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The Balancing Act: Synergy of China’s Political and Economic Systems; By Anithamerciyal D

Image Courtesy: Fair Observer 

Article No. 68/2018


Introduction

The objective of the article is to understand how the fastest growing and the second largest economy of the world, China, achieves its goals in an efficient manner. In order to comprehend this, it is necessary to study the history of China’s political and economic systems, and how China deftly managed to find a compromise between the opposing ideologies in the two systems. China has successfully portrayed that its model of state is economically successful, a phenomena which may be a disputed one to some observers. In the present international order, nation states are prioritizing a stable economy for themselves. Some developing and developed countries believe that open economic principles such as liberalization, privatization and globalization will play a major role for their economic growth. But in countries like India, which also introduced open door policy in 1991, the move was not as successful as has been in China. In China, perhaps the different dynamics within its system have played a major role. China has both the open door policy and a controlling government at the centre, which can be described as authoritarian. This form of government keeps all the country’s policies and socio-economic activities in check, which leads to higher growth. This article will discuss how China has been able to manage the compromise between its economic and political systems. Apart from this the challenges faced while sustaining this balance and the future implications for this type of growth will be analyzed.

History of China’s Political System and Evolution of its Foreign Policy

Before the colonial powers could establish a sphere of influence in China, i.e. prior to the 1840’s, China was ruled by various dynasties, the last one was the Qing Dynasty. Many wars were fought between the Qing emperor and the colonial powers to open up trade relationship with the colonies, and at the end the colonial powers were successful. Although the colonisers were successful they did not form any government in China. Instead, it was a sphere of influence shared by many major powers for their own trade benefits and for gaining raw materials. After subsequent events, upto 1917, the Kuomintang party (KMT) formed a government in China under Dr Sun-yat-sen. Meanwhile, the foundation for the Communist Party of China (CPC) had been laid. During the Kuomintang rule, the KMT members punished communist leaders in the country because of their varying ideology. This move led to the ‘Long March’ which saw the top communist leaders fleeing to southern China for safety.  On July 7, 1937, Japan invaded China which resulted in great loss of life and property. As the war intensified, the rival parties in China grouped together to oppose the common enemy and finally Japan was defeated in 1945. After this, the Japanese army surrendered and left China. However, there was contest between both the parties to form a government in China. Inter-party talks and discussions resulted in fueling the divide. This led to a civil war in China in 1946, by which time the CPC gained support of the majority of people. The Kuomintang party had no option but to flee to Taiwan in 1949. This led to the Communist Party of China forming the government in Mainland China. After the formation of government, Premier Mao Zedong became the head of the government and held the highest position in the CPC. The one-party system began to dominate Chinese politics. Mao was an authoritarian, so China experienced dictatorship form of government till 1976.[1] The communist state growth model similar to that of Soviet Union’s was implemented in China. China then saw a degree of economic growth. The China-U.S.S.R relationship turned out to have a cost on Beijing’s national interest. Mao was not ready to continue with the relationship, especially as he anticipated the Soviet Union`s motives.  The U.S.S.R in fact demanded China to allow the Soviet military to station at the two countries’ border for the protection of the Soviet Union. China then restricted its ties with the U.S.S.R. US-China rapprochement began in 1972. A great leap of change had begun in the foreign policy of China.

The History of the Chinese Economy

China in the past had a flourishing economy. It had the ‘Silk Route’ and also made many discoveries such as paper, silk, gunpowder, the compass, etc. However, China was not able to cope up because it missed the Industrial Revolution, which the western nations availed and established their status as major powers in the 19th century.  During this period, China fought the Opium Wars with major powers such as Britain and France. China lost and was subjected to the Western actors’ demands.

In the beginning of 20th century, China had to deal with new challenges. It faced intense famines from 1928-1930, and  again from 1936-1937, during which many of the country’s people died. After the Communist Party of China formed the government in Mainland China in 1949, the CPC joined hands with the Soviet Union for enhancing China’s then weak economic system. In the 1950s and 1960s, China managed to grow at a rate of 6% annually while following the Soviet model of central planning, which advocated collective agriculture model.[2] However due to subsequent perceived threats from the Soviet Union, China broke away from the U.S.S.R in the 1970s, and followed an isolationist policy during which it was also anti-US. Mao also started the ’The Great Leap Forward’ which was a major fallback.  It involved the consolidation of individual lands into collective land which resulted in one of the worst famines of the 20th century taking the life of around 30 million people; some cite a figure of 20 million.[3] Despite Mao’s attempts, fruitful development of China was not achieved. China was economically weak during this period and the living standards of its people deteriorated. Only after the 1978 economic reforms did China see growth in its economy.

