The ICAS Lectures

No. 2002-1011-JHC

China's Reform at Twenty:
A Mid-Term Appraisal and Challenges Ahead

Jae Ho Chung

ICAS Fall Symposium &
Humanity, Peace and Security
October 11, 2002 12:00 PM - 5:50 PM.
U.S. Senate Russell Office Building Room 418
Capitol Hill
Washington, D. C.

Institute for Corean-American Studies, Inc.

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Biographic Sketch & Links: Jae Ho Chung

China's Reform at Twenty:
A Mid-Term Appraisal and Challenges Ahead

Jae Ho Chung
Visiting Fellow, The Brookings Institution
Associate Professor, Seoul National University

JAE HO CHUNG: Thank you, Mr. Kim. This is a pleasure for me to give a talk today on China. Am I supposed to talk for 30 minutes and then open to the floor?


CHUNG: There are lots of discussions and debates concerning the leadership line-up of the existing party congress that is forthcoming. It will actually commence on November 8. My view is - whatever the outcome may be, I think the parameters of the reform will remain quite unchanged. So I think in that respect it's very important to put the reform of the last two decades in perspective so that we can have a better understanding of what is going to happen in terms of China's future.

It is very difficult to pinpoint when the Chinese reform started. Some people say - obviously the official interpretation will be 1978, but I would say the collective events from '78 to '82 shaped gradually the path of reform as we know it. Whatever the watershed (?) would take, I think there's no denying that the reform that happened - that has happened in China has been a huge success. The figure of 9.4% that is the average GDP growth, real GDP growth per annum from 1978 to the year 2000, is simply impressive. Of course there are some scholars that doubt the reliability of the figure and they present the alternative figure of 7.5%. Even that is more than twice the figure for the world average that is 3.3% for the same period.

China is currently the largest producer of air conditioners, television sets, cameras and telephones, to name the only principal industrial products. China also ranks sixth in terms of GMP size as well as in terms of total volume of foreign trade. If the purchasing power parity, PPP, measure is used, China already ranks second, only to the United States. If China should maintain an average growth rate of 5% for the next decade, China will certainly have surpassed Britain, France and Germany by 2010 if not Japan by then.

So China has become, as the Deputy Premier of Singapore, ....... Lung, said, the biggest new variable in the global equation. On top of being a member of the United Nations Security Council and the exclusive nuclear club, China slowly but clearly is strengthening its position in world affairs. Regionally also, China has shown (?) off its leadership by now devaluing its currencies during the East Asian financial crisis in the late 1990s. China has also been very active in participating in a wide range of multilateral institutions, including Asian ......, and the four party talks on the Korean issue. Furthermore, China has made efforts to create multilateral fora of its own by generating the B...... Asian Forum as well as the C...... Corporation Organization better known as the C.... Six.

In a nutshell, I think China has become a formidable force and presence to be reckoned with, economically, diplomatically, politically, and to a lesser extent militarily, at least in East Asia if not more.

While the possibility of a China collapse cannot be precluded totally - I will get back to this possibility later - but I think it is safe to say China is on the right track to become a more influential player in world affairs. You might recall the comments made by Mike Moore, the Secretary General of the WTO after China's accession to WTO. He said, "With the accession of China, WTO has now become a truly world organization." So that really tells a lot about the presence of China.

So in the final analysis, I think China's reform has been largely successful to the extent that it is now even being depicted as a global player that may have the ability to disrupt the stability in the international political order.

Then what has been the recipe of success in the Chinese case? I will not - given the time constraints - I will not get too much into this issue, but I will just give you five major programs of China's reform, and then why they were successful. As I see it, China's reform has had five different dimensions or programs in it. One is decentralization. As we all know, Mao's China had a very centralized system, therefore the Chinese Communist system didn't work. Now, extensive decentralization has been implemented so that decision-making is actually taking place where the actions have to be taken. So the ....... are now pretty much identified with the implementers as far as economic policy is concerned.

The second one is the marketization (??). Marketization as I define it is the reduction of state plans. So the state now gives up the role of playing the god. And thus paving the way for the invisible hand. Also the principles of competition, efficiency and ....... governance are used and popularized in China.

