China Inches Toward Market Economy

Written by David Frum on Tuesday September 16, 1997

Communist leader gambles he won't lose reins of power

Chinese Communist Leader Jiang Zemin took a big gamble this weekend. At the 15th congress of the Chinese Communist party, he said China's giant state-owned socialist monopolies will now go bankrupt if they can't pay their way. With that, the Chinese Communists have taken another step toward the market economy. The gamble? That they will be able to maintain their dictatorial grip upon a country where business transactions are increasingly free.

Many in the West fear Jiang's gamble will pay off. The pessimists point out that economic freedom and political tyranny have coexisted before -- in General Park Chung Hee's South Korea, for example, or Napoleon III's France -- and that there is no reason they cannot do so again. And in the short term, the pessimists are right. Yes, for a decade or two, a dictator can run a relatively free economy -- just as, for short periods, it's possible to combine socialism and democracy. But just as democratic socialism cannot last -- you cannot sustain free speech in a society where the government decides who keeps his job and who gets fired -- so undemocratic capitalism cannot long be sustained.

Look, for example, at Jiang's latest initiative. Imagine this. State Steel Works No. 1 is losing money and closes down. The works has both debts (to suppliers, workers, lenders) and assets (unused supplies of iron, piles of finished steel, used blast furnaces, trucks, cranes and so on). The purpose of a bankruptcy law is to divide up those assets among the defunct firm's creditors. Does the bankruptcy process permit politically powerful creditors -- banks controlled by the army, for example -- to throw their weight around, to jump to the head of the repayment queue? If so, State Steel Works No. 2 will quickly discover it cannot get credit. Who will sell it anything on 30-day terms, or lend it money, if Steel
Works No. 1 has proved only the politically powerful will be repaid should things go wrong?

So it will be in the interest of all the successful companies in China -- many of which are also owned by politically powerful people and institutions -- to devise a bankruptcy process that is fair and seen to be fair. But look at what that will mean A fair bankruptcy process requires bankruptcy arbiters who are seen as impartial. That means they will have to feel free to rule against the powerful, when circumstances warrant. In other words, an effective bankruptcy law requires an independent judiciary. And an effective judiciary takes away from the Chinese state another chunk of its
power to intervene arbitrarily in daily life: another big set of problems and disputes will be settled -- not by the arbitrary whims of the dictatorship -- but by independent decision makers enforcing rules that bind the state as well
as private citizens.

This does not, of course, amount to liberal democracy as we know it. It remains true the Chinese government can throw a man in prison for making a political speech or for attending a Catholic mass. But compare it to 20 years ago. Then the government allocated every grain of rice, distributed every shoe and shirt, and controlled every square foot of living space. If a citizen did not actively swear loyalty to the state -- join in its parades, mouth its slogans, denounce his neighbors -- he would starve, and go naked and homeless. Today, China prohibits freedom of speech; 20 years ago, it prohibited free thought. No would call China a free country. But it is a country where, over the past 20 years, the power and intrusiveness of a once-totalitarian government have radically contracted.

Jiang and his colleagues think they can stop the shrinkage -- they can hold onto a monopoly of power in a society where people increasingly own their own farms and homes, work for private employers, use computers and modems, have high school educations, and have money saved in the bank. That's what General Park and Napoleon III thought. But they both turned out to be wrong, and France and South Korea are both free countries today. It may take many years yet for China. But I'm betting that Jiang will turn out to be wrong too.

Originally published in The Financial Post