Information and organisation: China’s surveillance state growth model (Part 1: China’s state model)
Phuah Eng Chye (9 November 2019)
A surveillance state and growth sounds like a contradiction in terms. This is why the success of China’s surveillance state model comes as a surprise. Mark Wu notes “China’s impressive economic and technological rise in the early 21st century is unprecedented in modern times. For one, it marks the first time in the postwar era that the world’s leading trade power has embraced an economic and political model different than the traditional liberal democratic, market-oriented model associated with industrialised nations.” “Instead of separating the organs of a political party from those of the state and firms, China’s leaders have experimented with a model in which the Communist Party remains deeply enshrined at the core of how both the polity and the market are governed…the Party itself has adapted…much greater latitude for private enterprise, market forces, individual choice, and mobility…What has emerged is a unique economic system…is fundamentally different than other forms of state capitalism, corporatism, or conglomerate-led economies”.
Stephen Roach argues “notwithstanding all the criticism of China…progress…has actually been quite extraordinary…The middle-class Chinese consumer has come to life, and the services sector has emerged as an increasingly powerful growth engine. China’s outsize current-account surplus has all but vanished…And the signs of indigenous innovation are everywhere, from e-commerce and fintech to artificial intelligence and breakthroughs in the life sciences”. He cautions pitfalls still lurk as “instability remains a threat, underscored by China’s voracious appetite for debt…Imbalances persist, underscored by private consumption’s sub-40 per cent share of Chinese GDP – a shortfall that can be addressed only by a more robust social safety net…Persistent regional disparities, in conjunction with mounting income inequality, are visible manifestations of a lack of coordination…dealing with air pollution, environmental degradation remains central to China’s challenging sustainability agenda”.
Others suggest China’s prospects are “less promising than those of neighbouring South Korea[1] or Japan at similar stages of their development”[2]. Derek Scissors’ “analysis finds that China’s personal income growth in dollar terms is less than half of Korea’s and a third of Japan’s at the same stage of development”. His report notes “rural incomes remain unpleasantly low due to poor policy choices concerning land ownership” while “Beijing faltered on marshalling capital into productive investments” and research and development spending remained well behind the other two nations at the same stage” His report also noted “weak rural education policies, a comparatively poor innovation record and huge amounts of debt remain major impediments…Beijing struggles to follow Japan and South Korea in escaping the middle income trap, allowing it to become rich before it grows old”.
The rise of China’s surveillance state model has triggered alarm in other quarters. George Soros found it “particularly disturbing is that the instruments of control developed by artificial intelligence give an inherent advantage to authoritarian regimes over open societies…authoritarian regimes use whatever instruments of control they possess to maintain themselves in power at the expense of those whom they exploit and suppress…China wants to dictate rules and procedures that govern the digital economy by dominating the developing world with its new platforms and technologies. This is a threat to the freedom of the Internet and indirectly open society itself”.
China’s surveillance state model is controversial. But it deserves study to identify salient policy lessons. It should be noted that development models are constantly evolving[3]. Therefore, the conditions contributing to the model’s current success today may not be around in the future. China’s model hit a sweet spot of accelerated growth because externally Western economies, particularly the US, were willing to provide leeway to accommodate China’s growth. China’s aggressive post-2007 expansion was welcomed as it prevented a prolonged global recession from taking grip. Internally, Chinese bureaucrats were willing to provide the private sector not only a blank sheet of paper but effectively a blank cheque to build China’s technological capabilities. Timely advancements in mobile technology was a catalyst towards reshaping the ecosystem. I will analyse the two components of China’s model in separate articles.
How China’s state model differs from traditional state models
Traditional state models were regarded as monolithic and bureaucratic – inefficient, unresponsive, dependent on state subsidises, run by cronies and riddled with corruption. The bad experiences with state enterprises were not limited to the Communist/socialist economies. Some developed countries experimented with nationalisation. Eventually, many state enterprises were abandoned because they often had to be bailed out and was a heavy burden on governments.
From 1990 onwards, supported by theoretical advances in corporate management, governance and professionalism, state models underwent a major change. Many countries increasingly adopted market practices and privatised their state agencies. Several countries established sovereign wealth funds to accumulate passive stakes in leading global companies as well as to set up best-in-the-class “national champions”.
