Tuesday, December 21, 2010

China Watch 10: Is China Still a Communist Country?

There are two guest posts from two friends, with a discussion in between. Enjoy this long post, about 7 pages long.

(1) Guest post from FMG: Is China Still a Communist Country?  (written a year ago)

China's growth during the past thirty years is nothing short of phenomenal. Between the period of 1980 and 2001, poverty levels came down from 53% to just 8%(1). More and more Chinese can now afford to buy refrigerators, A/Cs and other appliances. Such growth and development is rightly admired the world over. And anyone trying to emulate China's economic success ought to find out its causes. This essay attempts to clearly and precisely answer the question whether communism played a positive and significant role in China's development.

How do we define communism?

There are currently many different forms of communism. And they don't necessarily agree with one another thus making it almost impossible to create a definition that would satisfy everyone. However I propose this: that communism is nothing if not anti-capitalistic. So we begin with the definition of capitalism by Miriam-Webster to define communism:

"an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.(2)"

And how does communism seek to replace capitalism? The Communist Manifesto says:

"...the theory of the Communists may be summed up in the single sentence: Abolition of private property."

Or more specifically, the private ownership of capital goods. Capital goods being defined as goods used to produce other goods or commodities. Examples are land used to grow food, machines used to manufacture cars, buildings to house factories, etc. For the sake of argument, set aside the practical difficulty enforcing such a rule when the same good (e.g. land) can be used both as a capital good (to grow food) and consumer good (to build a house to live in). Also set aside the inconsistent communist position that tradesmen can privately own tools (e.g. hammers) even if such goods are arguably capital goods since you don't buy tools for it's own sake but to build something with it(3).

What is ownership of property?

Macliing Dulag, a tribal leader, once quipped:“Paano mo aangkinin ang isang bagay na hihigtan pa ang buhay mo?” or "How can you own that which will outlive you?" Catchy but irrelevant and besides the point. Economic development doesn't really give a damn about who legally "owns" or under whose name a piece of property is. What is important is property rights.

To illustrate, suppose I gave you a car and register it under your name. However, I do not give you the right to drive, touch, or use the car in anyway. While I retain the rights to do so from driving it to using it for my business and thus enjoying the fruits of using the property (a form of usufruct). All your "ownership" gives you is a piece of paper that says you own it. Does your ownership mean anything? If it does, it still means nothing to economic development. For it would not determine whether the car will be put to more productive, and hence efficient, use or not. What does determine how the car will be used is whether I, who posses the rights to use it, find it profitable or costly to use it one way over another and whether the opportunities open to me is of benefit to anyone else. In short, what are the incentives and disincentives my property rights give me?

Private vs. Public ownership of property rights

Private ownership of property rights mean that one can exclude others from using said property (e.g. the toilet in your house). Public ownership means one cannot exclude others (e.g public toilets). Which do you think is cleaner? --->needs work

Communism Defined

We have now defined what we mean by ownership of property, namely the allocation of property rights. Capitalism seeks to allocate property rights to private individuals or groups of private individuals. Communism seeks to abolish private property of capital goods and give property rights to the whole of society. In practical reality it is given to the state(4). And so we define communism as an economic system that allocates property rights of capital goods to the public (or its representative the state). Thus the more a society communally(5) or publicly shares property rights the more it is communist in nature. And the more property rights are given to private individuals, to the exclusion of others, the more capitalistic it is.

(1) http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20634060~pagePK:64165401~piPK:64165026~theSitePK:469382,00.html

(2) It is interesting to note there is nothing explicit in Capitalism's definition about establishing a new world hegemony or to support any sort of "imperialist" motives of any particular nation. In fact, it is open to collective ownership of goods (corporate ownership) for as long as such individuals agree to share ownership voluntarily. Communism's fundamental criticism of capitalism is that it would collapse under its own contradictions inevitably ushering an era of socialism then communism. History, however, shows communism collapsing instead.

(3) This is due largely to Communism's loose use of language and terms.

(4) Whether or not communists actually intend to use the state to look after their interests or that people should be more directly involved and bypass the state is besides the point. What is important whether the means they wish to employ are themselves practical and/or lead to their intended outcomes. One cannot escape responsibility of one's acts with mere noble intentions.

