China, US face common challenges

2013-10-17Asia Times

BEIJING - A document recently circulating on the Chinese Internet [1] argues that there are eight areas that urgently need to be reformed. It is a lengthy and detailed account, but in a nutshell it announces that at the Party Plenum that will convene next month, the leadership intends to curb the power and access to financing for the once almighty and still inefficient state-owned enterprises (SOEs) and to create a better market and financial environment for the efficient yet still timid private enterprises. The latter, especially small- and medium-sized businesses, have for decades driven Chinese development.

This is certainly fully in line with the reforms approved in the past, in theory it is continuity. A decade ago the party changed the constitution, giving private enterprises the same status as SOEs. De facto this is the beginning of a total revolution that will check the influence of SOEs, which were an integral part of the economy and power structure of the elite of the party.

Through SOEs, Chinese party elites distribute favors and money, advance their agendas, and ultimately suck resources from the country by concentrating real power and huge amounts of cash in the hands of a tiny minority of people. This process is not driven by a search for economic efficiency, but by an attempt to corner the market and create virtual monopolies that stifle it and muscle out resourceful private entrepreneurs.

This reform should create a better long-term economic climate that can sustain Chinese growth for the next three or four decades and would foster the right climate for the urbanization drive announced earlier this year that should bring 400 million people to small and medium cities over the next decade.

All of these are long-term plans will be met with huge short-term opposition. The de facto owners of the SOEs will see their cash and power slashed, and thus they are opposing the reforms with all their might and their significant stash of money. This opposition is so powerful and entrenched that President Xi Jinping needs to concentrate power in his hands by taking it away from lower echelons - and this could be a reason for the recent campaign of televised criticism and self-criticism sessions at the provincial level and below.

Local administrations, out of the gaze of the central government's eagle eyes, in fact are the areas where SOEs operate best, drawing massive loans from the complicit provincial or city authorities. In this way SOEs and localities created huge debts that performed poorly but did not show officially in the state budget. There are various estimates of these debts, but they may be higher than 60% of China's gross domestic product, a figure that has become the threshold to establish the economic virtue of a country.

Definitely if this problem is not urgently addressed now, within 10 years China will have transformed into a second Brezhnev-era Soviet Union and that will cause the country to implode, as happened with the USSR. However, these problems are not imminent, whereas the pressure from SOEs is felt right now.

Then a less responsible government could decide, in order to have less troubles, to accommodate SOEs' requests and leave the problems as a legacy to the next generation of leaders, who then will be found guilty by history of having brought about the collapse of China. In a way this was the line upheld by former Chongqing Party boss, the now disgraced Bo Xilai. He supported SOEs against private entrepreneurs. His political demise has somehow sealed a new political compromise: this line is gone and his former supporters have to be brought back in line with the rest of the party.

Seen from China, America faces similar short- and long-term challenges. In the long term, the US has collapsing infrastructure, and here moderate Republican Bill Mundell [2] has long proposed partly privatizing badly managed state assets to finance a new Rooseveltian infrastructure drive that could also pay for better schools and better health care.

Yet his appeals fall on deaf ears. Moderate Republicans Henry Kressel and David P Goldman [3] see American innovation, critical to national security and prosperity, slipping. Innovation depends on entrepreneurial access to investment capital, but the authors, drawing on the experience of China, believe that public policy could help. But these concerns also do not appear in the public debate.

On another level, President Barak Obama is pushing health-care reform that could spur massive reform in America, as in principle everybody would have access to better care, thus improving the basic quality of life for many people. This may not be the right time for this reform. It calls on increased public spending at a time when America should rather pay off its debts, and there may be many other legitimate objections including blaming the president for failing to create a consensus.

But the political paralysis that occurred because of this opposition is creating an atmosphere that could stifle other necessary long-term changes in the US. If the next president is a Republican, the Democrats similarly could bitterly oppose any long-term reform he has in mind.

Seen from the distance of China, and thus certainly distorted as it fails to grasp many details, the present opposition to Obama undermines all attempts for long-term changes because short-term considerations - winning the next election; winning tomorrow's debate and thus the national or local headlines - outweigh long-term issues causing the overall American decline.

Of course, there are plenty of reasons to say that this reform is being handled poorly, and that something better is needed. But from a distance this objection sounds very lame because, as Italians put it, "il meglio ? il peggior nemico del bene" ("better is good's worst enemy").

In fact, it appears from China that American democracy, driven by the obsession with tomorrow's headlines and the vicious competition of constant electoral campaigns, makes it impossible to address structural issues - and this weakness and could eventually doom America.

If China had American-style democracy right now, SOEs would thwart reforms and thus bring down the country in the long term. This conclusion may have some merit - democracy in the US and in some countries in Europe may have hit a wall - but it fails to recognize how democratic America and Europe managed to create massive innovations over the past two centuries.

Perhaps there are some structural problems in managing a democratic system - conceived in a time without television or the Internet, and with much smaller and less mobile populations - now that everything is spinning at a much faster pace on a larger and interconnected scale. But there are also issues that the materialistic Chinese Communist Party would call "spiritual": the waning of a set of common values bonding the elites and the nation.

That is, the dominant Republican opposition in America seems to value being right and correct over the necessity to find a compromise with the president that could save the unity of the country and ensure a path for necessary long-term reforms. Here, China is aware of the moral confusion (see my 'Confusionists', Mao and urban morality (, Asia Times Online, September 17, 2013) and around the issue of Bo Xilai there was an important rift in the common values. This particular rift is being addressed now by trying to bring to the fold former Bo's supporters, as the Party did in 1989 with former supporters of the Tiananmen movement and in 1999 with former followers of the Falun Gong.

But America conversely seems unaware of the breakdown in the established value system and even more unaware of the long-term dangers posed by it. Democracies work because they use political compromises to solve differences of interests and principles. Yet if compromises are not found, a nation comes to a deadlock - or worse, a civil war. And these compromises are found based on shared values, something that can be expressed as, ultimately the interest of the nation trumps that of a single party.

So what is happening in America now? Is the Tea Party a fundamentalist group trying to force its will on the majority of Americans? Have the Republicans gone mad? Or what else? What is so difficult that the rest of the nation does not understand the Tea Party people and do not bring them to the fold? Why are the Tea Party people are considered almost like Afghanistan's Talibans by some other fellow Americans? Why cannot America fill this growing chasm in its conscience and in its value system?

Of course, America is currently too preoccupied with its problems to be worried about explaining them to the rest of the world, but the growing perplexity in China and the world about what is happening in Washington and the difficulty in understanding how the battle will end, beside the current issue of the debt ceiling, is undermining America's long-term credibility and thus its soft power, the underpinning of its hard power.

If this soft power is shaken, other countries will vie to replace it, and this simple attempt could shatter the present world order with medium- and long-term repercussions for America. This is not good for America and nor is it good for China, which needs a very peaceful and quite environment to carry out its development for the next decades.

1. The Third Party Plenum must urgently focus on eight issues (
2. See (
3. See Henry Kressel and David P Goldman, Prosperity, Security and Markets, American Interest, Nov-Dec 2013. (2013-10-17 Asia Times)


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