The China model represents another step forward. Mark Wu describes “China’s economic system is a unique product of its economic and political history…China’s leaders are constantly experimenting and tweaking, with the hopes of improving their governance model”. This includes various entities that facilitate the party state to retain control over the commanding heights in key strategic sectors; control of the largest banks which allows it to “direct its financial resources”; planning entities to “provide guidance and coordination…across government agencies and firms”; “nimble, informal networks between entities in industry sectors; “the Party’s Organization bureau, which sets individual performance metrics and directly controls personnel appointments”; and “formal and informal linkages between the Party and private enterprises, including possibly minority equity holdings as well as the establishment of Party cells within companies”. These features gave “rise to an economy where the Communist Party is able to retain overall control while still taking advantage of the benefits of market mechanisms and competition. This guards against the negative risks associated with inefficient rent-seeking by oligarchs and Party apparatchiks. It also enhances the ability of Party leaders to adjust economic and social policies to deal with market failures and negative market externalities, provided the technocrats are able to properly identify them”. He suggests this unique combination of features will assist the Chinese economic system to remain “the world’s most dynamic for the foreseeable future”.
The China state model is not ideological-based. David P Goldman[4] explains “the Chinese are the least ideological people in the world and the most pragmatic. I see the Communist Party as simply another manifestation of the Mandarin administrative cast which has ruled China since it was unified in the third century BC…the Chinese Empire has recruited, through the Mandarin system, the cleverest people from the provinces and aligned their interests with the center…The idea of public trust and subsidiarity that’s fundamental to democracy is unknown to the Chinese…Everyone strives for his own and his family’s power…What holds the country together is ambition. Therefore, it’s critical that the meritocracy be fair…The Chinese, as individuals, have no friends…there are no parallel institutions…China only has interests; it has no friends. There’s a term that was applied to southern Italy called amoral familism where you’re completely amoral with dealings of the world except for your family where you have different standards…Because the Chinese are tone-deaf to Western sensibility, they’re very bad at conducting a dialogue in Western terms. The thing I’m least worried about is Chinese propaganda in the West. They’re very good about generating influence through money and technology and so forth…No. I think the Chinese system is so alien to what Westerners want or expect that it will never look attractive to us”.
The aspect that garners much attention are China’s reforms[5]. Evan A. Feigenbaum points out “reform simply does not have the same meaning in China …Unsurprisingly, we tend to focus on market liberalization, to the exclusion of most else”. In China, “reform means: market liberalization; administrative measures to increase bureaucratic and operational efficiencies; and a rebalancing of authorities and decision powers among central and local levels of government”. China’s reform focuses on “realigning central and local government roles and functions…China faces enormous problems of unfunded mandates, confusion about who’s in charge, and policy paralysis as Beijing and the provinces pass the buck to each other to formulate, fund, and implement various policy tasks”. “Often, market-related changes are of instrumental utility, serving longer-term state-guided strategic goals rather than being…an end in itself”.
Thus, reform of China’s state model does not mean adopting the Western model, opening markets to international competition or reducing SOE support. Evan A. Feigenbaum suggests China’s reforms are aimed at increasing domestic competition while SOE reform will be deferred “because Beijing has been unwilling to bear the political cost of major restructuring”. He explains China’s reforms are aimed at “consolidating, rebuilding, and broadening the reach of the CCP. Whatever rebalancing has taken place has mostly happened organically rather than by policy intervention or design. This means that the Chinese president’s top three priorities – a cleaner CCP, a more disciplined CCP, and a stronger and more enduring CCP – have yielded a deeper connection between political goals and economic policy outcomes than China has witnessed in a generation. Inevitably, this leads to an overemphasis on the administrative aspects of reform”.
Some think the role of market reforms is overstated. Chong-En Bai, Chang-Tai Hsieh and Zheng Michael Song argues the “standard explanation for the extraordinary economic growth in China…driven by the gradual improvement of formal economic institutions…sits uneasily with other pieces of evidence”. They highlight some pro-market reforms were reversed and that there is still “no clear formal legal protection for private property in China, nor is there an independent judiciary that enforces contracts and adjudicates commercial disputes…Formal rules and laws facing private business are still opaque and onerous. Many foreign companies find their access to the Chinese market blocked, for reasons that are not immediately transparent”.
