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Behind China's woes, myth of competent autocrats

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Tailwinds in growth such as cheap labor and open access to global markets used to conceal and offset bad policies.   © Reuters

The relentless economic slowdown and the unfolding panic in China's financial markets have blasted apart several long-cherished myths. One of them is that of a competent autocratic regime run by clever technocrats and decisive politicians. Recent stumbles by Beijing, such as the ill-fated and costly decision to save a crashing stock market bubble, the surprise devaluation of the yuan, or renminbi, and the subsequent massive intervention by the People's Bank of China to support the currency, demonstrate that Chinese technocrats may not be as clever as many thought. As for the country's politicians, they appear to be decisive, but only in making bad calls.

     When it comes to China, policy competence is a far more valuable asset than in other countries. For the ruling Chinese Communist Party, competence is its claim to rule. Unelected by the people, CCP leaders have consistently tried to show that their ability to deliver economic benefits justifies one-party rule. So the party has an existential stake in competence because evidence of incompetence threatens its hold on power.

     For foreign investors or trading partners, Beijing's competence is practically all they can count on. With its lack of transparency and absence of the rule of law, China exudes a level of policy uncertainty that would make most uncomfortable. But if those inside Beijing's black box know what they are doing, China's trading partners and investors perhaps can go to bed and not worry about losing their shirts when they wake up.

     Skeptics have always questioned the idea that China has been endowed with unusually gifted technocrats who enjoy sufficient independence in policymaking and can thus compensate for the well-known flaws of autocratic regimes, such as arbitrary government, systematic falsification of data, cronyism and the lack of transparency. They point to obvious and chronic policy failures such as overinvestment, under-consumption, environmental neglect, and poor provisions of public goods as evidence of managerial incompetence.

     Until China's recent market meltdowns and surging capital flight, believers in the myth of autocratic competence seemed to have a slight edge in the debate. They customarily trotted out China's stellar growth data as prima facie evidence of the competence of China's rulers.

     To a limited extent, such advocates are not entirely wrong. Managing a transition economy that lacks the basic institutions that mature market economies take for granted is challenging even to the smartest people. In relative terms, China also has a greater number of competent policymakers than do many developing countries. But that is a very low bar against which to measure Beijing. China aspires to be a first-rate superpower and constantly benchmarks itself against the best in class -- the U.S. in particular -- in macroeconomic management. So praising China by saying that it does better than some less developed countries would insult every self-respecting Chinese official.

Shining stars of past era

In the post-Mao era, China was also lucky to have had two extraordinarily capable premiers, Zhao Ziyang (1980-1987) and Zhu Rongji, who became China's economic czar in 1993 and served as premier, the country's chief economic policymaker, from 1998 to 2003. Both played pivotal roles in launching and sustaining China's reform and development. Under Zhao, whom the CCP subsequently dismissed for his refusal to crush pro-democracy protesters in 1989, China adopted bold and creative policies to dismantle socialism and nurture a market economy when there was literally no map for reform.

     After Zhu was given the economic portfolio in mid-1993 as the country faced runaway inflation, he spearheaded crucial reforms, such as the reunification of exchange rates through a one-time substantial devaluation, restructuring of the fiscal regime, and the transformation of the financial sector. After he became premier in 1998, Zhu led China's efforts to join the World Trade Organization, recapitalize the banking system, and shutter hundreds of thousands of loss-making state-owned enterprises.

     Incompetence in economic management was far less costly when China enjoyed strong tailwinds in growth, such as cheap labor and open access to global markets. These structural factors both concealed and offset the impact of bad policies. One example was Beijing's gargantuan debt-fueled stimulus program in the wake of the global financial crisis. The injection of the equivalent of $15 trillion in credit into the Chinese economy between 2009 and 2013 temporarily supported growth and helped the world avert a global depression, but the consequences have been calamitous -- a huge property bubble, massive overcapacity, and unsupportable levels of debt. These are the very ills responsible for China's economic slowdown today.

     Like receding tides that expose naked swimmers, decelerating growth in the Middle Kingdom today reveals the incompetence of its economic policymakers -- and the deeper causes of managerial incompetence throughout the system.

     Among the systemic causes of bad policies, the most obvious culprit is the dominance of politicians in economic policymaking. While there is no shortage of capable technocrats inside the party-state, those who have the final say, from members of the Standing Committee of the Politburo all the way down to the humble county party chiefs, are typical politicians who are more influenced by considerations of their personal political gains than those of economic efficiency.

     Policies likely leading to their promotions are favored over those that could cause short-term pains and damage their career prospects. On rare occasions, technocrats are given greater decision-making authority, but that occurs only after the politicians have made such a mess that they, out of sheer desperation, have to allow the technocrats to clean it up. Based on this pattern, there may be a silver lining behind China's recent economic turbulence -- capable technocrats could be put in charge again.

Autocracy deters talent

The other systemic cause of incompetence is the well-known ill of progressive degeneration of talent in an autocratic regime. Government service in an autocracy often carries high moral costs for talented individuals: It leads to the loss of personal dignity in a political hierarchy where the only thing that matters is the status of an official (that is why Chinese officials have business cards with minute details of their official ranks and status that Western businessmen would find totally incomprehensible). Junior or subordinate officials in this system are routinely humiliated and mistreated by their superiors. With the private sector offering better opportunities and psychological well-being, most talented individuals would prefer to seek their fortune outside the government.

     Consequently, government service tends to attract not only less talented but also more opportunistic individuals who otherwise cannot compete in the marketplace. Such individuals can reap outsized rewards if they are willing to toil inside the Chinese bureaucracy and endure the daily indignities inflicted on them by their bosses.

     An even worse consequence of the chronic and progressive degeneration of talent is the tendency of political bosses to promote officials they see as non-threatening to their own advancement. Obviously a technocrat who consistently outshines his CCP chief is a serious political risk, either in the accumulation of political capital or the tournament of promotions. This practice allows, over time, mediocre officials masquerading as competent technocrats to populate and dominate the system from top to bottom.

     The worst aspect of progressive degeneration of talent inside the Chinese bureaucracy is the rigid process of recruitment and promotion instituted in the post-Tiananmen era. The CCP now mandates a minimum number of years and the number of positions an official must serve before he or she can be promoted to a key position. This system may provide all-round managerial experience to a Chinese official, but it also helps the less talented to rise to the top because inside the party-state, the deciding factor for getting ahead is not proven achievement but avoidance of mistakes. Again, if they punch every clock, risk-averse careerists, not dynamic and truly talented leaders, tend to thrive in the party-state.

     Can talented policymakers ever rise to the top in today's China?

     The answer is mixed. While it is conceivable that another Zhao Ziyang or Zhu Rongji could be found when the CCP is sufficiently desperate for a savior, the roots of China's malaise lie much deeper. Both Zhao and Zhu made a difference because they were in charge of the economy when the direction of reform -- toward a more market-oriented economy -- was unambiguous. Can anybody say with full confidence that China is headed in that direction today?

Minxin Pei is a professor of government at Claremont McKenna College and the author of China's Crony Capitalism: The Dynamics of Regime Decay (forthcoming, Harvard University Press).

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