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Economy: New China Leadership Faces Major Economic and Political Problems

Interviewee: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies
Interviewer: Bernard Gwertzman, Consulting Editor
September 27, 2004

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Elizabeth Economy, the Council’s director of Asia studies, says the new Chinese leadership led by President Hu Jintao must “address a rather large set of domestic political and economic problems.” Among them: economic inequality, corruption, and pollution. The author of “The River Runs Black: The Environmental Challenge to China’s Future,” Economy says Hu and the other so-called fourth generation leaders have to deal with the legacy of rapid industrialization that she describes as “irreversible environmental degradation and pollution.”

The leadership must also craft a new role for the Chinese Communist Party, she says. “In order to sustain economic growth, and to sustain itself in some form, the Communist Party is being forced to move toward strengthening the rule of law, improving transparency within the system, and developing mechanisms for soliciting the interests of the Chinese people. In the end, all of these factors are going to cause the party to transform itself or simply go the way of the Communist Party in the Soviet Union.”

Economy, the C.V. Starr senior fellow at the Council, was interviewed by Bernard Gwertzman, consulting editor for cfr.org, on September 27, 2004.


How would you describe the past four years of U.S.-Chinese relations? One doesn’t hear much about them; is that a good sign?

Probably it is a good sign. I think that for the most part, U.S.-China relations are on an even keel. We had some excitement last spring when Chen Shuibian was re-elected as president of Taiwan. But by and large, the U.S. has been preoccupied with Iraq, and China is preoccupied with domestic issues. China just completed a leadership transition from the third to fourth generation of leaders last week, and now the leadership has to move forward to address a rather large set of domestic political and economic problems on its agenda.

First describe the leadership transition, the final stage of which has been former President Jiang Zemin leaving his military post …

Jiang Zemin held one last position of power—chairman of China’s central military commission, one of the top positions within the Chinese leadership. He stepped down from that position, and President Hu Jintao assumed it. This happened a bit earlier than people anticipated, so it caused a little bit of a stir. But it really does cement the transition from the Jiang Zemin third-generation leadership to the Hu Jintao/[Premier] Wen Jiabao fourth-generation leadership. The other thing that was surprising in this transition process was that Zeng Qinhong, who is widely considered to be Jiang Zemin’s top protégé, did not assume a position as a vice chairman of the central military commission. Many China watchers assumed that such a promotion for Zeng would be a precondition for Jiang’s full retirement. The fact that this didn’t happen also helps to cement Hu Jintao’s hold on the leadership.

What are the domestic issues preoccupying the leadership?

Despite China’s very rapid and impressive economic development over the past decade or two, it faces a whole host of social and economic problems. Hu Jintao and Wen Jiabao have a different perspective on China than the third and second generation of leaders, such as Jiang Zemin or Deng Xiaoping. When they look at China, they see the dark side of what has transpired over the past two decades, namely that they have a China where 5 percent of the people hold 50 percent of the bank assets. China today is one of the most unequal economies and societies in the world. I think that is one [of their] goals, to rectify these enormous inequalities that have emerged. A second is the endemic corruption, and I think that Hu Jintao and Wen Jiabao take this much more seriously than Jiang Zemin did. Jiang Zemin and Deng Xiaoping were very much more in the mode of go-go economic growth: “We can grow out of any economic problems.” And this leadership says, “No, we can’t anymore.” China on average now, has 50,000 to 60,000 protests per year. So it needs to tackle these problems of corruption and growing inequalities, because the stability of the country is at stake.

What kinds of corruption are you talking about?

One of the biggest problems China faces in terms of its corruption is an issue of illegal land transfers. Deals are struck between land developers and local officials to transfer land without properly compensating the people living or farming the land, and then to relocate them forcibly to less attractive housing. Certainly these transfers are one of the major sources of social unrest in the country.

A second is the system of layoffs from state-owned enterprises that are shut down. There have been massive worker protests, not so much because [employees] are being laid off but because the managers of these state-owned enterprises have simply absconded with the assets of the company and left nothing for unemployment benefits, pensions, and medical care.

The environment is yet another area where there is corruption. Polluting enterprises that are fouling the water and air are not being closed, and this is producing social protests. And this is just the tip of the iceberg. Corruption is pervasive throughout the system and an important source of a lack of legitimacy for the Communist Party.

Is there also corruption within the government bureaucracy?

Absolutely. Not too long ago, a poll of 15,000 Chinese indicated that the majority believe government officials are the people in China who have benefited most from the economic reforms. Many of them take advantage of opportunities—for example, provision of licenses for cars—to extract side payments. This is a deeply rooted problem within the political system.

Are there positive developments?

The Chinese economy is continuing to grow. The leadership is trying to slow down investment, because it is worried about over-capacity. But by and large the Chinese people’s standard of living continues to increase. In addition, civil society continues to expand, and there are greater opportunities for personal expression as time goes on.

And American companies and other Western companies are continuing to invest heavily?

No doubt. China attracts foreign direct investment at a rate of over $1 billion a week. U.S. companies are very much engaged in that process.

Why is China so popular as an investment?

