its growth for the years between 1993 and 2001.15 While process trade made up the key portion of China’s trade, East and Southeast Asia have benefited significantly by providing about two-thirds of China’s total imports for processing. For process export, as for overall export, the US and EU remain the most important market. 13

Lemoine and Unal-Kesenci (2004). Gaulier et al. (2006). 15 Thorbecke,Willem and Masaru Yoshitomi, 2006,“Trade-FDI-Technology Linkages in East Asia”, NEAT Working Group paper. 14

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China's Mounting External Imbalances 33 120 Total Sino-US surplus Total Sino-EU surplus

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Sino-US surplus from processing Sino-EU surplus from processing

80 60 40 20 0 1995

1998

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2002

2003

2004

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-20

Fig. 2.7 Trade Surplus with US & EU, Total and from Processing, 1995–2005 (US$ billion)

Evidently, China has been increasingly integrated into an intensive regional production network. Over the years, China has increased its process trade with economies in Asia, significantly more rapidly on the import side especially from South Korea,Taiwan and ASEAN members.16 Imports for processing from these economies have grown by 31 percent a year since 2001, up from 22 percent between 1992 and 2001. On the other hand, process trade with the US and Europe has also expanded considerably. This triangular trade pattern constitutes a key part of China’s large and growing trade surplus with the two developed markets and trade deficit with its developing Asian neighbors ( Figure 2.7 ), especially in the post-WTO era. In the past 28 years, China’s reform and opening has led to steady growth in its trade and, more significantly, rapid expansion of 16

China has maintained a modest amount of surplus in process trade with Japan since the late 1990s. In 2005, China’s trade surplus with Japan in process trade was US$4.5 billion, less than five percent of total Sino-Japanese process trade (China’s process import and export with Japan amounted to US$45.2 billion and US$49.7 billion, respectively).

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external imbalances in recent years. Underlying the impressive trade performance is China’s decades-long policies that strongly encourage export and export-promoting inward foreign direct investment (FDI ). More significantly, FIEs have been the key player in China’s surging trade imbalances, especially after China joined the WTO in 2001, contributing to more than half of China’s total trade imbalance in recent years. FIEs’ role is particularly significant in China’s trade imbalance with the United States and European Union in recent years. Since China’s WTO accession in 2001, China’s trade surplus with the US has grown by nearly 40 percent a year on average, according to China’s statistics, from US$28 billion in 2001 to US$144 billion in 2006. However, export surplus with the US by FIEs has increased even faster over the same period, 42 percent a year on average, from US$18 billion to US$104 billion. As a result, the contribution of FIEs to China’s overall trade surplus with the US, already at a rather high level of more than 60 percent in the late 1990s, has gone up from 65 percent in 2001 to more than 72 percent in recent years ( Figure 2.8 ). Of late, the increasing importance of FIEs in China’s trade expansion is more striking in the case of China-EU trade. Between 2001 and 2006, China’s overall trade surplus with the EU has increased by an astonishing 77 percent a year on average from US$5 billion to

Fig. 2.8 Sino-US Trade Surplus and FIEs’ Contribution, 1997–2006

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US$92 billion. More remarkable is that, over the same period, ChinaEU trade surplus by FIEs in China has grown by 138 percent a year. The contribution of FIEs to China’s overall trade surplus jumped from only 14 percent in 2001 to around 60 percent in recent years. In addition to the US and EU, China is also running large and increasing trade surplus with Hong Kong, a Special Administrative Region of China. Since the late 1990s, the mainland’s trade surplus with Hong Kong has increased by 25 percent a year, from US$30 billion in 1999 to US$144 billion in 2006. Arguably, a significant portion of the mainland’s trade with Hong Kong, an important site for entrepot trade, should be recorded as trade with other markets including especially the US and EU. Trade surplus with Hong Kong by FIEs has grown at a much faster rate of 33 percent a year, resulting in their increasing overall trade surplus with Hong Kong, from 46 percent in 1999 to 75 percent in 2006. Overall, FIEs are the main contributor to China’s surging trade surplus in recent years ( Figure 2.9 ). Before 1998, while China had an overall trade surplus, FIEs were importing more than they were exporting. Since 1998, however, FIEs have begun to export more than

Total Surplus

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Fig. 2.9 Total Surplus and FIEs’ Contribution, 1998–Oct. 2007*

2007*

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import.The amount of trade surplus by FIEs and their share in China’s overall trade surplus have both accelerated since China’s WTO accession in the early 2000s. In 2001, FIEs contributed only around 10 percent of China’s trade surplus. That figure went up to about one-third for the years 2001 to 2004 and further to more than half for 2005 and 2006, as well as for January to October 2007. The importance of FIEs in China’s surging trade surplus is reflected in the changing composition of the product mix. Before the mid-1990s, China’s main sources of export and trade surplus were those in the category of “miscellaneous manufactured articles (SITC Section 8)”. Between 1990 and 1996, while China’s overall trade surplus was on average US$9.3 billion, trade surplus of “miscellaneous manufactured articles” was important to offset large trade deficits in “machinery and transport equipment (SITC Section 7)” and “chemicals and related products (SITC Section 5)”. Since the late 1990s, trade surplus in “miscellaneous manufactured articles” has continued to grow at a modest rate of about 10 percent a year.At the same time, trade deficit in “chemicals and related products” also increased at 18 percent a year on average and about twice as fast. Indeed, what contributed to the surging overall trade surplus in recent years was the trade in “machinery and transport equipment”. Between 1994 and 2003, trade deficit in “machinery and transport equipment” had been decreasing at around 18 percent a year. From 2004, export of “machinery and transport equipment” has been greater than its import, and surplus has increased rapidly. Since 2005, surplus in “machinery and transport equipment” has been the second largest contributor to China’s overall trade surplus, following trade surplus in “miscellaneous manufactured articles”. Indeed, FIEs played an essential role in the trade of machinery and transport equipment, especially since China’s WTO membership. Between 2002 and 2006, FIEs contributed more than three-quarters of China’s total export of “machinery and transport equipment”. According to China Chamber of Commerce for Import and Export of Machinery and Electronic Products, FIEs contributed 64 percent of

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China’s trade surplus in “Machinery and Electronic Products” in 2006.17 In recent years, China has become an important player in the trade of goods with high-technology content. In 2005, for example, China exported US$218 billion in high-tech goods and achieved US$20 billion in surplus, accounting for 29 percent of China’s total export and 19 percent of overall trade surplus.18 While China exports more high-tech goods than it imports, domestic firms and FIEs play different roles. State-owned enterprises (SOEs) actually import more than they export (with a deficit of US$12 billion for 2005), while FIEs (with a surplus of US$34 billion) are key to offset that and turn overall trade into surplus. It would therefore be fair to say that FIEs and their foreign owners are among those that benefited the most from China’s WTO accession and its subsequent surging export.

PROSPECTS FOR CHINA’S FOREIGN TRADE A number of conclusions may be drawn from the analysis presented aforesaid. It is increasingly clear that China has risen to become an important trading power in the world. More importantly, China’s trade expansion has largely reflected an overall trend of production specification and production sharing among Asian economies. In this process, China has played a more and more important role and has become a driving force for regional and global economic integration. Moreover,through increasing specialization and cross-border production 17

Source: Calculated from data in “Analysis of Trade in Machinery and Electronic Products in 2006: Export Growth Slowed While Import Growth Recovered ( , — 2006 )”, China Chamber of Commerce for Import and Export of Machinery and Electronic Products ( http://cccmeadmin.chinamet.com/news/attach/20/20070302115125 2006_1.pdf ). 18 Source: Calculated from data in “Analysis of China’s Trade in Hi-Tech Goods by Types of Enterprises 2005 (2005 )”, China’s Ministry of Commerce (http://cys.mofcom.gov.cn/aarticle/ m/cv/aa/200601/20060101434158.html), and China’s Customs Statistics.

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sharing, China has achieved higher technological sophistication of products in its trade. For example, the largest item in processed export has shifted from textile products to electrical machineries and appliances. Finally, FIEs have played a key role in China’s trade expansion and technological upgrading of its products. By producing final goods using imported parts and components from other Asian economies, most importantly Taiwan, Korea, Japan and ASEAN members, China’s FIEs form a crucial link in Asia’s regional production network. Often, these final goods are subsequently exported to the United States and European Union. Accordingly, trade by FIEs is the most significant component of China’s increasing trade imbalance with its major trade partners in recent years. Indeed, the formation of an intensive regional production network facilitated by increasing production specialization has benefited economies in the region. One might ask why China has emerged as a central player in this recent trade expansion and production sharing. There are two important elements to the answer. First, the recent trade expansion is featured by the growing share of electronics. Enabled by standardization, the production of electronics has become an increasing fragmented process conducted in different locations and involving numerous parts and components.This is different from the production of items traditionally important for developing countries’ trade, such as toys and clothing.As a result, countries participate in different stages of the production process, depending on their comparative advantage. Second, due to its size, China has become a central player in the regional production network. China is able to take advantage of the economies of scale with its large and rapidly growing domestic market, while benefiting from increasing industrial clustering. By locating closely with other firms in the same industry and in related industries, firms reduce their cost, attract new investment, facilitate innovation and improve productivity. Consequently, we would expect that in the short run, supported by the sustaining large inflows of foreign investment, China’s export would continue to expand. It seems that, in the foreseeable future, China will remain competitive in the production of labor-intensive

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goods as well as in the relatively labor-intensive assembly activities in the production of more sophisticated goods. China’s trade imbalance with its major trading partners will remain in the coming years. Indeed, this triangular trade pattern is not unique to China. Crossborder production networks started in Asia long before China opened its door for trade, but have since developed rapidly.The evolution of East Asian economies has become a telling example of the model proposed by Akamatsu,19 who observed that “the underdeveloped nations are aligned successively behind the advanced industrial nations in the order of their different stages of growth in a wild-flying geese pattern”. China can be seen as the latest goose within the context of the “flying geese theory”.While China is engaged largely in low value-added manufacturing activities, its sheer size has made it the “end-station” for the production process of the whole region. In the long run, China’s foreign trade development and its structural changes would depend on how fast and to what extent China can achieve technological upgrading of its domestic industries and move up in the product value chain.There is some evidence that the increasing presence of FIEs has facilitated productivity improvement of domestic firms. In addition, it is also observed that the composition of exports by mode of trade has also undergone changes in recent years.The importance of simple processing and assembling in export has declined consistently since the late 1990s. The share of processing with imported materials increased continuously since the early 1990s, but has remained relatively stable in recent years. In contrast, there is evidence that ordinary trade has increased its share in total export since 2005. However, the spillover effect from FIEs to domestic manufacturing industries remains limited and the linkages between outward-oriented sectors and domestic market-based companies are still weak. Therefore, it is rather premature to assess the impact of export-oriented, foreign investment-related sector on the technological upgrading of the domestic industry.

19 Akamatsu, Kaname, 1961,“A Theory of Unbalanced Growth in the World Economy”, Weltwirtschaftliches Archiv,Vol. 86, No. 1, pp. 196–217.

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Chapter

3 China’s Protest Wave: Political Threat or Growing Pains? Andrew G. Walder

TROUBLE ON THE HORIZON? Popular protest is clearly on the rise in China. Press reports and academic journals in recent years have documented the rising incidence of strikes, demonstrations and riots.1 These events clearly indicate rising discontent on the part of those who are losers in major structural transformations now sweeping the Chinese economy. Most troubling of all, perhaps, is the fact that some of these protest events are being met with violent and deadly force by local police and militia, or by private thugs hired by companies with ties to corrupt local officials. The sources of conflict appear to be new. They involve disputes over losses of rights that were previously guaranteed to the population 1 The trend has become a major stimulant for policy discussions in Washington. See Thomas Lum, “Social Unrest in China”, CRS Report for Congress, Congressional Research Service, Library of Congress, 8 May 2006; and Murray Scot Tanner, “China Rethinks Unrest”, The Washington Quarterly 27 (Summer 2004), pp. 137–156.

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until the 1990s, and they reflect the wrenching changes that accompany the restructuring of China’s old state sector and the spread of market-oriented capitalism to vast reaches of territory. One important category of protests is clearly linked to the decline of the previously dominant state industrial sector.The impact of this restructuring has fallen most heavily on the industrial manufacturing sector in large enterprises originally constructed with Soviet assistance in the 1950s. Outdated and inefficient manufacturing technologies and heavy welfare burdens have made these firms uncompetitive, and after almost two decades of subsidizing their operations, the government finally began to idle these plants and lay off large numbers of workers in the 1990s. This has led to a wave of protests in the vast rust-belt region of China’s northeast (particularly Liaoning Province), in isolated former “third front” company towns in western China hard hit by plant closures, and in other scattered regions where these sunset industries are located.2 Sometimes these protests involve recently-idled workers who claim to have been cheated out of rightful compensation; sometimes they involve protests by pensioners who are unable to collect pensions from bankrupted and closed firms.3 These are largely urban protests, and they are concentrated in regions where declining state firms are concentrated, and where the 2

See Cai Yongshun, “The Resistance of Chinese Laid-Off Workers in the Reform Period”, The China Quarterly 170 ( July 2002), pp. 327–344; Chen Feng,“Subsistence Crises, Managerial Corruption, and Labor Protests in China”, The China Journal ( July 2000), pp. 41–63; Antoine Kernan and Jean-Louis Rocca, “Social Response to Unemployment and the ‘New Urban Poor’: A Case Study of Shenyang City and Liaoning Province”, China Perspectives 27 (2000), pp. 35–51; Ching Kwan Lee,“The ‘Revenge of History’: Collective Memories and Labor Protests in Northeastern China”, Ethnography 1 (2000), pp. 217–237; Ching Kwan Lee, “Pathways of Labor Insurgency”, pp. 71–92 in Chinese Society: Change, Conflict, and Resistance, 2nd ed., edited by Elizabeth J. Perry and Mark Selden, London and New York: Routledge, 2005. 3 See William Hurst and Kevin J. O’Brien, “China’s Contentious Pensioners”, The China Quarterly 170 ( June 2002), pp. 345–360. China’s pension system was funded at the enterprise level, and pensioners were required to pick up their monthly stipends in cash at factory offices. A firm that was closed or restructured was often unable to meet these payments, which were funded by the sales of the firm.

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numbers affected are too great for growth in new industrial or service sectors to compensate. A second category of protests is linked to structural problems in the rural sector.There are three primary causes.The first is due to the imposition of additional extra-legal fees on farming households. In the wake of declining rural small-scale enterprise, a fiscal crisis affecting rural village and township governments has led them to intensify their exactions on farmers.These excessive “peasant burdens”, which have multiplied over the past decade,have led to rising incidence of rural protest in villages throughout the country.4 The second cause is the expropriation of land for non-agricultural development. In many of the cases that have come to light,farmers have been tricked into signing away their rights,or have not received the compensation promised by unscrupulous developers who are often in league with local officials. Some of the more violent and visible protests have resulted from these grievances, which affect the suburban rings of rapidly developing cities most heavily, but which can occur wherever local development projects take land away from agricultural use.5 A third cause — closely related to the second — is protest by farmers whose agricultural activities are damaged by pollution from recently built or prospective new industrial plants.6 4 Kevin J. O’Brien,“Collective Action in the Chinese Countryside”, The China Journal ( July 2002), pp. 139–154; Thomas Bernstein and Xiaobo Lü, “Taxation without Representation: Peasants, the Central and Local States in Reform China”, The China Quarterly 163 (September 2000), pp. 742–763; and Jean C. Oi,“Old Problems for New Leaders: Institutional Disjunctions in Rural China”, pp. 141–155 in The New Chinese Leadership: Challenges and Opportunities after the 16th Party Congress, edited by Y. Chu, C. Lo and R. Myers, Cambridge: Cambridge University Press, 2004. 5 Peter Ho, “Who Owns China’s Land? Property Rights and Deliberate Institutional Ambiguity”, The China Quarterly 166 (June 2001), pp. 394–421; Peter Ho,“Contesting Rural Spaces: Land Disputes, Customary Tenure and the State”, pp. 93–112 in Chinese Society: Change, Conflict, and Resistance, 2nd ed.,edited by Elizabeth J.Perry and Mark Selden,London and New York:Routledge,2005;and David Zweig,“To the Courts or to the Barricades:Can New Political Institutions Manage Rural Conflict?”,pp.113–135 in ibid. 6 Jun Jing,“Environmental Protests in Rural China”, pp. 204–222 in Chinese Society: Change, Conflict, and Resistance, 2nd ed., edited by Elizabeth J. Perry and Mark Selden, London and New York: Routledge, 2005; and Yongshun Cai, Collective Resistance in China: How the Weak Succeeded, forthcoming, Chapter 7.

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A third category involves urban residents and is connected to rapid commercial real-estate development. Those who are being evicted from their neighborhoods on short notice with little compensation for commercial real-estate projects have begun to protest their treatment. Similarly, urbanites who have invested their savings in purchasing apartments in these new commercial developments often find themselves cheated by developers who fail to complete projects or otherwise shirk their contractual obligations, or fail to provide the management services originally promised. Both groups have begun to form associations to assert their rights, and these conflicts can be bitter and protracted.7 It is important to recognize that these are novel grievances, and new forms of protest.They indicate a reaction to a new wave of structural changes that did not appear on the Chinese scene until the acceleration of market reform in the 1990s. In previous years there were few layoffs; pensions were regularly paid; extra-legal levies on peasants were not as severe or widespread; and private commercial real-estate development was still in its infancy. The rise of this new wave of grievances, and the evident political reaction of Chinese citizens to them, suggests that these protests might cumulate into a serious political problem for the regime, especially if these newly aggrieved groups — losers in the current structural changes — create coalitions and alliances in order to pursue their interests.

POLITICAL IMPLICATIONS OF PROTEST: FURTHER QUESTIONS When viewing such an evident rise in new forms of protest, there is a tendency to assume that they have the potential to eventually comprise

7

Cai, Collective Resistance in China, forthcoming, Chapter 4; Cai,“Civil Resistance and the Rule of Law in China:The Defense of Homeowners’ Rights”, pp. 174–195 in Grassroots Political Reform in Contemporary China, edited by Elizabeth J. Perry and Merle Goldman, Cambridge, Mass.: Harvard University Press, 2007; and Benjamin L. Read, “Inadvertent Political Reform via Private Associations: Assessing Homeowners’ Groups in New Neighborhoods”, pp. 149–173 in ibid.

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a significant political challenge to the regime.8 Most of us will extrapolate the current trends into the future, and consider continued escalation of similar kinds of protest as a potential future threat. But not all forms of protest, and not all sectors of the population, have the same political impact. What is distinctive about the recent wave of protest activity is that they are a symptom of the restructuring of the economy, and that they express the grievances of those who are currently losing out in the process. However, increasing levels of protest activity may represent simply a policy problem that lends itself to a resolution without threatening political stability or the regime’s ability to rule.Whether this is the case requires us to analyze the nature of the grievances, the size and political relevance of the population affected, and whether the protests involve politically strategic populations that threaten to shake the regime’s base of support. This requires us to specify what kinds of protests are politically consequential, what the regime’s base of popular support actually is, and what we mean by politically strategic populations. If we pursue these questions, we will realize that the kinds of protests that have received the most publicity in recent years are not the kinds that would entail serious political risks for the Chinese regime. This is not to deny that these protests are dramatic, or that the underlying grievances are serious, or that it will be difficult to resolve them in the short run. However, genuinely threatening protests would have to affect other sectors of the population, and would have different sources from what we have recently observed. These protests are not yet on the horizon, although it is possible to imagine situations where they might arise. 8

A carefully reasoned and articulate statement of this position is Minxin Pei,“Rights and Resistance: The Changing Contexts of the Dissident Movement”, pp. 23–46 in Chinese Society: Change, Conflict, and Resistance, 2nd ed., edited by Elizabeth J. Perry and Mark Selden, London and New York: Routledge, 2005; and especially Minxin Pei, China’s Trapped Transition: The Limits of Developmental Autocracy, Cambridge, Mass.: Harvard University Press, 2006, Chapter 5.

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POPULAR PROTEST AND POLITICAL INSTABILITY What kinds of protests would involve the prospect of serious political instability? Three types come to mind, with consequences in ascending order of seriousness.The first type would be protests that harmed production and exports, damaged China’s economic performance, or made China a less attractive location for foreign direct investment (FDI). These protests would have to be located in China’s leading business and export sectors, and would affect major ports and railroad lines.The disorders would also have to disrupt the cities and organizations that are the focal points for FDI, joint ventures, and production and services that are the key growth sectors of the economy. These protests would imperil China’s economic prospects in ways that could have more serious political implications if they contributed to a pronounced economic slowdown. A second type would involve core constituencies of the regime, in particular ordinary Party members and lower-ranking government functionaries. Similarly significant would be the participation not of groups who have clearly lost out in the recent structural changes, but groups that have benefited the most from the rapid growth since the 1990s: white-collar workers and educated professionals and workers in rapidly expanding export sectors. If not the most active supporters of the regime, these groups should at least be the ones most acquiescent because of the benefits of growth. To have them participate in protests would signal more serious political difficulties for the regime. A third type would be the most serious, and is in fact the regime’s nightmare scenario: sustained mass protests in major cities, in particular Beijing, which force the regime to make a choice of whether to use armed force on the population.This is the choice the regime was forced to make in 1989, with tragic consequences, and it has made every effort to avoid being put in a similar situation ever again. Should such a movement come to pass, however, it is less likely than in 1989 that the decision to use force would be made once again. Instead, the likely outcome would be political fragmentation of the national leadership that would lead to changes in the

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country’s political arrangements and, undoubtedly, a period of serious political instability.

SOURCES OF REGIME SUPPORT What is the primary social basis of the regime’s support? It is not some identifiable occupational group, but the membership of the Chinese Communist Party and grassroots government functionaries. This may seem tautological, but it is not. If we define the regime as the full-time functionaries of the Party and government, at county or division level and above, this would include 500,000 individuals who enjoy considerable status and privilege, and who make the key decisions at the national and local level.At the apex of this hierarchy are 39,000 individuals of prefectural or bureau rank, and some 2,500 with ministerial rank — the top decision-makers in the country.9 These regime functionaries depend heavily on the discipline and active compliance of two distinct and very large groups: 15.3 million ordinary government functionaries who are also Party members, and another 45 million Party members who hold no political office.10 The first group comprises the entire grassroots infrastructure of the government.The latter group is a cross-section of all occupations, and most of them are manual workers, farmers and other rural residents. However, the highest rates of Party membership have always been observed in the larger cities, key government offices and institutions, and the most important industrial enterprises. In the mid-1990s, 68 percent of managerial personnel were Party members, 34 percent of white-collar office personnel and professionals, 8.2 percent of skilled blue-collar manual workers, and only 4.5 percent of farmers were Party members.11 9

Andrew G. Walder, “The Party Elite and China’s Trajectory of Change”, China: An International Journal 2 (September 2004), pp. 189–209. 10 Walder,“The Party Elite”. 11 Calculated with data from the 1996 national survey cited in Andrew G. Walder, Bobao Li, and Donald J.Treiman,“Politics and Life Chances in a State Socialist Regime: Dual Career Paths into the Urban Chinese Elite, 1949–1996”, American Sociological Review 65 (April 2000), pp. 191–209.

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In recent years, the Party has aggressively recruited university graduates, and as the number of university graduates has grown, so have rates of membership among those with college degrees.12 These 45 million Party members who hold no political positions — along with the 15 million grassroots Party functionaries — are the most politically active element in the Chinese population. They are concentrated in key organizations and in key occupations, and the regime relies on them very heavily to do its bidding and make sure that its policies are enforced. One cannot assume, however, that these rank-and-file Party members will always approve of the national leadership or will not be affected by general levels of discontent among their coworkers. One of the more remarkable aspects of the Tiananmen demonstrations in the spring of 1989 was the active participation of large numbers of the Party rank-and-file and even basic-level officials to convince national leadership to hold a dialogue with student hunger strikers to resolve the impasse in the Square peacefully.13 If there is a significant dissent among these 45 million, or among grassroots functionaries, the regime will find it very difficult to cope.

POLITICALLY STRATEGIC POPULATIONS If the mass of rank-and-file Party members are the social basis of regime support, there are nonetheless politically strategic populations whose passive acquiescence in the regime is an important element of political stability. Who are they? And what leads to their acquiescence? They are, in brief, the winners of the recent period of rapid economic expansion. These are individuals who have experienced upward mobility, stable employment prospects, improved housing arrangements, and higher standards of living over the past two decades. They are the ones who have benefited most from the consumer revolution that has transformed urban life in China’s leading 12 Walder,“The

Party Elite”. Andrew G. Walder, “The Political Sociology of the Beijing Upheaval of 1989”, Problems of Communism 38 (Sept.–Oct. 1989), pp. 30–40. 13

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cities.14 These groups are much larger at present than those who have clearly been left behind, and who have fuelled the recent wave of protest activity. They include workers in relatively high-wage, highgrowth sectors of the economy, both the export manufacturing sector and the services sector, and the bulk of educated professionals in the large urban areas.They are concentrated in the large coastal cities that have prospered most visibly in recent years, and in some of the booming cities in the interior. What leads to their passive acceptance of the regime? Most obvious is the higher living standards and upward mobility that China’s economic boom has afforded them. Less obvious is the general sense of national pride in China’s rise as an economic and political power. This population is increasingly critical and sophisticated, much more knowledgeable about the outside world and more exposed to multiple sources of information than previous generations of urbanites. Under present circumstances, they generally accept the regime’s claim that current political arrangements are the only tenable ones that can provide stability in the current era of rapid economic transformation. And so long as things continue as they have in the recent past, these people are unlikely to turn against the regime. If they do, however, the fact that they are concentrated in the major coastal cities — and the nation’s capital — gives them the political leverage that other discontented groups lack.

THE REAL RISKS AHEAD Let us now return to the characteristics of the recent wave of protests — they do not have any of the features that would involve serious political risk. First, they do not involve politically strategic populations. With only one exception (purchasers of new apartments with grievances against real estate developers), the primary participants have been farmers, unemployed workers in sunset industries, pensioners,

14

Deborah Davis, ed., The Consumer Revolution in Urban China, Berkeley: University of California Press, 2000.

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and residents of dilapidated urban neighborhoods scheduled for redevelopment.The participants have not included current employees of China’s growth sectors, or any of the populations that have benefited the most from China’s economic transformation. Second, with only one exception (again, purchasers of apartments), none of these groups are located in politically strategic regions or enterprises. The rural protesters are scattered throughout China’s vast territory, while the protests by laid-off workers are concentrated in isolated rust-belt regions (achieving real critical mass only in Liaoning Province and company towns).This makes coordination and alliances very unlikely. Moreover, these rural regions and rustbelt towns are far from the leading political and commercial centers of China, where protests would have the greatest impact. Third, the grievances of these groups are all focused on specific local issues, and targeted at specific enterprises or local government officials. Laid-off workers target their former employers or local governments, farmers target local officials or enterprises, while urban residents target local officials or real estate developers. None of these targeted demands implicate the central government or the regime as a whole, and in many cases the protesters cite central regulations in support of their position and petition higher authorities to help them enforce their rights against corrupt local officials.This kind of protest permits the central government to act as an ally, should it choose to intervene to resolve the disputes in accordance with existing law.15 The localized nature and focused targets of these disputes are what make for such dramatic and entrenched resistance, but these same features also lessen their implications for politics on a national scale. Finally, the motives for participation in these protests sharply differentiate the affected population from others. Laid-off workers have sharply different interests from their former comrades who remain employed. Even in the same regions and enterprises, those who are fortunate enough to retain their jobs do not strike in support of their former comrades. Similar distinctions apply to farmers who have 15

Kevin O’Brien,“Rightful Resistance”, World Politics 49 (October 1996), pp. 31–55.

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been forced off their land: those who are still actively farming have crops to tend and businesses to run. Even in nearby communities, they do not risk their livelihoods to join in protests on behalf of others. In urban areas, those who have purchased new apartments but have no grievances against developers, and those who live in older neighborhoods, may anticipate the problems of their less fortunate neighbors by organizing associations in advance, but they are unlikely to join protests of those who have suffered real grievances. Even the very recent protests by university students — a potentially strategic and influential group — have been based on very specific and narrow grievances unique to them.The anger directed at school officials who violated earlier promises and provided them with second-rate diplomas upon graduation is highly unlikely to resonate with the broader population. In short, the specific nature of these disputes, which seriously affect only those unfortunate enough to be in the small group of most aggrieved economic losers, greatly reduces their potential national impact. Then what kinds of motives would stimulate protests that have more serious political implications? There are two types: economic and political.And for each type, the motives would affect larger categories of people who are less geographically isolated, would include politically strategic populations who have been among the beneficiaries of reform in recent years and who are located in major political and financial centers. While unemployment in sunset industries located in the rust-belt regions affects relatively small percentages of workers in isolated communities, similarly severe unemployment in current growth industries, especially the export sector, would have much more serious political implications. This would require some kind of macroeconomic shock: either a rapid drop in demand for export products, or a banking or financial crisis within China that idled large numbers of recently prospering firms. China was fortunate to weather the Asian financial crisis unscathed, but if employment was to suffer a shock similar to that in Thailand, South Korea or Indonesia at some point in the future, it would seriously affect large proportions of politically strategic populations who have come to expect upward mobility and

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relative prosperity in recent decades. Widespread layoffs in current boom sectors would create serious dislocations. The first to be fired would be the millions of migrant workers who are especially prevalent in construction trades.Their numbers are so large in coastal cities that they alone could create serious problems. If they were also joined by large portions of the relatively young workforce of growth and export industries, the potential political problems would be multiplied. Similarly damaging would be a renewed bout of inflation. Inflation is more politically destabilizing than unemployment, because it affects virtually everyone. Inflation was a serious problem in China in the late 1980s, when unofficial rates reached upwards of 25 percent. During the 1989 demonstrations, it was a major source of urban discontent that led to popular support for the demands of student hunger strikers and mass resistance to martial law. It is often forgotten that the Solidarity Union in Poland began as a reaction to price inflation in 1980.16 Because it affects everyone, and cuts real incomes across the board, inflation unites disparate populations, especially in politically strategic regions. Its recurrence could lead to a less stable urban China reminiscent of the late 1980s. Equally destabilizing would be an external political shock — an obvious and humiliating failure of the regime to stand up for China’s national dignity. The upsurge of patriotism and nationalism among coastal urbanites in recent years has been founded on a sense that China is rising in world affairs. Sporadic but emotional urban demonstrations by students — against Japanese textbook policy, or actions regarding the tiny Diaoyutai Islands, or the virulent response to the bombing of the Belgrade embassy — show that international affairs can have a major impact on politically strategic urban populations. The most likely source of such an external shock would be over the question of Taiwan’s international status. Should the Chinese regime permit itself to be maneuvered into a situation where it felt compelled to attempt a show of military force, and if that show of force 16

Or more precisely, the equivalent of inflation in a planned economy: an overnight doubling of prices for basic foodstuffs by a financially strapped Polish government.

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failed or resulted in a humiliating defeat, serious anti-regime sentiment could be the result, even among Party members and basiclevel functionaries. Moreover, the result among the top leadership would likely be a splintering of unity as factions sought to divert blame.The impact on China could be as consequential as that of the failed invasion of the Falkland Islands that finally led to the fall of the Galtieri regime and the end of military rule in Argentina two decades ago. In sum, the recent wave of protest in China is a response by scattered pockets of the population to wrenching structural changes during which they have turned out to be losers. Their energetic and determined resistance is an impressive new development, and a source of real concern for the central government. However, the protests do not involve politically strategic populations and are unlikely to culminate in any serious challenge to the regime, even if they continue to rise in prevalence. It would require a major macroeconomic or geopolitical shock to mobilize large numbers of politically strategic populations into the kinds of protests that would present a major challenge. The regime’s appeal to its base rests on two strong claims: that it has provided the framework for rapid economic development and increased prosperity, and that it has presided over a marked rise in China’s international prominence and national prestige. These claims would have to be decisively undermined for the regime to face serious challenges.

