China's Elites and Economic Development

November 17th, 2012
in Op Ed

by John West, Asian Century Institute and Mr. Globalization

Over three decades ago, China's Communist Party elite saw it in its interest to adopt pro-development policies. This is in sharp contrast to most countries in the Middle East and North Africa whose elites squandered development opportunities and plundered their countries. The frustrations that this caused, ultimately gave rise to the regional uprising known as the "Arab Spring".

China's strong economic performance has strengthened the Communist Party's legitimacy in the eyes of large numbers of Chinese citizens, especially those who benefited most from economic development. Perhaps ironically, however, China's elite now finds itself threatened by the consequences of its own success.

Follow up:

Dramatic economic growth has been accompanied by large scale corruption, widening income gaps between rich and poor, immense environmental damage, many scandals and growing social unrest. More fundamentally, China now has a much more complex and diverse society, which is more prosperous, better educated and informed, and demands greater freedom. As we have witnessed through the recent Communist Party Congress, the reaction of Chinese authorities has been to stiffen political and social repression.

Let's first delve into the question of elites and economic development.

The United Nations University has defined elites as "a distinct group within a society which enjoys privileged status and exercises decisive control over the organization of society". Countries typically have political, business and educated elite groups which are distinct groups, but are also interconnected.

The power of elites exceeds their actual representation within society because of their control over a nation's productive assets and institutions.

Elites can choose to use their assets and resources in productive, innovative and entrepreneurial ways that promote economic development, employment and reduce income inequality. Alternatively, elites can act as rent-seekers, can direct resources towards their own social groups, or over-exploit natural resources without regard for longer term sustainability.

Elites also control political decision making processes in society, and can design and implement institutions that favour their interests. They can also influence how both elites and non-elites perceive different issues through their control and presentation of information, and their influence over the media, even when it is "free".

In short, if elites can be induced to adopt pro-development policies, rather than predatory behaviour, they can have a very positive impact on development. For example, Lee Kwan Yew in Singapore, Nelson Mandela in South Africa, and Bill Gates in the United States changed the direction of development from their elite positions.

So how did China's elite (some 200 or so families) become motivated by a pro-development agenda?

Deng Xiaoping took over the leadership of China in 1978, following several decades of centrally planned economics under Mao Zedong. While some progress had been made under Mao, especially for health and education, China's overall economic situation was very poor, especially compared with its Asian neighbours like Japan, Korea, Taiwan, Singapore and Hong Kong. Of particular interest to China was that most of these economies achieved success by mixing market-based economics with non-democratic politics.

In a way, Deng's motivation was the same as Mao's, that is, a strong economy, regime stability and opportunities for corruption. This is how China has functioned for over 2000 years. But Deng could see that market economics (rather than central planning) was the best way to achieve this.

China's development path launched by Deng has been abundantly successful. Rapid economic growth has reduced poverty dramatically, a big positive in terms of its legitimacy with the Chinese public. The gap between rich and poor has widened dramatically, meaning that the elite has won more from development than the masses. And rampant corruption has also helped the elite benefit.

The ever pragmatic Deng once said, as he defended market economics against central planning, that it does not matter whether a cat is black or white, as long as it catches mice. But once the market economics "cat is out of the bag" it creates a whole new world of challenges.

Chinese citizens are economically much better off than they were before reform started, and they have much greater freedom. But many citizens are discontent with corruption, widening income gaps between rich and poor, environmental damage and official abuses like land grabs. And as is clear from China's cyber-world and its 500 million Internet users, many Chinese citizens, especially the young, want freedom and honesty.

The Party has promoted nationalism (especially anti-Japanese attitudes) as a force for social cohesion and political stability. This has proved to be a volatile and difficult-to-control tonic, and is very costly.

China's belicose behavior in the East China and South China Seas means that it has very few friends in its region, and it is now a much less attractive investment destination. And the Chinese public's passion for American movies, music, basketball and fastfood undermine the Party's efforts to strengthen the soft power of Chinese culture.

