Foreign Affairs.New York ：Sep/Oct 2002.Vol.81，Iss.5；pg.96
Subjects：Political power，Political parties，Reforms，Budget deficits，Corruption in government，Fiscal policy
Abstract
China is facing a hidden crisis of governance.The future of China，and theWest's interests there，depends critically on how Beijing's new leaders deal withthis somber reality.China's "dot communism ，"characterized by the marriage ofa Leninist party to bureaucratic capitalism with a globalist gloss，has merelydisguised ，rather than eliminated these contradictions.The previously hiddencosts of the transition have begun to surface.Further change implies not simplya deepening of market liberalization but also the implementation of political reformsthat could endanger the Chinese Communist Party's （CCP ）monopoly on power.Thecentral cause of the declining effectiveness of the Chinese state is a dysfunctionalfiscal system that has severely undercut the government's ability to fund publicservices while creating ample opportunities for corruption.If the new leadershipaddresses the institutional sources of poor governance，the CCP may be able tomanage its problems without risking political upheaval.
Predicting the outcome of China's upcoming leadership succession has becomea popular parlor game in certain Washington circles.The curiosity aroused by thetransition is understandable，given the huge stakes involved for the world's largestcountry.If all goes well ，the Chinese Communist Party（CCP ）is scheduled toselect a new and younger leadership at its Sixteenth Party Congress this fall.Theincumbent CCP general secretary ，76-year-old Jiang Zemin，may step down and bereplaced by China's Vice President Hu Jintao，who is 59.The all-powerful PolitburoStanding Committee will see most of its members retire，as will the important CentralCommittee.In addition，Chinese Premier Zhu Rongji is to step down in March，andLi Peng ，the leader of the National People's Congress （the country's legislature），may be heading for the exit as well.
In a country ruled largely by man ，not law，succession creates rare opportunitiesfor political intrigue and policy change.Thus，speculation is rife about the composition，internal rivalries，and policy implications of a post-Jiang leadership.The backgroundsof those expected to ascend to the top unfortunately reveal little.By and large，the majority of new faces are technocrats.Some have stellar resumes but thin records；other front-runners boast solid experience as provincial party bosses but carrylittle national clout.
In any case ，conjectures about the immediate policy impact of the pendingleadership change are an exercise in futility ，because Jiang will likely wieldconsiderable influence even after his semiretirement.A truly dominant new leadermay not emerge in Beijing for another three to five years.And regardless of thedrama that the succession process might provide ，a single-minded focus on powerplays in Beijing misses the real story：China is facing a hidden crisis of governance.This fact ought to preoccupy those who believe that much more is at stake in Beijingthan a game of musical chairs.
The idea of an impending governance crisis in Beijing may sound unduly alarmist.To the outside world，China is a picture of dynamism and promise.Its potentialmarket size ，consistently high growth rates ，and recent accession to the WorldTrade Organization have made the Middle Kingdom a top destination of foreign directinvestment（$46billion in 2001），and multinational corporations salivate atthe thought of its future growth.But beneath this giddy image of progress and prosperitylies a different reality——one that is concealed by the glitzy skylines of Shanghai，Beijing ，and other coastal cities.The future of China，and the West's intereststhere ，depends critically on how Beijing's new leaders deal with this somber reality.
dot communism and its discontents
China's current crisis results from fundamental contradictions in the reformsthat it has pursued over the past two decades ——a period that has seen the amazingtransformation of the communist regime from one that was infatuated with class struggleto one obsessed by growth rates.This "dot communism，"characterized by the marriageof a Leninist party to bureaucratic capitalism with a globalist gloss ，has merelydisguised ，rather than eliminated ，these contradictions.But they are growingever harder to ignore.The previously hidden costs of transition have begun to surface：Further change implies not simply a deepening of market liberalization but alsothe implementation of political reforms that could endanger the CCP's monopoly onpower.