THE ROLE OF PROTEST IN CHINA’S POLITICAL EVOLUTION These arguments do not imply that China’s current protest wave is politically irrelevant, or that it will play no role in the country’s future.This is far from the case. In fact, these widespread and vigorous protests are the primary dynamic element in China’s further political evolution. Relatively pessimistic portrayals of China’s “trapped” transition, which view gradual reform as reaching a dead end, tend to view these protests almost exclusively as a symptom of institutional decay

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and the decline of regime legitimacy.17 But these protests are also a potential cause of further political evolution, primarily by stimulating a process of institution building to adjudicate the underlying conflicts.18 This process would pit central and provincial governments — concerned about the potentially destabilizing impact of local protest — together with local aggrieved populations against local officials or enterprise managers whose arbitrary, illegal or corrupt behavior provides the cause for protest activity.19 There is no guarantee that the central government will be able to institute laws and procedures that protect the rights of vulnerable populations and establish effective means for adjudicating conflicts before they threaten local political order. But there is no doubt that these protests have placed these issues firmly on the agenda of central political leaders. Popular protest — and the leadership’s concern to counter it — is therefore one of the more important dynamic elements in China’s evolving political system.

17 Again, the most articulate case for this point of view is Minxin Pei, China’s Trapped Transition, pp. 210–211 and elsewhere. 18 As recognized long ago in classic sociological statements by Durkheim and Simmel, as synthesized by Lewis Coser, The Functions of Social Conflict, New York: The Free Press, 1956. 19 See the perceptive analysis of the changing perceptions of China’s security forces and the national leadership by Murray Scot Tanner, “China Rethinks Unrest”, pp. 143–151.

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Chapter

4 The 17th Party Congress and the CCP’s Changing Elite Politics You Ji

The significance of the 17th Congress of the Chinese Communist Party (CCP) is twofold. First, it formally symbolized the completion of Hu Jintao’s power consolidation, an unfinished business of the 16th Congress.1 Second, it has facilitated leadership succession for fifthgeneration leaders in the 18th Congress, serving as a linkage between the preceding congress and the next. This is expressed in several ways: the centrality of Hu’s political line, confirmation of his theory as the Party’s new guiding ideological principle sanctioned by the Party Charter, and construction of a discernable personnel network through a leadership reshuffle.This paper will focus on the last factor in close connection with the first two. It argues that the 17th Congress 1

For an analysis on the 16th Congress, see Lowell Dittmer,“Leadership Change and Chinese Political Development” in Yun-han Chu and others (eds.), The New Chinese Leadership: Challenges and Opportunities after the 16th Party Congress, Cambridge University Press, 2004; and John Wong and Zheng Yongnian (eds.), China’s Post-Jiang Leadership Succession: Problems and Perspectives, National Singapore University Press, 2003. 55

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is a platform to initiate a new succession cycle. Now with suitable younger leaders in place, Hu’s succession plan will be executed in an orderly way in the 18th and 19th Congresses.All this took place in an environment where China’s elite politics is undergoing substantial change. As the CCP is transforming from a revolutionary party to a ruling party, its elite politics is likewise experiencing a transformation from one where supreme leaders preside to one where succession is institutionalized.This dynamic is best reflected by each round of generational transfer of power. A national party congress magnifies its effect.

THE 17TH CONGRESS AND NEW FEATURES OF CCP ELITE POLITICS The 17th Congress is significant for it provides insight into the core of CCP politics: succession, an unresolved challenge.2 Feudal heredity that accorded legitimacy to the successor had long been discarded, but universal suffrage as the best substitution is still far from being implemented. The reign of supreme leaders had particularly resolved resultant political instability, but at a heavy cost to the society. Deng Xiaoping had made one-man rule unsustainable. The prospects of a power vacuum and escalated factional infighting have imposed a “catch-22” challenge for the CCP: it will either have to foster new supreme leaders to ensure its cohesion or employ other means, such as institutionalization of power, to consolidate. Each CCP National Congress since 1992 has been dealing with this challenge of further institutionalization in various degrees even though the final stage of power transfer is still governed by the personalized calculus of the top leaders. The 17th Congress was particularly important in this regard. New successors were chosen without the shadow of Party elders for the first time in its post-1949 history.3 The residue of supreme-leader reign is being gradually cleaned up. 2 On CCP succession politics, see Joseph Fewsmith, “The 16th National Party Congress: The Succession that Didn’t Happen”, The China Quarterly, No. 173, 2003. 3 Hu was predetermined as the successor by Deng long before his takeover of the Party’s helm. Song Ping and other leaders of the revolutionary generation also played a crucial role in the process.

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However, China’s political system and culture naturally produce supreme leaders, especially when the Party needs them to handle internal and external problems in the drastic social transition. The goal of maintaining political stability is embedded in effective leadership that, however, is a double-edged word. Supreme-leader rule is likely to upset factional equilibrium, leading to party disunity.The institutionalization of power is thus meant to strike a balance between the necessary evil of building strong leadership and the need to curtail the excessive authority of the top leader. The 17th Congress presented the CCP with an opportunity to further this institutionalization endeavor through enhancing the function of organizational mechanism vis-à-vis personal arbitrariness in handling personnel matters. The formation of the 17th Politburo and its Standing Committee seemed to have proven this point.

Relationship between Informal Politics and Institutionalization The contradiction between grooming strong leaders and restricting their power informs the see-saw battle between informal politics and institutionalization.4 Informal politics has held sway in CCP elite politics for a long time and supreme-leader reign is its core. There is another fundamental contradiction in CCP elite politics, which is increasingly more apparent in the post-Deng era.The selection of the successor is largely dependent on the operation of informal politics: he is basically the personal choice of the ultimate leader and embodies the compromise of few Party heavyweights.5 But his consolidation is increasingly more reliant on the institutionalization of power as a way to counteract the damaging effect of informal politics, most indicative of uncontrollable “factional groupings” around a few senior 4

On informal politics, see Lowell Dittmer and Wu Yu-shan, “The Modernization of Factionalism in Chinese Politics”, World Politics,Vol. 47, July 1995. 5 A typical example is how the Jiang leadership was manufactured by the Party elders. See Yang Mingwei,“Chen Yun yu Deng Xiaoping, Li Xiannian mishang ‘jiaoban’” (“The Secret Discussion of Chen Yun yu Deng Xiaoping, Li Xiannian Regarding Transfer of Power”), Dangshibolan, No. 6, 2005, pp. 1–5.

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leaders who long occupy the central posts. The CCP elite politics is now at a critical stage of transition. Leadership stability based on supreme-leader reign is no longer viable, but institutionalization of power has not evolved to the point of guaranteeing the new leader due authority with his formal portfolios.This is especially true at the early stage of succession, at a time of leadership crisis (acute factional strife) and during a major policy debate. Hu’s smooth rise to power reflects the extent in which institutionalization of power has deepened.6 The departure of Party elders as king-makers allows formal office to exert more authority and reduce the time for the successor to establish himself. On the other hand, the system continues to produce king-makers whose power logic is rooted in their inclination to exercise personal influence over personnel matters. This reduces scope for elite compromise and for organizational coordination, with prospects of periodic uncertainty before and after the succession.For instance,Jiang’s reluctance to quit in 2002 testified to Huntington’s idea that institutionalization in authoritarian states is elusive and often not an irreversible process.7 Therefore, the see-saw continues.The complex nature of changing CCP elite politics is marked by the phenomenon where continuation is intertwined with innovation which may have gained more currency in recent years. Institutionalization operates differently in different political environments. If it was a supplement to strongmen rule of Mao and Deng, now it is systematic insurance for post-Deng leaders to triumph. Institutionalization in an authoritarian political system does not mean that informal politics, which is still valuable to top leaders, will be eliminated. It is to create legal/institutional safeguards to prevent informal politics from evolving into a vicious power struggle among

6

David Shambaugh argued that elite power is more vested in institutions than in individuals. “The Dynamics of Elite Politics During the Jiang Era”, The China Journal, Vol. 45, 2001, p. 107. Also see Francois Godement (ed.), China’s New Politics, Les cahiers d’Asie No. 3, IFRI, Paris, 2003. 7 Samuel Huntington pointed this out as the early as the 1960s when he commented on regime transformation of authoritarian systems. Political Order in Changing Societies,Yale University Press, 1968.

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Party elites. These safeguards are expressed by written regulations and unwritten Party norms for the sake of disciplining excessive Party factionalism.8 The post-Deng era witnessed rising importance of codes and norms in regulating elite interaction. Prohibitive costs are thus generated on leaders intending to rock the boat. It is still debatable if institutionalization has become the main trend in CCP elite politics. Yet it is logical to conclude that informal politics is increasingly framed within a new set of rules of the power game, the most important of which being collective leadership. If the orderly transfer of power from Deng to Jiang to Hu proves anything, it is deepening institutionalization that makes it possible for the CCP to minimize factional activities and execute orderly succession.This may give rise to another debate: whether there is an alternative to democratic elections for an exclusionary party to resolve succession impasses. Taiwan’s election experience has shown that open competition can entail tremendous social cost if the zero-sum and populist mentality takes advantage of democratic formality. The Vietnam Communist Party has achieved uneventful transfer of power since 1969. The CCP’s three power transfer processes in the two decades also prove that power sharing mechanism is well-designed, consensual way of policy making prevails and a culture of compromise is firmly established. The 17th Congress served as another historical point in this evolution.A number of new features in CCP elite politics can be identified.

The Consensus on Supporting the Successor Supporting the successor has been a key post-Deng elite consensus that has become a new Party norm in the name of maintaining political stability. The norm of getting the Party behind the new leader is not entirely novel, but it takes a new dimension when institutionally 8 The

concept of Party norms is abstract and its contents change over time. However, they do create political taboos to office holders. For a good analysis of the concept, see Frederick Teiwes,“Paradoxical Post-Mao Transition: From Obeying the Leader to ‘Normal Politics’”, The China Journal,Vol. 34, 1995.

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constructed. Now, this norm and institutionalization have become integral to each other. One new feature of CCP elite politics is that the top leader has realized a simple truth: institutionalization is an effective weapon for a weak leader to overcome challenges in an uncertain environment by utilizing the available institutional powers in the most optimal manner. However, when he tries to undermine formal institutions, he gets hurt in the process. In Hu’s case, the usefulness of this norm for his consolidation has gone beyond the credentials accorded to him as Deng’s personal anointment. The Party’s acceptance of him as the core of the fourth generation of leadership is based on a recognition that his consolidation is the consolidation of the Party.9 Authoritarian parties are at their weakest when they face the succession challenge: it is a time when power infighting can be potentially explosive and yet these parties lack the legitimate procedures to select and protect the heir apparent.At the same time, their fate depends on the well-being of the new leader.The leader’s authority building becomes easier when his fate and the party’s are linked, for better or for worse.This is why the CCP has made extraordinary efforts at protecting its leader in the post-Deng era. To this end, the CCP has granted the successor as many key institutional powers as possible to enhance his legitimacy base. In order to help Jiang to survive Zhongnanhai’s hierarchical politics, Deng asked him to take all three top posts: Party boss; presidency and chair of the Central Military Commission (CMC). This three-in-one formula has been institutionalized as the ultimate leader’s portfolio, allowing him to control Party, state and military affairs.Through the personal signature system and presiding over all important meetings, he acquires effective control over key policy areas. In addition, he heads other key offices, e.g., the various central leadership small groups, which grant him privileged access and final say to specific strategic decisions. The Party’s institutionalized support for the successor is its response to a new challenge: routine generation transfer of power 9

The June 4th event had a lasting effect on the Party leaders who are constantly imbued with a sense of crisis. This has been reflected by their attitudes of conflict aversion toward the succession issue.

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every decade or so (between two to three Party congresses). Each entails an inevitable redistribution of power among political elites that may trigger “games to win all”.While accustoming themselves to this evolution, the Party elites have emphasized institutional formulas to minimize the damage.10 These formulas include selecting a small pool of candidates for protracted trial as distinct from the Maoist way of “line struggle”; due inputs from powerful institutions through wider elite consultation; and more vigorous application of objective criteria to match personal nomination of top leaders.11 All these were employed before, but not in an institutionalized framework. The difference is defined by whether the decision on the successor is made more on the basis of personal arbitration or as a result of more organizational and collective means.The Jiang–Hu transfer of power in the 16th Congress enhanced the latter choice, no matter how inadequate this was.12 Personal influence is inevitable and is not a question.The question is how this is balanced by objective organizational scrutiny.This is the test that would impact on every following Party congress that would either realize power transfer or make preparation for the next round of power transfer. The 17th Congress has consolidated this process. Consensus building on heir apparent has become a key component of institutionalization efforts not only for picking a new leader but his consolidation afterwards. 10 Huang Ju conveyed the message of safeguarding leadership unity in the process of succession in the meeting of the Shanghai delegation to the fifth session of the 10th NPC in Beijing on 8 March 2007. Shanghai Weishi, 8 March 2007. 11 For instance, the Party formally and informally solicited opinions from much wider political groups on Xi Jinping and Li Keqiang in the lead-up to their appointment in the 17th Congress.These groups included key top PLA soldiers, heads of the eight “democratic” parties, and provincial leaders who once worked with Xi and Li. This was in sharp contrast to Deng, who decided on Jiang and Hu with minimium consultation. As for the objective criteria, age, education and performance played a crucial role. 12 For an evaluation of the Jiang–Hu succession process, see You Ji, “Hu Jintao’s Succession and Power Consolidation Strategy” in John Wong and Lai Hongyi (eds.), China’s Political and Social Change in Hu Jintao Era, Singapore: World Scientific, 2006.

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Impact of Institutionalization on Elite Politics The design for resolving power vacuum by according due authority to post-Deng leaders, such as the three-in-one formula, may backlash against Party interests as it could nurture new power addicts. So the essence of institutionalization has been power-restricting on key office holders. This has become more urgent as succession is now routine and periodic. Hu made specific contributions in this regard in his first term as General Secretary. Six central directives were promulgated in August 2006 to set clear rules for cadre appointment, rotation, inspection and reporting — the most important of which is the two-term regulation for senior officials to serve in one place and in one post.13 In the past, the Party Charter and the State Constitution disallowed cadres to serve office for life, but this rule was not put in concrete terms. Leaders would retire from the first line duties, only to take duties in the second line, e.g., the People’s Congress, with their political influence lasting unnecessarily for too long. The limits on terms and places have profound impact on CCP elite politics. Firstly, Party leaders will have to exercise personal clout. Jiang’s influence, for instance, faded away in retirement.14 The CCP’s painful past has brewed a broad consensus that for institutional powers not to expand beyond control, a fixed term in office is essential. If he knows from the outset that his days as the ultimate leader are numbered, he would exercise his institutional duties differently. In office he enjoys enough authority (e.g., the three-in-one formula), and this raises opportunity cost for his ambitious colleagues to attempt leadership challenge. But a fixed term would restrict his personal authority as it sets the timeframe for him to develop a personal following and prevents him from becoming another supreme leader. Even if he does become a supreme leader, he will not be able to do damage to the Party for a protracted time and, more importantly, the 13

The Provisional Regulation on the Term of Party and Administrative Cadres, the CC General Office,August 2006. 14 One interesting sign of this is that his name is seldom mentioned in most PLA publications now, just two years after his retirement. The PLA used to be his most reliable power base in leadership politics.

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fixed term generates organizational pressure and mechanisms to oust him. Consequently, the aim of the term limit is to effect a change in the functions of the General Secretary in contrast to those during Mao’s and Deng’s time. He is the first among equals and a part of a collective process of leadership. His primary mission is to ensure consensus or compromise rather than to overrule key decisions made collectively at the top. In the 17th Congress, instead of insisting on Li Keqiang as his successor, Hu accepted Xi as an alternative candidate to succeed him, a perfect example to prove this point. Secondly, the two-term regulation makes any groupings less structurally cohesive. The absence of grouping heads is well-anticipated, leaving their proteges under new political masters.15 Frequent transfers of senior cadres also make the formation of power groupings more fluid, allowing cadres to acquire cross-grouping identities which may weaken factional rigidity of any single grouping and offset excessive infighting among elites.With this evolution of institutionalization, the intensity of CCP factionalism would be reduced and this may make it easier for the CCP to become organizationally tolerant of factions and construct LDP principles of factional management.16 The constant elite realignment may open a window opportunity for ambitious cadres to maneuver beyond the acceptable limit. Thirdly, power restriction as the essence of CCP institutionalization is primarily embodied in the retirement institution of all Party members. So far, the age and term rule is applied to all Politburo members except for the General Secretary. The six documents alluded to earlier affect only provincial leaders for the time being.This certainly limits their effects as the Party’s internal check and balance system. Yet, according to a senior cadre in the Central Organization 15

A good example is Li Peng’s grouping. He inherited the interest groups of state administration, heavy industries and central financial sectors. As Premier, he appointed a large number of his followers to the cabinet positions (many fellow students in the Soviet Union in the 1950s) and was the most powerful figure when Jiang came to Beijing. Soon after he quit premiership, his grouping dispersed quickly. 16 LDP refers to Japan’s Liberal Democratic Party. For LDP factional politics, see Ray Christensen, Ending the LDP Hegemony: Party Cooperation in Japan, University of Hawaii Press, 2000; and Haruhiro Fukui, “The LDP Revisited”, Journal of Japanese Studies, No. 2, 1984.

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Department (COD), the spirit and principle, according to Hu’s instruction, are applicable to higher levels of leadership.When conditions become ripe, the coverage will be extended to top leaders.17 The personnel make-up of the 17th Congress has clearly constructed such a foundation.The new heirs apparent brought the issue of Hu’s retirement to the political agenda. Analysts are debating about whether Hu would stay in power for two, two and a half or three terms. The two-term limit clearly shows that CCP elite politics is increasingly governed by a set of clear rules.

THE 17TH CONGRESS: NEW OPPORTUNITIES AMIDST NEW CHALLENGES The 17th Congress has accelerated power institutionalization. Hu’s authority has been further consolidated through policy adjustment and personnel arrangements.All this began with the Party’s rectification of the legacies of the 16th Congress.

Addressing Uneven Factional Presentation of the 16th Congress Jiang was visibly more arbitrary in his last years in office, most indicative in his bargaining for retirement: the award being his nominees forming the largest grouping in the Politburo’s Standing Committee (PSC) and the Politburo.18 Fulfilling Jiang’s preference paved the way for the execution of the succession plan in the 16th Congress in 2002 and his final exit from office in 2004. Despite Party support, Hu was almost alone not only in the PSC but also in the Politburo in terms of “factional back-up”. Jiang’s assertiveness in personnel affairs contravened 17

My conversation with him in Beijing in January 2007. Other examples include his personal decision to build the Beijing National Opera House against voices of opposition and to press ahead with the Qinghai–Tibet Railway, only to have these concurred by the Politburo later. Zuojia Wenzhai, 3 July 2006.

18

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the Party norm of balanced factional representation, and caused a backlash in the rank and file.19 Therefore, as far as personnel affairs were concerned, the priority of the 17th Congress was to reestablish “factional equilibrium” for top leaders as one precondition for the formulation of an institutionalized formula of succession. The Party norm of maintaining balanced representation is embedded in CCP informal politics to prevent the latter from getting out of hand. Factional equilibrium functions as an internal system of checks and balances when it is used positively.The lack of equilibrium erodes Party unity and may cause overt power rivalry.Although balanced representation is an important item in Party norms, it has traditionally been the least observed item. This is due to the fact that the Party allows the ultimate leader to have privileged nomination for the Politburo and thus the largest representation of his men as a shortcut for authority building. Equilibrium is relative even in good times.The flawed system makes equilibrium an exception rather than the rule. For instance, Mao advocated the norm and recruited elites from other “mountaintops” to show his fair leadership. Yet he never truly attempted to have a balanced representation at the top.20 Deng and Jiang followed suit. Deng disproportionally appointed his men from the Second Field Army to senior PLA positions.With effective control of the gun, he proceeded to capture the Party leadership.21 It is too early to conclude that Hu would be different. However, the composition of the 17th Politburo does show that he has not followed Deng’s or Jiang’s practice of brewing a large personal following. In the PSC, only Li Keqiang can be said to be his appointee. In the Politburo, Liu Yandong and Li Yuanchao have Communist League (CYL) connections, but identifying them as Hu’s protégés would be difficult due to 19

The “Shanghai gang” is widely talked about by Party members and the masses. It matters less if such a “gang” exists than if the popular feelings exist against Jiang’s “factional bias”. 20 On this mountainism, see Huang Jing, Factionalism in Chinese Communist Politics, Cambridge University Press, 2000. 21 Ian Wilson and You Ji, “Leadership by ‘Lines’: China’s Unresolved Succession”, Problems of Communism,Vol. 39, January 1990, pp. 28–44.

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their cross-factional ties with Jiang.22 The 17th Politburo is arguably the least factionally discernable body in CCP history. However, a point to note is, just because Hu did not appoint his own men in the 17th Congress does not mean that he will not do it in the Congress in which he steps down. The 17th Congress saw the departure of most Jiang nominees. A new personnel line-up has emerged, leading to a delicate equilibrium to be set. In the meantime, non-mainstay leadership groupings (leaders not personally affiliated with the General Secretary) make the majority of membership. Here the concept of equilibrium is designed to prevent the phenomenon of selecting too many Party leaders from one region (e.g., Shanghai) or from one particular sector of power (e.g., the PLA or the CYL).23 A province’s geographic space limits the Party’s organizational choices for promotion. Most provincial leaders are from the same, relatively narrow filter.They share similar working experiences in the locality and promote obedient subordinates to leading posts.When they are appointed to the central posts together, it is easy for them to form structured informing groupings, the long Chinese tradition of xiangdang (kinsmen groups).The principle of equilibrium is applied not only to curb excessive horizontal personnel linkage, but also to a vertical one linked to top leaders, Jiang being a typical example. The top leader has limited personnel choices when he considers key appointments. The selection of personnel involving 3,000 senior cadres at the PSC is a difficult task for the top leader who is personally familiar with only a small proportion of them.Therefore, he is most likely to choose candidates from a small pool of candidates he knows well. The level of subjectivity is thus high. It is not surprising if he picks the wrong guy, like Chen Liangyu, or if he selects people from similar career origins.24 Such practices 22 Labeling people as one’s faction is a speculative business. Here, the evidence of Liu and Li to be associated with Jiang was inclusive, as it can only be seen from their family and work background with Shanghai grouping. 23 Talk with friends associated with the central cadre evaluation team for northwest China in Beijing, January 2007. 24 One example is that the Li Peng cabinet was composed of many cadres who studied in the Soviet Union in the 1950s.

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would give rise to concentrated factional presentation at the top.The success of the 17th Congress could be attributed to the fact that this phenomenon was relatively rectified. “Organizational filter” was employed more vigorously than at all previous congresses, with objective criteria such as age, performance and education qualifications playing an important role in finalizing the selection of Central Committee (CC) members. For Politburo candidates, “personal filter” is still the primary leverage, but is balanced by opinion surveys of a large pool of senior cadres. This is why collective leadership has been intensively used to build consensus through compromise.25 Hu has handled the legacy of the 16th Congress well.This can be seen from his efforts to maintain good relations with non-Jiang nominees, and indirectly with their former superiors, such as Li Peng and Zhu Rongji. He has allied with Wen Jiabao on policies and backed the people outside the Jiang circle over specific issues in their areas of responsibility. Yet there is no evidence that Hu has tried to incorporate them into his factional grouping, as their contact has been maintained strictly on a business basis.26 There is a subtle difference between rendering support to them with factional motivations and keeping leadership unity. Hu has struck a delicate balance between the two, which may have helped dissolve the cohesiveness of existing groupings and deterred the emergence of new structured groupings. Hu’s fair treatment of other leaders is reflected in his keeping an equidistance with his Politburo colleagues.Yet this may have delayed the building of his own personal networks with some effect on his personal authority. Hu is probably a rare case in CCP history for not consolidating his power based on factional construction or military support. Jiang’s retention of CMC chair and his inclusion of personal associates in the Politburo in 2002 caused a “time lag” for Hu, but opened an opportunity for him to stand above “factional groups” on 25

Words from a cadre in the Central Organization Department in Beijing in January and October 2007. 26 The only person accompanying Hu day and night was Wang Gang, former director of the CC’s Central Office until September 2007. According to a source close to Zhongnanhai, Hu consciously keeps a personal distance with all other leaders at the top.

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his institutional authority, an indicator of CCP elite politics moving in a new direction. And it is likely his successors will experience a similar situation in the future.27

Hu’s Own Test in Fair Representation Hu faced a similar test prior to the Congress. In addition to the Party’s acceptance of its leader nominating a high percentage of his own men into top positions, Hu’s dominance in the Party had by then allowed him to follow Jiang’s suit. Hu’s need to have a strong personal following was both logical and natural, ironically as a way to rectify Jiang’s excesses in personnel matters and to push forward his own policy agenda, such as implementing controversial reforms. This could have resulted in the make-up of the 17th Politburo, but clearly did not. Hu well answered the question of what kind of personal network he had to construct — not a conspicuous but a covert core. He was rational enough to realize that placing too many followers at the top leadership might become his liability vis-à-vis party norms and popular perception. Hu was in charge of personnel affairs for the 15th and 16th Congresses, but he smartly let Zeng Qinghong take charge in the 16th Congress to give Jiang a good reason to retire at ease. Zeng shortlisted Politburo members to match Jiang’s plan: the reason for the emergence of an uneven PSC.28 For the 17th Congress and for the first time, Hu was in total control of personnel matters.The ball was in his court this time. Hu’s power base was already solid below the top leadership. There are a number of ways in which Hu augments the Party’s support.The first is through the Central Party School (CPS), of which he was president until 2003. In this capacity Hu not only lectured but also got to know many of the trainees by name.This teacher-student relationship continued when they returned to their posts across the 27 You 28

Ji,“Hu Jintao’s Succession and Power Consolidation Strategy”, 2006. Oral sources in Beijing, January 2007.

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country.29 Secondly, Hu has overseen the affairs of western provinces in the PSC ever since the 14th Congress. He personally screens nominees to Tibet, Xingjiang, Qinghai, Ningxia and Guizhou. He makes constant inspection tours to the region and talks to local leaders extensively. The third channel is through the cadres working under him in his previous appointments, especially the CYL in the first half of the 1980s.30 Prior to the 17th Congress, analysts debated if there would emerge a structured Hu following centered on former CYL leaders or Tuanpai. Many observers predicted that Hu would promote them to top positions. In a way this was something inevitable, as CYL leaders formed the largest pool of provincial and ministerial leadership of the 16th Central Committee. According to Li Cheng’s calculation, there were 46 members of Tuanpai origin in the 16th CC.31 By age, most of them remained in the 17th CC where they were joined by new CYL members. Tuanpai has remained as the largest cluster in the Party leadership after the 17th Congress. Yet there are definition problems to the term Tuanpai. Pai means faction in Chinese. Do people of CYL origin form a faction? There is no clear evidence to prove it, especially in the policy realm. Moreover, it is hard to establish how many of them are personally associated with Hu and between themselves. First, Hu worked in the central CYL leadership only briefly (1982–1984). Secondly, it is questionable how 29

Soon after the 15th Congress, Jiang instructed Hu to screen young leaders at the provincial level in preparation for the 16th Congress. According to Jiang, an early selection would give the PSC more time to test the candidates and allow them to be recognized through their performance. Jiang Zemin, “Promoting Large Numbers of Young Leaders” in Jiang Zemin Wenxuan (The Selected Works of Jiang Zemin), Vol. 2, Beijing: Renmin Chubanshe, 2006. Hu then opened two special courses at the CPS. Many of the trainees were in their 40s and held portfolios at the deputy ministerial level. Now they form the core of the fifth-generation leadership. 30 You Ji, “Profile: The Heir Apparent”, The China Journal, Vol. 49, July 2002, pp. 125–139. 31 Li Cheng, “The New Political Elite and the New Trend in Factional Politics” in Francois Godement (ed.), 2003.

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he could be personally familiar with provincial CYL cadres whose direct bosses were not Hu but their provincial party secretaries. Besides, Hu takes a detached approach to guanxi as mentioned earlier, even though he may be more enthusiastic about promoting CYL cadres than other Party leaders. Thirdly, the CYL has been personnel reserve for the Party from its formative years. It is not against Party norms to promote CYL people to senior Party positions. Fourthly, CYL leaders come from different places whose patronage is from their own locality. It is not easy for them to form an independently discernable grouping. For instance, Dr Li Yuanchao was CYL secretary of Shanghai in the 1980s. Should he be regarded as a member of the Shanghai grouping or Tuanpai, if there is Tuanpai at all? Having said this, people of CYL origin played a crucial part in CCP elite politics in the 17th Congress and beyond, regardless of whether they are Hu’s men or not.The line-up of the 17th Politburo has proven that Hu was very prudent in nominating people of CYL origin to avert the criticism that Jiang attracted due to his personal favoritism. Only four Politburo members had CYL connections.This figure is not more than the 12th and 13th Politburos.

CRITERIA FOR PERSONNEL SELECTION In the 17th Congress, over one-third of CC members made way for new members. With Jiang’s full retirement in 2004, Hu stepped up personnel realignment for the Congress through reshuffling ministerial and provincial leadership. Over 100 PSC selection teams busily travelled around the country to shortlist CC replacements almost right up to the day the Congress convened. All provinces completed the change of guard, with people born in the 1950s making the core of the committees. Leaders born in the 1960s entered the equation in an impressive way. For instance, Hu Chunhua (Tibet), Zhou Qiang (Hunan) and Sun Zhengcai (Ministry of Agriculture) are just 45 years old.32 This will pave the way for the elimination of all provincial leaders born in the 1940s, well before the 18th Congress.This paper is more 32

Wenhui Bao, 23 February 2007.

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concerned with the selection criteria than with particular candidates, as this is a better gauge of the evolutionary change in CCP elite politics. The selection criteria are divided into two categories: fundamentals and technical parameters. The former is assessed by the following: political stance; honesty (free from corruption); performance; and collegiality. The latter is evaluated based on working experiences in the center and the region; education credentials; age; family situation; and public approval. There are sub-rules to the promotion game, e.g., leaders’ recommendation and personal ties with the organizational chiefs.The CCP has a long tradition of allowing top provincial/ ministerial leaders to name their replacement upon retirement. This practice of informal politics continues till today. Some of these parameters will be analyzed in this section.

The Hu Revisionism: Unifying Ideological and Organizational Lines Ideological correctness is always the key criterion to assess potential successors, although the “meat” in this congress may be the “poison” in the next. For the 17th, the preferred ideas are clearly Hu’s social harmony, scientific development and humanism. Jiang’s ideological line enshrined growth, competition and meritocracy. Hu does not dismiss Jiang’s ideas but pays more attention to social justice, fair distribution of wealth and protection of interests of the underprivileged social groups. The different policy orientation has resulted in a Hu revisionism with crucial impact on promotion criteria for the 17th Congress.A bandwagoning effect was visible. Scientific development is premised on rational-legal political philosophy: policies should be consistent and predictable, and should be legitimized by legislation and in agreement with international practice.33 Humanism is fundamentally a political model of governance, defined as benevolent dictatorship: the state protects the basic 33

On rational-legal political philosophy as China’s post-Mao reform guidance, see Harry Harding, China’s Second Revolution, Brookings Institution, 1986.