Chong-En Bai, Chang-Tai Hsieh and Zheng Michael Song attributes China’s success instead to “the set of informal institutions that emerged in China in the early 1990s” which made special deals are readily available to private firms”. They explain “Chinese local governments have enormous administrative capacity and use it to provide a helping hand to favored firms. This helping hand ranges from exemptions to regulations, lobbying the central government for the right to break rules, improving local infrastructure, providing land (and to a lesser extent credit) at below market prices, and blocking entry of other firms that threaten the profits of the favored firms”.
Nonetheless, China’s markets are competitive because “a large number of local governments actively support private firms. Moreover, they compete ferociously with other local governments to attract and support their businesses…Competition between local governments is crucial in limiting the predatory power of protected firms. A local government can block competitors of favored firms in its locality but has no ability to do so in other cities. Competition also gives firms options when faced with incompetent or predatory local governments”.
Chong-En Bai, Chang-Tai Hsieh and Zheng Michael Song points out the “regime of special deals also clarifies the risks that China faces”. Domestically, there is tension between “the discretion of local officials and their incentives to provide special deals” and corruption. More critical is the “tension between China and its trading partners”. “Foreign companies in the Chinese market either have to make their own special deal or, as is the case with a Chinese firm that does not have a special deal, find that their intellectual property and contracts are not well respected. An important and still unresolved question is how the world trading system can accommodate countries based on rules as well as those based on access to special deals”.
Chong-En Bai, Chang-Tai Hsieh and Zheng Michael Song note “Chinese authorities have made multiple efforts in recent years to move away from a regime of special deals. This includes “specific policies to stop local leaders from providing special deals. On the government revenue side, local governments are not allowed to provide preferential tax policies, nor to reduce administrative fee or government funds from firms or to assign land at a preferential or zero price. On the government expenditure side, local governments are prohibited from developing preferential policies for firms, including those by means of remitting taxes or granting subsidies”.
J. Stewart Black and Allen J. Morrison notes the similarities between “China’s fast-growing conglomerates and the chaebol of South Korea and keiretsu in Japan…the affiliates and subsidiaries of Chinese mega firms are typically part of a network of cross-owned enterprises. The ownership structures, often opaque, represent high barriers to entry for foreign companies…Chinese mega firms are unique in the degree of involvement of the government, be it at the national, provincial or municipal level, in corporate affairs. Rather than merely serving as a regulator, the state is itself a large business owner and plays a much greater coordination role than most Westerners understand.” “Foreign companies that wish to succeed in China must find a way to fit into one of its major business ecosystems…Failing such an integration within local supply chains, foreign businesses can’t thrive in China. The Chinese government has a large say in who gets in and who doesn’t”.
Hence, China’s state model isn’t rigid but flexible and pragmatic. High Peyman points out China’s state model draws on its history and culture. “China’s overlooked X-factor, or more precisely that of modern Confucian societies, is the ability to work with, organise and respond to change…The concept of a Confucian state…begins with the state being involved in the nation’s welfare, including economic welfare. People cannot be well off if the state does not prosper in the long-term: neither is it right”. “The aim of all Chinese governments has been a strong state; quite the opposite of the Founding Fathers in the US. The purpose of reform in China is always to strengthen the central state never to minimise it. Government policy, though, no longer adheres any strict ideology or preset grand plan…Seeking truth from facts and crossing the river by feeling the stones might not sound very profound or precise, but turn out to be a lot more realistic and practical than many Western approaches”.
China is comfortable borrowing ideas and ditching them when it doesn’t. In earlier years, Shenzhen “borrowed a key idea from Hong Kong: selling land-use rights to developers through auctions” and pioneered the sale of land-use rights in mainland China in 1987. “But now, with rising wealth inequality one of the many gripes of angry protestors”, Meng Xiaosu[6] warns Chinese cities to “abandon the Hong Kong property model”. “Now we have seen the pitfalls of the Hong Kong model…Many of China’s larger cities today are cramped and suffer from severe traffic congestion problems. The amount of land used for housing in our major cities is also relatively little…We need to reasonably expand our cities’ usable land, especially to increase the amount of land for construction. We also need to prevent land prices from getting too high as a result of a lack of usable land, artificially pushing up property prices”.