(5) Hence "Commune"-ism

I posted FMG's article on the subject in our Asian Liberty Forum yahoogroups, a friend from Hong Kong, Simon Lee, made this comment below. Posting this with his permission, of course.
Hold on. State machinery in China still command a very substantial portion of the economy. So, what do you call that?

Don't fool ourselves. People's Republic of China is a Nationalist Socialist State - by definition, it is a fascism. If you look at history, fascists have track record defeating communists - by replacing them in the command of economy and everything else.

I suggest you guys to read The True Believer by Eric Hoffer. It was written in early 50s, even before the Cultural Revolution by Mao. But this piece of prophetic literary gem was so precise in describing (1) how fanaticism eventually unfolded into total chaos; and more importantly, (2) how the radicals settle down and institutionalize their powers etc.

Again, don't fool ourselves. PRC is no where close to capitalism as we understand it.

I think there are certain properties of the capitalist system that are present in China now:

1. Respect of private property rights, both personal property and "means of production" like machineries, factories, trucks, computers, etc.

2. Profit motive is alive and respected.

3. Price system by private sellers and buyers generally works. Meaning there is little price control by the State. I don't know what sectors there have price control in China -- transpo fares? minimum wage? house rental? medicines?

It's the state ownership of all lands, political party monopoly of the China Communist Party, and government harrassment of political dissenters, that makes it a communist in the classic definition of the concept.

So it's a mixture of business capitalism and political communism. A hybrid, which creates its own internal contradiction. Capitalism thrives on individual freedom while communism or socialism thrives on repression of individual freedom.

FMG made additional comments:

When Deng Xiaopeng allowed farmers to own a part of their harvest to do what they see fit (eat it or sell it), then it was movement away from communism or public control of property and to capitalism. That is, some property rights were taken away from public hand and given to private hands.

There are still other examples of public property rights being given to private hands, whether or not it tipped the balance in favor of capitalism is highly subjective. For example, we can argue that China's State industries still own a large chunk of the economy but does this really offset the relative freedom businessmen have in other parts of the economy? So far all of the Filipino Chinese businessmen I've talked to say doing business in China is freer than the Philippines. There is less mention of socialist or collectivist considerations.

I was going to say how we can say if the Philippines is more communist than China and that Communism rewarded selfishness and punished virtue more than capitalism.

For Simon Lee's comment: "Again, don't fool ourselves. PRC is no where close to capitalism as we understand it."

It really is subjective. There is no objective way of measuring whether one or two laws has X points of communism or capitalism.

Yes, it is impossible for China to grow its economy rapidly that it surpassed Japan's GDP size this year, if it did not liberalize many sectors of the economy to capitalism, the profit motive and the free pricing system.

We should consider, however, that many of China's biggest corporations are not private but state-owned and controlled, and possibly monopolies in particular sectors or sub-sectors. It is the small and medium enterprises (SMEs), and a few big private corporations, that are most dynamic and are really capitalistic -- privately-owned and are subject to fierce competition from other private players and businessmen.

The contradiction between a largely capitalist business sector and a communist political/state sector will remain for the next couple of years. The Communist Party of China, the state monopoly political power, is not giving any indication that it will democratize the party system to allow competing political parties.

(2) Guest Post by Simon Lee, a friend from the Lion Rock Institute, Hong Kong.

Let me point you guys to this brilliant work, Capitalism with Chinese Characteristics: Entrepreneurship and the State, by Prof Yasheng Huang.

Basically what Prof Huang argue can be summed up in a few points:

1. It is true that the early reform in the 1980s was mostly about opening up the economy and allow bottom up innovation.

2. But from 1990s onwards, it is more about managing an economy via the state-owned sector. It might have change somewhat the financing of these zombies but they are still under the state directives, to a certain extent.

3. China wasn't where real private enterprises flourished. It was HK where these enterprises, say Lenovo, domicile and obtained funding. Legally speakings, these Chinese companies are HK companies.

4. Reform in the State-owned enterprises in China stalled in the 90s.

The comment by FMG: "It really is subjective. There is no objective way of measuring whether one or two laws has X points of communism or capitalism." is absolutely misguided.