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interests of the people in exchange for their acceptance of an authoritarian rule. In a way, the model is based on Hu’s way of state concession to society to ease the rising tension between the ruler and the ruled. At the same time, the Party tries to alleviate grassroots discontent by tolerating demands for non-political freedoms to offset demands for any quick democratization. This model matches the transitional path of East Asian transformation along the line of authoritarian pluralism.34 Hu’s revisionism, it seems, originated from his experience as Party boss of Guizhou, and not a recent invention by central ideologues like Wang Huning who masterminded the three-represents. Hu first raised the ideas of sustainable development and harmony between human and environment as early as 1988 when he created an ecological experimental zone in Guizhou’s Bijie Prefecture.35 However, in the following 15 years he remained relatively silent about this governing concept because it was at odds with Deng/Jiang’s concept of fast growth. By 2003, it had become clear that if the thirst for growth was not eased by policies favoring social and ecological balance, the prosperity of Deng/Jiang’s era would gradually lose steam. This is clearly mirrored in rising state/society tension and conflicts between different social groups.The idea of a harmonious society is about regulating state power and redistributing economic benefits in favor of the underprivileged.36 The 17th Congress officially approved Hu’s revisionism and incorporated it into the Party Charter, itself a sign of his strong status in the Party. The change in political orientation must be supported by an organization line that was concretely expressed by promotion criteria for new leaders in the Congress. Primarily, the candidates had to be evaluated in terms of their sense of social justice. The concept of social justice was a kind of ethical preaching in the 1980s which 34

See Robert Scalapino, “Northeast Asia: Prospects for Cooperation”, The Pacific Review,Vol. 5, No. 2, 1992. 35 Xinjing Bao, 12 March 2005. 36 Sun Liping,“Hexie Shehui yu Qunli Guifan” (“Harmonious Society and Restrictions on State Power”), Zhongguo Gaige, No. 12, 2006, p. 1.

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evolved into a gauge of whether interests were fairly distributed in the 1990s.37 Under Hu, social justice has become a concrete issue of how the weak social groups should be treated. Therefore, the concept is linked to how public policies are made. Jin Renqing, the former finance minister, was summoned by Hu and Wen on a number of occasions in 2006 to discuss how state expenditure should be prioritized.38 Hu and Wen reset the rules of appropriation, leaning towards low-income earners, the western regions and the peasants. Specifically, 700 billion yuan, the bulk of the increased central revenue in 2006, would be mostly spent on creating a safety net for the rural and urban poor. A total of 150 million rural children will have free education. Medical care will now cover 80 percent in 2008 as compared to 50 percent of peasants in 2005. Each farmer receives an annual 50 yuan insurance coverage (individual contribution of 10 yuan; 40 yuan from local and central governments) for hospital visits.39 All these are indicators of the kind of candidates Hu would like to see in leading positions: people of leftist ideological tendencies. Power aspirants need to demonstrate that their choice of public finance synergizes with Hu’s policy of harmonious society, showing not only their pro-people mentality but their sensibility to the pressure from below. Li Keqiang’s social welfare policy in Liaoning provides a good example. In less than two years as its Party secretary, he reconstructed the urban slums of 13 million square meters, closely following state regulation of maintaining flat size of not more than 60 square meters, an anti-market act but indicative of the center’s social welfare focus. Li’s labor reemployment measures were not spectacular but practical: numerous small cooperatives were set up through provincial and local investment and helped millions find jobs. This translation of Hu’s ideas into practice won him praise not only from the grassroots, but also favorable impression from the top.As Premier Wen said, “Li not only talks about the socialist market economy, but 37 Zheng Yongnian, Jiang Zhu Zhixiade Zhongguo (China under Jiang and Zhu), Hong Kong: Taipingyang Shiji Chubanshe, 2000. 38 Jin was purged shortly before the Congress due to his involvement in a sex scandal. 39 Jin’s interview with Wu Xiaoli, Phoenix TV, 3 March 2007.

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also puts it into practice”.40 All Politburo hopefuls embraced Hu’s revisionism. Xi allocated 85 percent of Zhejiang’s increased revenue of 109 billion yuan in 2006 to social welfare, making it the first in China to provide low-income insurance to all peasants, floating rural workers and employees in village factories.41 This may be one of the reasons for his promotion into the PSC. Politburo candidates were tested on whether they fit into Hu’s vision of governance: according equal stress to social and economic development and sustaining growth while reducing energy consumption and maintaining environmental balance. Following this central guidance, Han Zheng, for instance, substantially altered Shanghai’s growth pattern. From 2007, the city’s growth would not be driven by injecting more capital investment. The share of manufacturing industries in the GDP structure will drop steadily in order to ease energy consumption. Social welfare is a new policy priority with coverage extended to over six million low-income families.42 Regardless if this policy orientation is new, Han clearly made it look so, as his way of political recovery from his Huang Ju-Chen connection.43 The new criteria for promotion were meant to address Jiang’s ideological excesses on growth that stimulated formation of special interest groups, under the slogan of enlarging the CCP’s class base, which by nature was largely a pro-rich policy.The pro-business culture 40 For instance, one retired worker told Premier Wen that he let go of his old hut for 15,000 yuan but received a flat of 50 square meters for free. He was extremely happy. National News at 7 pm, CCTV, 17 February 2007. Hu and Wu Bangguo also visited Liaoning a few weeks before Wen and gave Li similar high praise. It is unusual for the top three leaders to inspect one province within one month, and in an important period before the 17th Congress. 41 Speech of Lu Zushan, governor of the province, to the 2007 Session of the NPC. CCTV, 10 March 2007. 42 Han Zheng’s report to Shanghai People’s Congress, 5 February 2007. 43 Han was allegedly in the list of the fifth-generation leaders but dropped from it due to the Huang–Chen connection. On this connection, minister Zhao Qizheng gave me his approval.Talk with him in Sydney on 17 May 2007.

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that has resulted serves also as a hot-bed for corruption. One example is the emergence of the iron triangle of state cadres, property developers and banking officials who extracted enormous profits through illegal real estate deals. Here, the cadres sell state land cheaply to developers who bribe banking officials for cheap loans. Then, both property developers and loan officials give hefty kick-backs to state cadres as in the case of Chen Liangyu, Zhou Zhengyi (a property developer) and Liu Jingbao (former director of the Bank of China). One shocking figure reveals the level of damage these special interest groups have done to the Party and society. From 1958 to 1978, the state used the price scissors to milk 700 billion yuan from peasants for industrialization. In contrast, between 1998 and 2003, about two trillion yuan were extracted from peasants simply through land appropriation at ridiculously low prices. As many as 40 million peasants lost their land and two million more join them every year, contributing to rising social protests.44 Jiang’s ideological tendency facilitated social stratification, wealth polarization and state/society tension. Hu sensed the danger of this policy of negligence towards the majority of people in terms of the Party’s long-term rule.The change in ideological guidance bears the key perception of CCP legitimacy in the eyes of the people still under the strong influence of China’s political culture of egalitarianism, something Hu is very familiar with from working at the grassroots. In fact, he has quietly adjusted the governing principle since 2003 and made it the central theme for the 17th Congress. His effort to brew elite consensus on his ideas was embedded in the personnel arrangement. In a way, supporting Hu’s ideology is as useful as one’s personal ties with him and represents a new mechanism to regulate factional alignment. Only when the search for leaders is swayed by shared ideas will the dominance of informal politics in top-cadre management be shaken. Personal connections will gradually become supplementary, contributing to the equilibrium in the 17th Congress. 44 “Media

Focus”, China Reform, No. 6, 2004, p. 4.

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Affinity Affinity has been an unwritten rule in CCP elite politics, but only recently has it become an essential criterion. It is a new kind of Party norm regulating elite interaction in an era of “normal politics” where charisma is no longer regarded as a useful quality. Affinity reflects the Party’s current preference for its leaders: it does not need a leader like Mao who always wanted to move mountains, nor a leader like Deng who always tried to suppress internal policy debate, nor a leader like Jiang whose pretentious style gives rise to controversies.45 Affinity for ordinary people is just a fine quality that helps maintain friendship. For top leaders, it is a strategic factor for regime survival.Through addressing the leaders’ personal characteristics, affinity compensates for the inadequacies of China’s political system that is likely to produce dictators who eventually ruin the system. In selecting successors for the 17th Congress, the affinity factor paralleled other personal traits, such as strategic vision. Its primary concern is whether the leader has the ability to maintain the unity of the Politburo. The negative historical lessons are abundant. When Deng picked up Hu Yaobang, he was impressed by the latter’s resoluteness in making tough decisions, which mirrored his own.Yet the later events showed that his personality proved to be his undoing: he annoyed almost all key Party leaders of both his generation and Deng’s.46 Zhao Zhiyang’s undoing was also partially due to his inability to maintain unity at the top: his contempt towards Li Peng was personal but tore apart the precarious coalition of Deng’s reformers and Chen Yun’s conservatives in effecting a gradual 45

For instance, Jiang enjoys singing in public, writing inscription, and gloating about his past achievements. Shortly before the 17th Congress, he insisted that the Politburo pass a formal resolution to “summarize his 12 years’ precious experience of leadership”. This request is quite unprecedented in CCP history. See Jiang Zemin Wenxuan,Vol. 3, Beijing, 2006. 46 Frederick Teiwes,“The Paradoxical Post-Mao Transition: From Obeying the Leader to Normal Politics” in Jonathan Unger (ed.), The Nature of Chinese Politics: From Mao to Jiang, Armonk: ME Sharp, 2002, p. 91.

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transformation of China’s command economy.47 Yang Shangkun and Yang Shangzheng (Baibing) provided another example of how their lack of affinity aroused strong opposition from their peers.48 Their slogan of “baojiahuhang” (protecting Deng’s way of reform) was the trigger for their removal. Without the approval of the Politburo and the CMC, they launched a pressure campaign against “first-line” leaders.Yet the deeper cause of their dismissal was their assertive leadership style reflected by their casual personnel decisions according to their likes and dislikes, often without going through formal procedures.This upset the delicate balance of power among PLA elders.49 The affinity factor is abstract as an organizational principle in leadership selection. But Hu’s own style of affinity offers some concrete gauges.This is expressed by his consensual leadership style; his respect for procedures in policy-making; his cautiousness towards personnel affairs; and his coordination rather than suppression of existing “factional groupings” or different opinions. He does not pose threats to his colleagues and exercises effective anger management when encountering unpleasant incidents.50 Moreover, Hu does not lack resoluteness when making tough decisions, such as the prompt sacking of Beijing’s mayor, minister for public health and naval 47 You Ji,“Jiang Zemin: In Struggle for the Post-Deng Supremacy” in Maurice Brosseau, Suzanne Pepper and Tsang Shu-ki (eds.), China Review 1996, Hong Kong: The Chinese University of Hong Kong Press, 1996, pp. 1–28. 48 The arbitrary working style of the Yang brothers encountered strong resistance from PLA elders such as Hong Xuezhi, Zhang Zhen and Yu Qiuli. According to Yang Daming, the eldest son of Yang Shangkun and Deng’s personal photographer,Yang did not attend the 14th Congress to show his frustration with Deng’s sudden decision to remove Yang Baibing from the CMC. Deng asked his daughter Maomao to convey this message to him: “He had nothing against Yang brothers, please take it easy”. Yang replied:“Do not worry. I am OK”. Nanfang zhoumo, January 2007, cited in Jinxing Dianping, Phoenix TV, 16 February 2007. 49 Most of my PLA interviewees told me stories of this kind in the 1990s. However, the current line-up of PLA top command is still the outcome of Yang’s selection of capable and younger officers in the 1980s. 50 One interesting example was his calm reaction to the unpleasant happenings in Bush’s state welcome ceremony in Washington in 2006. Many of his subordinates said that Hu did not lose his temper.

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commander-in-chief. And the case of Chen Liangyu was handled with resolution,on just ground and with constraints for the sake of Party unity. It best shows the maturity of Hu in faction management and work style. The effort to promote affinity is in minimizing chances for assertive leaders to climb to the apex, probably through a top leader’s preference that is translated into organizational means. With the passage of Party elders and especially through Hu’s personal example, a culture of civility and a foundation thereof is being constructed in CCP elite politics. Although far from completion, this effort helps to curb constant anxiety and panic of subordinates to the top leader, a phenomenon inherent in Chinese “court politics”.51 Indeed, Hu’s own low-key personality symbolizes the preferred leadership style that power aspirants need to have in order to climb to the top. Personnel bosses at senior levels would keep this in mind when screening the candidates. Candidates are evaluated on their political ambitions (cause of leadership disunity), arbitrariness (cause of the breakdown of policy consensus) and attitudes towards organizational norms (cause for factional activities). Qualities such as thriftiness, down-to-earth manner, cool temperament, people skills, ability to resist lust and maintaining a low profile in the public are all assessed carefully. All these characterize Li Keqiang, Xi Jinping, Li Yuanchao and Zhou Qiang. Their rise showed how ideal leaders were defined by the 17th Congress. A leader with the right personality may help curtail uncontrollable factional infighting and compensate for the lack of an external check and balance system.

KEY PERSONNEL ISSUES OF THE 17TH DA IN THE CONTEXT OF THE 18TH DA The aforementioned criteria are, however, not without their weaknesses. Despite institutionalization progress and an emerging culture 51 On this element of fear in CCP elite politics, see Lucian Pye, “Factions and the Politics of Guanxi: Paradoxes in Chinese Administrative and Political Behavior” in Jonathan Unger (ed.), The Nature of Chinese Politics: From Mao to Jiang, Armonk: ME Sharp, 2002, p. 39.

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against personal arbitrariness, the CCP personnel selection process is continuously channelled more through leaders’“filter” than the institutional “filter”. Thus emerged an unanswered question: is Hu’s emergence a piece of luck or an outcome of the Party’s institutionalization? Regardless of the answer, Hu will leave a huge shoe for his successor to fill. Considering that it took over a decade to cultivate Hu in the PSC, the time is running out for the Party to foster an heir apparent. The 17th Congress has tackled the issue, but uncertainties still remain. The lengthy and complicated process of searching for “Mr Right” underscores the Party’s reluctance to impose the term and age limit onto the ultimate leader: it is so difficult for him to be spotted, accepted and established.This constitutes the biggest impasse for the CCP to further institutionalize top leadership: it has to choose between exercising prudence in replacing the top leader which may precipitate a political crisis, and enhancing institutionalization through fixing his term in power.Yet succession is something that has to come, like now. CCP elite politics is a closed book and the analysis of the personnel arrangement for the 17th Congress has to be speculative.Though the CCP’s political line and ideological emphasis are quite clearly spelled out, the outcome of its leadership reshuffle is still unknown, making a tentative analysis more interesting.The following issues are worth exploring.

The Strategic Issue for Hu: Two Terms or Three Terms? An analysis of the personnel arrangement for the 17th Congress may start with a crucial question: will Hu stick to two terms in office or two and a half or three terms? This is an academic question because there is no indication so far.52 Academically, it affords scholars with the opportunity of looking at the question of CCP institutionalization of power from a new angle. More practically, how Hu quits is decisive on how new leaders emerge. Apparently, this question of 52

According to some sources in Beijing, Hu mentioned two terms in office prior to the 16th Congress, as he said “If all goes well”. Oral sources from the author’s Beijing interviews in January 2007.

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two, two and a half or three terms touches upon the following strategic issues.

The Age If Hu takes the option of two terms, he would step down at the age of 70 in the 18th Congress,53 perfectly fulfilling the unwritten age rule for Politburo members and extending it to the very top. Even if the rule remains unwritten, this precedent will create a powerful binding effect on Hu’s successors.The age limit would nicely match the term limit for most Party leaders and will enormously help institutionalize top leaders. The unwritten acquiescence of 70 years of age for retirement of Politburo members can then take the form of a formal regulation. This will reinforce the CCP’s 2006 directives on cadre management, mentioned earlier.

The Three-Term Option and the Constitutional Constraints In contrast, the option of 2.5 and three terms will cause constitutional discrepancies in the three-in-one formula which has become a symbol of mandate for the ultimate leader.Although the term regulation does not apply to the post of Party leader, the two-term limit for state presidency is constitutional. If Hu continues to rule the Party without holding state presidency, it would not cause much fuss in the Party. However, it may generate an image problem in the public, as state presidency is a key civil-political indicator of the top leader’s legitimacy.

The Perils of the Two-Line Leadership The term for chair of the State Military Commission should theoretically be consistent with state presidency.Yet this affects the term for 53 Teiwes

commented that Hu would be two months short of his 70th birthday when the 18th Congress convenes in 2012.This opens the opportunity for him to serve a third term if he chooses, but a two-term limit will likely be in place. Frederick Teiwes, 2002, p. 251.

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CMC chair, which is under no term constraint. Hu can follow Deng/ Jiang’s practice, but this would again retard institutionalization progress, as the split civilian and military leadership only converged in Hu in 2004, two years after he assumed Party leadership. During this period, Jiang exercised the CMC commander responsibility system of signing all key military documents.As such, there was confusion in the chain of command.54 For instance, entrusted by the NPC, the ultimate authority in declaring war rests with the Party and state leader. However, Hu was only deputy to Jiang and without the power to deploy troops and activate the nuclear button. This grey area affects a major issue of national security. So the question of Hu’s terms of office is not merely an academic discussion by irrelevant scholars, but a question of strategic importance to a fundamental state affair: will such confusion in military command occur every time there is a transfer of power?

A Major Political Reform If Hu goes for two terms, a flaw in the Party Charter may be rectified. To prevent transitional instability in the succession process, the Party revised its Charter in 1987 to stipulate that its CMC chair should not occupy any other posts.This may potentially disintegrate civil-military relations and plant seeds of military intervention in civilian affairs. Clearly, this is at odds with Party norms. If the situation in the 1980s justified such an expression of the rule of a supreme leader, it was high time for this to be rectified. The need for Jiang to retain CMC chair in 2002 might be exaggerated. In 2012, the need may become much weaker.Then, scrapping the article in the Party Charter would be a major political reform that may contribute to China’s long-term stability. It will be more of the Party’s courage and Hu’s personal judgment than anything else to initiate this major change.

54 James Mulvenon,“Party-Army Relations since the 16th Party Congress: The Battle of the Two-Centers” in Andrew Scobell and Larry Wortzel (eds.), Civil-Military Change in China, US Army College, 2004.

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Constraints for the Two-Term Option On the other hand, the two-term option needs to satisfy some preconditions. If the CCP picks a successor hastily just for the sake of deepening institutionalization without knowing if he could control the overall situation like the failure of Hua Guofeng in the late 1970s, the political risk is equally serious.This is a country of 1.3 billion people with a long tradition and culture of rule of men. Change in top leadership too frequently without well-established domestic procedures and well-trained popular participation would subject the nation to periodical shock and elite instability. It is not certain whether Putin’s two-term limit is best for Russia. The Party does not seem to have a safe solution yet. Institutionally, the two-term option has its drawbacks as a major political reform. It is likely the Party leader would spend his first term on authority building. In his second term, he faces the pressure to search for a successor. Consequently, the policy he puts in place may become relatively short-term. Moreover, with a fixed term in office, it is logical that he would be more concerned with passing the CCP government to his successor than taking risks. Conservatism may become the rule of the game. A smooth transfer of power may outweigh promoting strategic changes in the country. Substantial political reforms would be the most likely items to be sacrificed. Timing is another constraint.Although the dual heirs apparent are in place now, they may not be able to take over in one term’s time. Hu’s full retirement in 2012 is linked to whether they can establish themselves and secure the Party’s acceptance. It also takes time for the Party to come to a consensus on any one particular choice from the two heirs apparent.This is not visible at the moment. Succession is a gradual business.The times that a supreme leader said “it is him” may have gone forever. A prompt decision on one heir apparent entails many risks. The safe way for the Party may be for one of the two would-be successors to emerge in the 18th Congress and for him to be confirmed either in the 19th Congress or in the lead-up to it (the 1/2 term option).The 17th Congress has unfolded this process. In the final analysis, two terms or three terms cannot be Hu’s own call any

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more.The whole process is likened to “crossing the river by touching the stones”, although a broad roadmap could already have been drawn. This path-dependent approach may be the best the CCP can pursue in tackling the contradiction between being prudent and further institutionalizing the leadership practice.

Tackling the Bottleneck Problems The 17th Congress resolved a few bottleneck problems.The first one was that the 16th Politburo did not include anybody from the succession generation (Li Changchun, the youngest, was born in 1947).As a result, the 17th Congress needed to fill the top body with both the fourth generation of leaders and those of the next, born in the 1950s. In order to lay a personnel foundation for the 18th Congress, the Party faced a problem it could not circumvent: picking a few current CC members to enter the PSC and bypassing the Politburo.Arranging CC members to enter the PSC is a non-conventional measure the Party has to adopt under extraordinary circumstances. Up to the 17th Congress, Hu was the only person in this regard. Recruiting people born in the 1950s would immediately reveal the CCP’s succession plan, and leave little room for alteration in the future. Thus, the number of candidates and their names became strategic issues Hu had to consider extremely carefully, as these would impact on the Party for generations.The inclusion of Xi and Li has resolved some suspense but may have caused other uncertainties in elite politics, such as who of the two would eventually emerge and whether this would be a smooth process. The second bottleneck problem was in the limited number of places in the Politburo if the fifth/sixth-generation leaders were included, and if the age rule of 70 was applied. Only General Cao Gangchuan was implicated. Yet the precedent of Li Ruihuan retiring at 68 in 2002 could create some flexibility.This provided an alternative of setting the demarcation on those born within a certain decade: members born in the 1930s should leave.This affected Zeng Qinghong, Wu Guanzheng, Luo Gan, Wu Yi, Zeng Peiyan, and Zhang Licang.The biggest challenge would be to ask these leaders to quit if

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they did not want to. Zeng Qinghong, for instance, was fit, powerful and representing Jiang’s remaining influence. If he was not willing, it was hard for Hu to force him to quit, due to the age rule of 70. One vivid example was that Luo and Cao entered the Politburo almost at the age of Zeng prior to the 17th Congress. The cutting line of the 1930s had no legal basis for implementation and its success was much dependent on the willingness of the leaders involved. It was a remarkable achievement that Hu secured their retirement. What helped Hu was the fact that since Qiao Shi’s departure in 1997, there has emerged a Party culture against any leader holding key offices at an advanced age.55 If one still enters or remains in the Politburo at age 68 or 69 for another five years, an official excuse could be found for him to stay, such as the age rule of 70 or an exceptional work need (e.g., the case of Luo and Cao in the 16th Congress). However, he would be suspected of being a power addict and would be badmouthed by Party members and in society. The high level of popular disapproval over Jiang’s retaining of CMC chair in 2002 was a case in point.56 Public pressure has increasingly affected the judgment of leaders involved. Yet this decade-rule has its drawbacks. For instance, it seems to be unfair for Zeng (born in 1938) to leave but Jia Qinglin (born in 1940) to stay, since Zeng is more capable than Jia. Moreover, people born in the 1960s were excluded from the Politburo. Although this reflects Hu’s prudence in personnel matters, it may cause a generation gap problem in the top body in the years to come.

Progress in Institutionalization On the other hand, the decade-rule is a progress in promoting rule-based power game: everyone follows the same objective, 55 Zheng Shiping,“The New Era in Chinese Elite Politics”, Issues & Studies, Vol. 41, No. 1, 2005. 56 I asked the question “How do you see Jiang’s semi-retirement?” to many ordinary people in China, especially to Beijing’s taxi drivers.The answer is remarkably similar: “He does not want to let go of power”.

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non-personalized criteria. In addition, the 17th Congress also made impressive progress in tackling the elusive issue of exceptional work requirement, a die-hard and anti-institutionalization habit of the CCP. Exceptional work requirement can be subjectively justified, often stemming from factional considerations. In 1992, Deng’s anti-institutionalization impulse was demonstrated in his recalling of General Zhang Zhen from retirement to assume first-line CMC duties. Jiang’s promotion of General Cao into the Politburo at age 68 caused a disruption of the duality pattern of PLA leadership in 1992.57 The duality pattern was only restored in the 17th Congress with Guo Boxiong and Xu Caihou in command. Politburo member Wang Lequan was appointed for the third term in Xijiang, only days after the Party Regulation on the Terms in Office was made public. Clearly, the exceptional work requirement for Jiang to stay on in 2002 was more politically motivated than work required. Yet, this is still a useful mechanism in terms of balancing “factional representation”.The 17th Congress made no retention or inclusion of leaders on the grounds of exceptional work requirement. Of course, some appointees may be exceptionally considered because of their gender (e.g., Liu Yandong), family connections (Bo Xilai and Wang Qishan) or faction linkage (Jia Qinglin). There are large numbers of Central Committee members who are at least equally capable as compared to the lucky ones.The politics of who laughs last is as obscure as ever.

IN SEARCH OF AN HEIR APPARENT The 17th Congress promoted Xi and Li to serve as the potential fifthgeneration Party leaders.This is the beginning of the end of the succession from Hu to Xi. Unlike the sole candidate of Hu 15 years ago, the duality of Xi and Li simply shows that an heir apparent is not yet apparent but the selection of one of them continues beyond the Congress. Uncertainties lie ahead. 57

Liu Huangqing–Zhang Zhen in the 14th Congress and Zhang Wannian–Chi Haotian in the 15th Congress.

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The Hu Connection, the Criteria and the Anointment Process The first uncertainty is closely related to the question of how long Hu will hold office, a result that is contingent on the new leader(s) establishing himself or themselves as the successor(s). If they are able to do so, Hu might see the value of institutionalizing the age and two-term limit for top leaders; after all, the Party regulation has already been implemented at the Politburo level and below. If they are unable to establish themselves, the two-term limit is too luxurious for the Party. Under normal procedures, a would-be successor has to be in the PSC for a number of years before he could gain enough experience at top decision-making, as suggested by Chen Yun in the 1980s. He will be entrusted with some difficult tasks to test his capacity in order for an elite consensus to be secured and for the nation to familiarize with him. He will be invisibly compared with a few other less prominent candidates in the process. The 17th Congress has taken this step. Even if all goes according to plan, it is likely that the heir apparent may still have to be confirmed in the 18th Congress to take the helm later. So it may already be late for an orderly transfer of power to the fifth-generation leadership in the 18th Congress. In the meantime, the Party tries to avoid repeating the history of placing Hua and Jiang hastily in the top leadership in 1976 and 1989, respectively. The problem is not with the standard criteria of selection: work experience, performance, age, health, academic qualification, international exposure and certainly, affinity. Both Xi and Li qualify. They have been CC members and have had full ministerial ranking for about ten years with both central and provincial portfolios.58 The ten-year requirement is politically significant and useful in practice. It reflects the Party’s reluctance to use the “helicopter method” of identifying the new “core”.59 Seniority is crucial to the new leader in his authority 58 Li has been a full member for ten years, while Xi has been an alternative member and a full member each for five years respectively. 59 Kou Jianwen, “Zhiduhua dui Zhonggong jinjing zhenbu zhi yingxiang” (“The Impact of Institutionalization on Elite Selection”), East Asian Studies, Vol. 37, No. 2, 2006, p. 16.

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making as it reduces elite resistance. Here, the two ministerial terms may be the minimum requirement for one to enter the PSC directly, one which does not cause too much controversy. It is understandable if the CCP prefers prudence to institutionalization, which means that the successor is not to take over in the 18th Congress. The choice of having dual candidates rather than one further obscures such an arrangement in 2012.This delay makes the age factor a key determinant. He has to be reasonably young now, ideally at an age of about 50 in order to rule for a decade or more from 2017 or earlier if Hu goes for the 2.5 term option which makes better sense in striking a balance between prudence and institutionalization. In keeping with the meritocracy logic, the successor’s academic qualification matters a lot. Other conditions being equal, this credential becomes crucial. It is not accidental that the dual finalists both possess a PhD degree. What is important is the fact that preference has shifted from engineering and science to economics, political science and law. The line-up of the 17th Politburo and the CC has reinforced this trend.The proportion of current ministers/provincial leaders holding economics, political science and law degrees has exceeded the former.This is especially true of the two likely successors: Xi holding a PhD in law and Li in economics. There are,of course,criteria which are not so objective.The primary one is the candidate’s personal relations with Hu. Hu’s rise broke the CCP record in being the first successor who was not picked by the incumbent Party leader. Despite the fact that Xi may not be Hu’s own man and he is ahead of Li in hierarchical ranking, the forthcoming round of succession may restore the Party tradition of giving the commander-in-chief the privilege of choosing the man he prefers, but in close consultation with other Party elites.

The Xi–Li Race The inclusion of Li in the PSC was well-anticipated. He satisfied all the criteria and seemed to have no contender in the race: he enjoys close personal ties with Hu going way back in the early 1980s; he is the only person among the nine new Politburo members who served as a full

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CC member for two terms and held full ministerial/provincial posts for ten years.Very importantly, he is within the ideal age group of just over 50, a crucial element if Hu has to go for the third term, completely or for a proportion of it. Analysts identifying him as the heir apparent follow the succession model of Hu, who was singled out among his generation leaders in 1992.The sole candidature has obvious advantages over dual candidature in terms of power consolidation, avoidance of uncertainties inherent in the latter, transparency of succession process and reduced level of anxiety for the whole Party as “one mountain cannot accommodate two tigers”. Therefore, that Xi was listed ahead of Li in the PSC was a surprise. Xi was only recently appointed Shanghai Party boss. It is extremely rare for this kind of quick transfer to happen in CCP history. If he were to take over Party affairs from Zeng Qinghong, and ultimately the Party’s helm, it would have been more helpful for him to be transferred to Beijing directly from Zhejiang to assist Zeng in personnel matters related to the 17th Congress. One logical explanation is that the decision that Zeng had to quit was a prompt one and the search for his replacement needed to be confined within the fifth-generation leaders. In terms of qualifications and ability, Xi is above all other full CC members born in the 1950s. Born in 1953, he is younger than most others of his generation in the CC except for Han Zhang and Zhao Leji, but evidently, Xi is more senior and more influential.The age of 64 is not too old for the leader of a major world power, if Hu indeed goes for a third term. His PhD in law from the CPS rivals Li’s, although the latter’s PhD in economics from Beijing University is more prestigious. Though Xi’s personal ties with Hu cannot be compared with Li’s, he maintains close relations with Party elders, Jiang/Zeng and the military through family linkage.60 As mentioned earlier, cross-grouping identities are important for the top leader to gain acceptance by all groupings, a precondition for selecting the heir apparent. Xi is not 60

In addition to his PLA family background, he was secretary to Geng Biao, who was in charge of the PLA’s daily affairs in the early 1980s, a position that gave Xi privileged access to key military decisions.

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affiliated with one particular grouping but has connections with most power groupings. Except for Li, it is difficult to find a second person who could satisfy all these conditions and preconditions for promotion to the PSC. Dual candidature is not entirely unimaginable: the worst scenario the Party fears is the heir apparent being a Chinese Gorbachev. The dual candidature provides better insurance against this phenomenon. It also creates the internal system of constraining them until judgment day.When the Party went for this option of dual candidature, it would have evaluated all the uncertainties it entails. But the decisionmaking process remains a mystery. One simple and speculative interpretation about how the dual candidature arrangement was made was that it was a historical accident that Xi was placed ahead of Li. Xi is basically a politician wellversed in Party affairs, while Li is basically a Party technocrat who is more interested in the country’s economic management, as shown by his choice of studying economics as his PhD major. Going for the job of Executive Premier in charge of national economy was also his own suggestion to the Party leadership.61 Xi and Li have got the jobs that suit them well, although the difference is huge when it comes to the finalization of the succession plan. If it is true that Li volunteered to go for the post of Premier, he would have resolved a major headache of Hu’s: the likelihood of a two-man duel would be substantially reduced. Certainly the person in charge of Party affairs has the shorter distance to the crown. So the next question is how Xi interacts with Li in the long lead-up. Now, Xi is strategically positioned to take over the helm eventually. His areas of responsibility are both wide-ranging and crucial.As the head of the General Secretariat, he runs daily Party and state affairs and oversees the CC’s General Office, the hub of the central administration and communication. He would thus closely monitor the Central Guard Bureau and the 8341 Unit, the control of which 61 It has been a long tradition that before such a key appointment is finalized, the candidate would be approached about his opinion on job choices, although the Party’s preference is made known to him.

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is essential at a time of political crisis. He is also responsible for Party organizational affairs through controlling the Organizational Department and the CPS. The former routinely presents the list of appointees to the PSC for approval and shortlists CC candidates for the 18th Congress. The CPS establishes lifetime hierarchical and clientele’s ties between the school’s president and future Party leaders — the reason why all CCP bosses have entrusted their most trusted subordinates in this post. It is also an accident that Xi ranks fifth and Li sixth in the Standing Committee of the Politburo, as traditionally the person running Party daily affairs is bureaucratically placed before the person running daily affairs of the State Council. In a way, it is not Xi ahead of Li but his portfolio ahead Li’s.This means that if the final choice is sought on an individual basis, Li is not yet out of the race.At the moment, Li’s job is probably tougher than Xi’s in that China’s economy has been at a crossroads.62 If a strong first vice premier capably assists a relatively weak premier in the next few years and succeeds in rectifying China’s economic ills, he remains a viable contender.The interesting thing to watch is whether Li had let the opportunity pass on his own accord for the sake of Party unity prior to the 17th Congress. Only time can decipher this riddle.