These emerging contradictions are embedded in the very nature of the Chineseregime.For example ，the government's market-oriented economic policies ，pursuedin a context of autocratic and predatory politics ，make the CCP look like a self-serving，capitalistic ruling elite ，and not a "proletarian party"championing the interestsof working people.The party's professed determination to maintain political supremacyalso runs counter to its declared goals of developing a "socialist market economy"and "ruling the country according to law，"because the minimum requirements ofa market economy and the rule of law are institutionalized curbs on political power.The CCP's ambition to modernize Chinese society leaves unanswered the question ofhow increasing social autonomy will be protected from government caprice.And theparty's perennial fear of independently organized interest groups does not prepareit for the inevitable emergence of such groups in an industrialized economy.Theseunresolved contradictions ，inherent in the country's transition away from communism，are the source of rising tensions in China's polity ，economy，and society.
During the go-go 1990s，the irreconcilable nature of these contradictions wasobscured by rising prosperity and relative political tranquility.Economically，accelerating liberalization and deepening integration with the world marketplaceproduced unprecedented prosperity ，even though some tough reforms （especiallythose affecting the financial sector and state-owned enterprises，or SOEs）laggedbehind.Politically ，the ruling elite drew its own lesson from the collapse ofSoviet communism（"It's the economy ，stupid"）and closed ranks behind a strategythat prioritized economic growth and left the political system untouched.
This strategy worked for a decade.Within the regime，conservatives who opposedmarket reforms were marginalized.China's pro-democracy movement，which peakedwith the Tiananmen Square protest in 1989，also waned after its leadership wasdecapitated through exile or imprisonment.The resulting tranquility ended the polarizeddebate between liberals and conservatives of the 1980s.But ironically，this shiftalso silenced those at both ends of the ideological spectrum who would have criedthat the emperor had no clothes.Thus ，the regime escaped pressure to adopt deeperpolitical reforms to relieve the tensions produced by the contradictions of dotcommunism.With rising wealth and loose talk of a "China century，"even some skepticsthought the CCP had managed to square the circle.The incompatibilities between China'scurrent political system，however，and the essential requirements of the ruleof law，a market economy ，and an open society have not been washed away by wavesof foreign investment.Pragmatists might view these contradictions as inconsequentialcognitive nuisances.Unfortunately，their effects are real ：they foreclose reformoptions that otherwise could be adopted for the regime's own long-term good.Tobe sure ，China's pragmatic leaders have made a series of tactical adjustmentsto weather many new socioeconomic challenges，such as the CCP's recent outreachto entrepreneurs.But these moves are no substitute for genuine institutional reformsthat would reinvigorate and relegitimize the ruling party.
the bubble bursts
In retrospect ，the 1990s ought to be viewed as a decade of missed opportunities.The CCP leadership could have taken advantage of a booming economy to renew itselfthrough a program of gradual political reform built on the rudimentary steps ofthe 1980s.But it did not ，and now the cumulative costs of a decade of foot-draggingare becoming more visible.In many crucial respects ，China's hybrid neo-authoritarianorder eerily exhibits the pathologies of both the political stagnation of LeonidBrezhnev's Soviet Union and the crony capitalism of Suharto's Indonesia.
These pathologies ——such as pervasive corruption ，a collusive local officialdom，elite cynicism，and mass disenchantment——are the classic symptoms of degeneratinggoverning capacity.In most political systems ，a regime's capacity to govern ismeasured by how it performs three key tasks ：mobilizing political support ，providingpublic goods，and managing internal tensions.These three functions of governance——legitimation ，performance，and conflict resolution --are，in reality ，intertwined.A regime capable of providing adequate public goods（education ，publichealth，law and order）is more likely to gain popular support and keep internaltensions low.In a Leninist party-state however ，effective governance criticallyhinges on the health of the ruling party.Strong organizational discipline，accountability，and a set of core values with broad appeal are essential to governing effectively.Deterioration of the ruling party's strength，on the other hand，sets in motiona downward cycle that can severely impair the party-state's capacity to govern.