As the recent Communist Party Congress has highlighted, societal diversity and complexity is also matched by the diverse and complex interests of the main factions of the Communist Party. Over time, this could threaten the Communist Party's hold on power. There is even speculation that the Party might tear itself apart!

The new Chinese leadership "elected" at the recent Communist Party Congress, seems a cautious, conservative bunch. Consensual decision-making, and the desire for stability, means that rapid ecnomic reform is unlikely, and political reform is off the agenda. But for its own long-term survival, the Communist Party needs to overcome political paralysis and gridlock, and launch a new wave of economic reforms.

China has entered the zone where developing countries usually become democratic, as Korea and Taiwan did. While there is much debate about the Chinese people want democracy, there is no doubt that they want better governance.

There are many things that the Chinese government could do to improve governance, even without moving to electoral democracy. First, they should improve the rule of law by giving independence to the judicial system and the police force, which are presently corrupt and under the influence of Communist Party officials.

Second, they should give much greater freedom to the media and civil society organizations. Third, government should become transparent and accountable, especially regarding its finances. Fourth, some privatization and more honest governance of state-owned enterprises is critical -- at present, lots of profits and assets are siphoned off into overseas bank accounts.

The best way for the Communist Party elite to hang on to its one-party system is to improve the quality of its governance through measures such as these. This is one of the lessons of Singapore, a case that China has studied closely for lessons.

Are the Chinese government and the Communist Party elite capable of undertaking such reforms?

The elites which, three decades ago, saw it in their interests to reform for their very own survival, today seem entangled in a vast complex system of crony capitalism that ties together state-owned business and government. And the passage of three decades means that there is now a whole new generation of children, other relatives and friends who are part of this bamboo network of crony capitalism.

The government's knee-jerk reaction is to ramp up the social and political repression. But experience shows that you can't keep the lid on a pressure cooker forever!

This situation is a great pity. There would very likely be many unpredictable consequences from a major economic and political crisis in China. And this would be in no one's interests.

"May you live in interesting times" is an oft-quoted Chinese saying. In reality, it is a curse!

Read More by This Author

About the Author

John West has completed his Masters in Economics from the University of New South Wales (Australia).   Currently he is working as the Executive Director at Asian Century Institute. He has worked for the Asian Development Bank Institute, the Australian Treasury and the OECD.  He has been a member of the American Chamber of Commerce (Japan) and Foreign Correspondents Club (Japan). He also acts as the Editor-in-Chief for To know more about him, please visit his LinkedIn profile.

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  1. Derryl Hermanutz says :

    Great article! I'm not sure if author West is aware of the irony of the fact that his description of the self-serving corruption of China's elites and the democratic yearnings of the people also describes today's USA. Two lines in particular are striking:

    " Fourth, some privatization and more honest governance of state-owned enterprises is critical -- at present, lots of profits and assets are siphoned off into overseas bank accounts."

    "Privatization" simply transfers the power of plunder out of the hands of bureaucrats and places it in the hands of plutocrats. This is true not only of America's privatized oligopoly industries, but of all the Latin American nations who have succumbed to "economic hitmen" who entrapped those nations in unpayable foreign debt then 'rescued' them by buying their national infrastructure for pennies on the dollar. The new private plutocrat owners take virtually all of their profits out of the country into "offshore" bank accounts in America or in tax havens, and reinvest as little as possible into the nation whose economy is paying those profits.

    The second striking similarity with the US is:

    "the cast complex system of crony capitalism that ties together state-owned business and government"

    America's military industrial complex and expanding "security state" apparatus is just the most visible portion of the crony capitalism iceberg. Many if not most US industries have completely captured their government "regulators". ALEC is industry writing the laws that regulate industry. So we have the health insurance industrial complex, the pharmaceutical industrial complex, the agribusiness industrial complex, and of course the 800 pound gorilla banking lobby.

