Foreign Affairs: China's Governance Crisis (Part II of Two Parts Series)

In a party-state, the ruling party's weakness unavoidably saps the state's power. Such "state incapacitation," which in its extreme form results in failed states, is exemplified by the government's increasing inability to provide essential services, such as public safety, education, basic health care, environmental protection, and law enforcement. In China, these indices have been slipping over the past two decades. This decline is especially alarming since it has occurred while the Chinese economy has been booming.

Most of the evidence of the government's deteriorating performance is mundane but telling. Take, for example, the number of traffic fatalities (a key measure of a state's capacity to regulate a routine, but vital, social activity: transportation). Chinese roads are almost twice as deadly today as they were in 1985; there were about 58 road fatalities per 10,000 vehicles in 2000, compared to 34 in 1985. An international comparison using 1995 data shows that traffic fatality risks were much higher in China than in India or Indonesia. Indeed, China fared better only than Tonga, Bangladesh, Myanmar, and Mongolia in the Asia-Pacific region.

Although China has made tremendous progress in improving education, its recent performance lags behind that of many developing countries. China's education spending in 1998 was a mere 2.6 percent of GDP, below the average of 3.4 percent for low-income countries. In fact, China spends almost a third less on education than does India. As a result, access to primary and intermediate education is as low as 40 percent among school-age children in the country's poor western regions.

China's public health-care system has decayed considerably in recent years and compares poorly with those of its neighbors. According to the World Health Organization, China's health system ranked 144th worldwide, placing it among the bottom quartile of who members, behind India, Indonesia, and Bangladesh. China's agricultural population has been hit especially hard, as government neglect has led to a near-total collapse of the rural public-health infrastructure. According to the 1998 survey conducted by the Ministry of Health, 37 percent of ill farmers did not seek medical treatment because they could not afford it, and 65 percent of sick peasants needing hospitalization were not admitted because they could not pay. Both figures were higher than in 1993, when a similar survey was carried out. Poor health has become the chief cause of poverty in rural China; 40-50 percent of those who fell below the poverty line in 2000 in some provinces did so only after becoming seriously ill. Even more troubling, the crumbling public-health infrastructure is a principal cause of the rapid spread of HIV and AIDS in China. The UN warned in a recent study that "China is on the verge of a catastrophe that could result in unimaginable human suffering, economic loss, and social devastation."

State incapacitation also manifests itself in worsening environmental degradation. This problem poses perhaps the deadliest threat to China's continued economic development. About a third of the country suffers from severe soil erosion, 80 percent of wastewater is discharged untreated, 75 percent of the country's lakes and about half its rivers have been polluted, and nine of the ten cities with the worst air pollution in the world in 1999 were located in China.

China suffers huge direct economic losses from this environmental damage. The World Bank estimated in the mid-1990s that major forms of pollution cost the country 7.7 percent of its GDP. Beyond this measurable cost, environmental degradation, together with the collapse of much of the agricultural infrastructure built before the 1980s, may have exacerbated the effects of natural disasters. Grain losses resulting from natural disasters have more than doubled in the last 50 years, with most of the increase recorded in the 1990s.

BUSTING THE BUDGET

The central cause of the declining effectiveness of the Chinese state is a dysfunctional fiscal system that has severely undercut the government's ability to fund public services while creating ample opportunities for corruption. Government data misleadingly suggest that the state experienced a massive loss of revenue over the last two decades, as its tax receipts fell from 31 percent of GDP in 1978 to 14 percent in 1999. The truth, however, is quite different. Aggregate government revenue over the past 20 years has held steady at about 30 percent of GDP. What has changed is the massive diversion of revenue from the government budget; increasingly, income collected by the government is not listed in the official budget. At their peak in the mid-1990s, such off-budget earnings exceeded budgeted tax revenue by two to one.
Provincial and municipal governments are the primary beneficiaries of this system because it allows them to raise revenue outside the normal tax streams. Because local officials are more likely to get promoted for delivering short-term growth or other such tangible results, off-budget revenue tends to be spent on building local industries and other projects that do little to improve education, health, or the environment. Moreover, since normal budget rules do not apply to such revenue, officials enjoy near-total discretion over its spending. Consequently, corruption is widespread. Large portions of this off-budget money have been found stashed away in secret slush funds controlled by government officials. In 1999, the National Auditing Agency claimed to have uncovered slush funds and illegal expenditures that amounted to 10 percent of 1998's tax revenue.
An important consequence of this dysfunctional fiscal system is the near collapse of local public finance in many counties and townships, particularly in the populous rural interior provinces (such as Henan, Anhui, and Hunan). Although counties and townships provide most government services, they rely on a slim tax base, collecting only 20 percent of total government revenue. In 1999, counties generated revenue barely equal to two-thirds of their spending, and about 40 percent of counties can pay for only half their expenditures.

The fiscal conditions for township governments are even more precarious because townships have practically no tax base and must extract their revenue from farmers, mostly through inefficient and coercive collection. The responsibilities of providing public services while supporting a bloated bureaucracy have forced many township governments deeply into debt. For instance, a survey in Hunan in 2000 found that township debts equaled half the province's total revenue.

In most countries, the state's declining fiscal health portends more serious maladies. The problems of the rural provinces should serve as an urgent warning to Beijing because these are historically the most unstable regions in the country, having previously generated large-scale peasant rebellions. Indeed, it is no coincidence that these agrarian provinces (where per capita income in 2000 was about half the national average) have in recent years seen the largest increase in peasant riots and tax revolts. Left to their own devices, local governments will not be able to provide effective remedies. A workable solution will require reforming the flawed fiscal system at the top and restructuring local governments at the bottom to make them more efficient and responsive.