How has China Grown Politically Strong?

As we are familiar with the political history of China, we know that China’s political system is bureaucratic- authoritarian which means it is neither like the democracies of US and UK nor like the dictatorship of Cuba.[4] The ultimate authority of China rests with the Communist Party When major policy decisions should be taken the President should get the consensus of the senior leaders in the party. In addition to this, China is seen as a modern, unique and authoritarian regime that has received successive transfers of power from one living leader to another; only Vietnam was successful in doing this for four transitional leaderships from 1991. When a comparison is made, the leadership transition is seen to have occurred in U.S.S.R. only when the acting leader died or by a coup.[5] The successive transfer of power in China is complex because the Chinese leader holds three positions simultaneously, whereby he is known as the General Secretary of the Party, the Chairman of the Central Military Commission and the State President. The country has a one party rule, the communist party is in effect the sole legal party, it does not have a tiny chain of secretive leaders, but it has a vast organization of 86 million members which includes the government, court, universities and religious organizations. China is formally centralized but in practice, it is highly decentralized.[6] There is no division of powers, but the government at the local level is given due recognition. This can be well understood by knowing that the same party controls at the lower and the top level. The appointment of the leader in the provinces is done by the party’s Central Organization Department. The fiscal allocation done for the government at the local level is almost more than 50%, which is greater when compared to any democracy. In 2004, an IMF study found that in the period of 1972-2002, this figure averaged 20% for democracies and 18% for non-democracies. For China, the average figure in 1958-2002, was 54% and in 2014 it has risen to a staggering 85%.[7] Apart from achieving fiscal decentralization, this shows us the stability that the political structure of China has apparently achieved over the years.

Economic strengths of China

In 1978, when Deng Xiaoping assumed power the economic reforms that he started, began with agriculture. China’s agricultural sector was the main employer, consisting of nearly 80% of the population. During this period the communes was replaced with the household responsibility system which increased the productivity in the agricultural sector, thereby improving the country’s economic performance. Apart from these moves, reforms also opened China to the world market. China opened up several state-owned enterprises which in turn gave many employment opportunities for the Chinese population. As there was no investment made by any private enterprises because of the government monopoly then, the government invested and it enhanced economic development. China rolled out a welcome mat for foreign investors, thus establishing special economic zones that are located in the southern coastal region. Reforms also redefined the country’s industrial policy which made China a big exporter of goods manufactured in factories which were partially owned by foreign companies. China was ready to take a big step to join the World Trade Organization and open up its domestic markets to the world. Its volume of trade increased twenty-five times between 1978 and 2001[8]. During this phase the Chinese economy multiplied nearly 50 times and the annual average GDP growth was nearly 10%. In the present era, China has grown into one of the most dynamic economies in the developing country category. By estimates it is one of the 4th largest economies[9], with the GDP of China having overtaken that of France, Great Britain and Italy, leaving only USA, Japan and Germany ahead. China has now become the manufacturing hub of the world; it is the world largest producer of steel. China has overtaken the US in exporting information and technological products like mobile phones, laptops, computers and digital cameras. China is also concentrating on technological innovations. It’s advanced technologies have created a stage for China to compete with other developed countries in the aerospace realm, and in various innovations. In fact, the fastest supercomputer in the world has been made by China.