    China's new leaders are reading Alexis de Toqueville's, "The Ancien Regime and the Revolution", so I'm reading it too. de Toqueville writes of some unkown but irresistable force that had been irrevocably destroying Europe's feudal systems of society and government ("monarchy") since the 14th century, and replacing them with centralized power. Readers of Niall Ferguson's, "The Ascent of Money", will recognize the late 13th - early 14th centuries as the beginning of the ascent of "finance", Medicis then Rothschilds and their private creation and allocation of financial credit, their creation and allocation of "money".

    de Tocqueville did not see, as we can see today, that the "unkown and irresistable force" that was corroding over centuries the real power of existing forms of government was this "money power". But de Toqueville describes its symptoms, chief among them that,

    "wealth was installed as the supreme power"

    America's founders were well aware of the "European financial interests", at that time Rothschilds, who were trying to monopolize the issuance of money in the nascent US as they had already accomplished in Europe. America's "liberals" (in the classic sense: those who preferred market freedom and self-rule to centralized power) resisted the efforts of Hamilton et al to institute a Rothschild central bank in America. Andrew Jackson's crowning achievement was, "I killed the Bank" (the Second Bank of the United States).

    Like the "United States Federal Reserve Bank" that was legislated into existence in 1913 (this was and remains the bankers' victory over US republican government), the second bank "of the United States" only "sounds" like a government institution when in fact it is a privately owned and operated system of 'invisible' government. The power to create and allocate money is the power to "govern" the economic life of a nation.

    de Tocqueville documents the increasing impotency of Europe's formal governing institutions under the grip of this "unkown force" that was centralizing all real power in its own hands. I'm not far into de Tocqueville's description of the circumstances that culminated in the Fench Revolution, but we know that impotence, subjugation, oppressive taxation, and the impossibility of alleviating any of these intolerable impositions via appeals to the existing powers, culminated in the enraged demolition of all remaining "visible" vestiges of France's traditional power structures.

    Which simply opened up a power vacuum for a Napoleon in 1789 France as it would later do in 1933 Germany crushed under the terms of the Versailles 'peace' Treaty. Readers of Hitler's 1925, "Mein Kampf", are aware that he sought to free the Germanic people from the yoke of "international finance". But ultimately the bankers won these battles and continue their inexorable march toward globalized central rule via their money power.

    This explanation for the broad direction of the past 600 years of Western history sounds like a dystopian conspiracy theory. But unfortunately for those who prefer to believe in more virtuous or unintentional motives driving world history, the money power theory actually fits the facts and coherently explains them.

    China's government has not yet succumbed to the "European financial interests" (now "Anglo-American") who effectively rule Europe and America and most of the world. China's political government still controls China's banking and money system. But when Deng Xiaoping set China on a new course in saying, "To be rich is glorious", he may have inadvertently opened Chinese morality and government to a state where "wealth is installed as the highest power". All other values, all private and civic virtues, dissolve in the acid pursuit of personal gain without restraint.

    Maybe China's leaders can succeed in reducing bureaucratic corruption and predations upon the Chinese people. But if personal wealth is the only value and also the highest power, and if China "privatizes" more of its institutional ownership and power structure in pursuit of more "opening up", then Chinese communism is simply on the road to Chinese plutocracy such as already rules most of the world. And China will simply travel from communist dictatorship (rule by a politboro) to plutocratic dictatorship (rule by money), bypassing altogether a Chinese sojourn in "democracy".

  2. Frank Li (Member) Email says :

    The author obviously knows a lot about China. However, he may benefit a lot by taking 3 different perspectives:
    (2) The Chinese system is totally imperfect, but it appears to be working slightly better than democracy, as we know it today. Fact: China is now the largest foreign debt holder of both Europe and America.
    (2) Yes, political reforms are necessary. But reform to what? There is no sample to follow!
    (3) Do not compare China with its small neighbors (e.g. Singapore or even South Korea). It's like talking about ex-AK governor Palin for the US Presidency - irrelevant, as they are totally different in scale!

    As a Chinese-American, I am more worried about the US than China, overall. But which one is to self-destruct first (barring a US-provoked war)? The US, I think.



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