ANGER MANAGEMENT

The institutional decline of the ruling party and the weakness of the state have caused rising tensions between the state and society. The number of protests, riots, and other forms of resistance against state authorities has risen sharply. For instance, the number of collective protests grew fourfold in the 1990s, increasing from 8,700 in 1993 to a frightening 32,000 in 1999. The size and violence of such incidents have grown as well. There were 125 incidents involving more than 1,000 protesters in 1999, and the government itself admits that protests with more than 10,000 participants have become quite common. For example, in March 2002, more than 20,000 laid-off workers participated in a week-long protest in the northern city of Liaoyang. In rural areas, many towns have reported mob attacks by peasants on government buildings and even on officials themselves.

To be sure, rising social frustration results partly from the hardships produced by China's economic transition. In recent years, falling income in rural areas and growing unemployment in the cities have contributed to the rising discontent among tens of millions of peasants and workers. But the increasing frequency, scale, and intensity of collective defiance and individual resistance also reveal deep flaws in Chinese political institutions that have exacerbated the strains of transition. Social frustration is translated into political protest not merely because of economic deprivation, but because of a growing sense of political injustice. Government officials who abuse their power and perpetrate acts of petty despotism create resentment among ordinary citizens every day. These private grievances are more likely to find violent expression when the institutional mechanisms for resolving them (such as the courts, the press, and government bureaucracies) are inaccessible, unresponsive, and inadequate.

In rural China, where institutional rot is much more advanced, the tensions between the state and the peasantry have reached dangerous levels. In a startling internal report, the Ministry of Public Security admitted that "in some [rural] areas, enforcement of family-planning policy and collection of taxes would be impossible without the use of police force." In some villages, peasant resistance has grown so fierce that local officials dare not show their faces; these areas have effectively became lawless.
The most important source of this anger is the onerous tax burden levied on China's most impoverished citizens. The effective tax rate in 1996 for the agrarian sector (excluding village enterprises) was estimated at 50 percent. In fact, collecting taxes and fees has become practically the only task performed by public officials in rural areas, consuming 60-70 percent of their time. In some areas, local officials have even recruited thugs in their collection efforts; such practices have resulted in the illegal imprisonment, torture, and even deaths of peasants who are unable to pay. What has irked the peasantry even more is that their high taxes appear to have brought few government services in return. The combination of high payment, heavy-handed collection, and inadequate services has thus turned a large portion of the rural population against the state. Recent polls conducted in rural areas found that peasants consistently identify excessive taxes and fees as the most important cause of instability.

Significantly, relations between the state and society are growing more tense at a time of rising income inequality. To be sure, the reasons behind this process are extremely complex. Although the most important causes of overall inequality are the growing rural-urban income gap and regional disparities, the level of income inequality within regions and cities has been rising at an alarming pace as well. Recent surveys have found that inequality has become one of the top three concerns for the public. In the context of rampant official corruption, this rising inequality is likely to fuel public ire against the government because most people believe that only the corrupt and privileged can accumulate wealth. Such a perception is not off the mark: one academic study estimated that illegal income contributed to a 30 percent increase in inequality during the 1980s.

The absence of pressure valves within the Chinese political system will hamper the regime's ability to reduce and manage state-society tensions. Recent reforms, such as instituting village elections and improving the legal system, have proved inadequate. The CCP's failure to open up the political system and expand institutional channels for conflict resolution creates an environment in which aggrieved groups turn to collective protest to express frustrations and seek redress.

The accumulation of state-society tensions will eventually destabilize China, especially because the dynamics that generate such tensions trap the CCP in a hopeless dilemma. Rising tensions increase the risks that any reforms, even implemented as remedies, could trigger a revolution. Alexis de Tocqueville first observed this paradox: repressive regimes are most likely to be overthrown when they try to reform themselves. This sobering prospect could deter even the most progressive elements within the CCP from pursuing change.

THINK AGAIN

Remedying China's mounting governance deficits should be the top priority of the country's new leaders. At present, these problems, brought on by the contradictions of dot communism, are serious but not life-threatening. If the new leadership addresses the institutional sources of poor governance, the CCP may be able to manage its problems without risking a political upheaval. The unfolding succession drama, however, will get in the way of meaningful change in the short term. Proposing even a moderate reform program could jeopardize a leader's political prospects. Moreover, undertaking risky reforms would require a high level of party unity -- unlikely from a leadership jockeying for power.

Thus, China's governance deficits are likely to continue to grow and threaten the sustainability of its economic development. The slow-brewing crisis of governance may not cause an imminent collapse of the regime, but the accumulation of severe strains on the political system will eventually weigh down China's economic modernization as poor governance makes trade and investment more costly and more risky. The current economic dynamism may soon fade as long-term stagnation sets in.

Such a prospect raises questions about some prevailing assumptions about China. Many in the Bush administration view China's rise as both inevitable and threatening, and such thinking has motivated policy changes designed to counter this potential "strategic competitor." On the other hand, the international business community, in its enthusiasm for the Chinese market, has greatly discounted the risks embedded in the country's political system. Few appear to have seriously considered whether their basic premises about China's rise could be wrong. These assumptions should be revisited through a more realistic assessment of whether China, without restructuring its political system, can ever gain the institutional competence required to generate power and prosperity on a sustainable basis. As Beijing changes its leadership, the world needs to reexamine its long-cherished views about China, for they may be rooted in little more than wishful thinking.