China’s Political System Influencing the Country’s Economic System and vice versa

The political and the economic systems of China have found a a semblance of balance.  The rest of the world had expected that the combination of the Chinese political and economic systems would fail someday. Many countries around the world which had authoritarian regimes eventually ended up either in chaos or in revolution, finally leading to formation of a new  government.  On the other hand, the Chinese politicians were able to influence the system to develop and sustain it to stay in power. Till date, the Communist Party of China still holds its tight grip on regulation of both the economic and political systems. The most significant development that convinced the Chinese people about the country’s political system, is the better standards of living achieved. Without the 1978 reforms, one cannot think of any other alternative would have led China on its path to growth. At the end of the Mao regime. The Chinese citizens grew dissatisfied with the system and this eventually should have led to revolution against the government. But at the right time the “economic reform “gave a political leverage to the party. Thus it is seen how the economy influenced politics and played a greater role in bringing stability to the Communist Party rule in China.

Likewise, the politics also influenced the economy because major policy decisions are taken by the leaders and the political heads. Liberalization, globalization and privatization are carefully implemented, while restrictions are posed by the communist political government. When the same was introduced by the U.S.S.R, it had introduced political and economic liberalization at the same time. This led to the political instability, because the political system was in chaos before economic growth could take off; thus resulting in the disintegration of the Soviet Union. In the words of the then Soviet Premier Gorbachev, “The old system failed before the new could take off”.

This is different from the Chinese experiment, where the leaders have carefully inferred from other systems. Chinese politicians were able to anticipate the future implications on Chinese economic and political systems, and they held a grip on the economy by formulating political policies despite having opened the country to the world. To regulate and maintain growth, restrictions were posed on imports and whenever China’s exports declined the country devalued its currency to make the Renminbi competitive in the international market. This shows both aspects, politics and economy equally play a role to shape China as it currently stands. It is also seen that major Chinese economic sectors are controlled by government organizations such as the People’s Bank of China, State Planning Commission, etc. Major policy decisions are taken by National People’s Congress. These decisions are then incorporated into the plans of various sectors of the Chinese economy. International trade was supervised by the Ministry of Foreign Trade AND Economic Cooperation and various other organizations under the government regulated access to the scarce foreign currency required for imports.

The central bank or the authority of public financing- the People’s Bank of China was formed in the 1948. By the 1980s the main activity of PBC was to fund public companies in order to enable programs of national planning. The inefficient allocation of savings in public banking is used as investment in areas and sectors with low productivity and hence enhances economic growth. The PBC plays a role as a central bank as well as the commercial bank with the task of supervising and controlling other smaller banks; its function is to service the national planning. For three decades the real economy of China was only supported by the People’s Bank of China.[10] At present many foreign companies are established in China yet these companies suffer many restrictions imposed by the government, due to the leaders’ active participation for stabilizing the country’s economy.

Apart from this the policies of the government in the social sector also posed a boost to economic growth. In developing countries, population is one of the constraints to economic growth. China was able to drastically address this situation. Though a large population gives way for the availability of cheap labor which can be a positive factor for foreign companies to establish base, the larger consumption population posed a major threat to Chinese economic growth. According to a 1949 report, the Chinese population was nearly 540 million; if there was to be 2% growth every year, the population would have soared to to 960 million in the 1970’s. This would have been bound to happen if there were 2 children born for each couple in the Chinese urban and the rural areas.  China was concerned about the impact of this on government spending in education, employment generation, medical services and retirement services. Beijing worried that almost half of the government spending would go for the domestic well being and the overall economy would not grow. To counter these consequences from seeing reality, the Chinese government introduced the “One Child Policy” in 1979[11], and this policy became an integral part of the “National Economic Program”. This clearly shows how Chinese politics were able to accommodate changes in the social system for enabling economic development and in turn the economic growth giving more leverage to the political system.

How does China’s Economic Openness Impact the Political System

The opening of China’s economy to the world has not given space for economic development and growth but it also has led to changes in the attitude of the people, with their exposure to countries which gives their citizens a more freedoms, while Chinese citizens have been denied several rights. Protests advocating democracy or demanding for more openness in the political system are not allowed. While the Tiananmen Square protest remains dark chapter in China’s history, there was the recent Umbrella movement in Hong Kong. China has gained a lot from globalization, yet is not free from drawbacks. The internet is a source for people to learn about the policies of different countries, and it also has created a platform to discuss various political ideas.  However China restricts internet access for people. As China is trying to get more connected with the world through trade relationships, it will be increasingly difficult for the country to prolong these restrictions. China is no longer same as it was in the 1950`s. It has ties with the rest of the world, and Chinese people travel extensively to other countries. This has led to few changes and China has given more rights to its people compared to the 1950s.