China thus prefers a developmental approach based on experimentation and the roll-out of successful pilots. For example, Shenzhen is experimenting with a party and technology development model to become a socialist model city. Xie Maosong suggests China “will be the world’s first modern powerhouse not built on the road of capitalism, but by practising socialism with Chinese characteristics. The leadership of the Communist Party of China is the most essential feature of socialism with Chinese characteristics… Being a socialist pilot demonstration zone, the governance models that have proven successful in Shenzhen will be replicated in other Chinese cities. That is why watching Shenzhen’s public administration and other developments will give you a very good idea of what China’s governance model will look like in the next few years.”[7]
Shenzhen is also the first Chinese city to launch a party building measurement indicator backed by big data and artificial intelligence which is “a standardised, scientific and quantifiable method for measuring the quality of party building.” William Zheng notes Shenzhen has taken a much bolder data strategy than Hong Kong in using big data to enhance governance. The biggest difference is the mindset with Shenzen “constantly looking for more efficient and advanced ways to run and govern the city, while Hong Kong believes in its small government, non-interventionist approach.”
Hence, Kai-Fu Lee notes “China’s governance structures are more complex than Americans assume; the central government does not simply issue commands…does have the ability to pick out certain long-term goals and mobilize epic resources to push in that direction”. In this regard, “American policy analysts and investors look askance at this heavy-handed government intervention in what are supposed to be free and efficient markets. Private-sector players makes better bets when it comes to investing, they said, and government-fund incubation zones or incubators will be inefficient, a waste of taxpayer money…But what these critics miss…when the long-term upside is monumental, overpaying in the short-term can be the right thing to do…China’s top leadership…wanted to use government money to brute-force a faster transformation.”
China has thus overturned notions associated with the stodgy traditional state model which tended to be protectionist. The China state model is outward-looking and has facilitated the blossoming of the private sector. More importantly, these companies are led by energetic, technologically-savvy and relatively young personalities. China is not just evolving the state model, it is tapping a generational change to energise its development.
In contrast with the strait-jacketed traditional state model, the standout difference is that China’s state model has gotten far without that much rules (or adherence to rules). China’s state model is characterised by intense competition with “industries crowded with hundreds of near-identical copycats vying for the hot market of the year”. Kai-Fu Lee describes China as having “the most cutthroat competitive environment on the planet. They live in a world where speed is essential, copying is an accepted practice, and competitors will stop at nothing to win in a new market…The messy markets and dirty tricks of China’s copycat era produced some questionable companies, but they also incubated a generation of the world’s most nimble, savvy, and nose-to-the-grindstone entrepreneurs”.
Kai-Fu Lee notes “a succession of American juggernauts – eBay, Google, Uber, Airbnb, LinkedIn, Amazon – tried and failed to win the Chinese market. Western analysts were quick to chalk up their failures to Chinese government controls…that hobbled their American opponents”. However, as Kai-Fu Lee explains, “American companies treat China just like any other market…They don’t invest the resources, have the patience, or give the Chinese teams the flexibility needed to compete with China’s world-class entrepreneurs. They see their primary job in China as marketing their existing products to Chinese users…Resistance to localization slows down product iteration…lose out on top talent…While foreign analysts continued to harp on the question of why American companies couldn’t win in China, Chinese companies were busy building better products”.
The no-holds barred approach creates an environment conducive to innovation. Kai-Fu Lee notes “that willingness to go heavy – to spend the money, manage the workforce, do the legwork, and build economies of scale – has reshaped the relationship between the digital and real-world economies. China’s internet is penetrating far deeper into the economic lives of ordinary people, and it is affecting both consumption trends and labour markets”.
In this regard, Kai-Fu Lee notes “China will lag in the corporate world, but it may lead in public services and industries with the potential to leapfrog outdated systems. The country’s immature financial system and imbalanced healthcare system gives it strong incentives to rethink how services like consumer credit and medical care are distributed. Business AI will turn those weaknesses into strengths as it reimagines these industries from the ground up”.
Overall, China’s state model has unique features that underpins its success. Other countries where the state has similarly prominent roles have not achieved the same level of success. India has a large population (which supports scale) but it is bureaucratic and still has a protected economy. Russia has a command-type economy and a strong technological base but has not been able to convert these strengths to build private sector competitiveness. In this regard, both countries have not shifted far enough from the traditional state model. Their missing elements include changes in the information infrastructure and organisational capabilities (including competition intensity, generational change and information disruption). The success of China’s state model will put it in direct conflict with the established Western model.