Numerous signs within China indicate that precisely such a process is producinghuge governance deficits.The resulting strains are making the political and economicchoices of China's rulers increasingly untenable.They may soon be forced to undertakerisky reforms to stop the rot.If they do not ，dot communism could be no moredurable than the dot coms.the party's overThe decline of the CCP began during therule of Mao Zedong，as the late leader's political radicalism，culminating inthe madness of the Cultural Revolution（1966-76），deeply damaged the ruling party.The ascent of Deng Xiaoping and his progressive reforms slowed this process ，aseconomic gains，the end of mass repression ，and the expansion of personal freedomspartially repaired the CCP's tarnished image.
But Deng's pro-market reforms produced a different set of dynamics that beganto corrode the CCP's support.As economic reform deepened ，large segments of Chinesesociety became poorer （such as grain-producing farmers and workers in SOEs）。The revenue-starved state was unable to compensate these losers from reform.Consequently，the CCP had little means to secure the political support of these disaffected groupsbeyond exhorting self-sacrifice and making empty promises of better times ahead.Some members of the ruling elite also converted their political power into economicgains ，building and profiting from patronage machines.In one survey，about two-thirdsof the officials being trained at a municipal party school said their promotiondepended solely on the favors of their superiors；only five percent thought theirown efforts could advance their careers.A ruling party fractured from within bysuch personalized patronage systems is hardly capable of building broad-based supportwithin society.It is worth noting that mass political campaigns，a previous hallmarkof the CCP's prowess，have virtually vanished from the Chinese political scene.An obvious explanation is that such campaigns tend to be disruptive and lead topolitical excesses，as they did during the Mao years.A more likely cause，however，is that the CCP no longer possesses the political appeal or the organizational capacityrequired to launch such campaigns even when it desires them （as was the case duringBeijing's efforts to contain pro-democracy dissidents in the late 1980s and theFalun Gong spiritual movement in the late 1990s ）。Increasingly ，when facedwith direct challenges to its authority ，the CCP can rely only on repression ratherthan public mobilization to counter its opponents.
immobilized
The extent of the CCP's decline can be measured in three areas：the shrinkageof its organizational penetration ，the erosion of its authority and appeal amongthe masses，and the breakdown of its internal discipline.The organizational declineof the CCP is ，in retrospect，almost predetermined.Historically ，Leninistparties have thrived only in economies dominated by the state.Such an economy providesthe economic institutions （SOEs and collective farms ）that form the organizationalbasis for the ruling party.By pursuing market reforms that have eliminated ruralcommunes and most SOEs，the CCP has fallen victim to its own success.The new economicinfrastructure，based on household farming ，private business ，and individuallabor mobility，is inhospitable to a large party apparatus.For instance ，aninternal CCP report characterized half of the party's rural cells as "weak"or "paralyzed"in recent years.In urban areas ，the CCP has been unable to penetrate the emergingprivate sector，while its old organizational base has collapsed along with theSOEs.In 2000，the CCP did not have a single member in 86percent of the country's1.5million private firms and could establish cells in only one percent of privatecompanies.
The CCP's organizational decay is paralleled by the decline of its authorityand image among the public.A survey of 818migrant laborers in Beijing in 1997-98revealed that the prevailing image of the ruling party was that of a self-servingelite.Only 5percent of the interviewees thought their local party cadres "workfor the interests of the villagers，"and 60percent said their local officials"use their power only for private gains."Other surveys have revealed similar negativepublic perceptions of the CCP.A 1998study of 12，000urban and rural residentsacross 10provinces conducted by the CCP's antigraft agency found that only 43percentof respondents agreed that "the majority of party and government officials are clean，"and that fully one-third said "only a minority of party and government officialsare clean."
