March 08, 2006

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Riding the rural tiger

Another piece from the StratFor crowd on China's rural problems and how the central leadership is trying to leverage these problems to their advantage:

Chinese President Hu Jintao and Premier Wen Jiabao have been touting the "New Socialist Countryside" initiative. The initiative is being painted as a priority for reducing China's widening rural/urban gap in the near term, and for creating a more sustainable and robust economic future in the long term. The problems of rural economic reform, the social gap and rural unrest rank high on the agenda of China's central leadership and in the current session of the National People's Congress (NPC). Potential solutions to these problems form the heart of China's 11th five-year economic plan (2006-2010).

Over the past quarter century, China has made remarkable economic progress. By all accounts, its cities are booming: The bicycle-clogged alleys of the past are now traffic-clogged avenues, and construction cranes rise within cities as part of a seemingly endless rejuvenation and modernization campaign. Statistically speaking, China has never been stronger; gross domestic product (GDP) has risen from $200 billion in 1978 to $2.7 trillion in 2005. Foreign trade last year reached $1.4 trillion, with a trade surplus of nearly $102 billion. Exports accounted for 18 percent of the 9.9 percent GDP growth China reports for 2005. In the same year, the country utilized some $60.3 billion in foreign direct investment and sent $6.92 billion overseas in non-financial-sector investments. Foreign currency reserves at the end of 2005 registered $818.9 billion, rivaling Japan's.

But the growth has been anything but even. Urban growth continues to outpace rural growth, despite income increases across the board. In 2005, per capita disposable income reached $1,310 in urban areas, compared to just $405 in rural net income. Income disparity in 1984 was about a 2 to 1 ratio; now it is 3 to 1. Overall, the poorest 10 percent of China's citizens hold only 1 percent of the nation's wealth, and the wealthiest 10 percent claim 50 percent of the money. Even in urban areas, there are massive disparities: The poorest 20 percent of urban-dwellers control just 2.75 percent of private income; the top 20 percent control 60 percent of the total.

The gaps manifest in other ways as well. China's registered urban unemployment stands at 4.2 percent, but rural unemployment -- which isn't measured officially -- is anecdotally much higher, and even Beijing admits that some 200 million rural workers have migrated to cities recently in search of employment. That represents a substantial portion of the total rural population, which numbers 800 million to 900 million. In the cities, these migrants are treated as second-class citizens at best. In the countryside, they fare little better: Measures of education and health care are substantially lower. Moreover, there has been little legal recourse for farmers, who technically don't even own the land they work, when local officials confiscate the land for new industrial and housing projects.

The central government is well aware of these problems and, perhaps ironically, began issuing public cautions about social and economic tensions years before the international business community bothered to notice. Unrestrained economic growth no longer is viewed as a viable or sustainable option, and Beijing has begun to reassert more centralized control over economic development, with a particular emphasis on reducing the rural-urban gap.

But in seeking to address this problem, Beijing has exposed a deeper issue: endemic corruption and self-interest at the local and provincial levels of government. It is where economic disparity and government corruption intersect that social clashes occur most often.

The rest continued below the jump.

Geography of Corruption

More than 25 years after its launch by Deng Xiaoping, China's economic reform and opening program has reached a critical juncture. Economic reforms have outpaced social and political reforms, and historical strains between the coast and inland regions, between urban and rural, and between the educated and less-educated are threatening the fabric of social stability and the central government's ability to rule. It is easy to see the frayed edges: Local protests turn violent where urban development projects eat away at the rural land. As the social instability moves closer to the coastal cities, there is a risk that China's competitiveness as an investment destination will be harmed, thereby triggering a spiral of economic and social degradation. Social instability also lays bare the growing rift between the central government and the local and regional leaders.

From a historical perspective, China's apparently stunning economic success stems from the pursuit and implementation of the quintessential Asian economic plan, which can be summed up as "growth for the sake of growth." Japan, South Korea, most of the Southeast Asian "tigers" and China all facilitated their economic "miracles" by focusing on the flow-through of capital, without regard for profits. As long as money was flowing in, there could be jobs. As long as there were jobs, there was a stabilizing social force. There was also an overall rise in personal wealth, though rarely was it evenly spread.