CONCLUDING REMARKS The CCP has entered a new era of development in the aftermath of the 17th Congress. Hu can now formulate his own ideological and political agenda and back it up with a solid organizational network with ease. In a way, Hu’s overall governing principle remains consistent with Deng/Jiang’s and along the lines of authoritarian pluralism: ensure political control but liberalize economically for the sake of 62 In December 2007, the central economic conference initiated a major change in the country’s financial and monetary policy that has been in place for over a decade. Li’s immediate job since the 17th Congress is to tackle the overheated economy and soaring inflation. Over the long-term, he is responsible for remoulding China’s transforming economy — a very tough challenge.

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development. Based on this fundamental Party consensus, he has reoriented the Party’s social policies decisively toward the left. In the years to come, he will address the problems that have caused rising tensions between the state and society and among different social groups. On the other hand, the left lurch is inherently risky: a developing economy cannot afford too many social welfare provisions, many of which are anti-market provisions too. Hu’s revisionism has been officially approved by the 17th Congress and is now used to unify the thinking of the Party.This constructivist process is gradual, and the building of personnel support is an integral part of it. The post-Jiang elite politics is set against this background. The personnel arrangement of the 17th Congress is a translation of Hu’s organizational line. Through leadership reshuffle, the lopsided “factional” representation of the 16th Congress has been rectified. Hu has refrained from putting too many of his men in the top leadership. His nominees are just a bit more numerous but still short of structured. Hu’s track record in dealing with Party factional politics is better than all his predecessors. More importantly, the 17th Congress has laid a solid personnel foundation for nurturing fifthgeneration leaders for the 18th Congress. By then, they would have worked in the Standing Committee of the Politburo, the Politburo and more visibly in the Central Committee. The way this is achieved is reflected in the deepening of power institutionalization. For instance, faction management has become more effective (a relatively balanced power structure in the top bodies), while promotion is now done through the organizational filter (more official power-restricting measures in place) more than the personal filter. Certainly the 17th Congress has left many unanswered questions, such as the heir apparent, the criteria for selecting Politburo members from provincial leaders, and the time of Hu’s retirement. However, the Party has worked out the abiding procedures and norms for the transfer of power in the next decade. In short, the mission of the 17th Congress — linking the last one to the next one — has been fulfilled. It can be regarded as an impressive success.

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Chapter

5 Diminishing Demographic Dividends: Implications for China’s Growth Sustainability Ding Lu

Confucius said: “A man who does not think far ahead is sure to be troubled by worries much closer at hand.” — The Analects

In China’s three-decade-long hypereconomic growth (1978–2007), demographic factors have played an indispensable role. In the early part of this hypergrowth period, a “bottom-heavy” population structure with a young and growing population provided abundant labor supplies to meet the demands of economic takeoff. A fast declining fertility rate has substantially reduced dependency ratio through the decades to allow the working-age population to spend more on raising standards of living and save more for investment. These favorable effects are dubbed “demographic dividend” for economic growth.

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Since the turn of the century, however, these favorable demographic effects have been quickly diminishing.The Chinese population has entered a fast ageing phase. In a large country of vast lands, the demographic changes are bound to be uneven across regions. How will this diminishing demographic dividend affect the growth prospect of the Chinese economy? What are the policy options to cope with these challenges? This paper will explore these issues by reviewing the existing literature and the relevant data. The next two sections identify some crucial stylized facts about China’s population trends. The paper first describes the fast-forward-play feature of China’s demographic transition in the past 50 years and shows its very favorable impact on economic growth in the past three decades. Then, the grim prospect of a fast ageing society in the coming decades and its implications on growth and income distribution will be discussed. Next, a comparison of the policy options proposed by researchers in this field will be evaluated. The last section summarizes the findings and proposes directions for further research.

A FAST DEMOGRAPHIC TRANSITION The issue of China’s demographic changes and their impact on economic growth is a challenging one to both policymakers and researchers. One reason is the quality of information.As observed by various scholars, China’s demographic statistics were measured with great detail and accuracy by official agencies in the 1980s, but the quality of some statistics, especially that of fertility data, deteriorated considerably by the 1990s. Due to the political pressure generated by a 1991 policy that links birth control achievement to performance evaluation of local administrations, a significant share of births was underreported. In some rural locales, as much as 30 percent of births were not reported. Even the 2000 population census reported a nationwide fertility rate of 1.22, which is unbelievably low, although

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most experts would expect it to be below the replacement rate since the 1990s.1 Despite statistical discrepancies and inaccuracies, several observations are shared by most of the researchers in the literature. Based on these observations and available data, China’s population structure has gone through a demographic transition as experienced in most other places in the world.This transition, however, has occurred like a “fast-forward play” in China. The typical “demographic transition” occurs as a society goes through economic modernization and thus experiences roughly three stages of demographic changes.At the initial stage, both fertility rate and death rate are high and life expectancy is relatively short, so the population growth is constrained and dependency ratio is high due to the large number of children per couple. With economic modernization, improved public healthcare methods, better diets and rising income, death rate (especially infant mortality rate) starts to plummet and people live longer. The growing divergence between high birth rate and falling death rate accelerates population growth and leads to an unprecedented expansion of population size which features the second stage of demographic transition. With further modernization and rise in standard of living, fertility rate starts to decline and population growth slows. At this final stage of demographic transition, the falling birth rate converges with the lower death rate over time and eventually leads to little population growth. 1

Zeng, Yi, 1996, “Is fertility in China in 1991–1992 far below replacement level?” Population Studies 50: 27–34; Merli, Giovanna M. and Adrian E. Raftery, 2000, “Are births underreported in rural China? Manipulation of statistical records in response to China’s policies”, Demography 37(1): 109–126; Scharping, Thomas, 2003, “The 2000 census and the decay of Chinese birth statistics: A review of figures, procedures, and policies”, paper presented at the Workshop on Recent Demographic Changes in China, Canberra, Australia; Mason, Andrew and Feng Wang, 2005, “Demographic dividends and China’s post-reform economy”, paper presented at the International Union for the Scientific Study of Population, XXV International Population Conference,Tours, France, 18–23 July 2005.

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Among the world’s richest countries, a post-transition era is unfolding: as fertility decline nears or passes replacement level, population growth eventually comes to a halt and even starts to decline. With the low birth rate and longer life expectancy, the population age structure gets older and an ageing society emerges. From 1949 to 1970, China was roughly in the second stage of demographic transition (Figure 5.1). Except for the three-year famine period (1959–1961), annual death rate declined continuously in most years, falling between 1.7 percent and 2.0 percent in the period 1949–1952, and to 0.76 percent in 1970. Meanwhile, annual birth rate hovered between 2.9 percent and 4.3 percent for all years except for the period 1959–1961, bringing two waves of baby booms — the first in the post-civil-war period 1949–1954 when birth rate stayed above 3.6 percent for six years, and the second in the post-famine period 1962–1965 when birth rate shot above 3.7 percent for four years.The enlarged gap between birth rate and death rate resulted in an unprecedented expansion of the population 45

Famine Cultural Revolution

40 35 30 25 20 15 10 5 0 -5

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Fig. 5.1 Birth Rate, Death Rate and Natural Growth Rate of Population (1949–2005) Unit: Per thousand persons. Source: China Statistical Yearbook (various years), China Population Yearbook (2003).

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at an annual rate above 1.6 percent through the period except for the three-year famine period. China entered the third stage of demographic transition in the early 1970s, when the government started the family planning program of late marriage, longer birth interval, and fewer births ( ). During the 1970s, female mean age at first marriage rose from 19.7 to 22.8.2 Between 1970 and 1979, both the total fertility rate (TFR) and annual birth rate fell sharply, with the former reduced from 5.81 births per woman to 2.75 births per woman, and the latter from 3.34 percent to 1.78 percent.The decline in total fertility rate was further accelerated by the strong-handed state intervention in family reproduction after 1980 when the one-child-per-couple policy was launched and promoted.With the combination of coercive and incentivebased interventions, the total fertility rate fell further in the 1980s and reached the replacement level of 2.1 per woman around 1990.3 Despite the declining fertility rate, the crude birth rate rebounced in the 1980s, when nine out of ten years had birth rates above 2.0 percent (Figure 5.1).The bulging birth rates in these years were largely caused by two waves of baby boomers. In a normal situation, the first-wave baby boomers who were born in the post-civil war period 1949–1954 should, on average, have families and children at least 10 years earlier than the second-wave baby boomers who were born in the postfamine period 1962–1965. However, many first-wave baby boomers delayed starting their families due to the Cultural Revolution (1966–1976), during which the state-administrated migration campaign sent over 17 million urban youth (mostly secondary and high school graduates) to live and work in the rural areas during the 1968–1976 period.When this policy was reversed in the early 1980s, most of the rusticated youth were able to return to their hometowns and many started their families in their late 20s to early 30s. The marriage-childbirth tide of the first-wave baby boomers thus coincided with that of the second-wave baby boomers in the 1980s. 2

Coale,Ansley J. and Chen Shengli, 1987, Basic Data on Fertility in the Provinces of China, 1942–1982, Honolulu: East-West Population Institute Paper Series. 3 China Statistical Yearbook, various issues.

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The birth rate soon resumed its downward slide by the end of the 1980s to below 0.15 percent per annum by the turn of the century (Figure 5.1). China’s fertility decline within such a short time period has been drastic, rarely seen elsewhere in the world.4 Despite continuing debates over the extent of China’s fertility decline, the consensus is that by the turn of the century China’s fertility rate had fallen to well below the replacement level of 2.1 births per woman. The United Nations5 estimated that the fertility rate in the 2000–2005 period was around 1.7 births per woman. Such a low and declining fertility places China alongside rich ageing countries, including most Western European countries and Japan. The sharp fall in birth rate was due to three factors: (a) the rapidly rising standard of living thanks to successful economic takeoff since the 1980s has reduced incentives for childbearing like in other parts of the world; (b) the draconian one-child-per-couple policy has further dampened fertility rate; and (c) the peak age for marriage and childbirth among the second-wave baby boomers was phased out. Thanks to this fast-play demographic transition, China’s population structure in the past three decades has been very favorable to economic growth.When the productive population grows at a faster rate than the total population, it should bring in faster growth in terms of per capita income if the productive population is sufficiently employed.This positive outcome occurs when the demographic transition goes from the second stage to the third stage. Demographic economists call this “demographic dividend” or “a window of development opportunity” — fertility falls; earlier baby boomers enter working age; fewer young mouths to feed and more youthful workers to produce.6 China’s population structure in the 1970s and 1980s was largely a bottom-heavy one, characteristic of a young and growing population. 4

Wang, Feng and Andrew Mason, 2005, “Demographic dividend and prospects for economic development in China”, United Nations, UN/POP/PD/2005/5, 25 July. 5 United Nations Secretariat, 2006,“World population prospects: The 2006 revision” and “World urbanization prospects: The 2005 revision”, http://esa.un.org/unpp. 6 Lee, Ronald and Andrew Mason, 2006, “What is the demographic dividend?” Financial & Development 43(3): 16–17.

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Fig. 5.2 China’s Juvenile, Elderly and Overall Dependency Ratios (1965–2050) Source: United Nations (2006); China Statistical Yearbook, various years (data until 2005). Notes: Juvenile dependency ratio = population age 0–14 to population age 15–64; Elderly dependency ratio = population age 65 and above to population age 15–64; Overall dependency ratio = (population age 0–14 and population age 65+) to population age 15–64.

In the three decades from mid-1970s to 2005, the combined effects of falling fertility rate and the entry of second-wave baby boomers into the working force have moved the overall dependency ratio downwards, while most of the first-wave baby boomers are still in their productive age. As seen in Figure 5.2, the juvenile dependency ratio (population aged 0–14 to population aged 15–64) fell all the way from over 70 percent in 1970 to below 30 percent after the turn of the century, while the elderly dependency ratio (population aged 65+ to population aged 15–64) remained relatively stable below 10 percent. The overall dependency ratio (population aged 0–14 and 65+ to population aged 15–64) thus fell from nearly 80 percent to below 40 percent. To quantify this demographic dividend,Wang and Mason (2005) used the support ratio, which is the ratio of the effective number of producers to the effective number of consumers.The effective number of workers is measured using age-specific productivity weights, while

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the effective number of consumers is measured to allow for variation in consumption by age.According to Wang and Mason, between 1982 and 2000 China’s support ratio rose by 28 percent or at an average annual rate of 1.3 percent, while the PPP-adjusted real GDP per capita grew at an annual rate of 8.4 percent, resulting in a demographic dividend of 15 percent of China’s economic growth.The growth rate in the effective labor force peaked in the late 1980s and early 1990s at 3 percent per annum. Such a favorable demographic change coincided with the crucial years of China’s market-oriented institutional reform and opening up to the world economy. In addition to the quantitative contribution of demography to economic growth, the author would like to point out a possible qualitative factor that may have important implications for productivity growth. Both the first-wave and second-wave baby boomers were disadvantaged by the interruption to the school education system during the Cultural Revolution to various degrees. Most of the first-wave baby boomers (born between 1949 and 1954) had their secondary education interrupted, while most of the second-wave baby boomers (born between 1962 and 1965) had their primary education interrupted. However, many first-wave baby boomers went through an extraordinary experience of first being involved in political turmoil as Red Guards and later being rusticated as laborers in farm fields and factories for years. Many had experienced hardship, poverty, hunger, malnutrition, diseases, and even lifeand-death agony. Once the Cultural Revolution was over and those baby boomers (in their late 20s and early 30s) restarted their careers in the early 1980s, a sense of urgency to make up for “the lost decade” prevailed among them. Such a sense of urgency must have been an unusual incentive for these people to work hard and achieve the best. On top of that, the unusual experience during the lost decade has made many of that generation sharp in monitoring dynamic changes, nimble in capturing opportunities, and bold and courageous in taking risks. These core elements of entrepreneurship were released during economic market-oriented reforms in the 1980s and 1990s — thus, a powerful engine of economic growth was turned on.

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As for the second-wave baby boomers, they were completing their secondary education in 1977–1978 when the government resumed the college entrance examination and tertiary education system after a 12-year-long suspension. Given the fresh memory of the horrible experience in the Cultural Revolution, the elder members in the families of these baby boomers had high expectations for this generation and did all they could to help them to move on to higher education. This social attitude towards knowledge pursuance and academic excellence has had lasting positive impact on the development and accumulation of human capital in the following years.

THE GRIM PROSPECT OF DEMOGRAPHIC TRENDS As pointed out by Lee and Mason (2006), in industrialized countries, the demographic dividend period described aforesaid lasted five decades or more, which may also be true for most other places in the world. For China, however, due to the fast-forward-play demographic transition, the dividend period is much shorter and more transitory. All indicators of demographic trends suggest that China’s population structure has become less favorable to economic growth.7 Like most industrialized countries, China has already entered a post-transition era of slow population growth and fast ageing population. By 2000, China’s population age structure was that of a mature population, where the largest shares are found in the working-age cohorts. Assuming a moderate improvement in life expectancy and continuation of the current fertility level, China’s population age structure is projected to be a very old one by 2030. According to the projection by the United Nations (2006), China’s population is moving to a reversal point around 2030 when the population size peaks before commencing its decline. Golley and Tyers8 offer a more pessimistic 7

Cai, Fang and Meiyan Wang, 2006,“Challenge facing China’s economic growth in its ageing but not affluent era”, China & World Economy 14(5): 20–31. 8 Golley, Jane and Rod Tyers, 2006,“China’s growth to 2030: Demographic change and the labor supply constraint”, Program on the Global Demography of Ageing, PGDA Working Papers 1106.

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Fig. 5.3 China’s Age-Group Structure (1990, 2010, 2030 and 2050) Unit: Thousands. Source: United Nations (2006).

projection, suggesting that China’s total population might reach its peak size and start to decline by 2020. Between 2005 and 2025, China’s population aged over 65 years old will likely double in size, to roughly 200 million people. By 2025, China would account for less than a fifth of the world’s population, but almost a fourth of the world’s senior citizens.9 As shown in Figure 5.3, between 1990 and 2010, the population of all age groups below 30 years old will dwindle while those above 30 years old will expand. From 2010 to 2030, the population of all age groups below 50 years old will downsize while those above 50 years old will grow. In the period 2030–2050, except for a slight increase in the group 25–29, all age groups below 70 years old will shrink in size. Such a short demographic transition has never occurred in other parts of the world attributable directly to the retiring 9

Eberstadt, Nicholas, 2006,“Growing old the hard way: China, Russia, India — living longer but poorer”, Policy Review No. 136, April & May.

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of the two waves of baby boomers and the rapid fall in fertility rate since the 1980s. With the fast ageing process, the type of demographic dividend described earlier is quickly diminishing. Figure 5.2 shows that the overall dependency ratio will complete its three-decade-long falling phase when it reaches the trough between 2005 and 2015 as the elderly dependency ratio breaks the 10 percent threshold to begin a phase of long climb. By the medium-variant projection of United Nations (2006), the juvenile dependency ratio will continue its falling trend to around 2015 and will remain fairly flat afterwards.The combined effects of rising elderly dependency ratio and moderately falling juvenile dependency ratio will lift the overall dependency ratio after 2015, which will resume the 1985 level by 2030. According to projections by Wang and Mason (2005), between 2000 and 2013, the support ratio will continue to rise but at a much slower pace of merely 0.3 percent annually (as compared to 1.3 percent from 1982–2000).The support ratio is projected to peak by 2013, and sustain before its gradual decline to only 85 percent of the peak by 2050. The depletion of the demographic dividend in that sense will reduce growth in per capita income by 0.45 percent annually between 2014 and 2050. The rapid ageing population structure may severely undermine China’s comparative advantage of labor abundance, which has so far contributed to the economy’s formidable competitiveness in laborintensive exports. The United Nations (2006) projects that China’s population aged 15–64 will peak around 2015 and then start to decline. This is consistent with the turning point of China’s labor force size projected by China Center for Population and Development10 and other scholars.11 Using the effective number of workers measured by age-specific productivity varieties, Wang and Mason (2005) estimated that the growth rate of effective labor force was halved from its peak rate of 3 percent per annum in the late 1980s and early 1990s to the current 10 11

Cai and Wang (2006). Golley and Tyers (2006).

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rate of about 1.5 percent per annum. The steadily declining growth rate will continue and labor-force growth will cease altogether by 2020 and turn strongly negative thereafter. The timing of labor-force decline compares China rather unfavorably with India and other emerging market economies. As pointed out by Golley and Tyers (2006, p. 4),“even though India is also ageing, its most populous age groups are very young and, as these groups age, they raise the labor force participation rate and the crude birth rate. Thus, in a period when China’s labor force shows little net growth, that of India rises by half. The same pattern is observed in other populous developing countries in South Asia and Africa.” Figure 5.4 shows that from 1990, the size of India’s labor force (defined as population aged 15–64) has grown faster than China’s and will eventually surpass China’s after 2025. China’s dependency ratio will continue to be lower than India’s until 2025 when it will rise to about 15 percentage points higher than India’s in the 2040s. The fact that China will enjoy a dependency ratio relatively lower than India’s

120%

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Fig. 5.4 Labor Force and Dependency Ratio: China vs. India (1965–2050) Source: United Nations (2006). Note: Labor force bar refers to size of population aged 15–64 in India relative to that in China.

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for at least 15 more years should not be a reason for complacency. This is because the impact of demographic change on per capita growth is determined not by the level of dependency ratio but by its changes. Only when the productive population grows faster than the total population could it be possible for the change necessary to bring in faster per capita income growth (if the productive population is sufficiently employed). China’s dependency ratio, although at its historical lows, will start to rise around 2015, exactly because the productive population (labor force) will grow slower than the total population. Cai and Wang (2006) anticipate a possible gap between labor demand and supply in the “very near future” (i.e., in the coming decade), causing “structural labor shortage in terms of region, sector and specific skills” from time to time. The rapid change in the population’s age structure will not only cause labor shortage and slow economic growth, but also aggravate income inequality between age groups and regions. Compared to younger generations who were born after the 1970s, the older generations aged 40 and over are generally disadvantaged in both education and health conditions. Such disadvantages are more pronounced for the two waves of baby boomers. The first-wave baby boomers, born in the early 1950s, experienced the Great Famine (1959–1961) in their childhood, had their secondary education interrupted by the Cultural Revolution (1966–1976), and were sent to the rural areas to be rusticated for years.The second-wave baby boomers, born after the Great Famine, spent most of their childhood and teenage years during the Cultural Revolution, when school education was in chaos and basic consumer goods were in severe shortage. As China’s demographic dividend starts to diminish, the first-wave baby boomers are in their mid-50s and entering their retirement ages, while the secondwave baby boomers are nearing their mid-40s. In the coming two decades, the greying population will be dominated by these disadvantaged generations who worked in low-paid jobs for many years of their working life and thus may not have saved enough to support themselves for retirement years. Given their disadvantages in education and health, it will be difficult for most of them to continue to be employable during their old age.

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The grim future of ageing generations is compounded by China’s underdeveloped social security system and huge amount of unfunded social insurance liabilities, particularly for the first-wave baby boomers. By 2006, the coverage rates of urban employees were 49.6 percent and 40.9 percent respectively for basic pension insurance and basic medical insurance. Of the retired urban population (60 years and older), the coverage rates were somewhat over 60 percent. Meanwhile, most of those employed in the rural area, who accounted for 63 percent of total employment, were not covered by these insurance.12 Putting these figures together, the coverage rates for the entire labor force should be well below 20 percent. With such a patchy social safety net, the prospective impact of further ageing on social-economic equity is rather worrying. Rapid ageing will also have a profound impact on interregional disparity in development. China is a large continental country with significant regional variety. In the recent three decades of fast economic development, interregional disparity has persisted and even deteriorated.13 As shown in Figure 5.5, in over half of the provinces, per capita income is less than one-fourth of that in Shanghai.The nine richest provincial economies are all coastal ones, while those with below-medium per capita incomes are mostly located inland. Like economic development, demographic changes are highly uneven. There is a rough correspondence between ageing and per capita income, which is consistent with the demographic trends in other parts of the world. For instance, the richest five provincial economies have the oldest population structures. Most lower-income provinces have younger populations, as indicated by their abovemedium juvenile dependency ratios. It is nevertheless alarming that some of the below-medium-income provinces have above-medium 12

Estimated from State Statistical Bureau, Statistical Communique on 2006 Social and Economic Development, 28 February 2007. 13 Démurger, S., J. D. Sachs,W. T.Woo, S. M. Bao and G. Chang, 2002,“The relative contributions of location and preferential policies in China’s regional development: Being in the right place and having the right incentives”, China Economic Review 13: 444–465.

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Shanghai Beijing Tianjin Zhejiang Jiangsu Guangdong Shandong Liaoning Fujian Inner Mongolia Hebei Heilongjiang Jilin Xinjiang Shanxi Hubei Henan Chongqing Hainan Hunan Ningxia Qinghai Shaanxi Jiangxi Tibet Sichuan Anhui Guangxi Yunnan Gansu Guizhou

Juvenile dependency ratio

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Fig. 5.5 Regional Disparity of Per Capita Income and Dependency Ratio (2005) Source: China Statistical Yearbook (2006). Note:“= =” refers to medium per capita income,“- - -” refers to medium elderly dependency ratio, and “−·−” is medium juvenile dependency ratio.

elderly dependency ratios, such as Guizhou, Guangxi, Anhui, Sichuan, Hunan and Chongqing. Situations in some provinces like Shaanxi, Hunan and Hubei are more worrying since they have below-medium juvenile dependency ratios but near- or above-medium elderly dependency ratios, which indicate fast ageing in the near future. Since per capita incomes in these provinces are below-medium, they are more likely to be trapped in a “getting-old-before-getting-rich” situation. Another problematic group is the three northeast provinces of Liaoning, Heilongjiang and Jilin, which are located in the heavy industry “rustbelt”, with high ratios of loss-making state-owned enterprises. The three have juvenile dependency ratios only two-thirds of the medium level and near-medium elderly dependency ratios, which again foretells of fast ageing. According to standard economic theory, flows of production factors across regions should have the effect of equalizing rate of returns

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to those factors.Thus, workers in relatively labor-abundant provinces with younger and poorer populations tend to benefit from greater mobility of labor across regions. By various measurements, interregional labor mobility has increased very rapidly since the 1990s. When data on migrant workers were collected for the official census in 1987, there were only 15.2 million migrants who were away from their place of household registration for more than six months.That accounted for only about 1.5 percent of the total population. The number of such defined “floating population” increased to 30 million by 1990, 56 million by 1995, 80 million by 2000, and 140 million by 2004.14 Since the turn of the century, there has been a series of policy reforms, including reforms of the household registration system,15 to allow greater freedom of interregion labor mobility and rural–urban migration. With greater freedom on labor mobility, provinces with younger populations and more abundant labor will continue to supply migrant workers to meet the job demands of richer and faster-ageing coastal provinces. If the migrant workers from inland and rural areas were allowed to establish permanent residence in urban areas, the migration will improve the age structure of the rich provinces as well as the welfare of those migrant workers and their dependents. The wages of their hometown regions may also be raised as labor becomes relatively scarce there thanks to emigration. However, if the household registration system and other regulations continue to keep the migrant labor force “floating” without being assimilated by the urbanization process, the consequence could be detrimental to their hometown regions as a substantial proportion of the population spend most of their productive years outside the local economy only to return after becoming aged dependents. Such a scenario and its implications for interregional disparity have to be taken seriously by policymakers. 14

See Mason and Wang (2005); and National Population and Family Planning Commission, 2005,“China’s population”, www.chinapop.gov.cn, 20 September 2005. 15 The system, established in the late 1950s, confined people, especially those in the rural areas, to the place of their birth. For a more detailed discussion on the system, see Chan, Kam Wing and Li Zhang, 1999, “The Hukou system and rural–urban migration in China: Processes and changes”, China Quarterly 160(4): 818–855.

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COMPETING PROPOSALS FOR POLICY OPTIONS Facing the grim prospect of unfavorable demographic changes, researchers have proposed several competing policy options. One obvious option is to relax the one-child-per-couple policy and even reverse the population policy from controlling fertility to encouraging fertility. Such an option is a logical and reasonable rectification to a problematic policy. It therefore has been proposed and debated by demographists, including those in China.16 Although the draconian state-enforced birth control policy was one of the major factors behind the plummeting fertility in the recent two decades, relaxing such a policy is unlikely to be an effective remedy to the fast ageing problem in the coming decades for the following reasons. First, the fertility rate decline started in the 1970s before the era of the one-child-per-couple policy. The declining fertility and birth rates in the recent decades is a common phenomenon where economic development and rising standard of living increase the opportunity costs of raising children. The 1980 one-child-per-couple policy merely accelerated this declining trend. Second, even if a pro-fertility policy replaces the birth control policy, it may not be effective in combating the falling fertility rate, as testified by the experience of other low fertility countries like Japan and Singapore.17 Despite various pro-birth public policies, the fertility rates in these more developed economies are still well below the replacement level. Finally, even if such policies succeed in lifting the fertility rate above the replacement level by causing a “mini baby boom” in a few years — which is very unlikely — it will not change the fact that the dependency ratio will rise sharply in the coming two decades before the new wave of baby boomers reach their productive age at least 20 years later. As a matter of fact, if the fertility rate does rise at a time of fast ageing of the older generations, it will push the dependency ratio even higher in the next two decades.

16 “Family

planning becomes a controversial topic”, Xinhuanet, 30 December 2005. Demeny, Paul, 2003,“Population policy: A concise summary”, Population Council, Policy Research Division Working Paper No. 173. 17

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The second policy approach is to develop a pay-as-you-go (PAYGO) social security system that can effectively raise the coverage of basic pension insurance and medical insurance for the greying population. That would be equivalent to setting up a massive intergeneration wealth transfer scheme, which has to be supported by the shrinking base of younger generations. Such a scheme will be neither politically acceptable by the younger population nor economically efficient. On the one hand, the wealth-income transfer or redistribution will not create new wealth or faster income growth, so it is a zero-sum game. On the other hand, if contribution to the system comes from tax-like levies linked to income, it may have negative impact on work incentives. An alternative approach was proposed by Wang and Mason (2005), who argued that China in the coming decades could get over the negative impact of ageing by replacing the losing demographic dividend with “the second demographic dividend”. In the framework of two demographic dividends,18 the first demographic dividend is transitory since it only occurs when the productive population grows at a faster rate than the total population. As fertility continues to decline and the population ages, that dividend runs out sooner or later. When the population ages, however, the possibility of a second dividend emerges because some of the gains in per capita income can be diverted to raise productivity, thereby raising standards of living for future generations. Such a possibility comes from the rising demand for assets in an ageing population since older people on average hold much higher per capita assets than do the younger ones. While the decline in fertility reduces the relative size of the dependent child population, resources are released for higher consumption at all ages, which in turn increases the demand for wealth necessary to support old-age consumption. On top of that, the steady improvement in life expectancy prolongs the expected duration of retirement and thence increases the demand for retirement resources. All these 18 See Lee and Mason (2006); and Mason, Andrew, 2006, “Population ageing and demographic dividends: The time to act is now”, Asia-Pacific Population Journal 21(3): 7–16.

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trends provoke the people of working age to save more and invest more. The resulting higher per worker’s capital stock (including both physical and human capital) will raise labor productivity and therefore bring in the second dividend of population change. As acknowledged by Mason (2006), the rise in the demand for assets to support old-age consumption may or may not lead to an increase in assets and capital. In other words, the existence of the second dividend is a mere possibility that may not “occur naturally” as the population ages. In contrast, the existence of the first demographic dividend has not been a problem as long as the demographic transition occurs and labor force is sufficiently employed. Therefore, the issue regarding the first demographic dividend is whether the economy can catch this “window of opportunity”to take off. In the case of the second dividend, its mere existence becomes a consequence of policy option.“The reason is that demand for wealth can be satisfied by expanding transfer programs rather than by increasing saving and investment. Expanded transfer programs can meet the increased consumption needs of the elderly but they do so by claiming a larger share of the output produced by younger (and future) generations of workers. Relying on transfer programs, however, will not produce greater investment nor the more rapid economic growth it enables.”19 Wang and Mason (2005) estimated the lifecycle wealth flows of the working-age population in China and derived some revealing observations: the percentage of labor income that goes to support child dependants fell from 11.2 percent in 1982 to 7.8 percent in 2000 and is projected to drop further to only 4.5 percent by 2050, while the percentage of labor income to support elderly dependants rose from 2.0 percent to 2.5 percent between 1982 and 2000 and will jump to 7.1 percent in 2050. Such a significant rise of support for the elderly population (or intergeneration reallocation of resources) must be either financed by intergeneration transfers, intergeneration credit market or capital accumulation during the working age.20 Based on 19

Mason (2006, p. 13). Credit markets play a small role in inter-age reallocation systems because of constraints on indebtedness. 20

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the neoclassical growth model that assumes steady-state growth equilibrium, the duo calculate that, given the demographic conditions in China, if all intergeneration reallocation is financed by capital accumulation, the incremental investment would raise capital–output ratio from 2.6 in 1982 to 7.1 in 2050.An increase in the capital–output ratio of this magnitude would lead to a doubling of output per worker under some simple assumptions. This analysis by Wang and Mason (2005) implies that public policies and institutional reforms should be geared to encourage savings and investment as a major vehicle for financing old-age support. A large-scale PAYGO pension system that transfers resources directly between generations “would most readily meet the short-term objective of fulfilling obligations to current pensioners. Such a strategy, however, could commit China to a path that forgoes the second demographic dividend.”21 In this perspective, it is better for China to develop a fully funded personal-account based pension-cum-health insurance system, like the Central Provident Fund system in Singapore. Such a system has the advantages of ensuring a minimum rate of personal savings for retirement and catastrophic medical needs, while offering incentives for individuals to save more and invest more in capital assets.22 Another policy approach promoted by Golley and Tyers (2006) to counter the negative impact of diminishing demographic dividend is to raise the labor force participation rates among the aged population.This approach is feasible since China’s labor force participation rates for old-age groups are quite low as compared to some other Asian countries (Table 5.1).These low participation rates were mainly due to two factors: (a) the mandatory retirement age of 60 for men and 55 for women, which was set at a time when life expectancy was only 50 years (compared with over 70 years now); and (b) economic reforms and transition in the late 1990s, especially the restructuring 21 Wang

and Mason (2005, p. 9). Lu, Ding, 2000,“Choice of social security systems: Singapore’s experience”, in Jason Yin, S. Lin and D. F. Gates, eds., Social Security Reform: Options for China, World Scientific, pp. 410–431.

