Cut Ties that Bind China to Special Interests

飞雪寒冰

Should this problem remain unresolved, no matter how fast the economy grows, people in China will feel neither happy nor secure. Rather, they will feel frustrated and deprived.

Thus, for the sake of long-term governance and stability, for the Communist Party and China -- and for the general welfare of the public -- it is time to confront post-development problems connected to special interest groups.

Here I'd like to discuss roles that the party and government must play to clean up certain special interest groups that have been around since the early days of reform.

The polarization and competition seen among various interest groups are not only natural results of market conditions but also signs of a mature market. However, the emergence and growth of special interest groups backed by public power is alarming.

飞雪寒冰

With the launch of the market economy in the 1990s, and amid the push for reforming production factors, official-business collusion for profit has become especially common in the real estate, mining, finance and energy sectors. Since 2000, some state monopolies and a few, big private enterprises with official backgrounds began seeking -- with abandon -- excessive profit and even illegal returns. They took advantage of the protective umbrella of public power. In the process, the government trespassed into private territory and muffled ordinary, private business.

Let's first look at the much-criticized state-owned monopoly sector. While not all state-owned monopoly enterprises can be called special interest groups, public discontent with some has tended to focus on two aspects: price controls and distribution of profits. Some state-owned enterprises have consistently managed to hijack government pricing policies without a whisper from consumers and, at the same time, wrestle super-high profits from the market. They also find ways to separate their profits -- sometimes amounting to hundreds of billions of yuan – and their budgets, thus depriving state coffers and social welfare initiatives.

There have been calls for transferring a percentage of corporate earnings from state-owned monopolies for redistributions among citizens, especially among the disadvantaged.

Now, let's turn to real estate – a hotbed for corruption and another area for public complaint. China's real estate sector provides a typical example of a government struggling for profit against its own people. Power-for-money deals can be seen at every stage of housing development projects -- land requisition, leasing, land-use adjustments, planning and approval steps, site selection, construction supervision, project inspection, floor-space ratio adjustment, and ownership registration. Recent media reports about land auctions that commanded exorbitantly high prices in some parts of the country have drawn broad concern.

飞雪寒冰

Because housing revenues are their most important source of fiscal growth, local governments have called for and adopted policies aimed at bolstering the housing market to save China's economy from the world financial crisis. While the public waits -- hopelessly -- for housing prices to fall to places that reflect their real income levels, local governments manage to get high scores on their political performance cards by reporting GDP growth. Some officials fatten their wallets along the way.

Another issue is survival and growth of the private sector. The nation's economic vitality could be smothered if some public sector activities, especially state-owned enterprises and private businesses with government backing, squeeze basic private businesses. Another danger surfaces when government agencies try to restrict the market access of private business while exploiting their profits.

Back in 2005, the State Council published a directive for encouraging and supporting private business and other non-public sectors of the economy. The directive -- 36 Policies for the Non-Public Economy -- promised to open all competitive industries to private capital. Industries that were open or would be opened to foreign capital also would be accessible to domestic private business, while non-public sector capital would be allowed into those industries and sectors under state monopolies.

Four, full years have passed. Yet those policies remain largely on paper. Some have observed that inspection and approval procedures implemented by industry administrative authorities have become an invisible hand choking the neck of private business. Against this backdrop, each sector that's barred for private companies becomes a pipeline for channeling the interests of private enterprises and citizens to special interest groups.      

As long as the pattern of resource allocation by power persists, and private sectors wish to grow, the likes of Huang Guangyu will choose to pay off government officials in exchange for privileges. Elitist business groups that conspire and do business with elitist political groups can control public policies, divide and devour state-owned assets, as well as seize and splurge public resources that rightfully belong to all citizens. This is what I call a typically harmful special interest group.