Challenges that China faces internally which may affect it in long run

Social factors of inequality and corruption are serious concerns being faced by China today. According to the Gini index which measures inequality based on income, shows that income inequality in China is very high, is growing more rapidly than any other countries.  China’s Gini index shows that the top 10% of the Chinese citizens hold 85% of assets in the country. There is also large inequality between people living in urban and rural China. Though China has taken steps to reduce the gap over the years it has not achieved much. And concerning corruption , it has become a part and parcel of the reform era.  While the economy is growing, several people in power become corrupt. For example, the 2000’s construction boom in urban China gave way for the CPC personal to accumulate money illegally and the biggest case recorded was that of Zhou Yongkang who served in the Politburo Standing Committee. Following this President’s Xi Jinping’s anti-corruption drive brought to light many party member who were involved in corruption charges. Despite these issues China is stable. The growing economy, which has brought a growing middle-class, has pacified the Chinese people for now. However these factors in the long run may cause unrest in China and collapse its political system.

Challenges Arising in China’s Economic Spectra

China is changing from an export-driven to a consumption-driven economy is suffering a major setback in foreign trade because the US which is a major import centre of China is trying to bring down Chinese imports into USA. As business in China is dominated by the state, the country is gradually disinvesting its holdings and now private investors are to to buy these shares, for then boosting the Chinese economy. Besides, there is a changing demography in China, where the youth population is anticipated to decrease in 2030 and the ageing population will rise. As a result China will suffer a major setback in development and growth due to reducing labor forces. Higher rates of a dependent population would rise and China would have to spend more on medical and social services.

While choosing between maximizing economic growth or political control, what do the leaders choose?

By analyzing the economic and the political history of China, it is clear that China has a transitional model of gradual transformation of the original communist centrally planned economy into a more market-oriented one.[12]  Other authoritarian states attach more importance to political might and try to control the economy through this power. But in the case of China, the leaders give equal importance to the economy. The present Chinese leader Xi Jinping has combined economic reform with a campaign to tighten the political control.[13] Both political and the economic systems are seen as complementary to each other and not contradictory in China. Beijing gives up some power to gain more economic power. China is ready to trade off some of its ownership rights in state-owned enterprises to make its economy more efficient. Though China seems to be compromising to gain more economic growth it is still holding a tight grip on the political spectra and is making regulations harder. The politicians choose the path of choosing the political power combined with economic development.

Conclusion

China, while choosing between the economy and politics, has a deep conviction that both are equally needed to keep the country on the perceived right path to development. Hence, its leaders always attempt to find a compromise between both to allow China’ growth. In future, despite the many challenges the country faces, China may fight all the odds and somehow find a place as a great power. On the other hand, it remains to be seen whether China will find a balance between the political and economic systems or see one tilt heavily against the other.

References

[1] Kroeber, Arthur R. 2016. China’s Economy What Everyone Needs to Know: 1

[2] Shirk, Susan.L. 2007. China Fragile Superpower:18

[3] ibid.

[4] Kroeber, Arthur R. 2016. China’s Economy What Everyone Needs to Know: 1

[5] Kroeber, Arthur R. 2016. China’s Economy What Everyone Needs to Know: 2

[6]  Kroeber, Arthur R. 2016. China’s Economy What Everyone Needs to Know: 4

[7] ibid.

[8]Shirk, Susan.L. 2007. China Fragile Superpower:19

[9] Shirk, Susan.L. 2007. China Fragile Superpower:15

[10]http://www.bankpedia.org/index.php/en/89-english/c/23726-chinas-banking-system-encyclopedia

[11]https://www.ncbi.nlm.nih.gov/pubmed/12313973

[12] Kroeber, Arthur R. 2016. China’s Economy What Everyone Needs to Know: 24

[13] Kroeber, Arthur R. 2016. China’s Economy What Everyone Needs to Know: 25

Anithamerciyal D  is an Intern, C3S. She is currently pursuing her M.A in International Relations. from the University of Madras. She has carried out research on identified issues on China under the guidance of the members of C3S. The views expressed in this article however are of the author.

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