At the same time as public officials are losing respect ，the party's ideologicalappeal has all but evaporated.Polls conducted by the official national trade unionin 1996showed that only 15percent of the workers surveyed regarded communism as"their highest ideal，"while 70percent said that their top priority was to pursueindividual happiness.Even members of the ruling elite are beginning，albeit reluctantly，to admit this reality.A poll conducted in 1998among 673CCP officials in the northeasternprovince of Jilin found that 35percent thought the status and authority of governmentofficials had declined.At the heart of the CCP's organizational and reputationaldecline is the breakdown of its members'ideological beliefs and internal discipline.Cynicism and corruption abound.The sale of government offices by local CCP bosseswas unheard of in the 1980s but became widespread in the 1990s.A 1998survey of2，000provincial officials，conducted by the official antigraft agency ，foundthat 45percent of respondents thought such practices were continuing unabated.
Even more worrying，the CCP appears unable to enforce internal discipline despitethe mortal threat posed by corruption ，which has surpassed unemployment as themost serious cause of social instability.Recent official actions ，especiallythe prosecution and execution of several senior officials ，create the impressionthat the CCP leadership is committed to combating corruption.But a comprehensivelook at the data tells a different story.Most corrupt officials caught in the government'sdragnet seem to have gotten off with no more than a slap on the wrist.For example，of the 670，000party members disciplined for wrongdoing from 1992to 1997，only37，500，or six percent ，were punished by criminal prosecution.Indeed，self-policingmay be impossible for a ruling party accountable to no one.According to a top CCPofficial，the party has in recent years expelled only about one percent of itsmembers.
Perhaps the greatest contributing factor to the CCP's political decline is，ironically，the absence of competition.Competition would have forced the partyto redefine its mission and recruit members with genuine public appeal.But likemonopoly firms，the CCP has devoted its energies to preventing the emergence ofcompetition.Without external pressures ，monopolies such as the CCP inevitablydevelop a full range of pathologies such as patronage systems ，organizationaldystrophy ，and unresponsiveness.Moreover ，one-party regimes can rarely takeon the new competitors that emerge when the political environment changes suddenly.The fall of the Soviet bloc regimes and the defeat of similar monopolistic partiesin the developing world （such as Mexico's Institutional Revolutionary Party）showthat an eroding capacity for political mobilization poses a long-term threat tothe CCP.
failing state ？
In a party-state，the ruling party's weakness unavoidably saps the state'spower.Such "state incapacitation ，"which in its extreme form results in failedstates，is exemplified by the government's increasing inability to provide essentialservices，such as public safety，education，basic health care，environmentalprotection，and law enforcement.In China，these indices have been slipping overthe past two decades.This decline is especially alarming since it has occurredwhile the Chinese economy has been booming.Most of the evidence of the government'sdeteriorating performance is mundane but telling.Take，for example，the numberof traffic fatalities （a key measure of a state's capacity to regulate a routine，but vital ，social activity：transportation ）。Chinese roads are almost twiceas deadly today as they were in 1985；there were about 58road fatalities per 10，000vehicles in 2000，compared to 34in 1985.An international comparison using1995data shows that traffic fatality risks were much higher in China than in Indiaor Indonesia.Indeed，China fared better only than Tonga ，Bangladesh ，Myanmar，and Mongolia in the Asia-Pacific region.Although China has made tremendous progressin improving education，its recent performance lags behind that of many developingcountries.China's education spending in 1998was a mere 2.6percent of GDP ，belowthe average of 3.4percent for low-income countries.In fact，China spends almosta third less on education than does India.As a result，access to primary and intermediateeducation is as low as 40percent among school-age children in the country's poorwestern regions.China's public health-care system has decayed considerably in recentyears and compares poorly with those of its neighbors.According to the World HealthOrganization，China's health system ranked 144th worldwide ，placing it amongthe bottom quartile of who members，behind India ，Indonesia，and Bangladesh.China's agricultural population has been hit especially hard，as government neglecthas led to a near-total collapse of the rural public-health infrastructure.Accordingto the 1998survey conducted by the Ministry of Health，37percent of ill farmersdid not seek medical treatment because they could not afford it ，and 65percentof sick peasants needing hospitalization were not admitted because they could notpay.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；40-50percentof those who fell below the poverty line in 2000in some provinces did so only afterbecoming seriously ill.Even more troubling ，the crumbling public-health infrastructureis a principal cause of the rapid spread of hiv and aids in China.The UN warnedin a recent study that "China is on the verge of a catastrophe that could resultin unimaginable human suffering ，economic loss，and social devastation."Stateincapacitation also manifests itself in worsening environmental degradation.Thisproblem poses perhaps the deadliest threat to China's continued economic development.About a third of the country suffers from severe soil erosion ，80percent of wastewateris discharged untreated ，75percent of the country's lakes and about half itsrivers have been polluted ，and nine of the ten cities with the worst air pollutionin the world in 1999were located in China.