The third program in China's reform is the diversification of ownership. Make no mistake. I do not mean privatization. Of course, this program includes privatization as a part, but Chinese have been making efforts to include privatization but not exclusively privatization as ownership reform.

Fourth - the liberalization. I think this program, this dimension to China's reform has been too often ignored. Without liberalization - actually the Chinese term is ....... - it's actually "emancipation of minds" without which I don't think Chinese reform would have continued, let alone succeeded.

Finally, the internationalization. Chinese call it ........ They distinguish it consciously - internationalization - from globalization, which is in Chinese ........ Internationalization is a process in which China actively goes out and expands its linkages with the outside world. On the other hand, ......, the globalization is defined as a process where the Chinese actually bring the norms and standards into China and internalizes them. So I think the last two decades, internationalization has been a major trend and not globalization. But nevertheless, China has made great strides in this area. For instance, in 1978, when the reform had just begun, China had maintained diplomatic relations with 99 countries. At the end of last year, China maintains diplomatic relations with 162. The share of China's foreign trade and it's GMP, rose sharply in the reform -- 9.8% in 1978 to 44.5% in the year 2000. So you can see how rapidly China's dependence on foreign trade and exchanges with the outside world increased.

Furthermore, China has been very active in joining various multilateral institutions such as UN, DP, IMF, World Bank, ADB and WTO in the economic world, and MTT, CTVT, Chemical Weapons Convention, ..... Committee, Outer Space Treaty, ..... Arms Control Treaty, and so on in the strategic military world (???).

Now, having said five programs in China's reform, I'd like to give you my own view on why this program succeeded. Basically three reasons, as I see it. First, experimentalism. China's leadership did not start their reform with a blueprint. This is very common in East Asian post-transitional or socialist reform systems like Vietnam. unlike the Eastern European experiences. So the Chinese had this gradual plan of transition. They didn't want to make it in three or five years. They wanted to have the reform program for as long as they achieved the goal. So actually, sometimes leaders say at that point - the cut point for the reform is probably 2050. So we're talking about a long period. So during this period, I think they can actually play with a lot of different ideas. They can actually experiment with ideas, and there is a kind of set pattern now in China. One province will actually experiment with an innovative policy, be successful, and it will expand to different provinces. If it's not successful, they will ..... back.

The second reason is adaptability of the Chinese Communist leadership. I think scholars and policy experts just too easily forget this. When Chinese Communists set out, they were put on the reform path - you have to go back to read the New York Times or probably the Washington Post - I haven't checked the Washington Post, but the New York Times reports 25 years, or 23 or 24 years ago there was a ...... about Chinese reform. "This is not going to work." But 20 years later, it is very successful. So we have to give credit to the adaptability of the Chinese leadership, which has shown the great ability to solve the problems that they have faced.

The third element is nationalism. Obviously, there are good and bad elements to nationalism. But I'm only here talking about the good elements, that is, the zeal -- Chinese leadership and populous' zeal for regaining its economic development as well as its world status.

So far I have painted a very positive picture of China's reform. If I stop here, that would probably be a gross over-simplification of what happened. So I will talk about what kind of problems China has. Obviously, China has a wide range of problems. Without solving them, China will be in very deep trouble.

On the basis of 12 book-length studies, both internal and open, that were published in China since 1998, I identified 41 problem areas which were listed in those materials. Of those 41 problem areas, about 13 areas were listed by at least of the 12 publications or internal reports, and these included state enterprise reform, financial sector reform, social welfare reform, unemployment crisis, rule (?) instability, various disparities (?) problems, environmental and resource issues, governmental reform, and so on.

Now, I don't have time to get into each of these, but I will give you three core issues that are relevant to all these problem areas that face China. First, many of these problem areas are closely inter-related among themselves. For instance, let's take the state enterprise reform as an example. State enterprise reform is intimately linked with financial sector reform because state banks have been funding the survival of the state-owned enterprises. It is also linked to social welfare reform. If you fire workers in order to raise the efficiency of the firm, you have to somehow provide the subsidies for those fired workers. And also it is related to unemployment crisis. Now, Chinese - after the mid-90s, Chinese firms can fire workers, or Chinese firms can file for bankruptcy. So 100% employment is not anymore standing.