飞雪寒冰

The growing power of these special interest groups, on one hand, is reflected in the ways they've seized natural resources. For example, state-owned monopolies and a few, privileged power groups have carved up the country's mining resources. On the other hand, special interest groups have hired so-called "experts" to defend their monopolizing behavior.

The penetration of the country's political and judicial systems by special interest groups is most alarming. Someone once commented that there are a lot of corrupt officials everywhere in the world, but corrupt judges are rare. At the moment, the country's laws and regulations are incomplete, allowing judges to frequently pass verdicts at their discretion. The system exercises little supervisory power over public security agencies, prosecutors, courts and judges themselves, leaving plenty of room for corruption and abuse of the law.     

Another dangerous phenomenon is that special interest groups are seeking political voices. As social resources transition from allocation by power to market allocation, the political circle has become an easy target for abduction and corruption by special interest groups. In order not to become a rubber stamp of special interest groups, the future government should rely on institutional and democratic procedures to coordinate interests and resolve conflicts among various groups, allowing them to reach consensus in the name of fair play.

In his book The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, author and leading American political economist Mancur Olson explored the idea of "distributional coalitions" or "interest groups." He said that distributional coalitions tend to form over time, and not all are counter-productive. Some, when seeking the promotion of individual and group interest, succeed in promoting the growth of overall social income. Others, however, are not interested in enhancing social productivity but in sitting idle and making profits; they care about profit-sharing, not competition. The latter hinder the flow and rational deployment of resources and are anti-technology, even though they manage to boost the bargaining value of law, politics and bureaucracy.

飞雪寒冰

The high-profile rise of special interest groups in China has not only disrupted market fairness and social justice but dealt a heavy blow to attempts at innovation in Chinese society. The phenomenon has twisted values among young people and poisoned the social atmosphere. If we take a closer look at the increasing interest in recent years among college graduates who want to become civil servants or employees of public institutions or enterprises with plenty of public resources, we see Olson's point: As motivation for enhancing production recedes and the motivation for owning more products increases, the direction of social development is altered.

Special interest groups, during their expansion period, created a facade of ideological legality. They've done serious damage. They foster unfair treatment of ordinary people, trample party principles and tarnish the government's reputation. On the one hand, they demand policy protection from the government in the name of safeguarding "national economic security" and "production security." On the other, they exploit consumers while citing "international practice" and "Chinese characteristics."

It's been said concentration of key resources and capital is an advantage of socialism conducive to major accomplishments. But it has inherent risks as concentration of power, capital and resources in the hands of a few privileged groups encourages graft. As a result, the fruits of economic growth can be monopolized and the interests of the common people stolen, inevitably leading to social conflict.     

If special interest groups are on one side of the scale, the other holds the disadvantaged who live in relative or absolute poverty. According to statistics, China's economic aggregate doubled between 1999 and 2006 while the proportion of aggregate salaries against GDP has been shrinking. Ordinary Chinese are burdened by high costs of housing, medical care, education and retirement.

飞雪寒冰

A poverty evaluation report by the World Bank in late 2007 said while the Chinese economy achieved an annual growth rate of 10 percent between 2001 and '03, real income among the country's poorest 10 percent of the population fell 2.4 percent. The low-income group had a slower income growth rate than the high-income group, widening the income gap. Unlike the early stage of China's reform and opening -- when an absolute majority of the country's poor lived in rural areas – poverty in urban areas is also on the rise. In the wake of the world financial crisis, as unemployment has risen, the disadvantaged are finding life even harder.

Today, many inside and outside the party have come to realize that it's difficult to sever ties with special interest groups. Should these problems continue, however, the Chinese people will feel increasingly insecure and frustrated over unfair growth. That could trigger social instability, even unrest.

What we urgently need now is to deepen economic and political reforms while promoting market-oriented resource allocation and private sector development. At the same time, rule of law and party discipline must be tightened. Only when we end the conspiratorial deal-making between elitist capital and power groups can we create an open market with strong policy support for job and business opportunities that support the common people.