The coastal provinces and cities became the focal points for international investments in manufacturing, as investors exploited preferential government policies and cheap labor. The rural areas -- traditionally the backbone of China's economy -- and the petroleum and heavy industry of the northeast (which had been core to early Communist Chinese economics) faded in relevance. Though Beijing occasionally promoted more inland development and investment opportunities, geography and a lack of infrastructure made these unappealing to investors. The concentration of wealth in the coastal regions was a source of minor social tensions, but restrictions on internal migration kept a buffer between rural and urban populations, and social frictions remained comparatively low. These restrictions, however, have been only selectively enforced as of late, and many are being lifted.

The booming coastal economies created clear opportunities for corruption. As provincial and local Party cadre and political leaders became the gatekeepers for foreign investments, they also became mini-emperors of their own economic fiefdoms. Collusion and nepotism -- always a part of Chinese political society -- became even more entrenched as the money flowed in. With the central government fixated on growth, the best-performing local leaders were rewarded. The more foreign capital they were able to attract, the greater their personal influence and takings. These officials were not measured on efficiency or profitability, but on total flow-through of capital, rates of growth, employment and social stability.

This partly explains why attempts by the previous government to address the unequal development in China failed. Each time former President Jiang Zemin or former Premier Zhu Rongji tried to adjust policies and financial flows to the interior, there were strong objections from the wealthier coastal provinces. When they launched anti-corruption campaigns, the graft their investigators uncovered was deep and wide, and in some cases even threatened to reach up to the top echelons of power -- at times implicating Jiang himself. This only further entrenched the problem and removed incentives for Jiang and Zhu to act; after all, both were part of the so-called Shanghai clique and derived their political support from the coastal regions.

Under these two leaders, the government was much more successful in reducing the independence of the military, as neither Jiang nor Zhu had significant ties into the institution. But because the economic and political elite in the coastal regions were the source of the central leadership's power, they were able to repel reforms sought by the central government.

This all changed with the coming of Hu and Wen, both of whom are from rural areas. Wen, a perennial political survivor known for his ability to connect with the "common man," has been practically deified among rural-dwellers on account of his 10-year-old coat. That the premier still wears the same coat after 10 years is a clear sign (according to ample coverage by the news media and blog sites) of his care for the people, rather than for himself.

Herein lies the secret of Hu and Wen's strategy to regain control over the local and regional governments and Party officials. Whereas Jiang and Zhu tried using anti-corruption campaigns -- only to end up implicating themselves and their core supporters -- Hu and Wen are moving to harness the power of China's rural masses. Depending on which Chinese official you believe, this is a mass of humanity numbering from 700 million to 950 million people. Even at the low end of the estimates, however, rural-dwellers make up more than half of China's population -- and greatly outnumber the 300 million middle- and upper-class Chinese living mainly in Beijing and the coastal cities.

Harnessing the Masses

Chinese leaders have a long history of using the masses as weapons when challenges to central authority arise -- from the attempts to harness the Boxers at the turn of the 20th century to Mao's communist revolution to the Cultural Revolution. In each case, the process was chaotic and the outcomes were uncertain. Though Mao eventually succeeded in rallying the rural populace to effect his communist revolution, it simply served as a starting point for a new Chinese system. The use of the Boxers led to the dissolution of the Chinese dynastic system, and the Cultural Revolution wiped out whatever economic gains had been made, leaving China to start nearly from scratch once again.

What Hu and Wen intend to do is rally the masses to pressure local leaders into returning authority to the center. From this, centralized economic direction will, they hope, lead to more equalized development without significantly undermining the country's growth (though a slight slowing will be expected). Ultimately, the causes of social discontent would be mitigated and social frictions reduced as money is shifted to the interior.

This is a rather risky proposal, but China's core leadership sees this as the least distasteful among a poor selection of options. The initiative is being presented not as a disruptive social revolution, but as the duty of those who got rich first to assist those who trail them. The initial details of the official plan include greater spending in rural areas on infrastructure, education, healthcare and agriculture, with funding coming primarily from the urban centers. The plan already is meeting with mixed reactions from China's regional leaders -- and while the NPC is expected to approve the plan, that doesn't mean that they like it.

However, as the government's core leadership has pointed out ad nauseum over the past year, the Chinese economy is in a fragile state, and the rural/urban inequalities threaten to undo everything China has built up since the economic opening and reform program began. Unless the central government regains complete control over economic strategy and tactics, there is a fear that China ultimately would fracture into competing regions, largely independent of any central authority -- a sort of economic warlordism reminiscent of the final days of previous Chinese dynasties.