Similarly, rule instability is connected to widening disparities, employment issues and government reform. If you have any specific questions about this, I will get them in the Q&A session. So the implication is that the Chinese leadership may need a very well and meticulously made plan and patience, as well as good leadership. Otherwise, huge problems will explode simultaneously to possibly bring the regime down.

Second, China's reform seems to have already crossed the point of no return. A generation has passed since the reform has begun. So I think a pretty good portion of the Chinese population is very comfortable with this modus operandi of market socialism (??), as they call it. It is very difficult to be replaced now. So a very important goal for the Chinese leadership is to sustain its growth. It is absolutely necessary in order to minimize the possibility of any political crisis.

Third, to a considerable extent, I think China's reform is as much engineered within China as it is influenced by the outside now. WTO accession is one example. On the other hand, we see a lot of different examples of so-called .....ization. By .......ization I mean, an issue that is considered as a domestic sovereignty issue by China is increasingly internationalized so in the end it cannot be dealt with solely by China. One example is the Falon (?) G....... issue. So it is no longer internationalization alone. I think China needs globalization to complete. But that takes a lot of time and it will be quite painful.

Now I'm moving into my final section which is probably the most interesting, I would hope. That is, to give you some scenarios for China's future. Mr. Agawa gave you three analogies. I'll give you six possibilities, using the names of six countries.

We are already familiar with two of the six projections. One is the China Threat Thesis. The China Threat Thesis is basically founded on the notion that China will become a competitor for hegemony. So it can be said - I mean, it can be likened to an American model because America achieved hegemony over the competition or semi- competition or quasi-competition with Britain. Will China become a threat? My answer is: it depends. It depends on who you are. If you're Americans, then I think you may be looking at a longer time frame. If you talk to American government people in private, they won't worry about China in 20 years. But if you are not America, if you are a smaller country, you might have more to worry about. Or if you live in a country where the perceptions of China are very favorable, you don't need to worry about it at all. So it all depends on the perceptions. It's not really the absolute amount of money or weapons you have or China has, but it's the perceptions. How do you perceive China to be?'

Second projection is what I call the Yugoslavian model, that is the China collapse model. Of course, this model was very popular 10, 15 years ago, or right after the Tianamin (?) incident. You can find ..... reports everywhere actually projecting for the immediate collapse of China. But after a decade later, we find China much stronger than that period.

In my view I think China is - of course it depends on how you define the collapse of China or - are you referring to the territorial disintegration of China, or are you referring to the demise of the CCP - Chinese Communist Party? If you are talking about the disintegration of China, territorial disintegration of China, I don't think that will happen at all. I have two reasons to prove that. One is the comparative method. This China Collapse Thesis first came through right after the Soviet Union collapsed. But the mere or simple comparison with the Soviet Union does not really help because there are so many different ....., so many different characteristics between China and Russia, or former Soviet Union. In China the proportion of ethnic minorities is only 8%, although the absolute number is large, but it's only 8%, and most of the provinces actually have ...... nationalities as their majority population. And also in the Chinese case, most of the provinces have at least 300 to 1,000 years of integration, which is different - which was different in the case of the Soviet Union.

Now I'll give you a second reason why I believe territorial disintegration of China is not likely that is historical. If you look at China's history, China's history is replete with collapse and reintegration over the last 2000 years, but if you look at when the collapse was made, you can actually come up with a combination of three factors that were conducive to the collapse of China. First, the rise of peasant revolt. Second, the formation of local armies. Third, full integration. When these three combinations were there at the same time, the China's dynasty fell, the mandate of .......... How do you compare those three conditions to the present China? I don't think - -- rule instability is a serious problem, as I mentioned before, but not to the extent that we have to worry about the regime collapse. In 1990, six provinces were said to have serious rule instability problems in 1990. Ten years later, that is two years ago, 16 provinces are now having the problems of rule instability. The most famous case was in August, year 2000 in ........ where about 20,000 peasants got together. They broke into the government building at the ...... Magistrate, and they set fire on everything. But they were suppressed by the people on the police (???). Not PLA - people on the police.

What I'm trying to say here - rule instability is a serious problem, but they are widely scattered at this point. If they are united, if they are organized in some way, in a horizontal manner, then I think there is a big problem, but that is not happening now.