22

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Diminishing Demographic Dividends 113 Table 5.1 International Comparison of Labor Force Participation Rates Age Group

China Japan

40–59 (1997)

Over 60 (1997)

60–64 (2000)

Over 65 (2000)

Men

Women

Men

Women

Men

Men

91 97

43 67

24 46

4 23

60 72

28 33

Sources: Jackson, Richard and Neil Howe, 2004, “The graying of the Middle Kingdom: The demographics and economics of retirement policy in China”, http://www.csis.org/gai/dc04/ jackson-howe.pdf; Golley and Tyers (2006).

of state-owned enterprises, led to massive layoffs, rising unemployment and forced early retirements. Using a GTAP-Dynamic global economic model, Golley and Tyers (2006) simulated the effects of alternative policy approaches. According to their results, a transition to a two-child policy in China would boost its GDP growth, enlarging the projected 2030 Chinese economy by about a tenth.The approach, however, would slow the growth rate of real per capita income, reducing the level projected by the baseline scenario for 2030 by a tenth. Alternatively, almost the same GDP growth performance might be achieved with continued low fertility if China’s aged labor participation rates rise gradually through 2030 to approximate the rates currently observed in Japan. Starting from the current low level, the increased employment of the aged might be sufficiently life-enriching to offset the decline in leisure time.The simulated results suggest that the approach of raising aged labor participation offers superior per capita real income growth to what might be achieved via a policy-driven boost to fertility. To make this approach workable, a series of reforms are needed, including raising mandatory retirement age, introducing tax schemes and other policy incentives for old-age job creation and employment, and developing a pension system conducive for aged labor participation.There are, however, some formidable barriers to continuous rise in aged participation rate, as pointed out by Eberstadt (2006).The first barrier is educational disadvantage of the elder population. In comparison with China’s overall workforce, workers 65 years or older are

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six times as likely to be illiterate or semiliterate, almost 50 percent more likely to have only primary education, and only a tenth as likely to have a high school or college diploma. Based on the current data of the educational attainment of the people who will make up China’s elderly cohorts 20 years from now, Eberstadt (2006) projected that by 2025 about two-fifths of China’s senior citizens will have a primary school education or even less. That circumstance contrasts starkly with prospects for today’s developed countries: in both Japan and the United States, for example, nearly five-sixths of the 65-plus population will have at least a high school diploma in 2025. The second barrier is health conditions of the aged population. Given their educational disadvantage, the elder people’s employment opportunities are more likely to be found in low-paying and physically demanding jobs. Unfortunately, the aged Chinese are on average less healthy and more fragile than their counterparts in rich countries. Both men and women at age 65 in China can only expect to live two-thirds of the years their counterparts in Japan can expect to live. Of that period of life, both Chinese men and women succumb to disability for nearly one-third of the years. In contrast, Japanese men only had to endure disability for one-sixth of the years and Japanese women had it for one-fifth of the years ahead.As discussed in the previous section, those disadvantages in education and health conditions are more pronounced for China’s two waves of baby boomers, who experienced the Great Famine and Cultural Revolution in their childhood and youth.

CONCLUDING REMARKS Given the data and various projections of demographic changes, it is quite clear that China’s demographic dividend is fast diminishing and population is fast ageing. Beyond quantitative assessment, an important factor to be considered is the unusual periods of turmoil experienced by China’s two waves of baby boomers in the 1960s and 1970s, crucial members of the country’s labor force in the past two decades of rapid economic development.Will the retirement of these

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baby boomers and their replacement by those born in the onechild-policy years result in a more hedonistic and less hardworking labor force? If that happens, will that be another tipping factor that will end China’s era of fast economic growth? To verify this big “if”, more careful studies on social-economic behavioral differences between these generations must be conducted. After reviewing and comparing alternative policy options to answer the challenges of a fast ageing society, a conclusion can be drawn: that providing social security coverage for the ageing population is urgent, but the system must be pro-saving and less dependent on intergeneration transfers. That is because an ageing society has to save and invest enough for future per capita income to keep rising from capital deepening — the benefit of the “second demographic dividend”. The reality in today’s China is that the savings rate has been pretty high by international standards for years. Investment has also been booming and even overheating in recent years. Therefore, how to raise efficiency of investment and capital formation is a much more important challenge than the need to raise or keep high saving-investment rates.To answer that challenge, more reforms are needed to overhaul the banking sector and the whole financial system. Raising retirement age may be an effective measure to moderate the negative impact of ageing on labor supply and improve elderly people’s welfare in the near future. However, given the disadvantages of education and health conditions of the baby boomers, there are severe constraints on how far this approach can go. Like economic development, demographic ageing has developed unequally across regions. Generally, poorer regions have younger populations and thus have more time to benefit from demographic dividend. What is worrisome is the degree and speed of ageing in some poor provinces and northeast provinces. Greater interregional labor mobility, if not properly handled, may also aggravate disparity in regional development. As remarked by Golley and Tyers (2006, p. 15) on ageing emerging economies:“Even with rapid and uninterrupted economic growth, by

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2025 these ageing or aged societies will be far poorer than was the West when Western societies had to face comparable degrees of population ageing. There is no ‘fix’ to this basic dilemma — at least, not in the next two decades.” That may be true.But right policies will certainly help China cope better and reduce the pain of transition. Right policies come from careful studies and early preparation.

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Chapter

6 Towards Universal Coverage: China’s New Healthcare Insurance Reforms Edward Gu

As healthcare costs increase considerably, an increasing number of Chinese people cannot afford healthcare services, even outpatient services.The problem of healthcare unaffordability has become one of the top social issues in China, and has triggered tremendous discontentment among the ordinary people. In response to this situation, the Chinese government plans to launch a new round of comprehensive healthcare reforms in early 2008. Approved by the State Council, a National Healthcare Reform Coordinating Group was established in September 2006 to draft a new healthcare reform proposal. The group is chaired jointly by Ma Kai, the Chairman of the National Development and Reform Commission, and Gao Qiang, the then Minister of Health.1 Universal access to “basic healthcare” 1

The official news announcement is available at http://gov.people.com.cn/GB/ 49901/5261572.html. Since late June 2007, Chen Zhu has replaced Gao Qiang as the Minister of Health, while Gao Qiang still serves as the Party Chief of the Ministry. 117

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has been placed as one of the top priorities on the public policy agenda. China’s healthcare reforms are at a crossroad. It has been widely recognized among Chinese policy research circles that as severe market failures often take place in both healthcare service and health insurance markets, appropriate state interventions are important to the proper functioning of the healthcare system. Yet there are few consensuses on the appropriate kind of state interventions. One consensus is that the state should play an active role in the provision of healthcare security. The key for a new round of healthcare reforms is to establish a healthcare security system towards universal coverage of all citizens. As the coverage rates of existing health security programs are all too low, the majority of Chinese people have to pay their healthcare bills out of their own pockets at the points of service. As a consequence, the financial burden on ordinary people for paying healthcare services cannot be properly estimated. Meanwhile, when out-of-pocket payment is dominant, provider-induced overconsumption is alleged to be widespread, and this phenomenon has become a target for harsh public criticism. The mechanism of third-party purchase is largely lacking, and thereby soaring healthcare expenses cannot be effectively contained. Yet, the problem still remains that there is no consensus on how to achieve universal coverage of health security.Two approaches have emerged during the debate. One is to follow the British model of National Health Service (NHS), and the other is to adopt the model of social health insurance. It is unlikely that the NHS model will be directly transplanted wholesale into China as it is fiscally unfeasible. Hence, a mini-NHS model has been proposed by some experts and favored by some government officials, in particular those who work for the Ministry of Health. According to this proposal, Chinese citizens would enjoy basically free primary healthcare at public community health centers (and stations).

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Another approach, proposed by a group of economists and social policy experts who seek proper accommodation of both state and market forces in the healthcare sector, offers a solution based on the model of social health insurance and public contractual purchase. Universal coverage can be achieved by gradually reforming the existing social (or quasi-social) health insurance schemes in urban and rural China. Health insurance agents play the role of purchaser and payer of healthcare services on behalf of enrollees.At the same time, healthcare providers can be marketized, and managed competition encouraged. According to this approach, harsh restrictions over the entry of private capital into the healthcare sector should be lifted, and privatization of existing public providers should be allowed.

A CHINESE DISEASE: UNAFFORDABILITY OF HEALTHCARE Many sensational cases of extremely high healthcare prices have been reported in the Chinese mass media.2 A look at the statistical data will give a better sense of the state of affairs. Figure 6.1 shows outpatient and inpatient care costs, on average, experienced fast growth over the years from 1990 to 2006. By 2006, outpatient cost on average was about 12 times that of the 1990 level, and hospitalization cost about 10 times. By comparison, people’s income levels in urban and rural areas only recorded about 5- and 7-time growth over the same period.

2 An

extremely sensational case was exposed by CCTV on 24 November 2005 when a patient named Weng Wenhui was charged about 5 million yuan after he was hospitalized for 67 days; Weng died at Harbin Medical University’s 2nd Hospital. On 26 April 2006, the Ministry of Health issued a report of expectation, confirming the existence of unlawful charges and imposing penalties against managers and doctors responsible for the case. The 3A ranking of this hospital was also suspended for one year. Harbin Medical University and the Provincial Government’s Department of Health were harshly criticized. For more details about this case, please check the Chinese government’s official website: http://www.gov.cn/gzdt/2006-04/29/content_271285.htm.

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1300 Outpatient Per Person Per Visit Hospitalization Per Person Per Time Disposable Income Per Capita in Urban Areas Net Income Per Capita in Rural Areas

900

500

100 1990

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Fig. 6.1 Index Growth of Healthcare Costs in General Hospitals, Compared with People’s Income Levels in Urban and Rural Areas Sources: China Health Statistical Yearbook (2003, pp. 74, 299; 2004, pp. 85, 321; 2005, pp. 101, 357; 2006, p. 369; 2007, p. 345).

As a consequence, many Chinese people cannot afford healthcare services. Based on data from national healthcare surveys conducted in 1993, 1998 and 2003, the author found that the problem of economic inaccessibility of healthcare has become even more severe in primary healthcare. In 1993, only 5.2 percent of people could not afford outpatient care when they felt sick, but in 1998 this figure climbed up to 13.8 percent and by 2003 to 18.7 percent. In particular, one-fifth of urban patients failed to seek outpatient care due to “economic difficulty” (see Figure 6.2). Economic inaccessibility to hospitalization was already a severe social problem in 1993 when 20.1 percent of Chinese patients who needed inpatient care declined hospitalization because they could not afford it.The situation showed no improvement during the period 1993–2003, although there was no sign of worsening as well (see Figure 6.3). There are two approaches to deal with the problem. One is to find explanations to this phenomenon and seek ways to deal with it from the supply-side. The marketization of healthcare delivery was blamed, and the renationalization of healthcare providers was taken

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Fig. 6.2 Chinese Patients Who Did Not Seek Outpatient Care Due to Financial Constraints Sources: Center for Health Statistics and Information, MOH (ed.), An Analytical Report of National Health Services Survey in 2003. Beijing: China Union Medical University Press, 2004, pp. 36–37.

Fig. 6.3 Chinese Patients Who Decline Hospitalization Due to Financial Constraints, as Percentage of All Who Need Hospitalization Sources: Center for Health Statistics and Information, MOH (ed.), An Analytical Report of National Health Services Survey in 2003. Beijing: China Union Medical University Press, 2004, pp. 44–45.

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as the solution. Certain version of the British model of NHS was proposed. The other is to explain it from the demand-side, and offer a demand-side solution. These two approaches are discussed in the following sections.

SUPPLY-SIDE SOLUTION: HEALTHCARE PROVIDERS GO BACK TO THE PLANNED SYSTEM The most prominent proponent of supply-side solution is a research group at the Development Research Center (DRC) under the State Council. This group published a report in mid-2005 claiming health reforms over the past two decades have not been successful due to the marketization of the health sector. The report proposes a free basic healthcare system to benefit all Chinese citizens, and renationalize most healthcare providers to provide cheap healthcare services. All public healthcare providers must be funded and controlled directly by the government.3 Their opinions heated up the debate on marketization of the healthcare sector. In some sense, the supply-side approach is right in that public healthcare providers are considerably marketized.As a matter of fact, the vast majority of healthcare providers are public organizations in China, but most of their operational funding is generated from healthcare service provision and drug sale. Figure 6.4 shows that stateowned providers still dominate the sector, while private providers are still insignificant players in the sector. Nevertheless, while maintaining the status of public organizations, most healthcare providers have transformed themselves into service-for-fee organizations. Although some providers still receive government funding, their operation heavily relies on earnings or revenue generated from the healthcare market. Service fees and drug sales have become their major sources of revenue. In comparison, government funds have become increasingly insignificant.The national 3

DRC Research Group, “China’s Healthcare Reforms: Appraisals and Suggestions (Abstracts and Key Points)”, China’s Hospital CEOs, No. 16 (2005), pp. 36–41; No. 17, pp. 34–39.

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Fig. 6.4 Organization Structure of Healthcare Providers in China (calculated by number of beds) Sources: China Health Statistical Yearbook (2003, p. 41; 2004, p. 61; 2005, pp. 63–64; 2006, pp. 62–63; 2007, pp. 60–61).

Fig. 6.5 Resources of Revenue for General Hospitals under the Ministry of Health Sources: China Health Statistical Yearbook (2004, p. 85; 2005, p. 100; 2006, p. 102; 2007, p. 100).

statistical data in Figure 6.5 indicate that the proportion of government funding to the total amount of revenue that general hospitals under MOH generated fluctuated at the level of 10 percent over the past years.

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Hence, all healthcare providers, public or private, have been transformed from passive service providers under the planned economy to active competitors in the healthcare market. Revenue maximization has almost become the single most important goal for most providers. It is likely to result in the problem of provider-induced overconsumption, such as the issuing of large prescriptions, the provision of excess services and the raising of price levels.4 Inevitably, the surge in provider-induced overconsumption would lead to soaring healthcare costs (see Figure 6.1), and become a subject of public concern. The government has made tremendous efforts to contain this trend, but has produced little (if not nothing) in the way of results so far. It seems that administrative surveillance and penalties are the only policy tools available. Naturally, the supply-side explanation paves the way to a supplyside solution. According to the logic of this solution, if the government provides enough money, healthcare providers would not need to maximize revenue from marketization.At the same time, if the government cut off the linkage between market earnings and the income of healthcare professionals, the ground for provider-induced overconsumption would be shaken, and ultimately healthcare costs would be substantially contained.5 Following this logic, “government domination” ( ) has been proposed as the guiding principle for new healthcare initiatives, and widely accepted by the government and the mass media. Ideally, the supply-side solution favors the public funding and provision of most healthcare services, but it cannot be sustained due to the limited fiscal capability of the Chinese government.According to official statistical data, the total revenue generated by all health service providers amounted to 601 billion yuan in 2006.6 If the government

4 Yang

Chao, Yi Shang [The Elegy of the Healthcare Profession]. Beijing: Guangming Daily Press, 2003 (in Chinese). 5 Ge Yanfeng, Gong Sen, and others, Zhongguo Yigai: Wenti, Genyuan, Chulu [China’s Healthcare Reforms: Problems, Origins, and Way Out]. Beijing: China Development Press, 2007. 6 See China Health Statistical Yearbook (2007, p. 94).

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were to provide for 80 percent of this total revenue, it would have to set aside 481 billion yuan or 11.9 percent of total government expenditure in 2006.7 Government expenditure for health (including healthcare and other public health service providers) recorded only 156 billion yuan in 2005, accounting for only 4.5 percent of the government budget.8 It is clearly unlikely for the Chinese government to raise the level of health expenditure multiple times during a short period. Taking government fiscal capability into consideration, proponents of the supply-side solution proposed the mini-NHS model. According to this proposal, all Chinese citizens can enjoy basically free “basic healthcare” at community health centers (or stations), probably with 20–30 percent of co-payment. Public community primary healthcare providers serve as “basic healthcare” providers with operational funding coming chiefly from the government budget. It was estimated that 269 billion Chinese yuan are needed annually to run this mini-NHS system. It is uncertain if the stated amount is sufficient to run the proposed mini-NHS system. The key issue is where the line between basic and non-basic healthcare should be demarcated. To allocate government funding for basic healthcare, a public management system has to be established. At the same time, the government also needs to spend public money on enhancing the capability of existing community health centers (stations), in particular, through training healthcare professionals. The problem is that once the professional skills of these healthcare professionals are upgraded, they may move to other public organizations which offer them better remuneration. Despite tremendous government efforts and money spent, existing community centers (stations) fail to attract Chinese patients as well as healthcare professionals. Furthermore, the risk-pooling for hospitalization still needs social health insurance, according to the mini-NHS proposal. That is to say, 7 Total government expenditure in 2006 was 4042 billion yuan, according to China Statistical Yearbook (2007, p. 279). 8 See China Health Statistical Yearbook (2007, p. 84).

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public health insurance schemes covering the vast majority of people should be enhanced to pay for “non-basic healthcare” services, mainly hospitalization. Again, it is proposed that public hospitals should be dominant in the field, and the marketization (market reforms) of healthcare services be controlled. Under this circumstance, “basic” and “non-basic” healthcare would be paid by two payers, whose coordination can be expected to be a headache for the government as it is difficult to draw an objective demarcation between the two categories of healthcare services. In addition, the establishment of a miniNHS system would incur considerable transition costs, as outpatient care has already been covered by existing social health insurance schemes operating in both urban and rural China. All in all, the supply-side solution faces tremendous difficulties in fiscal feasibility, coordination among healthcare payers for different kinds of healthcare, huge administrative and transition costs, and so on.

DEMAND-SIDE SOLUTION: UNIVERSAL COVERAGE OF HEALTHCARE INSURANCE MATTERS The demand-side approach looks for solutions to China’s healthcare reforms mainly from the improvement of the health security system and the formation of a third-party purchase mechanism.9 According to this approach, a normal healthcare sector should be governed by a triangular relationship, as shown by Figure 6.6. All people should be covered by certain health security schemes, and health security agents (mostly insurers) play a role in purchasing healthcare services from providers on behalf of enrolees. In other words, healthcare services should not be directly purchased by patients, but rather by a third party, namely health security agents.With health security coverage, the financial risks of people seeking healthcare can be pooled among patients and healthy people and during their healthy and unhealthy periods. With such a third-party purchase mechanism, the 9 The

section is partially drawn from Gu Xin, Gao Mentao and Yao Yang, Zheduan yu Chufang: Zhimian Zhongguo Yiliao Tizhi Gaige [China’s Healthcare Reforms: A Pathological Analysis]. Beijing: Social Sciences Documentation Press, 2006.

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Towards Universal Coverage 127 Insurers as purchasers

Enrollment

Payment

Providers

Healthcare service

People

Fig. 6.6 Healthcare Service: A Triangular Relationship

problem of provider-induced overconsumption can be controlled by payers rather than patients. The most prominent feature of China’s healthcare sector is the underdevelopment of the health security system and the malfunctioning of the third-party purchase. By 2003, there were four public health insurance schemes in China, namely Employees’ Healthcare Insurance (also called “Social health insurance”), Cooperative Medical Scheme, Labor Health Insurance, and Government Healthcare Scheme.The last two were established during the period of the planned economy, targeting formal employees in state-owned enterprises and in administrative and public organizations respectively in urban areas. From 1994, the two have been gradually replaced by Urban Employees’ Healthcare Insurance Scheme.10 As Figure 6.7 shows, Labor Health Insurance and Government Healthcare Scheme covered 48.2 and 18.2 percent of urban population in 1993, but by 2003 the coverage 10

For the evolution of these public healthcare security schemes, see Edward Gu and Jianjun Zhang, “Healthcare Regime Change in Urban China: Unmanaged Marketization and Reluctant Privatization”, Pacific Affairs, Vol. 79, No. 1 (2006), pp. 49–72; Edward Gu,“Market Transition and the Transformation of the Healthcare System in Urban China”, Policy Studies,Vol. 22, Nos. 3–4 (2001), pp. 197–215; Edward Gu, “Dismantling the Chinese Mini-Welfare State: Marketization and the Politics of Institutional Transformation”, Communist and Post-Communist Studies, Vol. 34 (2001), pp. 91–111.

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Fig. 6.7 Changes in Health Security Coverage in Urban China, 1993, 1998 and 2003 Sources: Center for Health Statistics and Information, MOH (ed.), An Analytical Report of National Health Services Survey in 2003. Beijing: China Union Medical University Press, 2004, p. 16.

rates of these two schemes dropped to 4.6 and 4.0 percent. By contrast, the coverage rate of social health insurance (mainly Employees’ Healthcare Insurance Scheme) increased from 1.1 to 34.4 percent from 1993 to 2003.The problem was that a large proportion of urban population, namely 44.8 percent, enjoyed no healthcare security whatsoever. They had to pay the healthcare bills entirely from their own pocket. The Urban Employees’ Healthcare Insurance Scheme is supposed to be compulsory, targeting all employees and retirees in the cities. It is financed by employee and employer contributions of two and six percent of payroll respectively in urban formal sectors. Since 2000, its coverage rate has been increased considerably. Nevertheless, due to many factors, it only covered about 47 percent of urban employees and retirees by the end of 2006, still a rather low coverage rate (see Figure 6.8). One of the important factors to explain the low coverage is that many private companies, including many foreigninvested companies, are reluctant to participate in the scheme as they wish to curtail costs as much as possible. To compete for in-flow investment, many local governments are also reluctant to take harsh

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55% 46.6%

Number of Enrollees (million)

140

42.5%

45%

39.8%

120

Coverage Rate (Total of Urban Employees and Retirees as Calculation Basis)

million

100

32.4%

36.1%

35%

25.8%

80

157.4 14.0%

60

124.0 109.0

7.3%

40 1.4%

1.9%

3.4%

7.4%

94.0

7.9%

25%

137.8

15%

72.2

3.7%

5%

20

37.9 2.9

4.0

7.5

8.6

17.6

18.8

20.7

0

-5%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Fig. 6.8 Coverage of Urban Employee Health Insurance, 1993–2006 Sources: China Statistical Yearbook (2006, pp. 125, 908–909).

measures against private companies which refuse to join the public health insurance. In the countryside, healthcare security coverage was extremely low. During the Mao Zedong era, there were cooperative medical schemes around the country, providing limited degree of health security for Chinese peasants. After the decollectivization of the People’s Commune, most cooperative medical schemes collapsed.11 Figure 6.9 shows that from 1993 the coverage rates of remaining cooperative medical schemes were below 10 percent, and the vast majority of rural residents in China had no healthcare security coverage. Largely due to the fact that the majority of urban and rural population enjoyed no healthcare security,China was ranked 188th among 191 WHO members for fairness of healthcare finance, and 144th for overall health system performance score.12 Obviously, it was an embarrassing 11

Gu Xin and Fang Liming,“Ziyuanxing yu Qiangzhixing zhijian: Zhongguo nongcun hezuoyiliao de zhidu qianruxing yu kezhixuxing fazhan de fenxi” [“Between Volunteerism and Compulsion: An Analysis of Institutional Embeddedness and Sustainable Development of Cooperative Medical Schemes in Rural China”], Shehuixue Yanjiu [Studies in Sociology], No. 5 (2004), pp. 1–18. 12 See World Health Organization, The World Health Report 2000: Health Systems: Improving Performance. Geneva:World Health Organization, 2000.

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Fig. 6.9 Changes in Healthcare Security Coverage in Rural China, 1993, 1998 and 2003 Sources: Center for Health Statistics and Information, MOH (ed.), An Analytical Report of National Health Services Survey in 2003.Beijing:China Union Medical University Press,2004,p.16.

record for Chinese government officials who are concerned about the international reputation of China. In response to the fact that about 80 percent of rural residents had no health security coverage (see Figure 6.8), the Chinese government decided in 2003 to kick off a “new-type cooperative medical scheme” (NCMS) in the countryside.This is a public health insurance scheme based on voluntary enrolment. From 2003 to 2005, the government provided 20 yuan enrolment subsidy for each enrolee; the subsidy has been raised to 40 yuan per head since 2006. It is important to note that 40 yuan per head is just a minimum subsidy level formulated by the central government.Though providing enrolment subsidy is largely a local government responsibility, the central government has contributed 20 yuan per head for most provinces in western and central China as well as for some poor areas in eastern China. During the first three years of the NCMS in operation, the enrolment rates were low even though the enrolment per head was extremely low, only 10 yuan. Among many factors, adverse selection, poor governance, and unattractive benefit level and structure have negatively impacted on enrolment of Chinese peasants in the scheme. By the end of 2005, the number of enrolees was only 179 billion

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or only 24.0 percent of total population of peasants.13 As the government subsidy level has increased and the institutional arrangements for its functioning have improved since 2006, the enrolment rates of the NCMS over the past two years have increased considerably. By the end of June 2007, the NCMS was implemented in 2429 counties, or 84.9 percent of counties in China. The number of enrolees reached 720 million, and 82.8 percent of rural residents.14 In 2004, the Chinese government further launched a new Medicaid scheme in the rural areas, providing poor rural households with cash assistance to partially cover their healthcare bills. In 2005, a similar scheme for the cities was implemented on an experimental basis.

TOWARDS UNIVERSAL COVERAGE: GRADUAL REFORMS OF EXISTING PUBLIC HEALTHCARE INSURANCE SCHEMES The debate between supply-side and demand-side proponents heated up from the summer of 2005. In early 2007, seven organizations, namely Peking University, Fudan University, Beijing Normal University (BNU), the Development Research Center of the State Council (DRC), the World Bank, the World Health Organization, and McKinsey, were invited by National Healthcare Reform Coordinating Group to submit their proposals for China’s health reforms. On 30 May 2007, all proposals were presented at a two-day international conference jointly chaired by the National Development and Reform Commission and the Ministry of Health.15 There was some consensus among different proposals. One important consensus was that public spending on healthcare in 13 Evaluation Group on Pilot Programs of the NCMS (ed.), Fazhanzhong de Zhongguo Xingxing Nongcun Hezuo Yiliao [The New-Type Cooperative Medical Scheme in Development]. Beijing: People’s Health Press, 2006, pp. 2–10. 14 The figures were officially announced by Chen Zhu, the Minister of Health, on 5 September 2007 (see http://ccms.org.cn/third-xwxx.asp?id=186). 15 As the author of the BNU proposal, I was invited to take part in the conference and to present the key points of the demand-side solution that I put forward earlier and was adopted fully by the BNU proposal.

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100% 90% 80% 70% 60%

72.9% 74.9% 77.2% 79.2% 79.9% 80.0% 81.1% 82.0% 81.6% 81.9% 81.4% 80.0% 75.6%

68.6% 66.3%

Private

31.4% 33.7%

Public

50% 40% 30% 20% 10%

27.1% 25.1% 22.8% 20.8% 20.1% 20.0% 18.9% 18.0% 18.4% 18.1% 18.6% 20.0% 24.4%

0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fig. 6.10 Public vs. Private Spending on Healthcare in China, 1990–2004 Source: China Health Statistical Yearbook.

China is indeed disproportionately low. In 1996, the proportion of public spending to total health expenditures in China was at a record low, and largely due to the expansion of public health insurance schemes in both urban and rural areas, the proportion of public spending increased (see Figure 6.10). The government, in particular the Ministry of Finance, acknowledged that public spending on health has been too low and promised to spend more public money in the health sector. Once again, the key issue is how to channel public money into the health sector. Among the seven proposals mentioned aforesaid, at least five proposed slightly different versions of the demand-side solution. The Ministry of Finance, a key player in formatting the policy framework of new healthcare reforms, also favors the demand-side solution, hoping more public money would be used for consolidating and improving existing public health insurance schemes.As noted previously, the problem with the supply-side solution is to establish an entirely new mini-NHS system to provide basically free “basic healthcare” for all Chinese citizens, taking little consideration of existing public health insurance for the same purpose. As the basic institutional framework of public health insurance has been well-established in both urban and rural China, it is likely that the demand-side approach will prevail.

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This tendency can be ascertained from the actual development of new health reform policy measures. On 10 July 2007, the State Council promulgated a policy guideline: to extend pilot experiments of the Urban Residents’ Healthcare Insurance to 79 cities across the country. Some provinces, including Guangdong, Jiangsu, Zhejiang, Jiangsi, Jilin and Gansu, have already decided to launch the Urban Residents’ Healthcare Insurance in their provinces. The Urban Residents’ Healthcare Insurance targets non-working people in the cities, including the unemployed, children (including students), and the elderly who are not covered by other public health security schemes. Basically, it is a public health insurance program on the basis of voluntary enrolment, similar to the NCMS in rural areas. The government provides subsidy for enrolment, with the minimum level of government subsidy set by the central government at 40 yuan per enrolee.The levels of enrolment fee for enrolees are set by municipal governments. Benefit package is also determined locally.16 Currently, the existing three public health insurance schemes target enrolees on the basis of their social status, namely their household registration category. In most localities, the two urban schemes are open only to registered urban residents, while the rural scheme is for peasants only. It is likely that this rule will be abolished in the future. In some cities such as Zhejiang in Jiangsu and Dongguan in Guangdong, the restrictions on enrolment based on household registration status have been removed. Over the next decade, the enrolment into these schemes would be gradually open to all Chinese citizens. Eventually, the three schemes can be transformed to institute a three-tier public health insurance system. With different amount of enrolment fee, the three insurance schemes can offer different benefit packages to enrolees.The government has made it mandatory for all citizens to enrol in at least one public health insurance scheme. As public health insurance schemes only provide basic health security, there is much space for the development of private health 16 The text of the policy guidance issued by the State Council can be found at the official website of the Ministry of Labor and Social Security (see http://trs.molss.gov.cn/ was40/mainframe.htm).

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insurance, on either for-profit or non-profit basis. In particular, commercial health insurance can be developed to cover services, expenses, and treatments of limited number of special or major illnesses uncovered by public health insurance schemes. Meanwhile, it is also possible for public health insurance agents to contract out fund management as well as other services to private organizations. A variety of pilot public-private partnership arrangements have been carried out in some localities in China.The functioning of these pilot local practices can be considerably improved if their experiences and lessons can be scrutinized systematically. In brief, the formation of a three-tier public health insurance system indicates that China is moving towards universal health coverage of its entire population. As the government gradually increases the subsidy level, the financing level of these public health insurance schemes would be raised in the foreseeable future. It is widely anticipated that the proportion of out-of-pocket payment would be decreased when patients pay healthcare bills at the micro level, and the proportion of public spending on health would increase considerably at the macro level. Nevertheless, to achieve universal coverage of health insurance is only one aspect of the new round of China’s healthcare reforms. Another aspect is the government procurement of healthcare services from different providers. In this sense, reforming payment modes with health insurance agents purchasing healthcare services is a challenge. Currently, fee-for-service is a widely used payment mode. It is likely to create an incentive for providers to induce overconsumption of healthcare services and drug uses. The replacement of fee-forservice with a combination of other payment modes is also a consensus reached by all proposals favoring demand-side solutions. As suggested by some reform proposals mentioned previously, public health insurance agents adopt capitation as a major mode of payment to primary healthcare providers, accounting for at least 60 percent of their operational revenue. In so doing, the phenomenon of provider-induced overconsumption would considerably decrease or even disappear. Primary care providers would pay more attention to

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preventive care, health promotion and cost-effective services. Enrolees are allowed to change registered primary healthcare providers once a year (or within even a shorter period), so as to stimulate improvement of service. To prevent them from reducing the provision of services by making unnecessary referrals, the referral fees can be included into the capitation payment. Basically, specialists and high-ranking hospitals would have to compete for referrals from primary healthcare providers.This can be achieved by combining multiple payment modes, including payment according to diagnoses-related groups. The choice of particular payment modes is subject to negotiation between public health insurance agents and healthcare providers. Professional associations from both sides of payers and providers can play active roles in cost calculation, rate setting and choice of payment modes. Another important issue is to introduce a gatekeeping mechanism into China’s healthcare sector. All public health insurance schemes should cover both primary and secondary healthcare. Community health centers (stations) and other small hospitals can play the role of gatekeeper. If enrolees choose them as the first point of contact and accept the referral arrangement, they would enjoy low co-payment rates, but would have to pay more out of their own pockets if they go to high-ranking hospitals for primary healthcare services.