I am not saying there is a spectrum of capitalism. Indeed I abhor such relativistic perspective.

Capitalism is an ideal. It is a form. Even Hong Kong does not conform to the ideal. Using China as an example exhibits one's ignorance on the ideal as well as the reality.

Nowadays, the catch phrase in China is: the State advances, Civil Society on the retreat. 國進民退 For someone who has been following the reform in China, I would not say China is the model for reformers. Gradualism has its own deficiency. It allows special interests groups to take root, hence became a resistance to further reform.

Also, I personally urge everybody to take Deng's role in the reform with a bit more skepticism. It was the Hu Yaobang, later disposed by the Communist Party for pushing forward the reform too hard. Deng certainly provided political support to Hu during the early phase of the reform. But as it was unfolded in 1989, Deng obviously cared more about having the Chinese Communist Party remain in control of its absolute powers, rather then reforming the economy and nation.

More on Hu Yaobang here,

If you are interested about the history and Deng's attitude, I suggest this highly:

Prisoner of the State: The Secret Journal of Premier Zhao Ziyang (secretly written by Zhao himself).

So much about China. Again, if there is only one message you can pick up today, this is it: "Even if you are desperate to reform, China is not the role model."

Indeed, there is no short cut to freedom and prosperity.

I'd rather look at the history of the last 300 years, i.e. (1) strong establishment of property rights before the industrial revolution, (2) free movement of goods, labor and capital in the 19th century, and (3) the first constitutionally established republic, i.e. the United States of America, for inspiration.

By calling China the model of economic reform, we will all look like clowns if one day, it retreats and rolls back the progress made since 1979.

Thirty years is comparative insignificant if you look at what really matters. At the end of the day, no communist regime survived for more than 80 years.

A country moving away from being a nominally communistic regime doesn't necessarily make it capitalistic. Putting capitalism vs communism is binary.

Also, I doubt if Milton Friedman say economic freedom is "better" than political freedom. His conjecture was that once a nation becomes economically free to a certain extend its people would demand the later.

The problem is whether the later will be granted in a peaceful manner. Don't forget who has gotten the nobel peace prize this year and where he is now.

Even when we look deeper into the detail the way Chinese economy is running, you will be surprised to realize the extralegal part of it as well as the dissipation of value due to rent seeking. It is simply heart breaking.

If we all do agree corruption is a symptom of an unfree economy, the Philippines and China share the same ailment.
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A little bit more from our personal experience in Hong Kong.

The government in HK has this motto: big market, small government. In principle, it implies we always allow the market forces to play it's role first then if everything else fails, the government steps in.

The problem is: how do we know when the market fail permanently? My answer is never.

Here is the lesson: whenever there is a justification for more government, someone is going to use it as an excuse. There is almost no exception.

Therefore, we can only choose if we are true to our belief: necessary evil is still an evil.

While the man on the street care about economic growth, jobs and income, i.e. The Big Market. They do not really care if it comes at a cost of bigger government. So, to them, it is possible to have Big Market and Big Government. I do not need to elaborate anymore here: that is exactly the promise of Fascism.

So, whenever we were asked for our stance on the motto, this is my standard answer:

"We don't know if the big market is an inevitable outcome, small government is always right."

The perspective that China has done economic miracle in the past thirty years so it is the role model is simply flawed. Don't forget Japan, which was the miracle in 1980s. MITI screwed up and the financial institution were tied up by cronies financing, hence entire decade lost. We do not know yet if some far more disastrous is going to happen in China along the same line.

At the end of the day, there is no guarantee anything in the market will work, including the market itself. The surest we know is when government play market, it will fail. That is why I say China isn't even close to anything we know as Capitalism.

Those owho are yet to be convinced, please consider this: will you call it a capitalist economy when you do not really have a choice on how and where to save you hard earned money? The capital control in China was instituted so its citizens cannot send money overseas. By keeping this money domestically, saved in State owned banks, which in turn lend the money back to cronies. On the other hand, the government keeps printing money to finance its deficit budget thus ripping off ordinary people's saving. This is the vicious cycle that keeps China from inflating one bubble after another. Do you call this Capitalism with a big C?

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