China suffers huge direct economic losses from this environmental damage.TheWorld Bank estimated in the mid-1990s that major forms of pollution cost the country7.7percent of its GDP.Beyond this measurable cost ，environmental degradation，together with the collapse of much of the agricultural infrastructure built beforethe 1980s ，may have exacerbated the effects of natural disasters.Grain lossesresulting from natural disasters have more than doubled in the last 50years，withmost of the increase recorded in the 1990s.
busting the budget
The central cause of the declining effectiveness of the Chinese state is a dysfunctionalfiscal system that has severely undercut the government's ability to fund publicservices while creating ample opportunities for corruption.Government data misleadinglysuggest that the state experienced a massive loss of revenue over the last two decades，as its tax receipts fell from 31percent of GDP in 1978to 14percent in 1999.Thetruth ，however，is quite different.Aggregate government revenue over the past20years has held steady at about 30percent of GDP.What has changed is the massivediversion of revenue from the government budget ；increasingly ，income collectedby 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 systembecause it allows them to raise revenue outside the normal tax streams.Becauselocal officials are more likely to get promoted for delivering short-term growthor other such tangible results，off-budget revenue tends to be spent on buildinglocal 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 ，corruptionis widespread.Large portions of this off-budget money have been found stashed awayin secret slush funds controlled by government officials.In 1999，the NationalAuditing Agency claimed to have uncovered slush funds and illegal expenditures thatamounted to 10percent of 1998's tax revenue.An important consequence of this dysfunctionalfiscal system is the near collapse of local public finance in many counties andtownships ，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 20percent of total government revenue.In 1999，counties generated revenue barely equal to two-thirds of their spending，and about 40percent of counties can pay for only half their expenditures.The fiscalconditions for township governments are even more precarious because townships havepractically no tax base and must extract their revenue from farmers ，mostly throughinefficient and coercive collection.The responsibilities of providing public serviceswhile supporting a bloated bureaucracy have forced many township governments deeplyinto debt.For instance ，a survey in Hunan in 2000found that township debts equaledhalf the province's total revenue.
In most countries ，the state's declining fiscal health portends more seriousmaladies.The problems of the rural provinces should serve as an urgent warningto Beijing because these are historically the most unstable regions in the country，having previously generated large-scale peasant rebellions.Indeed，it is no coincidencethat these agrarian provinces （where per capita income in 2000was about half thenational average）have in recent years seen the largest increase in peasant riotsand tax revolts.Left to their own devices，local governments will not be ableto provide effective remedies.A workable solution will require reforming the flawedfiscal system at the top and restructuring local governments at the bottom to makethem more efficient and responsive.
anger management
The institutional decline of the ruling party and the weakness of the statehave 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 ，increasingfrom 8，700in 1993to a frightening 32，000in 1999.The size and violence ofsuch incidents have grown as well.There were 125incidents involving more than1，000protesters in 1999，and the government itself admits that protests withmore than 10，000participants have become quite common.For example，in March2002，more than 20，000laid-off workers participated in a week-long protest inthe northern city of Liaoyang.In rural areas ，many towns have reported mob attacksby peasants on government buildings and even on officials themselves.