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Chapter

7 A New Perspective in Guiding Ethnic Relations in the 21st Century — “De-politicization” of Ethnicity in China Rong Ma

After thousands of years of people migrations across lands and seas, most countries in the world today are multiethnic nations. Some countries accepted “new citizens or permanent residents” who came from other nations with various backgrounds in race, national origin, language and religion. In some countries (such as today’s Western European countries), the immigrants who have settled down for decades or even generations have virtually become an indispensable part of the local community, even though they may not be granted citizenship or “permanent residency” of the receiving country. From a sociological point of view, all these societies with the aforementioned features are deemed multiethnic societies. In any political entity of a multiracial or multiethnic composition, its political leaders and elites are confronted with such questions as

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how to cope with the legal status and basic rights of distinct ethnic groups within its political entity (federation or state), how to look upon their socioeconomic structural differences (e.g., in education, industry, occupation and income) and cultural differences (e.g., in language, religion and customs), how to understand their existence and evolution (ideology and social norms) and the trends of ethnic-based movement in the future, and what the governments should do to guide the trends of inter-ethnic relations (strategies and measures) for group equality, social justice, ethnic harmony, social stability and political unity. A nation with good ethnic relations will be able to continually strengthen the cohesiveness of its citizens through positive internal integration, so as to reduce administrative and operational costs, enhance efficiency of social and economic organizations, and strengthen its economic power. In a country where politics, economy and culture are undergoing positive developments, all ethnic groups will enjoy the benefits brought about by a prosperous economy and a harmonious society. Although an egalitarian distribution of benefits among all members is almost impossible, to a great extent, all ethnic groups are “winners” in the process. On the other hand, a nation with deteriorating ethnic relations will suffer a growing social disunity and disintegration caused by deteriorating internal contradictions, followed by an evident increase in social costs in the form of money, manpower and material goods for maintaining social order, increasing government’s expenditures and citizens’ tax burdens. Ethnic disputes that turn into open political confrontations or splittist movements may upset social harmony and lead to riots or civil war, even foreign invasion. This consequently weakens or destroys the state, undermines the economic foundation and establishments, inflicting great hardship on all ethnic groups and leading to social riots, economic collapse and political separation. Ultimately, all ethnic groups will become “losers”. An apparent example is witnessed in the transformation of ethnic relations in former Yugoslavia. Hence, ethnic relations have become one of the core problems facing all societies in the 21st century.

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“NATION” AND “ETHNIC GROUP” The Concept of These Two Terms in General “Nation” and “ethnic group” are distinct concepts in Western literature. In the discussion of definitions of these terms, Immanuel Wallerstein emphasized that: “Race” is supposed to be a genetic category, which has a visible physical form …. A “nation” is supposed to be a socio-political category, linked somehow to the actual or potential boundaries of a state. An “ethnic group” is supposed to be a cultural category, of which there are said to be certain continuing behaviors that are passed on from generation to generation and that are not normally linked in theory to state boundaries….The last of these three is the most recent and has replaced in effect the previously widely-used term of “minority”.1

Given the concepts’ respective time of usage and inner meaning, these terms represent human groupings at totally different levels and reflect different forms of identity in human society under different historical conditions. “Nation” is related to “nationalism” and the “national self-determination” political movement that took place in Western Europe in the 17th century. “Ethnic group”, on the other hand, only appeared in the 20th century and is commonly used in the United States and gradually adopted by other countries. It refers to groups which exist and identify with a pluralist country with various historical backgrounds, cultures and traditions (including language, religion and place of origin), and even distinctive physical features. “Ethnicity” only appeared in English dictionaries in the early 1970s.2 1

Wallerstein, Immanuel, 1987, “The Construction of Peoplehood: Racism, Nationalism, Ethnicity”, Sociological Forum, Vol. 2, No. 2, pp. 373–388. Any concepts or terms emerged in human societies under certain circumstances. In other words, they were created to describe a special phenomenon which needs to be distinguished from the others. Different groups “learned and borrowed” those terms from each other in the process of interactions.Therefore, the same term (e.g.,“ethnicity”) might have different meaning in different countries and people’s interpretations are various. See Fenton, Steve, 2003, Ethnicity, Cambridge: Polity. 2 Glazer, Nathan and Moynihan, Daniel P., 1975, “Introduction”, in N. Glazer and D. P. Moynihan (eds.), Ethnicity: Theory and Practice, Cambridge: Harvard University Press, pp. 1–26.

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A cultural minority

Internal Pull Power A

A nation-state

Fig. 7.1 The Continuum of “Ethnicity–Nation”

There are important differences between ethnic groups, which are characterized by distinct cultural tradition and history, and nations, which are political entities tied to a stable territory. However, there is no impassable gulf between “an ethnic group” and “a nation”. With changes in the internal and external conditions,“an ethnic group” and “a nation” are transferable. Between the “pure” cultural group (a minority group) and the “pure” political entity (state), or between two “ideal types” in ethnic relations, there is a continuum with numerous points or steps of transition (Figure 7.1).This is a theoretical model in examining ethnic–nation process. None have reached the extreme end in real practice. In reality, ethnic groups in all countries can be located at various points along this continuum. With economic development, guidance by government policies, or endorsement by external forces, an ethnic group would move from its original location towards either end of the continuum; its “political entity” nature will be either strengthened or weakened. Therefore, ethnic relations within various nations are multifaceted and dynamic rather than fixed in a singular form. Under the combined effects of internal and external factors, a quantitative change of a group along this continuum may turn into a qualitative change at a certain point. For some ethnic groups, it is possible to split from their home countries and transform into independent nations.3

3

For example, in a ballot in Quebec several years ago, if the majority had supported the independence of Quebec, it would have been separated from Canada and become a new country.

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The Terms Used in Contemporary China Regarding “Nation” and “Ethnicity” In China,“Min Zu” ( ) has been one of the most frequently used Chinese vocabularies. The other word, “Zu Qun” ( ), has just appeared in academic literature in recent years.The former’s corresponding English word is “nation”, while the latter corresponds to the English word “ethnic group” (or ethnicity). When talking about “Zhong Hua Min Zu” ( , the Chinese nation) and the 56 “Min Zu” ( , 56 “nationalities” in Chinese official translation), there is a conceptual confusion when the same word for two different concepts is used. Accordingly, I suggested to keep the term “Chinese nation”, and change the expression of 56 “nationalities” to “ethnic groups” or “ethnic minorities” when these groups are referred to as a whole.4 My proposal is based on three considerations. First, the social and cultural connotations of the minority groups such as Mongolians, Manchurians, Tibetans, Ugyhurs and Hui in China approximate to “racial and ethnic minorities” in other countries, such as American Indians, African Americans and Hispanic in the United States.5 Thus, the term “ethnic groups” reflects more accurately the structure of ethnicity in China. Second, by differentiating these terms, conceptual confusion resulting from two different meanings (the “Chinese nation” and “ethnic groups” composed of the “Chinese nation”) of the same term in Chinese will be avoided.6 Finally, if we translate China’s 4

Ma, Rong, 2001, Ethnicity and Social Development, Beijing: Minzu Press (in Chinese). There are great variations among the Chinese minorities regarding their population size, residential patterns, and relationship to the Han majority in history.These groups may be viewed to spread along the “ethnic group–nation”continuum in Figure 7.1.Tibet was close to the right end (de facto independent) before 1951. Manchu was close to the left end and largely lost their identity by 1949. Nine minority groups only had a population less than 9,000 in 2000. See Ma, Rong, 2004, Sociology of Ethnicity: Sociological Study of Ethnic Relations, Beijing: Peking University Press (in Chinese). 6 Some western scholars used “ethnic relations”to describe the majority–minority relations, and used “nationalities” in referring to Chinese official statements (e.g., Dreyer, June T., 1976, China’s Forty Millions, Cambridge: Harvard University Press). 5

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56 ethnic groups as 56 “nationalities”, and name their request for economic and cultural interests as “nationalism”,7 we will seriously mislead the non-Chinese readers into associating these groups with independent political entities who have the right to carry out “national self-determination” and establish their “nation-states”. The reason we distinguish between “nation” and “ethnic group” in Chinese language is because the different usage of these terms may actually imply varied orientations for viewing, understanding and directing ethnic relations.

TWO TYPES OF POLICIES FOR DIRECTING ETHNIC RELATIONS: POLITICIZATION AND CULTURALIZATION Government policy plays an important role in guiding group identity and adjusting the boundaries of a political entity. In social development, governments generally adopt two contrasting policies for regulating ethnic relations: one views ethnic groups mainly as political entities, and the other views ethnic groups mainly as cultural groups. The first policy views ethnic groups mainly as political entities and emphasizes integrity, political power and “territorial” conservation of ethnic groups.The second policy regards ethnic groups mainly as cultural groups and prefers to treat ethnic relations as cultural interactions and to deal with the problems between people of different ethnic backgrounds as the affairs among individuals and not between groups even though the common characteristics of the ethnic group members are recognized. As such, by emphasizing the cultural characteristics of ethnic groups, their political interests are diluted. Furthermore, in the process of migration, the historical connection between ethnic groups and their traditional residence is gradually loosened. 7

“Regional nationalism” of minorities often appeared in Chinese documents. This term in Chinese interpretation only refers to the requests of economic benefits, cultural autonomy and limited political autonomy within the present system.

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The Traditional Culture-Centered View of Ethnic Relations in Chinese History Historically, eastern Asia has been a motherland of many ethnic groups.Among these groups were the more “advanced” han Chinese and the relatively less advanced minority “barbarians” including nomads in grasslands and mountain people in the south.8 In traditional China, ethnic identity was just a distinction between barbarian minorities and civilized han. This distinction, according to Confucianism, does not refer to apparent differences in physical features or in language. Rather, it is mainly shown in cultural differences with values and norms of behavior as the distinguishing characteristics. Some scholars point out: According to Confucianism, the distinction between “hua (xia)” (civilized han) and “yi” (minority barbarians) was a cultural boundary rather than a racial and national boundary …. The barbarian–civilized distinction did not indicate racial or national exclusiveness. Instead, it was a distinction that differentiated levels of cultural achievement.9

In other words,“barbarian–civilized” distinction does not indicate division and exclusivity between different “civilizations” such as that between medieval Christians and Muslims. Instead, it refers to the distinction between highly developed and less developed “civilizations” with similar roots but at different stages of development. Such a distinction was accepted by the less developed minorities (“barbarians”) who had actively sought to learn from the Chinese civilization. Therefore, although there were conflicts and wars between the dynasties in the “core area” and minorities in the peripheries, what characterized the interaction between the “more civilized” and “less civilized” groups was mainly not hostility and mutual destruction but cultural diffusion and learning. 8

The terms “advanced” and “less advanced” only refer to the development stage of sciences and technology, not the nature of “culture”. 9 Zhang, Lui and Kong, Qingrong, 1999, Coherence of Chinese Nation, Beijing: Chinese Social Science Press (in Chinese).

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Ancient Chinese viewed the Chinese culture as “the most advanced civilization” of the world, which would sooner or later influence surrounding “barbarians”. Those who were acculturated by the Chinese civilization became “members” of this “civilized” world with han as its “core”.Those who were unacculturated would remain as “barbarians” who needed to be “educated”. Ambrose King argues, as a political entity, traditional China was unlike any other nation-state since “it was a political-cultural entity, or what is called the civilized state which was marked by cultural rather than ethnic differentiations, and consequently followed a unique civilized order”.10 An American sinologist, John King Fairbank, discussed “the nature of Chinese nationalism” in his book The United States and China. He emphasized that: Undoubtedly this universalism has meant that culture (the way of life) has been more fundamental in China than nationalism. Early Chinese emperors asserted that they ruled over all civilized mankind without distinction of race or language. Barbarian invaders who succeeded them found it expedient to continue and reinforce this tradition.To any Confucian ruler, Chinese or alien, the important thing was the loyalty of his administrators and their right conduct according to the Confucian code. Color and speech were of little account as long as a man understands the classics and could act accordingly.11

Since culture can be learned and taught, the Chinese traditional ideology therefore believed that the two sides of the “civilized–barbarian distinction” were transferable. That is to say, “evil Chinese retreats to 10 King, Ambrose, 1997, The Politics and Culture in China, Hong Kong: Oxford University Press (in Chinese), p. 177. 11 Quoted from Fairbank, John K., 1979, The United States and China (fourth edition), Cambridge: Harvard University Press, p. 98.The fact that most groups in China belong to the Mongoloid also made the physical differences less significant in China. Some literature discussed the idea of “race” in Chinese history, but in my opinion the argument made by Frank Dikotter is not so convincing. Dikotter, Frank, 1992, The Discourse of Race in Modern China, Stanford: Stanford University Press; Dikotter, Frank (edited), 1997, The Construction of Racial Identities in China and Japan, Honolulu: University of Hawai’i Press.

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barbarians, and fine barbarians advance to Chinese”.12 “Fine” refers to “civilized”, whereas “evil” “uncivilized”. This ideology articulates dialectic reasoning and echoes a relaxed attitude of the Chinese culture towards other cultures. Chinese emperors, elites and people considered ethnic minorities that had accepted the Chinese culture as “civilized” citizens and treated them fairly equally.Yet, they adopted a discriminating attitude toward the “barbarian” groups. The foundation of such a discrimination was, however,“cultural superiority” rather than “racial superiority”. Behind this superiority was a flexible and dialectic view that “barbarian” groups could be “civilized” through acculturation rather than military conquest. In the Chinese cultural tradition, the “civilized–barbarian distinction” was advocated along with a unified view of “the world” (“under the sky”) which emphasized “all lands belong to the emperor and all people his subjects”. Both “barbarians” and “civilized” were under the same “sky”, and thus “barbarians” could be “educated”. Based on these thoughts, in the Chinese cultural tradition, all ethnic groups were considered equal.This idea was most explicitly expressed in the saying “all people around the four seas are brothers” (The Analects of Confucius), which emphasized that all ethnic groups should be treated equally; that their differences in biological characters,13 language, religion and customs should not override their common traits in basic ethics and norms as well as their peaceful co-existence, and that the main difference between ethnic groups is a cultural one and the “superior (more advanced) culture” is capable of integrating

12 Zhang, Lui and Kong, Qingrong, 1999, Coherence of Chinese Nation, Beijing: Chinese Social Science Press (in Chinese), p. 285. 13 In Chinese tradition, there was no clear view of “race” as the term in the West (Stafford, Charles, 1993, “The Discourse of Race in Modern China”, Man: The Journal of the Royal Anthropological Institute, Vol. 28, No. 3, p. 609). The statements cited by Frank Dikotter did not support his argument since those statements of Kang You-wei (1858–1927), Sun Yat-sen (1866–1925), or Su Xiaokang (1949–) only expressed the influence of western categories in modern China (Dikotter, 1997, pp. 1–4).

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all other cultural groups.14 It is a “diffusion model”15 that emphasizes only the aspect of culture. In Chinese history, it was quite clear that when acculturation occurred among the “barbarians”, diffusion process in other aspects would follow. American sociologist Milton Gordon classifies ideologies concerning ethnic issues into two categories. One view maintains ethnic inequalitarianism or racism, while the other view supports ethnic equalitarianism or non-racism. Gordon further divides the second view into three sub-categories, namely: (1) assimilationist structure, (2) liberal pluralism, and (3) corporate pluralism.16 The Chinese traditional view of ethnicity (“teaching without discrimination”) and practice (“transforming barbarians into civilized people”) belong to the category of assimilationist structure. Although issues concerning race, nationality and ethnic groups are often politicized,“majority–minority relations” or “civilized–barbarian relations” in both its theory and practice was to a great extent ingrained in the Chinese cultural tradition.This strategy facilitated the civilized group in the core region to unify and embody the ethnic minorities in periphery areas. In addition, the Chinese tradition of treating ethnic differences as “cultural differences” made it possible for the Chinese to implement the policy of “transforming barbarians into civilized people” and attract ethnic minorities from the periphery areas, leading to the ultimate formation of a unified pluralist Chinese nation with the han group in the central plain as the core.17 14

In his study, Frank Dikotter noticed the distinction between “outside barbarians” and “inside barbarians” and he also emphasized “despite many disparaging comments on the supposedly bestial origins of the minorities, the Han perception of minority Chinese remained embedded in an ethnocentric framework that stressed sociocultural differences”(Dikotter, 1992, p. x).Therefore sociocultural differences, not biological differences, were major indicators of ethnic characteristics and boundaries in ancient China. 15 Hechter, Michael, 1975, Internal Colonialism, University of California Press, p. 6. 16 Gordon, Milton M., 1975, “Toward a General Theory of Racial and Ethnic Group Relations”, in N. Glazer and D. P. Moynihan (eds.), Ethnicity: Theory and Practice, Cambridge: Harvard University Press, pp. 105–106. 17 Fei, Xiaotong, 1989,“Pluralism-Unity Structure of the Chinese Nation”, Journal of Peking University, No. 4 (in Chinese), p. 19.

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But it should be noticed that the idea of “cultural racism” also emerged among the ethnic groups and their elites throughout the interactions among the groups in history, and sometimes “barbarians” were viewed as “uncivilized” and a fatal threat to the han group when the central government was weak. Since the late Qing dynasty, racism among the han group has become uniquely strong in Chinese history because of western and Japanese invasions which proved to be a fatal threat to China’s independence and culture.

The European Nationalism Movement: “Politicizing” Ethnicity With industrialization and the emergence of capitalism, a trend of “politicizing” majority–minority relations began to develop in some European countries.This was the period when the concept of nationalism began to kick in. By advocating regrouping of political entities around the world based on “national identity”, the essence of contemporary “nationalism” was to establish “nation-states” through “national self-determination”. Thus, the “nationalist” movement was an important historical landmark of “politicizing” ethnic issues. As Ernest Gellner points out, “nationalism is primarily a political principle, which holds that the political and national unit should be congruent …. Nationalism is a theory of political legitimacy, which requires that ethnic boundaries should not cut across political ones”.18 Nationalism did not exist in the past, and only emerged in the process of industrialization: The age of transition to industrialism was bound, … also to be an age of nationalism, a period of turbulent readjustment, in which either political boundaries, or cultural ones, or both, were being modified, so as to satisfy the new nationalist imperative which now, for the first time, was making itself felt.19

With the emergence of the “nationalist” ideology and political movements,“nation-states” were established in the Western European 18 19

Gellner, Ernest, 1983, Nations and Nationalism, Ithaca: Cornell University Press, p. 1. Gellner (1983, p. 40).

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continent. European capitalism was first developed in the Netherlands in the early 17th century. Holland was considered the “first capitalist nation-state”. Dutch jurist Hugo Grotius treated the independent “nation-state” as the principal unit of the international law or the sole authority of the state. In France, the French Revolution overthrew Louis 16th of the Bourbon dynasty.The French “citizens” became enthused with nationalism when defending their motherland against armed forces of other monarchal states. During the American War of Independence in the 18th century, the idea of “all men are created equal” inspired the people in the colony to establish their own independent state. Consequently, the War of Independence in North America and the French Revolution were regarded as important watershed or pioneering events for the construction of contemporary nationalism. The 20th century witnessed three waves of nationalist movements.The first wave took place at the end of World War I. With the collapse of the Ottoman Empire and Austro-Hungary Empire, a number of “nation-states” were established in eastern and southern Europe. The second wave arose in the mid-20th century following World War II. With the weakening of the global colonial system, the “nationalist” movements again were launched in colonies in Africa, and Asian,Latin American and Pacific regions.Those who received education in Europe or were influenced by western ideologies became indigenous elites who promoted the local “nationalist” movement.20 Under these conditions, the colonial powers had no choice but to consent to independence of the former colonies. As a result, a large number of newly independent states were established in the colonies with some copying the political and administrative structures of western “nation-states”. 20 There

were political maps in the mind of these indigenous elites, referring to the administrative boundaries of colonies, not to cultural boundaries of historical heritages, linguistic, or tribes. The new “nation-states” were “imagined communities” rooted in colonist education and administration (Hobsbawm, E. J., 1989, Nations and Nationalism Since 1780, Rye Field Publishing Com, p. 138; Anderson, Benedict, 1991, Imagined Communities: Reflections on the Origin and Spread of Nationalism, London:Verso).

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These newly independent states are the “liberated type” of “nationstates”, regardless of whether they are ethnically more homogeneous (such as Iraq, Egypt and Algeria) or heterogeneous (such as India, Indonesia and Malaysia). The collapse of the USSR started the third nationalist wave of the 20th century, whereby national splittist movements took place in the former USSR and some Eastern European countries, such as former Yugoslavia and Czechoslovakia. During this movement, 23 newly independent states were established on the land of the former three states. The national splittist movement has continued in some of these states.

Continuation of the European Tradition of “Politicizing” Ethnicity by the Former USSR Communism is deeply tinted with ideology and thus has the tendency to “ideologize” cultural or social differences among ethnic groups, and use political measures to deal with these differences or issues. After the October Revolution, imperial interventionists employed “national self-determination” as a political slogan to instigate ethnic groups’ rivalry in Russia against the new-born proletariat regime. To counteract, Lenin proposed to support “national selfdetermination”according to whether it would be beneficial to the proletarian revolution or not. Under the political climate of the time, the Federation or the Union was utilized for uniting those ethnic groups under the rule of the former tsarist Russia.21 However, The convergence of ethnic and administrative boundaries results in politicization of ethnicity and emergence of nationalism. The identification of ethnic with political and socioeconomic structures sharpens the perception of each group’s relative position in the competition for the allocation of social values.22

21 Wang, Liping, 2000, Federation

and International Order, Beijing: Peking University Press (in Chinese), p. 151. 22 Rakowska-Harmstone,Teresa, 1986,“Minority Nationalism Today: An Overview”, in Robert Conquest (ed.), The Last Empire: Nationality and the Soviet Future, Stanford: Stanford University Press, p. 239.

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Various groups were linked under the Federation or the Union while maintaining their own republics or autonomous regions and a full range of political rights. It was exactly this type of institution that later provided legal grounds for these groups to separate themselves from the USSR and to establish their own independent states. Lenin pointed out clearly that the Union is, under unique historical conditions, a “transitional” form towards complete unification (a singular state).23 After Lenin passed away, the Soviet regime was consolidated and the Communist Party was once highly regarded by the Soviet people, especially after WWII. Stalin had many opportunities to lead all groups from this “transitional” stage into a unified nation, but he and his successors failed to do so.24 Instead, the transitional stage became permanent and continued for several decades until its ending day. In handling ethnic relations, the Soviet government either consciously or unconsciously emphasized the political power of minority groups and institutionalized such a power. Minority groups were treated as political units and were “politicized”. At the macro level, the political entity of “the Soviet Union Republics”, “Autonomous Republics”, or “Autonomous States” led to autonomous administration and identification of nationality-ethnic groups connected with their own territory.These groups thus became “territorialized” and had the characteristics of “a nation”. At the micro level, in the 1930s, a “nationality recognition” campaign was implemented and every resident’s “nationality status” 23

Lenin, F. I., 1920, “Comments for Revising Party Program”, Collection of Lenin, Vol. 24, Beijing: People’s Press (in Chinese), p. 126. 24 There might be several reasons why Stalin did not change the system. First, USSR just took control of several East European countries, so to maintain union republics in USSR would make these countries more comfortable under the Russian’s control and not worry about formal expansion of USSR. Second, the three Baltic nations just recently became union republics of the USSR, and the system change might cause resistance in the three.Third, the Cold War started right after WWII, so in negotiation and bargaining with the US, the votes of Ukraine and Byelorussia might be helpful in the United Nations.

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was identified and formally registered in his/her internal passport: “An internal passport system that lists the owner’s nationality has had a negative impact on integration because … it has created a ‘legalpsychological deterrent’.”25 Thus, the individual’s nationality became evident and permanent, and boundaries between ethnic groups became unambiguously marked and fixed. The government’s policies favoring minorities in aspects of language, education, promotion of cadres and financial aid further fortified group identification and boundaries. The USSR government tried to establish a new identity of “Soviet People (Soviet man)” among all ethnic groups, but this identity was mainly based on a political-ideological tie (Sovietism-Communism). When people no longer believed in Sovietism and Communism during the reform promoted by Gorbachev and the rise of Russian nationalism promoted by Boris Yeltsin, the base of the new identity also collapsed. The Soviet practice of “politicizing” minority groups and the corresponding institutionalization of minority groups greatly influenced Chinese policies after 1949.

“Politicizing” Ethnic Groups in the Process of Globalization With the establishment of nation-states, globalization has become a popular topic among all nations. Some scholars noticed that, in the process of globalization, a new tendency of “politicizing”ethnicity reappeared both within multiethnic nations and between states.“National self-determination” once again became a newly found political weapon of domestic groups or external hostile powers for splitting or weakening some multiethnic nations. Joseph Rothschild points out: In modern and transitional societies — unlike traditional ones — politicizing ethnicity has become the critical principle of political legitimation and delegitimation of systems, states, regimes, and governments and at the same 25

Rakowska-Harmstone (1986, p. 252).

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In the process of modernization, societal-institutional change and readjustment of power and interest give rise to opportunities for various ethnic groups to defend and to acquire power and resources. Ethnic group thus becomes an ideal cohesive group unit and an effective tool for social mobilization. Advantaged as well as disadvantaged ethnic groups in social competition will all strive for “politicizing” ethnicity so as to mobilize their followers and establish an ethnicbased political and economic interest group. Under the climate of “politicization”, ethnic conflict becomes one of the major sources of social instability, violent conflicts and break-up of the state: Many observers, indeed, have been so fascinated and/or alarmed by this initially destabilizing impact of freshly politicized ethnicity that they have interpreted it as launching an absolutist, zero-sum type of politics over uncompromisable values and rights (for example, to self-determination, group status, territorial control) and, hence, as more dangerous to civic order than class and functional interest-group politics are…. More seriously, it is also true that the energies of ethnic politics have sometimes produced catastrophic violence.27

The above analysis provides us with insights into the interest drive, the ideological basis and possible damage to national stability by “politicizing” domestic ethnicity as is happening in many countries.

The Policy of “Acculturation” in the United States of America In industrialized countries, immigrant countries in particular, the term “nation” has increasingly become a symbol of a stable political entity. The term “racial and ethnic groups”, on the other hand, has gradually lost its political implications. With more frequent interactions and intermarriages, boundaries separating ethnic groups became blurred 26 Rothschild, Joseph, 1981, Ethnopolitics: A Conceptual Framework, Columbia University Press, p. 2. 27 Rothschild (1981, pp. 6–7).

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when members of different ethnic groups became acculturated by one another. Members of racial and ethnic groups began to look upon themselves as equal citizens.The rights of minority group members as citizens are protected by the Constitution and government.28 In daily life or social events, members of minority groups are officially treated as individuals rather than as a collective of an independent political group. Problems (such as inadequacy of the English language or lower levels of education) faced by disadvantaged groups are not perceived as “political interests” and regulated through government policies. Rather, these problems are resolved through public or semi-public social welfare programs.As a result, ethnicity-related issues are shown as individual or social problems, not political issues facing the entire ethnic group. For a long time, the US government and the mainstream society have operated on the policy of assimilation without enforcing an identical culture through administrative measures. Enforced assimilation is, in essence, an indication of “politicizing”ethnicity. In promoting a unified political entity, the US government and the mainstream society direct the public to look upon differences in ethnicity and religion mainly as “cultural diversity”of a “pluralist society”. Considering the long-term existence of racial and ethnic diversity and conflicts, American academic circles proposed in the mid-20th century the goal of achieving “cultural pluralism”,29 and of perceiving ethnic groups as “subcultures”.There are three measures to achieving the goal. The first measure is to enforce a unified federal law and mainstream culture (English as the de facto official language and the Christian culture).The second is to permit the preservation of certain traditions by ethnic minorities.The third is to do away with the need to identify one’s racial-ethnicity status for job applications, though it is optional for school admission application. In a census questionnaire, 28

Of course, there are still racial/ethnic prejudice and discrimination in the US. But the situation has been largely improved since the “Civil Rights” Movement of the 1960s. 29 Gordon, Milton M., 1964, Assimilation in American Life, Oxford: Oxford University Press, pp. 157–159.

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the item on “race/ethnicity” is optional and filled out by the informant himself/herself.30 The government also de-stresses or blurs ethnic boundaries by eliminating residential and school segregation and adopting a neutral attitude towards intermarriages and other practices (e.g., interracial adaptation). In the past half a century, the United States emphasized “pluralism” in dealing with racial and ethnic relations.“Pluralism”, of course, does not indicate any form of division by ethnic groups either politically or geographically. Instead,American “pluralism” is overseen by a strong unified political entity at both the federal and state levels. Although the establishment of ethnic-based, inclusive informal cultural organizations is sanctioned by the government, setting up of racial-/ethnic-exclusive organizations with a tendency toward political and economic “self-determination” is prohibited. Obviously, the US government stresses “unified politics” by all racial and ethnic groups, although such a view is not openly communicated in the discussion of ethnic issues.Yet, with its advanced economy and a strong armed force, the tendency to “self-determine” and to establish an independent state still exists among certain minority groups, such as the African Americans and American Indians who are at the lower rungs of the socioeconomic ladder.31 Such a tendency is naturally under close scrutiny and under containment by the US government. In addition to political and economic unification, the United States also implements powerful measures to fortify a “unified national culture”. For example, the most popular language in public is English. Fundamental values and norms of behavior — the core of culture — are also shaped by the mainstream society. In fact, members of minority groups can hardly advance in society unless they learn 30 That

was why 2.4 percent of the respondents of the 2000 US Census reported their racial status with two or more races; 823 respondents even reported six races in their census reports of racial/ethnic status (Farley and Haaga, 2005, The American People: Census 2000, New York: Russell Sage Foundation, p. 335). 31 “In the United States, only among the most disadvantaged minorities do we find such separatist tendencies” (Yinger, J. Milton, 1986,“Intersecting Strands in the Theorization of Race and Ethnic Relations”, in John Rex and David Mason (eds.), Theories of Race and Ethnic Relations, New York: Cambridge University Press, p. 25).

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English. Also, they will face tremendous difficulties in interacting with mainstream community and government agencies unless they accept and learn Christian values and norms.Therefore,“pluralism” does not help to preserve independent “cultural groups”; it only permits the existence of “subcultural groups” and the preservation of certain aspects of their tradition.The US government and politicians will not accept any “cultural groups” with the tendency of self-determination since they will endanger the political unity of the United States. In sum, since the “civil rights” movement in the 1960s, a fundamental policy and guiding ideology of the US government in handling racial and ethnic issues has been to develop minority groups into “subcultural groups” within a pluralist society, or to “acculturate” and to “de-politicize” ethnicity in the United States.

