American and Japanese scholars view China’s economy and politics

Editor’s Note: On December 18 and 19, 2014, the Brookings Center for East Asia Policy Studies (CEAP) hosted a dialogue among China specialists from Japan and the United States in which the participants discussed their respective analyses of the Chinese economy and political system. The rationale for such a dialogue is that it is in the interest of both countries to align their assessment of China as much as policy as the basis for a chief task of their alliance: managing the revival of China as a great power.

One part of that dialogue was a public program, convened on the morning of December 19. Video and audio recordings, a complete transcript, and some presentations from the event are available on the Brookings website.

Not surprisingly, in both the United States and Japan, there is a range of views about China and all its aspects. Depending on which aspect is being considered, the range of interpretation will vary both within each group of China specialists and also between them. So some differences are to be expected; the question is the source of those differences.

The Economy

On the Chinese economy, there was very little difference between American and Japanese specialists. There was general agreement that:

In our discussions, there was general agreement that the emergence of the Chinese economy was beneficial to the American, Japanese, and other economies. Tomoo Marukawa of the University of Tokyo pointed out that the view from Japan is nuanced. On the one hand, many political and business leaders understand that the growth of the Chinese economy is beneficial to the Japanese economy. But there is also a sense of fear and envy of China’s economic rise among the Japanese people. Fear, because they assume a connection between China’s economic rise and China’s assertiveness in diplomacy and military expansion. Envy, because China has taken over Japan’s position as the second largest economy in the world. Pessimistic views on the future of the Chinese economy are very popular in Japan, in part because they can ease such fear and envy.

Participants agreed that the Chinese model of export-led growth had reached the limits of its utility and had to be replaced by a different approach, one that emphasizes domestic demand and innovation, and includes measures for financial liberalization, greater exchange-rate flexibility, relaxation of restrictions on movement of people, and opening the service sector to external investment and competition.

There was also broad agreement that the Chinese leadership clearly recognizes the need for such policy reform and has focused on the right areas. It is prepared to accept the lower rates of growth that a new model will entail.

Finally, there was an appreciation of the fact that progress in carrying out reform is difficult. Three challenges stood out as particularly important:

• • Overcoming the resistance of central state-owned enterprises (SOEs) will be a significant challenge, since they benefit from the status quo.
  • It will be necessary to change the incentives to which local officials respond, away from a single-minded obsession with growth.
  • Strengthening the rule of law is a precondition for ensuring the central role of the market. The general focus of the decisions of the Fourth Plenum of the Central Committee in November 2014 is correct, even if the details were disappointing.

There is some debate among specialists concerning the weight and role of state-owned enterprises (SOEs) in the economy. The conventional wisdom is that they enjoy a privileged position. A recent publication by Nicholas Lardy (Peterson Institute for International Economics), assembles significant evidence to support the hypothesis that the private sector has been and will be the driver of economic growth. Skeptics note that even if state-owned firms have contributed less to China’s growth than private ones, they still receive preferential support from the state, which has a distorting effect. In our public session, Tomoo Marukawa noted the beginning of an increase of SOE assets as a percentage of China’s GDP which began in 2009, reversing a previous declining trend. Another participant noted a distinction between “reform” of the domestic economy and “opening up” externally. The direction of the former is positive but the treatment of foreign firms is not.

The Political System

The range of disagreement appears to be greater regarding the political system. The disagreement is not really between Japanese and American China experts. It is more among scholars in each country regarding which aspect of Chinese politics – for example elite politics, center vs. local, or bureaucratic interests – is most significant for understanding political outcomes and the system as a whole. Of course, between Japanese and American scholars there may be, and probably is, a difference between how much weight to give each factor. It appears that on balance Japanese scholars give more weight to elite politics than their American counterparts.

In this regard, Professor Akio Takahara of the University of Tokyo observed that there were two principal schools of thought concerning politics at the Center, each focusing on a different aspect of the system. On the one hand, the “institution school” sees high-level politics through institutions. On the other, the “power struggle school” emphasizes power struggle. As he said, “reality could be somewhere in between.” Political actors can contend for power through and around institutions, and institutions can better carry out their mission if they increase their relative power. Moreover, individual power-holders may use their control of institutional positions to increase their personal wealth and power (corruption), and so degrading the autonomy, coherence, and effectiveness of institutions.

By extension, there are other aspects of the system which, in tandem with institutions and power struggle, enrich our understanding.

The first is the mode of policy implementation. One is bureaucratic routine, according to regulations, norms, guidelines, and supervision. The other is through political campaigns, which seek to carry out goals through mobilization, intervention in the normal work of institutions, and some degree of intimidation. Campaigns occurred frequently during Mao Zedong’s rule, but they did not disappear after his death (the one-child-per-family campaign that began in the 1980s and the anti-corruption campaign today are examples), but the shift to a more reformist approach to the substance and implementation of policy is clear.

The second aspect is relations among different administrative levels (the center, provinces, cities, counties and township). These have been stable over recent decades, and sub-central local officials have had significant authority, autonomy vis-a-vis higher levels, opportunities for personal enrichment, clear policy goals (mainly stimulating economic growth and assuring social stability), and clear metrics of performance. The reforms formulated by Xi Jinping clearly change policy objectives but as yet lack criteria for measuring performance. Thus, the sustained implementation of the reforms is not assured, with potential consequences for the authority and autonomy of officials at each level. In addition, the anti-corruption campaign is highly disruptive, because it is a campaign and threatens to reduce opportunities for rent-seeking.

The third aspect is relations between state and society, which for most sectors and over time were liberalized considerably after the beginning of reform in 1979. The trends in the Xi Jinping period appear to be mixed. On the one hand, if effectively implemented, economic reforms will remedy the worst negative consequences of the political economy of the reform period, and a strengthening of the legal system will similarly provide channels for correcting abuse of power. On the other hand, restrictions on political activity, always tight, have been tightened further. In addition, the definition of what is political has been expanded.

There is general agreement that Xi Jinping has consolidated his power more quickly than his predecessors, and has more personal decision-making power than they did, as highlighted by Tomoki Kamo of Keio University. There are differences on whether this is because he and his leadership colleagues are insecure and need to suppress public alienation and dissent, or because such consolidation is a prerequisite for a vigorous reform effort (or both). Concentration of power, and initiatives like the anti-corruption campaign, have the side-effect of reducing feedback to the center.

Read Richard Bush’s analysis of CEAP’s event on February 27, 2015 »