Beijing's choice, then, is between taking no action against local governments, out of fears of triggering massive capital flight or inadvertently crippling investment and export activity, or rallying the rural masses -- which would be another avenue toward recentralizing control.

Thus, the central government has made a point of publicizing ever-more-dire statistics concerning rural and urban unrest. The Ministry of Public Security reported 87,000 cases of public disturbances in 2005, up from 74,000 in 2004 and 58,000 in 2003. (The numbers are high, but the definition of "disturbance" remains ambiguous.) The ministry has also warned of an imminent "period of pronounced contradictions within the people" in which "unpredictable factors affecting social stability will increase." Meanwhile, Wen has repeated that the cause of many protests is the confiscation of rural land for development and industrial projects -- projects that often are linked to corrupt local officials or are local initiatives that don't match the central priorities.

The message to the local leaders, of course, is that China's masses are on the move. In discussing the rural/urban gap, Chen Xiwen -- deputy director of the Office of the Central Financial Work Leading Group -- noted recently (and somewhat ominously) that 200 million farmers have left the countryside; Chen warned that "to increase the living standard of these farmers, China should spare no efforts to build the new socialist countryside." In essence, Beijing is threatening the local leaders with the spectre of a rural rising. The class struggle is on, and the farmers far outnumber the city-dwellers. The implicit message is that, for the safety of the city, the farmers must be funded and rural areas built up.

At the same time, Beijing is looking at a wholesale change in the local leadership, beginning with the Party secretaries and chiefs of China's 2,861 counties. New regulations -- not altogether welcomed by the existing Party cadre -- will require new county-level Party secretaries and chiefs to be around 45 years old and possess at least a bachelor's degree. These individuals would be less likely to have already built up their personal economic connections, and be more beholden to the central government for legitimacy and support. Beijing is also increasing supervision and admonition of Party and government officials.

But to make these changes last, Beijing needs to give the lower cadre some incentive to follow the central government's demands -- even if it means a reduction in local investments or a rise in local unemployment. Beijing must ensure that local officials are more closely tied to the central leadership in Beijing than to foreign investors and shareholders in Japan or the United States. For this, Beijing needs to make it utterly clear what risks the local government leaders face. Threats of prosecution and even the token executions of some officials have not worked, but the potential for more and larger social uprisings might.

This means Beijing needs to allow, if not subtly encourage, more localized demonstrations.

And that apparently is where Hu and Wen intend to go. The central government's response to stories of rural unrest has remained rather low-key thus far. In reference to the Dongzhou protests in December 2005, where at least three were killed when local security forces opened fire on the crowd, officials on the sidelines of the NPC session recently made it a point to say the officers in question are under detention and did not follow orders. In other uprisings, there even have been suggestions of sympathy from the center. In the cost-benefit analysis, Beijing apparently has determined that the risks of allowing the current trend of growing regionalized power to continue outweigh the risks of trying to manipulate popular sentiment against local officials.

This, perhaps more than anything, underscores the severity of the economic and governing problems facing China's central leadership.

The strategy of unleashing the rural masses, allowing and even subtly encouraging protests could quickly get out of hand. However, given the wide array of localized concerns, there is a natural disunity that could be expected to constrain protesters -- keeping demonstrations locally significant but nationally isolated. So long as protesters don't join across provinces and regions, so long as no interest is able to link the disparate demonstrations, the central leadership will retain some leeway to implement its policies.

But as history bears witness, any attempt to harness protests and mass movements is a very risky strategy indeed.

posted by Simon on 03.08.06 at 12:57 PM in the China brief category.


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They are taking advantage of the role guanxi networks play in chinese stability.

They are hoping to build up trust by not responding negatively to demonstrations.

Brilliant move, but in the end, they still have to deliver a substantially higher standard of living at some point, and thats impossible, given the state of the Chinese economy.

Worse yet, their "reorganizations" are disrupting local social structure among the networks, which will induce cross network ties and social instability, the very things they are trying to avoid.

Accordingly, I am predicting massive social upheaval around 2010. An "A" for effort though.

posted by: Randy Gordon on 03.10.06 at 03:42 AM [permalink]

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