References
Chong-En Bai, Chang-Tai Hsieh, Zheng Michael Song (May 2019) “Special deals with Chinese characteristics”. NBER. https://www.nber.org/papers/w25839
Evan A. Feigenbaum (26 February 2018) “A Chinese puzzle: Why economic reform in Xi’s China has more meanings than market liberalization”. Marco Polo.
George Soros (24 January 2019) “Remarks delivered at the World Economic Forum Davos, Switzerland”. https://www.georgesoros.com/2019/01/24/remarks-delivered-at-the-world-economic-forum-2/
Hugh Peyman (2018) China’s change: The greatest show on earth. World Scientific Publishing Co. Pte ltd.
Kai-Fu Lee (2018) AI Superpowers: China, Silicon Valley and the new world order. Houghton Mifflin Harcourt.
J. Stewart Black, Allen J. Morrison (18 September 2019) “Why foreign firms struggle to break into China”. Insead. https://knowledge.insead.edu/strategy/why-foreign-firms-struggle-to-break-into-china-12421
Mark Magnier (4 September 2019) “China’s economic prospects are less promising than Japan’s or South Korea’s at similar stages, US think tank says”. SCMP. https://www.scmp.com/news/china/article/3025715/chinas-economic-prospects-are-less-promising-japans-or-south-koreas
Martin Choi (7 September 2019) “Shenzhen, a blueprint for Chinese cities, must abandon Hong Kong’s property model, warns China’s godfather of real estate Meng Xiaosu”. SCMP. https://www.scmp.com/business/article/3026090/shenzhen-blueprint-chinese-cities-must-abandon-hong-kongs-property-model
Mark Wu (30 May 2019) “China’s rise and the growing doubts over trade multilateralism”. Meredith A. Crowley. Trade war: The clash of economic systems threatening global prosperity. A Voxeu ebook. https://voxeu.org/article/trade-war-clash-economic-systems-threatening-global-prosperity-new-ebook
Philippe Aghion, Sergei Guriev, Kangchul Jo (7 November 2019) “Chaebols and firm dynamics in the Republic of Korea”. Voxeu. https://voxeu.org/article/chaebols-and-firm-dynamics-republic-korea
Phuah Eng Chye (20 July 2019) “Information and development: Development models and landscape change”. http://economicsofinformationsociety.com/information-and-development-development-models-and-landscape-change/
Stephen Roach (29 August 2019) “Trump’s incoherent policies take aim at a China that no longer exists”. Project Syndicate. https://www.scmp.com/comment/opinion/article/3024595/trumps-incoherent-policies-take-aim-china-no-longer-exists
Urs Gehriger (October 2019) “You can never be China’s friend: Spengler”. Asia Times. Originally published by Weltwoche. https://www.asiatimes.com/2019/10/article/you-can-never-be-chinas-friend-spengler/
Wang Gungwu (30 September 2019) “How China chose a communist revolution over capitalism and rehabilitated the idea of reform”. SCMP. https://www.scmp.com/week-asia/opinion/article/3030729/how-china-chose-communist-revolution-over-capitalism-and
Wang Gungwu (30 September 2019) “China’s reforms don’t contradict the communist revolution – they consolidate it”. SCMP. https://www.scmp.com/week-asia/opinion/article/3030785/chinas-reforms-dont-contradict-communist-revolution-they
William Zheng (1 November 2019) “Chinese city of Shenzhen is using big data to become a smart, socialist model city”. SCMP. https://www.scmp.com/news/china/politics/article/3035765/chinese-city-shenzhen-using-big-data-become-smart-socialist
[1] Philippe Aghion, Sergei Guriev and Kangchul Jo relate how the Korean government’s chaebol reforms in the late 1990s transformed the economy from an investment-based to an innovation-based model.
[2] See Mark Magnier.
[3] “Information and development: Development models and landscape change”.
[4] See Urs Gehriger.
[5] Wang Gungwu provides a historical perspective of the meanings of revolution and reform in China.
[6] See Martin Choi.
[7] See William Zheng.