Second, the rise of local armies. I think probably the PLA - the People's Liberation Armies, the unit, is most closely controlled by the ..... There is no denying that. Before the Tianamin incident, if you wanted to move around a regiment for training or other purposes, you had to get a written permission from the - prior written permission from the Military Affairs Commission. After the Tianamin incident, that was actually reduced to a battalion force. We all know - most of you know that a battalion force doesn't do that much damage on the national level - government.

Finally - full (?) integration. I'm not sure China is facing any full integration these days. Probably China is enjoying the most peaceful, most stable period in its history. So that's why I'm saying China collapse is not very likely in the near term.

So I gave you two projections. One is the American model, the second one is the Yugoslavian model. The remaining four are: first, Indonesian model. Indonesian model refers to a state which has no democratic nor successful economic mechanism. It may be plagued with some ethnic problems as well. So it may be - it may have one small portion of its country separated by some serendipitous events or anything like that.

The next one is Indian model. Indian model refers to a state where you have a very democratic system, but you do not have a very strong economic system so the implication is that you may have a very strong power in regional terms, but it does not have the potential to become a global status power.

Now, with regard to this Indonesian model and Indian model, my own view is that these are not likely to be a model for China in the future, if the past is an effective guide at all.

The remaining two models I think are the ones that I think to be more likely to come about in the future. First is what I call China model because you can't find another country that is quite like it. That is, you continue to maintain authoritarian regime, although with some gradual changes over time, and you have a very successful economy. So what - other people have called it undemocratic capitalism and so on. But this is a model that can be created actually for many other pro-Socialists or Socialist Reform countries.

Finally I think it's the French model. Actually, Mr. Agawa said about the Chinese - mentioning the possibility of Japan becoming the Germany of the East. Actually, that is in a publication. Three years ago, Chinese ...... publication of ...... foreign ministry ...... that is world knowledge, an article called "What If Japan Becomes the Germany of the East?" By implication it was never specified in the text, but if you're reading between the lines, I think one implication is: China might become the France of the East. That means, it is democratic, it is hugely successful in economy, and it also holds some - more than regional status in world affairs, and it can veto some of the decisions made by the hegemony - that is, the United States.

So I have given you six scenarios, or six projections for China's future. And these do not have to be chosen at one time. It can be sequentially placed so that China may become one and then become another at different times. But in order for China to become a global level power, I think you need something more than military or economic power. That is, s..... power. Even though you have an enormous amount of weapons and a huge size of economy, that does not necessarily mean that you will be reckoned with in the minds of people. S..... is the ability to bring about compliance, voluntary compliance of other countries. I think in that respect, the U.S. has been very successful in the last 50 or more years, because the principles of democracy, freedom, market - that has worked. Of course, there were some p....... used for those principles in the past, but basically, those principles worked. Whether China is able to develop an alternative platform of norms (?) comparable to those, that remains to be seen.

I will stop there.

QUESTION: I think I remember ......... some time ago stating that China will not be very happy if the two Koreas were unified. Do you have any thoughts on that?

CHUNG: Okay, that's a very good question. Actually, what I'm doing at Brookings right now for one year is how America views .... Korea - China bilateralism. And actually I'm doing interviews with about 100 people in the Beltway, and one of the questions on the questionnaire is that it's actually asking the interviewees to rank the extent of support by four countries: U.S., Japan, China and Russia. It will be interesting to see. My answer to your question is - in my view, no country, none of the four major countries actually supports unification because most basic literature in bargaining tells you you have a potential benefit to gain when there is a competition between two parties. So there is no - I mean, of course, all of the four countries officially say they support unification. They have to do it. It's a diplomatic game. But whether or not they really mean it is quite another thing. I've talked sometimes to people and they say - they even go so far as to argue that, "Well, it's much better to manage one country rather than two nationalistic Koreas." That may have some truth, but it may not necessarily be China only that does not want to be in a position that has to support unification.

QUESTION: I have two questions. The first one has to do with the American model you have for China, and if China chose to go that route and try to become a major world power, you talked about how .......... offering capitalism and democracy. What would be the ideology that China would bring to the world?