THE POLITICAL AND CULTURAL LEVELS OF “ETHNICITY” “An Ethnic Group” Might Become a “Nation” and Rewrite Its History Indigenous ethnic groups have their traditional area of residence. Immigrant groups have their place of origin: The concept “ethnic group” is therefore as linked in practice to state boundaries as is the concept “nation”, despite the fact that this is never included in the definition. The difference is only that a state tends to have one nation and many ethnic groups.32

This means that “ethnicity” is not only meaningful at a cultural level, but at a political level as well. It indicates that “an ethnic group”has the potential to become a “nation” under favorable conditions.Therefore, there is no impassable gulf between the “ethnic group” and a “nation”. The leaders and elites of ethnic minorities will fight for power and space in the national political structure, and they are also given some political space by the government in some nations. 32

Wallerstein, Immanuel, 1987, “The Construction of Peoplehood: Racism, Nationalism, Ethnicity”, Sociological Forum, Vol. 2, No. 2, p. 385.

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Wallerstein provides a vivid case of Sahrawi people in northern Africa: Is there a Sahrawi nation? If you ask Polisario, the national liberation movement, they will say yes, and add that there has been one for a thousand years. If you ask the Moroccans, there never has been a Sahrawi nation, and the people who live in what was once the colony of the Spanish Sahara were always part of the Moroccan nation. How can we resolve this difference intellectually? The answer is that we cannot. If by the year 2000 or perhaps 2020, Polisario wins, there will have been a Sahrawi nation.And if Morocco wins, there will not have been.Any historian writing in 2100 will take it as a settled question, or more probably still as a non-question.33

In order to legitimize their independent movement, some ethnic groups will work very hard to “prove”that their group had established an independent “nation” a long time ago and with a legitimate status. These “evidences” provided by them are usually not accepted by the government and other groups. But if this group successfully becomes an independent nation, these materials to prove “the history of this ancient nation” would become the new official historical records.

Practical Measures of “Politicizing” Ethnicity: Institutionalization of Ethnic Status and Ethnic Relations One important measure was that the government identified and recognized an “ethnic status” for each of its citizens and made it a political system. Any citizen who wants to change his/her ethnic status must apply for permission from government offices and satisfy certain criteria. In China, some applicants are allowed to switch from one of his/her parents’ ethnic status to another’s in the case of intermarriage and only after the applicants reach age 18; the government may also allow changes if the government has made a mistake in the previous status recognition. The institutionalization of ethnic groups systematically creates institutional barriers for the interaction and integration of members 33 Wallerstein

(1987, p. 384).

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of different ethnic groups. This official system always reminds them that they belong to “a specific group”.Clarifying the boundaries between ethnic groups and fixing the “membership” of each ethnic group make the ethnic boundaries a social issue,and when the ethnic status is related to some favorable or discriminative policies, ethnic boundaries will become a political issue. Institutionalizing ethnic relations has both positive and negative impacts. Favorable policies towards disadvantaged groups may improve the situation in ethnic stratification and reduce the structural differences in education, industry, occupation and income among groups. Discriminative policies towards disadvantaged groups may worsen the situation in ethnic stratification and provoke ethnic tension. In both cases, these policies designed for ethnic groups as a whole will certainly strengthen ethnic identity and consciousness. Under certain historical and social circumstances, favorable policies towards the minorities may efficiently improve ethnic relations, reduce the tension and promote cooperation, but these policies will certainly not weaken the ethnic consciousness or promote integration. The former Soviet Union politicized and institutionalized its minority groups and made great progress in helping minorities improve their education and socioeconomic development in minority regions.The relationship between Russians and other groups was generally improved. But based on the institutionalized ethnic relations (union republic — autonomous republic — autonomous region) and fixed ethnic status, the group consciousness and their political interests were obviously strengthened. When international and domestic political environment and conditions change, as in the case of the USSR in the late 1980s, the political consciousness of ethnic groups will be provoked and turned into “nationalist” movements aimed at independence based on their autonomous “territory”. There are many interpretations of the disintegration of the USSR and Yugoslavia among scholars and politicians.Their way of handling minorities should be considered one of the most important factors. The Soviet Union differed greatly from the United States in the way ethnic relations were handled. One was guided to politicizing and

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institutionalizing ethnicity/nationality, the other to “culturalizing” or “de-politicizing” ethnic minorities.

“Culturalism” and “Nationalism” in Modern China Indian American historian Prasenjit Duara prefers to look at Chinese history from a “bifurcating linear way”. In his opinion, the ideas and narratives of Chinese history were along the “bifurcating linear route” in the past. He recognized that the core in Chinese traditional views of different groups is “culturalism”, a “mode of consciousness distinct from nationalism”: Viewing “culturalism” (or universalism) as a “Chinese culturalism” is to see it not as a form of cultural consciousness per se, but rather to see culture — a specific culture of the imperial state and Confucian orthodoxy — as a criterion defining a community. Membership in this community was defined by participation in a ritual order that embodied allegiance to Chinese ideas and ethics.34

This is the prevailing idea of viewing “culture” as the core identity of society membership and the idea of “educating barbarians for civilization without discrimination” (The Analects of Confucius). But Duara also pointed out that there was another “nationalist” route in Chinese history of viewing minorities.When barbarians were no longer subjects for “educating” but became so strong militarily as to threaten the existence of Chinese empire and culture, the Chinese elite would be forced to turn to the “nationalist route”. For example, “during the Jin invasion of the 12th century, segments of the literati completely abandoned the concentric, radiant concept of universal empire for a circumscribed notion of the Han community and fatherland ( guo) in which the barbarians had no place”.35 Then, defensive “nationalism” emerged among the elites and people at the core. Around the end of the Qing dynasty, “nationalism” emerged among the han Chinese elite who had supported the Qing for over 34

Duara, Prasenjit, 1995, Rescuing History from the Nation, Chicago: Chicago University Press, p. 56. 35 Duara (1995, p. 58).

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two centuries mainly because of the Qing’s failures in the wars against imperialist invasions.They called to “expel the Barbarian Manchu and restore China”. Sun Yat-sen and his colleagues were also influenced by this “nationalist” movement. In contrast, Kang You-wei, the leader of “royalists” of the Qing dynasty, …cited Confucius to argue that although Confucius has spoken of barbarians, barbarism was expressed as a lack of ritual and civilization. If indeed they possessed culture, then they must be regarded as Chinese…. He was convinced that community was composed of people with shared culture and not restricted to a race or ethnic group.36

When the Qing dynasty was overthrown in 1911, facing the independent movement of ethnic minorities, Sun Yat-sen and the leaders of the new Republic sought to supplement their racialist narrative with the culturalist narrative of the nation espoused by their enemies — the reformers and the Qing court itself. The Chinese nation was now to be made up of the “five races” (Manchu, Mongol,Tibetan, Muslim, and Han).37

Prasenjit Duara applied his “bifurcating linear way” mainly to examine Chinese history of the late Qing dynasty. But this approach can be expended even after the 1911 revolution and the 1950s. During the Republic period, Chiang Kai-shek followed the “culturalist” framework and denied Mongolians,Tibetans, Huis, etc., as other “nationalities” and considered them as tribes of the Chinese nation. He emphasized that China should be “one nation and one leadership”. Meanwhile, the Chinese Communist Party (CCP) followed the Soviet model and “nationalist” narrative, claiming that these groups were “nationalities”and they should have the right of “self-determination” and to establish their own nations.38

36

Duara (1995, p. 74). Duara (1995, p. 76). 38 This attitude of the CCP changed after their assuming power in 1949 (Connor, Walker, 1984, The National Question in Marxist-Leninist Theory and Strategy, Princeton: Princeton University Press, p. 87). 37

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P. R. China USSR influence Chiang Kai-shek R. China

Communist

Sun Yat-sen The Qing court Sun Yat-sen & Royalist Revolutionist Traditional Culturalism Nationalism (Universalism)

Fig. 7.2 The Bifurcating Linear Route in China

Sun Yat-sen learned “culturalism” from the royalist, and passed it on to Chiang Kai-shek; the Communist Party learned “nationalism” first from revolutionists of the late Qing and then from the Russians. This is the unimaginable historical dialect in a nation’s development process. It switches its positions continually along a bifurcating linear route from time to time (see Figure 7.2).

The Policies of the Chinese Government Since 1949 Although there were some periods of disturbance in ethnic relations in the thousands of years of Chinese history, the mainstream view always has “culturalism” in ethnic relations and integration among the groups. This process lasted until the 1950s. Under the international circumstances at that time (the Korean War), the Chinese leaders, who had almost no past administrative experience, had to seek the support of the Soviet Union and copied almost all the Soviet systems of administration, education, economy, military, and jurisdiction. The government also started politicizing and institutionalizing ethnic minorities in China based on the Soviet model. First, the government organized the “recognition of nationalities” in the early 1950s. A total of 56 “nationalities” with population sizes ranging from 718 (Hezhe39 ) to 547,283,057 (Han in the 1953 census) 39 The Hezhe, a fishing group living in Amur River, was officially recognized as a “nationality” in the late 1950s and the registration records showed that group had only 718 persons in the 1964 census.

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were officially recognized. After the recognition, all Chinese citizens were registered according to his/her “nationality status” in household registration and personal identification.The system is still in practice today. Second, an “autonomous area” system was established for all ethnic minorities. There are five autonomous regions at the provincial level, 30 autonomous prefectures, and 120 autonomous counties in today’s China. The total area of these autonomous areas together makes 64 percent of the Chinese territory. The system assumes that the minority groups play a leading role and manage their own affairs in autonomous areas.The Autonomy Law of Minority Nationalities in the People’s Republic of China was passed in the National Congress in 1984. The law became one of the basic laws in practice, detailing items regarding administration, jurisdiction, education, religious and cultural affairs, and local regulations in the autonomous areas. Third, the government has designed and practised a series of policies in favor of ethnic minorities in aspects of administrative, educational, economic and cultural development, and even in family planning programs.40 The central government provides large amount of financial aid to these autonomous areas each year.The aid covered 38–94 percent of the total budget of the five autonomous regions in 2002.41 These policies helped these minorities in their socioeconomic development and reduced the gaps between groups. But since these policies were targeted clearly at specific groups, these policies also strengthened group consciousness while the boundaries between ethnic groups and the membership status became clear and stable. These policies and institutions link ethnic minorities to a certain geographic area, provide these groups with a political status as well as 40

The members of a minority group usually were allowed to have more children, while the han has been restricted to the policy of “one couple, one child”.This was one of the most important reasons for many farmers trying to change their “nationality status” from han to a minority group. During 1982–1990, several minority groups doubled their population size mainly by switching the status (e.g., Manchu population increased from 4.3 million to 9.8 million and Tujia increased from 2.8 million to 5.7 million during the eight years) (Ma, Rong, 2004, Sociology of Ethnicity: Sociological Study of Ethnic Relations, Beijing: Peking University Press (in Chinese), p. 662). 41 Ma (2004, p. 525).

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the administrative power in their “autonomous territory”, and guarantee fast-paced growth for the ethnic minorities under the favorable policies of the central government. In the process of establishing and implementing these policies and institutions with the emphasis on “equality between ethnic groups” instead of “equality among citizens”, it will inevitably politicize and institutionalize these groups and strengthen their group consciousness, transforming them from “cultural groups” to “political groups”in the “ethnicity–nation”continuum. Some governments, including China, are paying more attention to the political aspects of the minorities because they have been pressured by western countries to promote human rights and democracy. They raised the political status of the ethnic minorities in their countries in the hope that these measures would satisfy the critiques. Unfortunately, these efforts not only satisfy the critiques for a very short period of time, but also result in the minority groups demanding even more political power knowing now that their requests will always be supported by the West. The political concessions granted did not relieve the tension among ethnic groups, but instead created a more solid base for future splittist movements.

THE IDEAL NATION–ETHNICITY FRAMEWORK: POLITICAL UNITY AND CULTURAL PLURALISM Political Unity and Equality among Ethnic Groups Fei Xiaotong proposed “a pluralist-unity structure” to describe the basic pattern of ethnic relations in Chinese history.42 This theory can be further developed into a framework of “political unity–cultural pluralism”, strengthening “national identity” at the national level whilst guiding ethnic identity with cultural characteristics at the ethnic group level. Of course, political and legal equality among all groups should be the precondition and political base for this framework. At the nation-state level, the equality of all citizens (including all ethnic groups), the political and legal rights as stated in the Constitution 42 Fei, Xiaotong, 1989,“Pluralism-Unity Structure of the Chinese Nation”, Journal of Peking University, No. 4, pp. 1–19.

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as well as the rights of all groups to maintain and develop their own cultural traditions (including language, religion, customs, etc.) should be guaranteed.This framework combines political unity, ethnic equality and cultural diversity.

“Ethnic Cultural Pluralism” and “National Cultural Identity” There are two levels in cultural identities: one is the traditional culture of each ethnic group at the group level; another is the national culture at the national level. Habermas emphasizes that by national identity, a national cultural unity is also needed for creating a group identity at the nation-state level.43 At the national level, members of all ethnic groups should respect the common social norms; at the ethnicity level, each group should respect, even appreciate, the cultures of other fellow groups. An Indian scholar who has spent a long time in the former Soviet Union compared the nation-building process in India and the Soviet Union. He pointed out that: The Soviet Union came into existence as a multinational nation-state without creating an inter-ethnic, composite culture which would have promoted a common identity of the Soviet people in the form of “Soviet nationalism”. In the absence of such a common unifying identity, constituent nationalities were bound to develop separate, distinct identities of their own which led to the growth of separate nationalism.44

The way the former Soviet Union handled its nationality/ethnicity issues and its emphasis on common ideology (Communism) as the major linkage among its ethnic groups created a great risk.The nation might disintegrate when the ideological linkage among groups broke while separate national identity remained strong in these groups. 43

Habermas, J., 1998, Die Postnationale Konstellation: Politische Essays, Suhrkamp Verlag Frankfurt am Main. 44 Behera, Subhakanta, 1995, Nation-State: Problems and Perspectives, New Delhi: Sanchar Publishing House, p. 31.

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In contrast, the Indian government tried very hard to create an Indian national identity in the process of its nation-building after independence. There were so many groups in India with different religious, linguistic, ethnic, caste, and even political backgrounds [the Communist Party holds the power in three Pradeshes (provinces)] that India was never unified before the British domination. After its independence, “India, though a multinational state, has developed ‘Indian nationalism’ as a common bond, and the ‘India’ as the common nationality”.45 Another study reported that about 90 percent of the survey respondents in India said that they were proud of being “Indians”; the percentage of positive responses to this question to test “national identification” in India was even higher than that in Spain, Argentina, Brazil, Belgium, Switzerland, and Germany.46 The nation-building in India is still in process and there have been ethnic nationalist movements in India among the minority tribes and even guerrilla wars. But to a certain extent, these issues have not been internationalized to become a serious threat to Indian unity. On the other hand, the caste system in India is mainly a social structure (hierarchic social status system) with limited political meaning in the modern sense. The United States of America is a young nation and its citizens come from all parts of the world with various racial/ethnic, linguistic, religious, and cultural backgrounds. Under the framework of “cultural pluralism–political unity”, these immigrants gradually established their new identity and loyalty to the nation. It seems that both India and the United States have tried hard to de-politicize or “culturalize” their domestic ethnic minorities and have successfully created a “national identity” among the majority of their citizens. Of course, there are racial, ethnic and religious conflicts in India and the US as in other nations, but there has been no real threat from minorities to the national unity.The Chinese may learn from the Soviet Union, India and the United States in guiding the direction of its ethnic relations. 45 46

Behera (1995, p. 6). UNDP, 2004, Human Development Report 2004, New York: United Nations, p. 49.

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DISCUSSION The successful strategy of “culturalizing” ethnic minorities in the Chinese tradition still plays a positive role in the United States today — a nation in another continent across the Pacific Ocean. This historical position should be carefully reviewed by the Chinese. Although in general the ethnic relations in today’s China are smooth and cooperative, the differences among ethnic minorities in national identification remain. The Chinese should learn from their ancestors in the area of ethnic relations. They should also learn from other nations for both positive and negative lessons. China could consider switching from “politicizing” to “culturalizing” its ethnic relations in the future. The route of “de-politicizing”ethnicity might lead China to a new direction — strengthening national identity among ethnic minorities, while guaranteeing the prosperity of their cultural traditions. Of course, protecting the rights and benefits of ethnic minorities in that process will still be a big task. But to guide ethnic relations in a modern civic model (citizenship and diversity) instead of the traditional tribal model (group or regional autonomy-separatism)47 might be an alternative for China in the new century. There are over 195 members in today’s United Nations. Many of them are multiracial/multiethnic nations which became independent political entities at different times. Though tension exists among ethnic groups within these nations, these groups came together as a political entity recognized by the international society of the UN. In domestic majority–minority relations, de-politicizing ethnicity while strengthening national identity might be a strategy for keeping the national unity and for achieving a successful nation-building process. Meanwhile, no country should intervene in the domestic affairs, including ethnic relations, of other nations. The national boundaries recognized by the international society should be fully respected, even if there might be some debates about them. When nations handle their domestic ethnic relations as well as their relations 47

Gross, Feliks, 1998, The Civic and Tribal State,Westport: Greenwood Press.

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with other nations maturely, then a peaceful international order may be achieved. When there is equality among groups along with a high level of social development, economic prosperity, democracy and cultural diversity, the tension among ethnic groups will fade and vanish as minorities do not see the need to fight for their rights and benefits. Ethnic identity will thence lose its political meaning and cultural heritage will be enhanced.

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Chapter

8 Is There an Asian Value? Popular Understanding of Democracy in Asia Tianjian Shi

More than ten years ago, an important and emotional debate broke out among scholars who specialize in Asian politics and economy. The debate was set off by an interview conducted by Fareed Zakaria, editor of Foreign Affairs, with Minister Mentor Lee Kuan Yew of the Republic of Singapore. In the interview, Mr Lee argued that “more than economics, more than politics, a nation’s culture will determine its fate.”1 Although his argument simply states that Asian culture is different from Western culture, and the cultural differences between the East and the West can have certain impact on political processes in different societies, such a simple claim triggered strong and emotional opposition from the intellectual community in the West. Some extremists even charged Mr Lee for being a racist, for they interpreted 1

Zakaria, Fareed, 1994, “Culture is Destiny: A Conversation with Lee Kuan Yew”, Foreign Affairs 73, March–April, pp. 109–126. 167

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his statement as denying the rights of people in Asian societies to enjoy democracy. The emotional nature of the debate could only be understood in the context of the international environment at that time.The Soviet Union collapsed in 1991. After its collapse, many scholars believed that the struggle between liberal democracy and Communism was over. As democracy became the only game in town,2 no other type of regime could be considered as legitimate in this world. Of course, no other ideology that might challenge the dominant ideology, liberal democracy, was considered as legitimate at the time. Although both the proponents and opponents of Asian value arguments felt very strongly about the issue, it is surprising to find that the debate was based primarily on logical deduction. Up until now, little, if any, serious empirical work has been done to explore political culture in this critical region of the world. This study is designed to fill this gap. With the help of the data collected in the first wave of Asian Barometer Surveys (ABS) 2002–2003,3 this paper tries to answer two important questions: first, is the value system of people in Asia significantly different from that of people in the West as claimed by Minister Mentor Lee from Singapore? Since the real issue that triggered the Asian value debate is whether Asian value, if there is one, is compatible with democracy, I will concentrate my empirical research on the relationship between Asian values and democracy. Second, if there are indeed Asian values, whether and how do they differ from that of the system we are familiar with? Even if we find that people in Asia want democracy, the democracy wanted by them may differ from the democracy defined in the Western culture. Unless we can show that people in Asia want democracy and the democracy wanted by people in Asia is identical with that of the West, we cannot deny that there exist Asian values that are different from other cultures. I conclude the article 2

Linz, Juan, and Alfred C. Stepan, 1996,“Toward Consolidated Democracies”, Journal of Democracy 7, No. 2, p. 15. 3 Sampling procedure can be found in www.asianbarometer.org/newenglish/ surveys/SurveyMethods.htm.

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with a discussion on the implications of the findings from our empirical analysis of Asian values from survey data.

DEMOCRATIC DEMANDS AMONG PEOPLE IN ASIA The heart of the Asian value debate is the validity of modernization theory — whether economic development will lead to democracy and democratization in Asia as in many other parts of the world. Fareed Zakaria asked Mr Lee whether economic development in Asia will make people demand democracy as in other parts of the world. Mr Lee challenged the validity of modernization theory and argued that political culture plays a powerful role in shaping people’s orientation and political processes in Asian societies. For him, economic development in this region has yet to alter people’s value orientations. Since the issues of democracy and democratization occupy a central position in this debate, I will start my empirical exploration by examining whether people in Asia have developed a desire for democracy as did people in other parts of the world.Two groups of questions are used in ABS I to gauge people’s attitudes towards democracy in Asia. First, the survey asked respondents in eight Asian societies to report their preferences for regime type. For this purpose,ABS chose a widely used question to track people’s preferences among regime types.4 The question asked respondents which of the following statements is closest to their opinion: (a) democracy is preferable to any other form of government; (b) in certain situations, a non-democratic government can be preferable; or (c) to people like me, it does not matter what form of government we have.Those who chose (a) over (b) and (c) are coded as committed to democracy (CTD), and the rest are coded the other way. In Figure 8.1, I report the percentage of people in each of the eight Asian societies who reported that they prefer democracy to 4 Mattes, Robert, and Michael Bratton, 2007, “Learning about Democracy in Africa: Awareness, Performance, and Experience”, American Journal of Political Science 51, No. 1, pp. 192–217.

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Fig. 8.1 Commitment to Democracy Sources: Afro Barometer, Latino Barometer, Southeast Asia Barometer and Asian Barometer.

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authoritarian rule against the preferences of people from other parts of the world. The data presented seem to refute the claim made by the proponents of Asian values — democracy appears to enjoy considerable support among people in Asian societies included in the survey. On average, 58.8 percent of people in East Asia reported that they prefer democracy to other kinds of regimes.Although people in East Asia as a whole seem to be less committed to democracy than people in other continents, democracy in East Asia enjoys no much less support than in Africa and Latin America as revealed in the Afro and Latino Barometers respectively. Within East Asia, however, the level of CTD varies significantly from society to society. While a majority of people in 5 out of 8 societies included in the ABS prefer democracy to any other kind of regime, the majority of people in 3 out of 8 societies prefer other kinds of regimes to democracy. The analysis shows that the CTD is low for new democracies, especially for people in South Korea and Taiwan. Although pro-democracy sentiment in post-transition regimes is found to be unusually low, the level of popular CTD in these two societies is alarming as it is even lower than in mainland China. Last but not least, despite popular demands for democracy in Hong Kong being widely reported, the general level of support for democracy in Hong Kong appears to be the lowest among all societies included in the ABS. Although the analysis of CTD reveals that people in East Asia prefer democracy to other kinds of regimes, it does not fully address the questions raised by the proponents and opponents of the Asian value debate. In fact, the basic logic behind the Asian value argument is that liberal democracy is not fully compatible with culture in East Asian societies, especially societies dominated by Confucianism. The Asian value argument may be rephrased as stating that despite democracy being desired by people in Asia, the concepts, institutions and processes of democracy may not be compatible with that of the cultural environment in Asian societies. Thus, there exists a possibility that although people in Asia prefer democracy to any other kind of regime, they may not believe that democracy is suitable for their own societies.A man may prefer a red shirt over shirts of any other color; however, his preference for red shirts does not indicate that

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he believes red shirts are suitable for him to wear. Despite people in those societies preferring democracy over other kinds of regimes, they may not necessarily think that such a regime type is suitable for their own country/region. For example, democracy is believed to be closely associated with a vibrant middle-class.5 Some people who are committed to democracy may believe democracy has yet to become suitable for their own society, for a middle-class has yet to be developed therein. Others may argue that despite their preference of democracy to other kinds of regimes, democratic regimes are not compatible with the political culture in East Asia. Still others may argue that until the rule of law is established in a society, introducing democracy may create chaos.6 Thus, despite a person believing in and being committed to democracy, he may still not believe that democracy is suitable for his own country. Our second survey question asked people to evaluate whether democracy is suitable for their societies.To find out if people perceive democracy as suitable to their own polities, ABS includes a question which reads,“Here is a scale: 1 on the scale means complete dictatorship and 10 means complete democracy.At what number on the scale would you think our country should be now?”We present the mean values of the answers given by people in each of these eight societies in Figure 8.2. The data presented in Figure 8.2 show that the absolute majority of people in East Asia perceived democracy as suitable for their own society. Again, people in Thailand took the lead in East Asia — the mean score for the answers to this question given by Thais reached 8.76 on a ten-point scale. People in mainland China followed the lead 5

Moore, Barrington, Jr., 1966, Social Origins of Dictatorship and Democracy: Lord and Peasant in the Making of Modern World, Boston, Mass.: Beacon Press; Nie, Norman H., Bingham G. Powell Jr., and Kenneth Prewitt, 1969a,“Social Structure and Political Participation: Developmental Relationships, Part I”, American Political Science Review 63, No. 2, pp. 361–378; Nie, Norman H., Bingham G. Powell Jr., and Kenneth Prewitt, 1969b,“Social Structure and Political Participation: Developmental Relationships, Part II”, American Political Science Review 63, No. 3, pp. 808–832. 6 Zhao, Suisheng, 2006, Debating Political Reform in China: Rule of Law vs. Democratization, Armonk, NY: M.E. Sharpe.

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Fig. 8.2 How Suitable is Democracy for Your Society?

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of the Thais, and Mongolians are paired with people in mainland China. To our surprise, however, less people in Taiwan — the newly emerged model of democracy in East Asia — perceived democracy as suitable for their society than people in other societies in East Asia. Among people in the eight Asian societies, people in Taiwan gave the lowest score to this question. Despite enjoying full civil liberties and political rights, less people in Taiwan believe that democracy is suitable for their society than people in any other societies included in the first wave of ABS. Two puzzles emerge from the previous analysis: first, our analysis shows that in one of the most democratic societies in East Asia — Taiwan — not only do less people prefer democracy over other kinds of political regimes, but also fewer people perceive democracy as suitable for their societies than people in not-so-democratic societies in the same region. Why are people in one of the most democratic societies in Asia less committed to democracy than people in not-so-democratic societies? Second, and probably a more serious puzzle, is why Thais, who show the strongest support for democracy in surveys, tolerated and even supported the coup of December 2006?

DEMOCRATIC SUPPLIES In the previous section, I examined the democratic demands among people in East Asia. Our analyses seem to suggest that the majority of people in East Asia are committed to democracy as they not only prefer democracy to any other form of regime, but also believe democracy is suitable for their own society. Contrary to the Asian value argument, democratic demands in East Asia are rather high.The above findings seem to provide strong evidence for scholars to reject the Asian value argument. Before reaching any conclusion, however, we want to remind our readers that most studies of people’s commitment to democracy are confined to the demand side — how many people in different societies want democracy. In real life, however, people’s desire for democracy is the function of the supply and demand of democracy in their society. Let us assume that we have

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two persons in front of us. One lives in a liberal democratic society and the other lives in an authoritarian one. Suppose we ask them the same question — how much democracy do they want — and we get the same result: 8 on a 10-point scale. Can we conclude that their desire for democracy is identical? Probably not. To understand the strength of their desires, we need to ask at least another key question, that is, how much democracy do they enjoy now, to understand the supply side of the equation. Demands for democracy matter for people in East Asia. However, talking about democratic demands without examining the supply side (extent) of democracy can be misleading. How does one measure the extent of democracy in general and in East Asian societies in particular? Many students of comparative politics rely on Freedom House (FH) scores to represent the extent of democracy in different societies. We do not deny the importance of FH scores, but would like to point out that FH scores are an objective evaluation of the extent of democracy. As revealed by students of comparative politics, however, social movements, revolutions and democratic transitions as well as breakdowns of democracy usually occur when the objective situation facing political actors becomes better.7 Such findings made students of comparative politics realize that what triggers crisis that may lead to regime change in different societies is usually not the objective political environment facing political actors, but their subjective evaluation of the political situation in their society. Thus, the subjective evaluation of democratic extent by actors in a society may, not surprisingly, play a more important role in a democratic transition than an objective evaluation given by experts. Since people’s subjective evaluations of democratic supply might be shaped by many variables, we cannot simply assume that the FH score reflects people’s subjective evaluations. To measure people’s subjective evaluations of democratic supply in their own societies, ABS asked respondents to evaluate based on a 7

Skocpol,Theda, 1994, Social Revolutions in the Modern World, Cambridge Studies in Comparative Politics, Cambridge: Cambridge University Press; Skocpol, Theda, 1979, The State and Social Revolutions, New York: Cambridge University Press; Gurr, Ted Robert, 1970, Why Men Rebel, Princeton, NJ: Princeton University Press.

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scale:“1 means complete dictatorship and 10 means complete democracy. Where would you place our country under the present government?” The mean values of the answers given by people in each country are presented in Figure 8.3. The results of the analysis again surprised us — among eight societies included in the ABS, people in authoritarian China gave the second highest evaluation of the democratic extent in their own country. The mean score on democratic extent acquired from mainland China, the only non-democratic society in the ABS, is even higher than the democratic extent perceived by people in Japan, the oldest and most mature democracy in Asia. I would like to emphasize here that this finding neither suggests that China has become democratic nor that the score assigned by FH for China is incorrect. Rather, the finding suggests that there exists a substantial difference between the evaluation of democratic extent in China given by experts from the outside world and people in mainland China itself. Such a difference, if true, can have significant political implications. Nonetheless, it is not hard for us to imagine that many readers may challenge the validity of the findings presented in Figure 8.3. Since China is still an authoritarian society and the regime there does not hesitate to suppress unauthorized political expression, some readers would argue that the fear of political persecution may prevent people in mainland China from telling interviewers their true evaluation of democratic extent in the survey. To test such a possibility, I included two questions to measure political fear in Chinese society. Since I reported on the validity of surveys in China elsewhere, I am not going to repeat the test here.8 Instead, I will summarize the finding below. Two instruments were included in the survey of mainland China to measure political fear. The respondents were asked if they criticized government officials or government policies, were they afraid of being reported by someone to the authorities. Nearly a quarter of respondents reported that they were somewhat afraid or afraid of 8 Shi, Tianjian, 1996, “Survey Research in China”, in Research in Micropolitics, eds. Michael X. Delli Carpini, Huddy Leonie, and Robert Y. Shapiro, pp. 213–250, Greenwich, Conn.: JAL Press.