To be sure，rising social frustration results partly from the hardships producedby China's economic transition.In recent years ，falling income in rural areasand growing unemployment in the cities have contributed to the rising discontentamong tens of millions of peasants and workers.But the increasing frequency，scale，and intensity of collective defiance and individual resistance also reveal deepflaws in Chinese political institutions that have exacerbated the strains of transition.Social frustration is translated into political protest not merely because of economicdeprivation ，but because of a growing sense of political injustice.Governmentofficials who abuse their power and perpetrate acts of petty despotism create resentmentamong ordinary citizens every day.These private grievances are more likely to findviolent expression when the institutional mechanisms for resolving them （such asthe 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 "insome [rural]areas，enforcement of family-planning policy and collection of taxeswould be impossible without the use of police force."In some villages，peasantresistance 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 onChina's most impoverished citizens.The effective tax rate in 1996for the agrariansector（excluding village enterprises ）was estimated at 50percent.In fact ，collecting taxes and fees has become practically the only task performed by publicofficials in rural areas，consuming 60-70percent of their time.In some areas ，local officials have even recruited thugs in their collection efforts ；such practiceshave resulted in the illegal imprisonment ，torture，and even deaths of peasantswho are unable to pay.What has irked the peasantry even more is that their hightaxes appear to have brought few government services in return.The combinationof high payment ，heavy-handed collection，and inadequate services has thus turneda large portion of the rural population against the state.Recent polls conductedin rural areas found that peasants consistently identify excessive taxes and feesas the most important cause of instability.Significantly，relations between thestate 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 themost important causes of overall inequality are the growing rural-urban income gapand regional disparities，the level of income inequality within regions and citieshas been rising at an alarming pace as well.Recent surveys have found that inequalityhas become one of the top three concerns for the public.In the context of rampantofficial corruption ，this rising inequality is likely to fuel public ire againstthe government because most people believe that only the corrupt and privilegedcan accumulate wealth.Such a perception is not off the mark：one academic studyestimated that illegal income contributed to a 30percent increase in inequalityduring the 1980s.
The absence of pressure valves within the Chinese political system will hamperthe regime's ability to reduce and manage state-society tensions.Recent reforms，such as instituting village elections and improving the legal system，have provedinadequate.The CCP's failure to open up the political system and expand institutionalchannels for conflict resolution creates an environment in which aggrieved groupsturn to collective protest to express frustrations and seek redress.The accumulationof state-society tensions will eventually destabilize China ，especially becausethe dynamics that generate such tensions trap the CCP in a hopeless dilemma.Risingtensions increase the risks that any reforms，even implemented as remedies ，couldtrigger a revolution.Alexis de Tocqueville first observed this paradox ：repressiveregimes are most likely to be overthrown when they try to reform themselves.Thissobering prospect could deter even the most progressive elements within the CCPfrom pursuing change.
think again
Remedying China's mounting governance deficits should be the top priority ofthe country's new leaders.At present ，these problems ，brought on by the contradictionsof dot communism，are serious but not life-threatening.If the new leadership addressesthe institutional sources of poor governance，the CCP may be able to manage itsproblems without risking a political upheaval.The unfolding succession drama ，however ，will get in the way of meaningful change in the short term.Proposingeven 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 threatenthe sustainability of its economic development.The slow-brewing crisis of governancemay not cause an imminent collapse of the regime，but the accumulation of severestrains on the political system will eventually weigh down China's economic modernizationas poor governance makes trade and investment more costly and more risky.The currenteconomic 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 embeddedin the country's political system.Few appear to have seriously considered whethertheir basic premises about China's rise could be wrong.These assumptions shouldbe revisited through a more realistic assessment of whether China ，without restructuringits political system，can ever gain the institutional competence required to generatepower and prosperity on a sustainable basis.As Beijing changes its leadership，the world needs to reexamine its long-cherished views about China，for they maybe rooted in little more than wishful thinking.
Minxin Pei，Senior Associate at the Carnegie Endowment for International Peace，is completing a book titled China's Trapped Transition：The Limits of DevelopmentalAutocracy.！
来源：Foreign Affairs.Sep/Oct 2002.Vol.81