CHUNG: Very good question. Actually I'm in the process of exploring those in more detail. First of all, one quick road to do that for China is to come up with ideas that straightforwardly oppose those of the United States. For instance, U.S. has this first strike principle. China refuses it. China already made it clear that it will not use nuclear weapons as a first strike means. Second, U.S. forward (?) positioning strategy is well known. The United States will send troops, station troops overseas. China has made it very clear it will not send troops overseas unless it's endorsed by the United Nations, like ...... So it has said very clearly it will not station forces on foreign soil. So these would be the good examples of how China would counter the ideas espoused by the United States in the future. But I think China is still in the process of doing it. So it will take some time before they come up with their own platform.

QUESTION: Then my other question has to do with rural unrest. Some of the latest statistics show that almost 200 million Chinese are out of work, and that as the SOEs convert into privatized companies, I think that may increase. What do you think China's going to do about -

CHUNG: What was your second -

QUESTION: That as the State-Owned Enterprises turn privatized, that unemployment number may increase because of the amount of employees that have the same task in the company. What are they going to do about this massive unemployment rate?

CHUNG: First of all, I think if you talk to Chinese scholars on this issue, they will tell you they don't really have a good estimate on employment, because it all depends on what kind of definition you employ. For instance, now many scholars in China say about 120 million are a floating population. That means those who used to hold rural registration are now moving to the cities, and they actually live in the cities but without being given any official status as city dwellers. But whether those 120 million are really the ones who live in the cities throughout the year, that remains to be a question because there seems to be about 40 million that are only seasonal migrants. You know, they have homes in their own villages, and they do their farm work during the spring to fall, and then they go out to find work in the cities during the late fall through the winter. So if you exclude these numbers - and also, there are many different systems. The reason why the Chinese financial system is in such bad shape is that the Chinese government has to provide such a large amount of subsidies for these employees. So there are so many safety mechanism there, but it's very difficult to give you a very generalizable picture on that. Second one, I think you are talking about two different things. Rural instability is one thing, and the State Enterprise reform is quite another, because you don't have many state enterprises in rural areas. What you have is collective enterprises. State enterprises - I think 95% of state enterprises are actually located in cities or urban areas as what we say. So it is quite different. I think rural instability will get worse after the minor details of the WTO accession become available. For instance, one ton of corn which costs $100 in Chicago is now costing $150 in China. So if the market is open for American corn, then I think corn farmers in China are doomed to lose their jobs. They have to float to cities. So that's more ominous, I think.

QUESTION: I have to ask about the relationship between Japan and China ....... getting worse. ...... What's your view of future relations?

CHUNG: I think you must be more expert on that than I am. I don't know. Well, I think the Chinese view - I mean, the Japanese view of China is probably - is not the area that I should talk about. Probably the Chinese view of Japan - I think they have a dualistic perception. The Chinese have envies and awes of what Japan has accomplished, although probably not in recent years. On the other hand, China still holds onto the past, and the possible revival of the past. And how China's leadership is going to balance between the two I think is the main question. For detailed or specific events, I'm not really in a position to comment.

QUESTION: ........... going on for over 25 years. At this moment, do you think China is ..............

CHUNG: I think that's a very scholarly question. There is one article written by Rick Baum at UCLA. In his chapter he actually lists about 43 different definitions applicable to what China's economy is now today. Actually, the Chinese had never used the term "market economy" during the 1980s. They said "planned commodification economy" - .......... So it's very different. In the 1990s they began to use just the "market," or "socialist market economy." So it has been only actually a decade or so, not really 20 years. But is it really important what kind of label you attach to it? I think that is not really important in my view. In my view what is important is whether China will pull through. Obviously, China has made clear that it can develop its economy and has reached a certain level of what Chinese say the ........, right? Relative wellness of economy. But whether China can make a transition, stable-y (?), from that level to a much more - much wealthier level of economy is quite a different question. Here, I think the politics get in because experiences in Europe and elsewhere in Asia tells us that if your economy reaches a certain level, people tend to have the post-materialist values - that you want to get involved in politics, that you want to have more say in government policy making and so on. According to one Hong Kong estimate that is actually done by South China ........, by 2010 40% of China's population will perceive themselves as middle class, which means they are probably the potential candidates for political actions. So of course, political action can mean different things in different cultures, but if that means a violence or disorderly action, then I think it will be a big problem for China's stability.