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Fig. 8.3 Democratic Supplies in Different Societies

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being reported if they criticized government officials or government policies. The finding confirms that political fear is indeed a problem in mainland China. Conceptually, however, the existence of political fear in a society does not necessarily mean that such fear will influence people’s answers to survey questions on the democratic extent in their society. In other words, we believe that whether political fear in China influences people’s evaluation of democratic extent in surveys is an empirical issue. Logically, we assume that those who are afraid of political persecution would give low scores to questions asking about the democratic extent in China because they do not enjoy democracy. However, if political fear prevents people from giving interviewers candid answers to survey questions regarding democratic extent, the relationship between political fear and one’s appraisal of democratic supply should be positive — those who are fearful of political persuasion would give high “appraisal” to democratic supply in Chinese society.Thus, the relationship between political fear and subjective evaluation of democratic supply in the society should be positive. Our analysis shows that the bivariate correlation between political fear and subjective evaluation of democratic supply is negative — the more fearful a person is, the less the person evaluates democracy extent in China. Moreover, multivariate analysis shows that when structural factors are controlled, political fear appears to have no independent effect on people’s subjective evaluation of democratic supply. These results clearly suggest that the high level of subjective evaluation of democratic extent in mainland China cannot be attributed to political fear. Having demonstrated people’s subjective evaluation of their own democratic demands and supply in their own society, I will compare the gap between democratic demands and perceived democratic extent for people in different societies. To understand the importance of such a comparison, let us assume two different scenarios. In the first scenario, people’s democratic demands are rather low but the perceived democratic extent is approaching zero — the gap between democratic extent and democratic demands can be fairly large. In this case, it is 5. In the second scenario, the democratic

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demands are high — for example, an 8 on a 10-point scale — but the perceived democratic extent is also high: 7 on a 10-point scale.The gap between extent and demand in the second scenario is rather small. The implication of these two scenarios for political development in those societies must be fundamentally different. We thus argue that although the absolute level of democratic demand and extent perceived by people in societies matters, what matters more should be the perceived gap between democratic extent and demand in different societies. In Figure 8.4, I present the gap in the mean values between democratic extent and demand perceived by people in eight Asian societies included in ABS. The findings can be summarized as follows: among people in these societies, people in Hong Kong see the largest gap between democratic demand and extent. As people in Hong Kong enjoy a good level of civil liberty but fewer political rights, the finding is easy for us to understand. In fact, such a finding helps to explain why the struggle for democracy continually occupies a central position in Hong Kong politics. Secondly, people in Japan and the Philippines are found to feel little gap between democratic extent and demand in their societies. Since these two countries are the oldest established democracies in Asia, we should not be surprised to find that the people here see a small gap between democratic extent and demand. Beyond this point, the analysis also reveals several findings that come as a surprise to students of comparative politics in general and Chinese politics in particular. The first counterintuitive finding is that the analyses reveal that the gap between democratic extent and demand perceived by people in mainland China is smaller than the gap perceived by people in liberal Hong Kong and newly democratized Mongolia. China is the only authoritarian regime included in the survey. FH assigned a miserable score of 7 for its civil liberties and 6 for political rights.Why do ordinary Chinese feel differently? More specifically, why do ordinary people in China fail to identify the huge gap between their democratic demands and their perceived democratic extent? Another counterintuitive and surprising finding is that people in Taiwan reported that the extent of democracy in their society exceeds their demands for democracy. To

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Fig. 8.4 The Gaps between Democratic Supply and Demand

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my knowledge, this is the only case in the world where people in any society reported that too much democracy is available in their society. Why do people fail to identify a huge gap between democratic extent and demand in mainland China? Why do people in Taiwan tell interviewers that the democratic extent in their society exceeds what they desire? How can we explain these puzzles? These counterintuitive findings remind us of the possibility that democracy could be defined differently in these two Asian societies. It is true that we learned from ABS that people prefer democracy to any other kind of regime.What we do not know, however, is how people in these societies interpret democracy.To understand the puzzles revealed in the above analysis, we need to explore whether the meaning of democracy in the minds of Asian people in general and in the minds of people in the above two societies in particular is identical with the meaning of democracy in the mind of scholars.

TESTING THE MEANING OF DEMOCRACY AMONG ASIAN PEOPLE One way to explore democracy as perceived by people in the two Chinese societies is to find out if people who claim that they are committed to democratic rule are actually committed to the principles and practices associated with a democratic government. Theoretically, we should expect that those who claim that they are committed to democracy would reject various authoritarian alternatives. In fact, many students of comparative politics use questions measuring people’s CTD and people’s rejection of dictatorship to form an index of democratic demands.This index is then used to predict the consolidation of new democracies.9

9 Mattes and Bratton (2007); Bratton, Michael, and Nicolas Van de Walle, 1997, Democratic Experiments in Africa: Regime Transitions in Comparative Perspective, Cambridge Studies in Comparative Politics, Cambridge, UK: Cambridge University Press; Bratton, Michael, Robert B Mattes, and Emmanuel Gyimah-Boadi, 2004, Public Opinion, Democracy, and Market Reform in Africa, Cambridge Studies in Comparative Politics, New York: Cambridge University Press.

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Do people who claim that they are committed to democracy actually reject authoritarian alternatives?10 To find out if people in Asia are detached from authoritarian rule, ABS adopted a scale developed by Rose, Mishler, and Haerpfer.11 There are four major alternative forms of authoritarian government that exist and may be accepted by most people: presidential dictatorship, one-party rule, military government, and rule by technical experts. ABS therefore used four questions to form a battery to measure people’s detachment from authoritarian alternatives.The questions first assured respondents that some people in their society want to change the way their societies were governed.Then, interviewers were instructed to ask respondents if they strongly agreed, agreed, disagreed, or strongly disagreed with the following statements: (a) we should get rid of parliament and elections and have a strong leader to decide major issues facing the country;12 (b) no opposition party should be allowed to compete for power;13 (c) the military should come in to govern the country; and (d) we should get rid of parliament and elections and have experts decide everything. If a respondent rejects all these alternatives, it means that the person is psychologically detached from authoritarianism (DFA).To facilitate presentations and analysis, I collapsed the four response categories into a dummy response in which a 0 means that the respondent is willing to tolerate a particular form of authoritarian rule, and 1 indicates that the respondent is not willing to tolerate that authoritarian alternative.14 The result of the analysis is presented in Table 8.1. 10

Bratton, Mattes, and Gyimah-Boadi (2004). Rose, Richard, William Mishler, and Christian W Haerpfer, 1998, Democracy and Its Alternatives: Understanding Post-Communist Societies, Baltimore, Md.: Johns Hopkins University Press. 12 Since national elections have yet to be introduced to mainland China, we asked people there if they agreed that national leaders should be elected by the general populace in the society to achieve functional compatibility. 13 For mainland China respondents, they were asked if an opposition party should be allowed to compete for power. 14 Only two questions were asked in mainland China. Therefore, we adjusted the score acquired in mainland China to make it compatible with the scores acquired from other Asian societies. 11

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Is There an Asian Value? 183 Table 8.1 Commitment to Democracy and Detachment from Authoritarianism Countries/Regions

CTD

DFA

CTD–DFA

Correlation

Thailand Japan Philippines Mongolia Mainland China South Korea Taiwan Hong Kong

82.6 67.2 63.6 57.2 53.8 49.4 40.4 40.2

43.1 54.3 35.6 36.9 7.5 65. 1 50.0 49.4

39.5 12.9 28 20.3 46.3 −15.7 −9.6 −9.2

0.103 0.233 0. 100 0.312 0.092 0.184 0.177 0.207

Source: Data is from ABS I. Note: Entries are percentage.

In the first column is the percentage of people in each society who claim that they prefer democracy to authoritarian rule in any situation. In the second column is the percentage of people in each society who claim that they reject all authoritarian alternatives. The percentage difference between people who claim that they are committed to democracy in each society should be roughly the same as people who reject all authoritarian alternatives.Theoretically, if one prefers democracy over any other kind of regime, the person should reject all authoritarian alternatives. Thus, if people’s understanding of democracy in these Asian societies is identical to that of expert opinion, the figures in the third column, which are the differences between the percentage of people who claim that they prefer democracy to other kinds of regimes and the percentage of people who claim that they reject all kinds of authoritarian rule, should approach zero for each society. The results of this analysis reject the previous hypothesis.As data in Table 8.1 reveal, there exists a major discrepancy between CTD and DFA. For example, while the data show that more than 82 percent of Thais claim that they prefer democracy to any other kind of regime, only slightly more than 42 percent of people in Thailand reject all authoritarian alternatives. Such a finding may help explain why despite the survey showing that Thais overwhelmingly reported that

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they supported democracy, millions and millions of people went on the street to welcome the coup of early 2006. A similar gap can also be found among people in the Philippines — while more than 63 percent of Filipinos claim that they prefer democracy to any other kind of regime, 30 percent less people reject all authoritarian alternatives.Apparently, when a person claims that he is committed to democracy, that person may not reject all authoritarian alternatives. The data presented in Table 8.1 also reveal a very interesting and important pattern — beyond mainland China, people in societies under the direct influence of Confucian culture seem to be more likely to reject authoritarian alternatives than to claim that they prefer democracy. In the data presented in column 3, the entries for Taiwan, Hong Kong and South Korea are negative, while the entries for Thailand, the Philippines, Japan and Mongolia appear to be positive.15 Further statistical analysis reveals that the correlation between CTD and DFA is either approaching zero or nearly non-existent — the Pearson’s correlation coefficient is only 0.185 for data gathered from Asia. Further analysis of the correlation between these two variables surprises us again: among these eight Asian societies, the correlation between these two variables is highest in countries with a Communist tradition. The correlation between CTD and DFA for Mongolia is 0.312, the highest in Asia.The correlation between these two variables in Thailand is 0.103, which is the lowest among these societies. Although the figure for mainland China is even lower, it is not known if the lower figure is due to different institutions or different survey questions used there.Taken together, the findings seem to confirm that although a majority of people in Asia reject authoritarianism and claim that they prefer democracy to any other kind of regime, the meaning of “democracy” in their minds seems to be different from that of the liberal democracy defined by Western experts. 15 Despite some claiming that Japan is under the influence of Confucianism, more than 50 years of democratic experience may have had a certain influence on people’s attitudes towards democracy therein.

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THE MEANING OF DEMOCRACY IN MAINLAND CHINA AND TAIWAN Many societies included in the ABS are neither democracies nor dictatorships — they are “hybrid regimes” as defined by Larry Diamond. Though channels of communication between state and society in these societies are not institutionalized, channels do exist and provide people with real opportunities to express their interests to public authorities. Sometimes, such interests can be properly addressed and taken care of by rulers in these societies.16 In fact, these regimes are also the ones that are embedded in “Asian values”. The political culture (whether they are Asian or not) of these societies requires rulers to take people’s interests into consideration.The culture also requires rulers to listen to people’s opinions when making decisions on politics and governmental affairs, although no formal institutional constraints have been built into the system to constrain political leaders in these societies.17 Although Western scholars usually characterize such regimes as either totalitarian or authoritarian as the governing principles defined by political culture in these societies are essentially different from the liberal democratic ideology of the Schumpeterian tradition, it is not too hard for us to imagine that rulers in these societies may successfully persuade their people that their regime works on the “for the people” principle, thus interpreting their political institutions as some kind of democracy. Political leaders in hybrid regimes may claim themselves to be democratic through a reinterpretation of the meaning of democracy.The key issue here is whether these rulers can successfully sell such ideas to their own people. If yes, we may attribute the high appraisal of the democratic extent in these societies revealed in the previous analysis to the different understanding of the meaning of democracy for people in Asia as shaped by the political culture in this region. 16

Diamond, Larry Jay, 2002,“Thinking About Hybrid Regimes”, Journal of Democracy 13, No. 2, pp. 21–35. 17 Pye, Lucian W., 1985, Asian Power and Politics: The Cultural Dimensions of Authority, Cambridge, Mass.: Harvard University Press.

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There are two versions of democracy — liberal democracy and minben democracy. For students of democratic transitions in general and Chinese politics in particular, there seems to be only one version of democracy — political institutions that were developed in Western societies. The intellectual tradition of liberal democracy is associated with such scholars as Hobbes and Locke. This exogenously-developed concept of democracy was imported into Chinese society by intellectuals in the early 20th century.18 In addition to the liberal tradition of democracy, there is another version of “democracy” which is associated with the intellectual tradition of Confucius and Mencius in Chinese political culture. In this intellectual tradition, the word minben, which means “for the people”, was used to describe the proper relationship between state and society.19 Despite the words minben and minzhu (democracy) being used interchangeably in Chinese, there are several crucial differences between them. First, these two versions of democracy differ in their respective assumptions on the nature of the relationship between individuals and the state. For minben, the relationship between individuals and the state is defined as a model relationship within a family. While governments are conceptualized as parents, people are considered children in a family. In other words, the relationship between individuals and states in this intellectual tradition is defined as paternalistic. Such a definition of the relationship between state and society has significant political implications — the state is required to take care of the interests of its own people as parents take care of their 18

Nathan, Andrew J., 1985, Chinese Democracy, 1st ed., New York: Knopf. Distributed by Random House. 19 Such an understanding of democracy is further reinforced by the Leninist ideology dominating the political arena in China for around 30 years after the founding of the PRC.The official ideology stated that the Communist Party consisted of pioneers of the proletariat revolution who knew the secret of the law of historical development. Those pioneers were capable of providing guidance to people in the society as they knew what their long-term interests were. Since such an ideology is largely compatible with the classical intellectual tradition in China, the CCP has been quite successful in using state power to promote such an understanding of democracy since 1949.

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children (i.e., the people), while the people are obligated to obey the leadership of their government. For minzhu, the relationship between individuals and the state is defined as reciprocal — the government has been granted the power to rule by the people and in turn, it is obligated to satisfy the people’s needs. If the government fails to satisfy people’s requirements, the people would have the power to withdraw their support of the government. Secondly, the two versions of “democracy” define freedom in different ways. Liberal democratic tradition sees individual freedom as natural rights enjoyed by ordinary people in society. Although the establishment of a sovereign power requires the people in a society to partially transfer their rights to the government, the regime is not supposed to deprive the people of their freedom of expression for it is crucial for them to pursue their own private interests. Minben, on the other hand, requires a good government to make decisions in consultation with the people and to allow them freedom of speech. Mao himself argued that “allowing people to speak will not make the sky fall apart.” Some scholars argue that it is also a liberal tradition of Confucianism to allow freedom of speech. I argue that such an understanding actually misreads Confucianism and thus blurs an important difference between the two intellectual traditions. Keep in mind that minben makes it an obligation for government to make proper decisions on behalf of its own people just like parents make decisions for their children.20 To achieve such a goal, government is encouraged to solicit opinions from its own people.Although people are allowed to express their opinions, such expression is defined in the minben tradition as a privilege given by the authority rather than a natural right enjoyed by individuals. Thirdly, since the liberal democratic tradition assigns equal rights to all people in a society, an inherent difficulty facing a government under this tradition is to find the proper standard for public authority to evaluate demands made by different people. If everyone in the society has equal rights, how can a government

20

Pye (1985).

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decide on whom to listen to? The only reasonable solution would be to follow the preferences of the majority of people in the society. This raises a second difficulty for the government, that is, how does a government get to know the preferences of the majority in its society? One way to resolve this problem is to create a political market and set up rules for different interests to compete. The government enforces the rules and accepts whatever solution the people have come up with through competition. Under such an institutional setting, procedure plays a critical role in determining justice in the liberal democratic tradition. Confucianism, on the other hand, makes it an obligation for the government to make decisions on behalf of its citizens. Instead of being a rule-keeper who has to accept whatever solution is proposed by the people, the minben tradition requires government to make wise decisions for its own people. In this tradition, the legitimacy of decisions made by public authority is not judged by whether the regime follows the proper procedure but by its substance, i.e., whether decisions by government bring real benefits to its people. As minben emphasizes policies based on this principle, “democracy” is an offshoot of the minben tradition of substantive democracy. Of course, the above discussion is based on ideal types and there can be large variations in people’s understanding of democracy in each of these ideal types. Although the intellectual tradition of these two versions of democracy is fundamentally different — while the idea of minben was endogenously developed in ancient China and its intellectual tradition can be traced back to Confucius and Mencius in 500 BC, the liberal democratic idea was exogenously imported from abroad into China more than 100 years ago — few people from these two traditions are actually aware of such important differences. When the liberal democratic idea was introduced to the Chinese society, they were probably heavily influenced by the traditional political culture. Research by students of international relations shows that when a concept travels across borders, the structure, institutions and political culture of the recipient country will always influence the people’s

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understanding of such new concepts.21 We thus expect traditional political culture in both traditions to have made an influential impact on people’s understanding of democracy, including people who believe that they are committed to liberal democratic ideas. As the differences in the definition of democracy in these two intellectual traditions are rather subtle, people are expected to keep the essence of their traditional political culture when accepting the new culture. To find out if this is indeed the case, we asked a straightforward question in the survey:“Everybody talks about democracy, what does democracy mean to you?” Interviewers were instructed to probe respondents three times. Analyzing answers to this open-ended question requires language skills — coders must be able to understand the subtle differences in the choice of words by respondents. Instead of analyzing data gathered from all eight societies, only data gathered from mainland China and Taiwan will be presented here as these two societies represent two poles in the survey and both of them use Chinese as their language. The level of economic development in these two societies is clearly different. While the per capita GDP of mainland China is around $3,000, the per capita GDP of Taiwan exceeds $15,000. Politically, Taiwan has well-developed democratic institutions and mainland China remains an authoritarian society. While Taiwan has been rated as a totally free society — people there are believed to enjoy full civil liberties and political rights — mainland China has been criticized as the exact opposite — people enjoy no civil liberties and little political rights. Despite these structural and institutional differences, these two societies are similar on one key account, that is, both of them are under the heavy influence of Confucian culture which constitutes the core of “Asian value”. Thus, the two cases provide us with a near ideal quasi-experimental research 21

Finnemore, Martha, and Kathryn Sikkink, 1998,“International Norm Dynamics and Political Change”, International Organization 52, No. 4, pp. 887–917; Finnemore, Martha, 1996, National Interests in International Society, Cornell Studies in Political Economy, Ithaca, NY: Cornell University Press.

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design which allows us to at least partially resolve the endogenicity problem that is usually associated with political cultural studies. Table 8.2 presents answers given by people in these two societies to the open-ended questions on the meaning of democracy. What are the differences in answers? The first major difference is in the number of “Don’t Know” (DK) in people’s answers to questions on democracy.While around 25 percent of people said that they did not know the answer when asked if they preferred democracy to any other kind of regime, nearly half of people in mainland China claimed that they do not understand what democracy means. Compared to mainland China, the DKs in Taiwan are much lower. While 15 percent of respondents told our interviewers that they did not know if democracy is preferable to other kinds of regimes, 17 percent of people claimed that they did not know the meaning of democracy when answering the open-ended question. The finding Table 8.2 Meaning of Democracy for Respondents in China and Taiwan China What Does Democracy Mean to You?

Taiwan

Percent

N

Percent

N

22.9

739

48.6

687

54.7 13.5

429

33.7 13.4

190

17.1

544

5.7

81

16.9 7.2

538 229

6.8 7.8

96 111

Election, Check and Balance, Rights Elections and Participation in the Decision Making Check and Balance, Rights to Participate

17.9 11.6

371

14.4 10.4

147

6.3

200

4.0

56

Don’t Know

42.1

1340

17.0

241

Freedom Freedom and/or Equality Paternalism Listen to People’s Opinions when Making Decisions Soliciting People’s Opinions when Making Decisions Joint Decision Making Government for the People

Source: 2002 Asian Barometer Study. Note: Total exceeds 100 percent due to multiple answers being allowed for each respondent.

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suggests that a substantial number of people in mainland China claim that they prefer democracy but have no clear idea what democracy is. Secondly, more people in Taiwan (48.6 percent) define democracy in terms of ziyou (freedom) than in mainland China (22.9 percent). However,a point to note is,the meaning of ziyou in the minds of people in these two societies may not necessarily be identical to our definition of freedom.The word ziyou in Chinese may have different connotations from the word “freedom” used in the West.When probed by interviewers, around five percent of people in mainland China said that democracy means “I can do whatever I want to do”. It is also not uncommon for people in Taiwan to give us similar answers to the same question. Rather than coding such answers as freedom, we believe such answers should be coded as anarchy — freedom without constraints of the rule of law and that would make a country return to a state of nature. Having discussed the differences between these two societies, what are the similarities? The most important similarity in the answers given by people in these two societies is that only a small percentage of people in both societies interpret democracy in terms of periodical elections for people to choose leaders, checks and balances, and rights of people to participate in decision-making processes. In mainland China, only 17.9 percent of respondents interpret democracy in terms of key democratic institutions defined by liberal democratic ideas; only a little more than 14 percent of people in Taiwan interpret democracy in such a way. Although the people in Taiwan have been living in a democratic polity for nearly two decades, only a small percentage of people understand the meaning of democracy in terms of the liberal views developed in the West. Last but not least, a substantial number of people in mainland China understand democracy through the logic of the minben tradition. Our analysis shows that 54.7 percent of people in mainland China reported that their understanding of democracy is in line with paternalism. For these people, democracy either means that when the government makes decisions, it takes the interests of ordinary people into consideration or government solicits people’s opinions and

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provides people with an opportunity to speak out when making decisions. People who responded with such an answer actually assumed that a good government should have Sage-king type of authority. Although these people also hope that the government can listen to people’s opinions, they do not assume that free expression is the natural right of individuals in a society.“Democracy” to these people is actually akin to benevolent dictatorship. In other words, democracy in the minds of a substantial number of people in these two societies differs significantly from the Western type of democracy. Some may challenge the findings by raising the problem of endogenicity — that both the particular understanding of the meaning of democracy in mainland China and the political culture there are shaped by authoritarian institutions in that society. The hypothesis may be tested by data acquired from Taiwan.Taiwan had been under democratic rule for more than 15 years at the time of the survey. If both people’s understanding of the meaning of democracy and the political culture in their society are shaped by institutions as claimed by some students of Chinese politics, institutional changes in Taiwan should bring forth a fundamental change in both the political culture in that society and people’s understanding of democracy. Our data analysis suggests that this is not true — although people in Taiwan have been living in a democratic regime for more than 15 years, more than a third of the population still define democracy in terms of paternalism as defined by traditional Chinese political culture.

CONCLUSION In this paper, I systematically examined the popular commitment to democracy and detachment from authoritarian rule in East Asia as well as people’s understanding of the meaning of democracy. Several findings emerged from the analysis which can not only help us address the debate on “Asian values”, but also have significant political implications for general political developments in this important region of the world. First, the analysis confirms that there are indeed extant Asian values which are different from the value system defined by Western

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political culture.The impact of Asian values on people’s preferences, although quite subtle, is significant. We expect that Asian values can also have a significant impact on the political processes in these societies. Using traditional measures of people’s preferences, the data suggest that democracy seems to have become the only game in town. An absolute majority of respondents from Asia reported that they prefer democracy over all political arrangements.When asked to evaluate whether democracy is suitable to their society, the absolute majority of people in each society included in the survey reported that they believed democracy to be suitable for their country/region. However, such findings do not survive further scrutiny.When we asked people to evaluate the democratic extent in their society, the majority of people in mainland China reported that the extent of democracy in their own country is quite high.This finding suggests that political institutions in these societies seem to have no impact on people’s evaluation. Further examination of the gap between democratic extent and demand suggests that the pattern of the gap revealed in the survey has little to do with political institutions in these societies. It is true that people in Hong Kong see the largest gap between their demands for democracy and its extent in their society, while people in mainland China perceive a rather small gap between democratic extent and demand. Our most surprising finding here, however, is that people in Taiwan as a whole think that democratic extent in their society actually exceeds their democratic demand! Such counterintuitive findings alert us to the possibility that the word “democracy” may mean different things to different people. More specifically, the popular understanding of democracy in Asia may be defined by Asian values and thus are different from the popular understanding of democracy elsewhere.To test this hypothesis, we first examined if a self-reported commitment to democracy is closely associated with detachment from authoritarian rule. The analysis shows that the correlation between these two variables is either low or nearly non-existent in each of these eight societies. To further explore this puzzle, we examined the answers given by people in mainland China and Taiwan to an open-ended question asking them to define democracy. The analysis shows that the majority of people

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in mainland China understand “democracy” in terms of minben, which actually has little to do with Western liberal democracy.Taking advantage of this near perfect quasi-experimental design, we analyzed the data acquired from Taiwan and found that even though Taiwan has been democratized for nearly two decades, the majority of people there have yet to understand democracy in terms of the liberal tradition. Instead, their understanding of democracy is still heavily influenced by Asian values. The analysis in this paper reveals that despite its popularity in Asia today, democracy to Asians is actually fundamentally different from the one that the West is familiar with. Such a finding raises several important questions for students of comparative politics regarding further research. As suggested by Larry Diamond, between liberal democracy and authoritarianism, there are also many hybrid regimes in this world and many such hybrid regimes are located in Asia. Does the political culture in general and do so-called Asian values in particular play any role in forging and sustaining such hybrid regimes? If so, what are the micro-mechanisms by which Asian values influence the political processes in these societies? Most importantly, if people’s understanding of democracy differs from that of the liberal democratic tradition, what are proper paths to promote democracy in these societies?

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About the Authors

Edward Gu (Gu Xin) is Professor at the School of Government, Peking University. After obtaining a Ph.D degree from Leiden University, the Netherlands in 1997, he assumed post-doctoral fellowships at Harvard University and the University of California at Berkeley. He served as Research Fellow at the East Asian Institute, National University of Singapore for three years. He was also a Professor of Social Policy at Beijing Normal University. His publications have appeared in many international journals such as Economy and Society, Development and Change, The Journal of Asian Studies, and The China Quarterly. Ding Lu is Professor of Economics at Sophia University,Tokyo.A graduate from China’s Fudan University, he obtained his Ph.D from Northwestern University (USA) in 1991. Before joining Sophia University, Professor Lu was affiliated with National University of Singapore (1992–2005) and University of Nebraska at Omaha (1991–1992). His research interests include international trade and investment, regional economic development, and comparative economic systems. He has published several books and dozens of papers in peer-reviewed journals and book chapters. Most of his 195

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publications involve development issues in Asia-Pacific, particularly the Chinese economy. Details of his research records can be found at www.geocities.com/ecslud/. Rong Ma received his Ph.D degree in sociology at Brown University in 1987. Now he is Professor at Department of Sociology and Institute of Sociology and Anthropology, Peking University. During 1990–1991, he visited Fairbank Center at Harvard University. He also served as visiting professor at UCLA and Duke University in 2000 and 2006. His major research fields include: ethnic relations in China, rural development, education, and migration. He has jointly edited two books in English, China’s Rural Entrepreneurs (1995, Singapore: Times Academic Press) and Local Governance and Grassroots Democracy in India and China: Right to Participate (2007, New Delhi: Sage Publications), as well as many articles in English. Eswar S. Prasad is the Tolani Senior Professor of Trade Policy at Cornell University. He was previously Chief of the Financial Studies Division in the IMF’s Research Department and, before that, was the head of the IMF’s China Division. Eswar Prasad received his Ph.D from the University of Chicago. His research has spanned a number of areas including labor economics, business cycles, and open economy macroeconomics. His extensive publication record includes articles in numerous collective volumes as well as top academic journals. He has co-authored or edited several books and monographs on financial globalization, China, and India. His current research interests include the macroeconomics of globalization, the relationship between growth and volatility, and the Chinese and Indian economies. Many of his research papers and quotes from his speeches have been cited extensively in the international press. He has contributed op-ed articles to The Financial Times, International Herald Tribune, Wall Street Journal Asia and various other newspapers. He has testified before the Senate Finance Committee and the House of Representatives Committee on Financial Services (both on China), and his research has been cited in the US Congressional Record.

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Tianjian Shi is Associate Professor of Political Science at Duke University. He earned his Ph.D from Columbia University. Specializing in comparative politics with an emphasis on political culture and political participation, he is the author of Political Participation in Beijing (1997, Harvard University Press). His research has appeared in World Politics, Journal of Politics, Comparative Politics, Daedalus, China Quarterly and Journal of Contemporary China. His current research focuses on political culture in China and Taiwan. Sarah Y. Tong is Assistant Professor of the Department of Economics and Research Fellow of the East Asian Institute, both at the National University of Singapore. Her research interests concentrate on the recent transformation of the Chinese economy, including developments in trade, foreign investment, and industrial restructuring. Her recent work has appeared in journals such as Journal of International Economics, Global Economic Review, China: An International Journal, Review of Development Economics, China and the World Economy, and China Economic Review. Andrew G. Walder is the Denise O’Leary and Kent Thiry Professor in the Department of Sociology at Stanford University, where he is also a Senior Fellow in the Freeman–Spogli Institute of International Studies. He previously taught at Columbia, Harvard, and the Hong Kong University of Science and Technology. He has published widely on conflict, stability and change in China, the organization of the economy and the political system, and the impact of market reform on Chinese society. Dali Yang is Professor of Political Science and Director of the East Asian Institute at the National University of Singapore. He was previously Chairman of the Department of Political Science and Director of the Committee on International Relations at The University of Chicago. Among his books are Remaking the Chinese Leviathan: Market Transition and the Politics of Governance in China (2004, Stanford University Press); Calamity and Reform in China: State, Rural Society and Institutional Change Since the Great Leap Famine (1996,

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Stanford University Press); Beyond Beijing: Liberalization and the Regions in China (1997, Routledge). He is also editor of Discontented Miracle (2007, World Scientific), and co-editor of Holding China Together: Diversity and National Integration in Post-Deng China (2004, Cambridge University Press). He was a team member and contributor to The United States and the Rise of China and India, by the Chicago Council on Global Affairs. You Ji is Associate Professor at the School of Social Sciences and International Studies, the University of New South Wales. He has published widely on China’s political, economic, military, and foreign affairs. He is the author of In Quest of High Tech Power: The Modernisation of China’s Military in the 1990s (1996), China’s Enterprise Reform (1998), The Armed Forces of China (1999), as well as numerous articles. Litao Zhao is Research Fellow of the East Asian Institute at the National University of Singapore.He received his Ph.D in sociology from Stanford University. His research interests include social stratification and mobility,sociology of education,organizational analysis,and China’s social policy. He has published in the China Quarterly, Research in Social Stratification and Mobility, Social Sciences in China, China: An International Journal, and Frontiers of Education in China. Yi Zheng obtained her Ph.D degree from the Economics Department of National University of Singapore in September 2007. Her main research areas include international financial integration and the Chinese economy. Her research papers have appeared in journals such as Singapore Economic Review, China & World Economy, Emerging Market Letters, etc. She was also a contributor to the books of Interpreting China’s Development (eds. Wang Gungwu and John Wong) and Public Governance — Theories & Practices (ed. Liu Bolong). Currently, she is research officer with the East Asian Institute.

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Index democracy, 162, 166–176, 178, 179, 181–194 democratic demands, 169, 174, 175, 178, 179, 181 democratic supplies, 174, 177 demographic dividend, 93–95, 98–101, 103, 105, 110–112, 114, 115 demographic transition, 94–98, 101, 102, 111 dependency ratio, 93, 95, 99, 103–107, 109

17th Party Congress, 55 ageing, 94, 96, 98, 101, 103, 104, 106–110, 114–116 Asian value, 167–169, 171, 174, 185, 189, 192–194 basic healthcare, 117, 122, 125, 126, 132 central government, 50, 53, 54, 73, 130, 133, 147, 161, 162 Central Military Commission, 60 Central Organization Department, 67 Chinese nation, 141, 143–146, 159, 162 Communist Youth League (CYL), 65, 66, 69, 70 community health centers, 118, 125, 135 Confucianism, 143, 171, 184, 187, 188 consensus building, 61 cultural identity, 163 culturalization, 142

economic growth, 16, 25, 93, 94, 98, 100, 101, 105, 111, 115 elite politics, 55–60, 62, 64, 68, 70, 71, 76, 78, 79, 83, 84, 91 ethnic group, 138–143, 145–147, 149–157, 159, 161–163, 165, 166 ethnic relations, 137, 138, 140–143, 150, 154, 156, 157, 160–162, 164, 165 exchange rate, 2, 3, 6, 10–17, 26, 28

demand-side solution, 122, 126, 131, 132, 134

foreign investment, 19, 22, 23, 25, 38, 39 199

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200 Index government expenditure, 125 grievances, 43–45, 49–51 healthcare, 95, 117–120, 122–135 informal politics, 57–59, 65, 71, 75 labor mobility, 108, 115 laid-off workers, 42, 50 leadership succession, 55 majority-minority relations, 141, 146, 147, 165 Minben democracy, 186 monetary policy, 2, 3, 10, 13–17, 90 nationalism, 52, 139, 142, 144, 147–149, 151, 155, 158, 160, 163, 164 new-type cooperative medical scheme (NCMS), 130, 131, 133 pluralism, 72, 90, 146, 153–155, 162–164 political culture, 75, 168, 169, 172, 185, 186, 188, 189, 192–194 politicizing ethnicity, 147, 149, 151–153, 156, 165

power consolidation, 55, 61, 68, 88 production networks, 39 protest, 41–46, 49–51, 53, 54, 75 public-private partnership, 134 reform, 3, 10–15, 17, 18, 21, 33, 42–44, 51, 53, 68, 71, 75–77, 81, 82, 95, 100, 108, 112, 113, 115, 117–119, 122, 124, 126, 131–134, 151, 159, 172, 181 regime support, 47, 48 regional economic integration, 22 state enterprises, 4, 6, 11 strategic populations, 45, 48, 49, 51, 53 supply-side solution, 122, 124–126, 32 support ratio, 99, 100, 103 trade expansion, 19–21, 23, 25, 29, 32, 34, 37, 38 trade imbalances, 25, 27, 30, 31, 34 universal coverage, 117–119, 126, 131, 134