Friday, March 30, 2012

Greater freedom has made China more stable


by Richard J. Grant

BEIJING – If China’s government were a monolith, then reading its intentions from its actions would be much easier. There is never a guarantee that the words of a government reflect its true intentions. But there is no certainty that its actions do either.

There seems to be the recognition within the Chinese government that they must move away from protection of state-owned enterprises (SOEs) and away from state ownership. SOEs tend to be inefficient and to be disruptive of natural market activity. According to Professor Wen Hai, an economist and Vice President of Peking University, as well as Dean of the HSBC School of Business, SOEs appear profitable only because the government controls their prices. We happen to be meeting the day after the government increased gasoline and diesel prices by between 6.5 and 7 percent. That brings the gasoline price up to about $4.80 per gallon.

But special-interest groups have grown up around the SOEs. These groups profit from their relationship with the SOEs and don’t want it to end. As do interest groups everywhere, they will continue to work at preventing any reform that threatens that relationship. Result: Either nothing happens or reform comes more slowly than intended.

That society-changing reform has already come is unmistakable. The Communist Party of today is not the Communist Party of 40 years ago. Neither is China the same. Change has come much faster than in the West, so rapidly that generations are shortening culturally, which is another way of saying that generation gaps are widening. Those born in one decade experience a very different world from those born in the previous decade. Yet there is continuity.

Chinese history did not begin with Chairman Mao Zedong, nor did it end. Mao’s time in history is remembered and publicly respected. But it is not to be relived. Those who lived through the Cultural Revolution seem intent to guard against that.

Zhu Yinghuang, Editor-in-Chief Emeritus of China Daily, remarked that those of his generation (those now in their 70s) had accepted that whoever had the strength to seize control of the country “had the right to rule.” In his time that was the Communists. They seized control soon after helping to drive out the Japanese. He asks rhetorically whether leaders of future generations will think differently. Perhaps they will.

Different lessons are learned from shared experience. The experience of communism, as actually attempted, was “profitable” for only a few. For those who traveled or could see outside, the contrast with the West was unmistakable. So was the lesson: Reform must happen.

When speaking with high government officials, a word that recurs too frequently to be an accident is “stability.” Reform does not go ahead unless it is believed to solve a problem and not to threaten stability.

The high growth and rising incomes since the reforms began would certainly help the re-election chances of a Western government. While some Chinese might be politically emboldened by their experience of greater freedom and higher incomes, there might be as many who see no reason to risk derailing what seems to be working. This balance serves to help preserve stability in the governance structure.

It is one more example of where greater market freedom has helped to support stability of government and of society. Perhaps that was the intention.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail messages received at: rjg@richardjgrant.com
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Copyright © Richard J Grant 2012