First, labor is cheap, and Chinese workers increasingly are demonstrating that they are quite a talented labor pool. In China’s major cities, the infrastructure necessary to do business—telecommunications, frequent international flights, etc.--has been a priority for the Chinese government. China has worked hard to make itself very attractive for foreign investment. It was also, until last year, fairly reliable in terms of its energy supplies. So, for a developing country, it placed a high priority on the infrastructure that foreign investors want to see before they pour their money in. That also helps to explain why investment has not moved into the interior of China, where such infrastructure is not well developed.

You mentioned energy. China’s been accused of being partly responsible for the big rise in oil prices. Is that a fair charge?

It is probably a fair charge, and we are likely to see more competition emerging from China for oil. The Chinese expect that their demand for oil will double by 2020, and with automobile ownership expected to jump from 20 million today to between 110 million-160 million by 2020, I think we can expect at least that much of an increase.

China has been helpful to the United States in the six-party talks on North Korea’s nuclear program, is that right?

China has been helpful in the sense that it is hosting the talks and it is continuing to encourage all the parties to sit down and continuing to work to bring North Korea to the table. It’s less clear that China and the United States share precisely the same agenda. I think China, Japan, and South Korea, since the outset, have approached the negotiations somewhat differently from the United States. I think it’s undoubtedly helpful that China is acting as the host, but it’s not clear that the Chinese don’t, in fact, try to press the U.S. to be more accommodating, too.

They seem to have succeeded because the United States has modified its stance.

What has succeeded has been the combined pressure of Japan, South Korea, and China, along with the intransigence of North Korea, and probably some people within the U.S. government that have long argued for a more accommodating position.

Will the new Chinese leadership change policy toward Taiwan and Hong Kong?

I don’t think the new Chinese leadership has a very different view from the third-generation leaders about how to manage the Taiwan and Hong Kong issues. The goal at this point is to minimize change, and they are not interested in seeing Chen Shuibian and Taiwan move any further toward a declaration of independence. Similarly, in Hong Kong, the Hong Kong people just had their legislative elections this month. The Democrats did well, but not as well as some people anticipated or hoped. I think that Beijing sees an opening now to try to manage the relationship with a lighter hand, because the elections were not a rout for the Democrats.

Has Hong Kong’s economy suffered since China took over sovereignty?

I don’t think that Hong Kong’s economy has suffered because of management from Beijing. Hong Kong’s economy has suffered because of competition from China, from the mainland. As the capacity of Shanghai or even Guangzhou to serve as a competitive choice grows, the value of Hong Kong to the international community as a financial center, for example, becomes somewhat diminished. It is up to the Hong Kong government to find a way to keep Hong Kong competitive.

China is going to host the Olympics in 2008. It had a Formula One race in Shanghai and the China Open tennis championship in Beijing. Is this emphasis on sports having an impact?

Sports for China can be an important source of national pride. The only danger that I foresee is that when you pour money into something like a Formula One racetrack, there will be many within the country who wonder why money is being spent on this when health care, education, and environmental protection—essentially the entire social welfare system—is so completely dysfunctional. The Chinese government doesn’t want to breed resentment. There is a fine line between promoting sports as something about which all the Chinese people can rally around and of which they can be proud, and then at the same time seeing hundreds of millions of dollars being invested in these things when you have tens of millions of people still in poverty.

What is the future of the Chinese Communist Party? Is it conceivable that it might lose its omnipotence?

I think that is already happening. There is no doubt that over the past decade there has been an enormous transformation in terms of the all-consuming, all-knowing, all-seeing power of the Communist Party. As market reform has progressed, there has been this dramatic increase in the role of civil society and private initiative. This is not just in the economic sector, but throughout society as a whole.

It has become necessary for private citizens, NGOs [nongovernmental organizations], churches, etc. to step into the breach to fill the social welfare function that the government no longer provides. This all diminishes the power of the Communist Party. People communicate via the Internet and instant messaging; the media are constantly pushing the boundaries of what is politically acceptable. Over time, all of these changes at the margin are going to produce a China that looks very different from the China today. In fact, in order to sustain economic growth, and to sustain itself in some form, the Communist Party is being forced to move toward strengthening the rule of law, improving transparency within the system, and developing mechanisms for soliciting the interests of the Chinese people. In the end, all of these factors are going to cause the party to transform itself or simply go the way of the Communist Party in the Soviet Union.

You mentioned private citizens and the environment. Almost every developing country has a terrible environmental record. How does China stack up?

The challenge for China is that it began its process of rapid industrialization—or, really, its second round of rapid industrialization—with an already highly degraded and polluted environment. China is already one-quarter desert, and the desert is advancing at 1,300 square miles per year. China has 16 of the world’s 20 most-polluted cities in terms of air quality. Lakes and rivers are simply evaporating—drying up—from overuse. The volume of the Yellow River, for example, has been affected because 2,000 lakes and rivers in Qinghai have simply dried up over the past decade. These are the types of changes that cannot be reversed. And that’s the challenge that China’s facing now, this kind of irreversible environmental degradation and pollution.

Are there solutions?

Sure, and for the most part the Chinese government knows what needs to be done. But these solutions require political will to put forth remedies and even more political will at the local level to enforce them. It is very difficult to persuade local officials in most of the country that they should raise the price of water or shut down polluting factories because they are so degrading the environment that people are becoming ill and soon the land won’t sustain their industry. This is a long-term perspective that is often necessary to address environmental problems effectively.