The Art of Governance
China is at an important stage in its development as its recent rapid growth has propelled it to become the second largest economy in the world. Still, the Chinese Communist Party (CCP) and its new leader Xi Jinping face many challenges to further China’s advance to becoming the world’s largest economy and a respected economic superpower. Though China has a single-party system and its leaders are not up for election, its governance challenges are very similar to those of other countries, and in particular, China faces some of the same issues that the Western democracies once encountered when at China’s current stage of development. Above all, the CCP must improve the standard of living for its over 1.3 billion citizens so they do not demand drastic change.
In a speech to the people of China, Xi Jinping said his government needs to work for “better schooling, more stable jobs, more satisfying incomes, more reliable social security, higher levels of health care, more comfortable housing conditions and a more beautiful environment.”[i] To do this, the economy must continue to grow. China experienced growth at around ten percent in recent years, but it has since slowed from its peak. Workers moving from agriculture to export-oriented manufacturing accounted for much of this growth. The benefits from this transition, however, have about run their course.
China’s new leadership has to find new ways to maintain growth and avoid the “middle-income trap” that many other countries, such as Malaysia and Thailand, have not been able to overcome. This occurs when fast growing economies reach a certain level of per capita income and experience a considerable slow-down. China is expected to reach that income level within the next couple of years. The CCP can promote renewed growth, in part, by creating white-collar jobs for China’s college graduates. The example of other Asian economies shows that an education system that produces the skills that employers demand is a key to avoiding the middle-income trap. As Eichengreen, Park, and Shin explain, “the rapid expansion of secondary and tertiary education helped Korea’s successful transition from middle- to high-income status, very much unlike Malaysia and Thailand.”[ii]
Avoiding the middle-income trap is particularly important for the CCP. Given the great growth China has already experienced over the last thirty years, China’s leaders have been able to get away with disregarding equality, human rights, and social justice. If Xi Jinping’s new government cannot deliver the services he pledged in his speech, his party could be faced with a populist uprising like those in recent years in Egypt and Libya. Elections are not the only way citizens can hold their leaders accountable. Therefore, the main challenge that the new leadership faces is avoiding the middle-income trap and maintaining growth to keep the citizens content so they do not demand drastic change.
To be sure, corruption threatens these goals. High levels of corruption within a country’s government can lead to lower economic growth, less foreign investment, and lower income levels for citizens. Xi Jinping discussed dealing with corruption within the CCP: “Inside the party, there are many problems that need to be addressed, especially the problems among party members and officials of corruption, particularly taking bribes.”[iii] Nevertheless, fighting and reducing corruption have a high cost, and it cannot be completely eliminated.
In fact, combating corruption should be secondary to promoting continued growth. Since China is on path to become the world’s largest economy, it is useful to compare it to the current largest economy, the United States, when it was in a similar situation. Carlos D. Ramirez, an economist at George Mason University, conducted a study comparing corruption in China over the last fifteen years with corruption in the United States between 1870 and 1930, a period when real income per capita was similar. This research concluded that China was no more corrupt than the United States was at that time, and it suggests that China fits in with the “life-cycle theory of corruption,” which says that corruption is higher in earlier stages of development and declines as development progresses. Thus, China’s corruption level may not be as bad as popular belief suggests and is actually quite normal for its development stage. Therefore, China’s leadership must decide whether to take drastic corruption-control reforms now or focus on continuing the development process and seeing corruption naturally decline over time. Even though corruption can negatively affect growth, Ramirez’s research concludes that, like the United States and United Kingdom in similar times, China can still grow and develop even while experiencing these levels of corruption.[iv]
Finally, the CCP is trying to improve China’s standing in the world as an economic superpower. One step to do this is to internationalize the renminbi and have it become a major global reserve currency like the U.S. dollar. Barry Eichengreen explains that being the second largest economy is not enough to give the renminbi this prominent status. In 1913, the United States was the largest economy, but the British pound was still the world’s number one currency. The United States lacked liquidity and stability then, and China faces the same issues today. The dollar became an international currency only after Congress passed the Federal Reserve Act of 1913. With this, the Fed could act as the lender of last resort, and it had the ability to buy and sell dollars. This created a liquid market for the dollar and provided stability. This transformation took only ten years. Today, China’s leadership must enact the appropriate regulatory changes to promote stability and liquidity to allow the renminbi to follow the dollar to global status and further China’s rise as a world leader.[v]
In conclusion, Xi Jinping and the CCP face many of the same challenges that the current developed countries previously faced. The most important is continuing to grow and develop the economy to avoid the middle-income trap and maintain political stability. Since Xi Jinping has given no reason to think that his new leadership will bring about fundamental changes to the way China is governed, how it handles these challenges will determine whether or not the CCP can stay in power and if China will go on to become the largest economy in the world and a major economic superpower.
[i] Ian Johnson. “A Promise to Tackle China’s Problems, but Few Hints of a Shift in Path.” Nytimes.com. November 15, 2012. http://www.nytimes.com/2012/11/16/world/asia/new-chinese-leader-offers-f...
[ii] Eichengreen, Barry, Donghyun Park, and Kwanho Shin. “Growth Slowdown Redux: Avoiding the Middle Income Trap.” Voxeu.org. January 11, 2013. http://www.voxeu.org/article/growth-slowdowns-redux-avoiding-middle-inco...
[iii] Ian Johnson
[iv] Carlos D. Ramirez. “Is Corruption in China ‘Out of Control’? A Comparison with the U.S. in Historical Prespective.” George Mason University Economics Dept. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2185166
Eichengreen, Barry, Donghyun Park, and Kwanho Shin. “Growth Slowdown Redux: Avoiding the Middle Income Trap.” Voxeu.org. January 11, 2013. http://www.voxeu.org/article/growth-slowdowns-redux-avoiding-middle-inco...
Global Times.“China Needs to Address Challenges to Make Yuan a Global Currency of Choice. Globaltimes.cn. January 14, 2013. http://www.globaltimes.cn/content/755675.shtml
Johnson, Ian. “A Promise to Tackle China’s Problems, but Few Hints of a Shift in Path.” Nytimes.com. November 15, 2012. http://www.nytimes.com/2012/11/16/world/asia/new-chinese-leader-offers-f...
Ramirez, Carlos D. “Is Corruption in China ‘Out of Control’? A Comparison with the U.S. in Historical Prespective.” George Mason University Economics Dept. Paper No. 12-60. December 2012. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2185166
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