QUESTION: One issue I haven't seen talked about a lot - I guess how the ....... you have India right next to China. I don't see North Korea, I don't see Japan, the United States and China - I don't see much talk about how India - the two countries with billions of people ...... a major say in the ..... shared borders ........

CHUNG: That is true. Not much writing is done actually on that nexus of the great game (??), but I think at the policy level, I think a lot of people are exchanging delegations among India, Japan and United States, so I think that value (?) is recognized more in the policy community than the scholarly community. I'm not really sure. I'm not really an expert on Sino-Indian relations, so what is your question specifically? You want me to comment on the current state of Sino-Indian relations? I don't really know. I'm not in a position to comment on that.

QUESTION: ...... you mentioned China's successful .......... But nevertheless ........... How do you see this model ......... to resolve these Taiwan issues - the U.S. model, or you mentioned French and then ...... model. ........... resolving the Taiwan issue?

CHUNG: Well, with all due respect for the Taiwan issue, I didn't really think about Taiwan when I came up with the six models. Now there are controversies online and offline as well. There has been the Mainland Affairs Council in Taiwan. They conduced a poll on how many people actually preferred to have one country, two systems as opposed to other options and so on. But the question is, I think, Taiwan is a very good example of ......ization. I now sure whether the analogy is proper, because China wants to take it as a very sovereign issue that has to be resolved by China and Taiwan alone. But most of the other countries, including the United States do not see it that way. They want to get involved. But what complicates the issue more is the domestic audience in Taiwan. Different media have very different views. Like the Taipei (?) Times tends to reflect more on the independence route of Taiwan. On the other hand, China Times and United Daily seem to reflect what we call the "unificationist" approach - that is, unification under whatever formula - it's the only way out for Taiwan. Then again, one country - two systems has different meanings for Taiwan than it has for Hong Kong. Hong Kong, as we all know, China maintains the diplomatic and military authority over Hong Kong. Hong Kong is now authorized to have that. But nevertheless, Hong Kong is allowed to maintain the status ..... international ..... organizations and so on. What China has proposed to Taiwan is quite different. No p.... presence in Taiwan, and Taiwan is allowed under this formula - allowed to have its own military. About the diplomatic representation, I don't really recall the details but it's a very different formula. So there are very important variables working here. First of all, what if China democratizes? This would be a very - because one of the main pillars for the survival of Taiwan has been the support provided by the United States, and ...... premise on that is Taiwan is democratic; China is not. But what is China democratizes? Then what kind of impact does that on the U.S. support for Taiwan. That's one thing. Second one - sustainable growth on the part of the mainland as well as on the part of Taiwan. If Taiwan's economy does not do well - on the other hand, mainland China's economy does very well - then how does that play out in the eventual resolution of the Taiwan issue? And those are the variables that you have to take into consideration. But I think one country-two systems idea is very much alive in the case of Taiwan because Chinese leadership has been flexible enough to distinguish one country-two systems formula for Taiwan and for Hong Kong.

QUESTION: Do I understand correctly that Taiwan ......... and China now, economically they are integrated?

CHUNG: I think it is fair to say so, yes, although the figures vary. Now about half a million Taiwanese live on the mainland as long time residents, not including the one-shot visitors. Of course, the amount of investment is just mind-boggling. So there has been some concern on the part of the Taiwanese government that this kind of huge investment made in China by Taiwan, could actually work as a kind of pawn (?) for Taiwan's policy toward - because Taiwan's ....... actually could work as a lobbyist for policy - different policy for the mainland. So it's a very interesting issue going on but a final note is that, as we have seen in '95, '96, economic integration or increased investment does not necessarily preclude the conflicts across the street. I mean, missile- missile crisis shows us very well.

QUESTION: (inaudible for transcription)

CHUNG: If ...... retires - sweepingly, at the upcoming .... Party Congress. I would give him the first one to make sound power transition. That has not been done in many countries actually, and given the fuss about what position will be retained by him and what position will be given to ....... - I think if he does retire from all the positions he has, I think it will be - he will be remembered fondly, I think, because that is a major contribution in making China's political culture as well as institutionalizing the succession in China.

KIM: Thank you very much.

This page last updated 8/18/2003 jdb

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