Governance Evolution in China

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Killian McMahon's picture

Governance Evolution in China

The governance challenges facing China’s new leadership are not materially different from the governance challenges already faced by or facing other countries. However, China’s governance progress to date is significantly influenced by two factors: (1) China’s stage in the governance cycle and (2) communism.

China is at a relatively early stage in its governance cycle. Most developed countries have had democracy and free markets for many years and their governance structures are more developed than China’s governance structures. Economic reform only began in China in 1978 with Deng Xiaoping's adoption of a more exports-led focus. China has been transformed by its global economic performance. China is now the second largest economy in the world. In 1990, China was not in the Top 10 global economies. In global terms, China is still in the growth phase of its economic cycle. China's 2012 nominal GDP per capita of US$6,0941 is low compared to its G20 counterparts. In addition, China is still not a G8 member. Therefore, the governance challenges facing China’s new leadership are not new global governance challenges; they are only governance steps, which China has not yet reached.

Communism could be the greatest single barrier to good governance in China. The communism challenge is different to most other countries as there are only four self-confessed communist regimes left in the world (the others being North Korea, Vietnam and Laos). The Chinese Communist Party has insisted on the principle of centralised democracy. The Chinese government has promoted Western economic principles and expressions but the government has curtailed freedom of speech on many communication media. China has employed a bottom-up approach to reforming its communist culture but the disparity, which exists between actual and autonomous rights, is still too great. ‘Human rights’ is not on its own, a governance issue. It is the decision-making process relating to human rights that needs to be changed.

Leadership succession is the Achilles heel of authoritarian political systems2. The current leadership system is driven by a National Congress, which is held every five years. The National Congress elects a new Central Committee of the Party, which will in turn elect its executive bodies, the Politburo and Politburo Standing Committee. The election results are negotiated well in advance of the National Congress and are agreed within and controlled by the upper echelons of the Chinese Communist Party. The leadership appointment system for the Communist Party has to become more transparent. Public opinion will sway China’s ruling party to change the current system as it is not practical to allow a decision-making process, which has a 10-year life-term, to be conducted in secret and without input from China’s people.

China faces governance challenges, which many of its G20 counterparts do not encounter. Previously, China’s size and its underdeveloped economy promoted a segregated structure in which factionalism, localism and departmentalism could thrive3. The 1978 economic reforms advocated decentralization and the gradual decline of state interference in the economy. With a population of over 1.3 billion, China has to govern more people than any other nation. Within this population, China has to deal with many issues including regional conflict (e.g. Taiwan), employment and tax considerations (e.g. farmers) and population concentration. Before one judges China, it may be the case that perceived good governance may not effectively operate in a country with China’s population. In fact, certain aspects of good governance could be detrimental to the efficient operation of larger countries.

A different governing system does not always result in inferior governance. For example, the incumbent leadership style of China’s Central Committee is one of consensus decision making and this leadership style should not allow one dominant voice to emerge, thereby ensuring one major pillar of good governance.

A country’s governance principles are usually enshrined in its constitution. Constitutions were written to promote a sense of equality and fairness. Good governance should have been a by-product of each country’s governing mandate. However, countries have been slow to adopt formal governance requirements. The numerous scandals (e.g. Watergate, the Iran-Contra affair, Berlusconi’s ‘Bunga-Bunga’ parties) in developed nations illustrate many governance failures. Dominant politicians have prospered financially throughout history and the electorate seem to condone inappropriate actions on a regular basis (e.g. Bill Clinton in the White House and ‘Ted’ Kennedy at Chappaquiddick).

At least China is attempting to introduce best practice governance change before a major crisis. Governance has been around for centuries but in the business world, corporate governance was only formally ratified in the UK by the Combined Code in 1998. A number of countries (e.g. Ireland, the UK and the US) talked about best practice governance in the financial services sector and in politics but did not enforce any mandatory requirements. It was only in the aftermath of crises that formal governance requirements were introduced.

China has made significant governance progress but its new leadership still has a number of governance challenges to address:

- Corruption: The introduction of anti-bribery legislation may force China to increase the pace of its governance change. The custom of accepting payments for services may have to be eradicated or replaced with an above-the-counter alternative. Incentive payments may have to be declared and may have to be included as part of an employee’s remuneration and taxed accordingly. Formalising this cultural custom will allow companies in developed nations to continue to transact in China and this governance initiative may also increase Chinese tax revenues.

- Intellectual Property Rights: The protection of intellectual property rights is a governance area, which China needs to address. China is responsible for manufacturing a significant proportion of the world’s counterfeit goods. If China wants to improve economic relations with the US, the EU and Japan, China’s government has to enforce international patents and property rights. The current enforcement imbalance is giving China an economic advantage over its competitors but affected countries may retaliate with new trade tariffs if China does not address this imbalance.

- Fossil Fuels: The new Chinese government must focus on sustainability and environmental protection. The Chinese economy is energy-intensive and inefficient. China must address its dependence on energy imports. China must start investing in renewable energy to ensure it does not become over-reliant on the productivity of oil and gas producing nations.

- Social Stability: There is a growing disparity between the rich and the poor in China. This development contradicts the communist philosophy and will lead to social unrest if China’s new leadership does not implement new governance measures to narrow this ‘wealth’ gap. China is experiencing rapid class stratification, and it is vital that the new leadership focuses on mitigating inequalities and adopting ‘harmonious society’ policies4.

- International Relations: China has still not resolved its dispute with Japan over the Senkaku / Diaoyu islands. Additionally, China is an ally of North Korea. The on-going dispute in Taiwan is also globally visible. China’s new leadership has to disassociate itself with the insular politics of past governing committees and embrace the world as a global economy.

Xi Jinping has to commit to further governance changes but China is making steady governance progress. China’s governance challenges are not new challenges. Each governance requirement has been implemented successfully before by another country. China’s biggest governance challenge, communism, has previously been modified by Russia. China needs to be given time to catch-up on the governance years it lost before its economic reforms. China’s current challenges represent China’s stage in its governance evolution. If China can deal with its major governance weakness, its communist election system, then China’s governance structures may even become the benchmark for best practice governance in the not-so-distant future.