The Chinese Governance System: Impressive Strengths and Appalling Flaws

by Pranab Bardhan

This is the 40th anniversary of the onset of economic ‘reform and opening-up’ (gaige kaifang) in China under the leadership of Deng Xiaoping, which eventually led to a dramatic transformation of its economy and global status. It is, however, remarkable that China’s current supreme leader, Xi Jinping, marked the anniversary in a speech in the Great Hall of People in Beijing mainly emphasizing the Party’s pervasive control. It is also remarkable that in recent years this leadership seems to have forsaken Deng’s earlier advice of tao guang yang hui (“keep a low profile”). In the flush of Chinese nationalist glory, Xi explicitly stated in the 19th Party Congress that China has now entered a “new era”, when its model “offers a new option for other countries and nations who want to speed up their development while preserving their independence”. Many people both in rich and poor countries seem to be already awe-struck by this model.

What are the special characteristics of the Chinese development model? Briefly, it’s a model of essentially capitalist development under authoritarian leadership and purposive governance, with a vertical production structure where basic capital goods are produced in monopoly state-owned enterprises and the much-larger rest of the economy is under private ownership, with a state-guided nationalist industrial policy and finance, with subsidized access to land and credit for state-favored business and repression of labor rights, massive investments in infrastructure funded by a very high national savings rate (particularly on account of large undistributed profits of companies), with rural industrialization in a decentralized framework of jurisdictional competition, and openness to foreign trade and acquisition and learning of foreign technology.  It has produced a rapid pace of economic growth over the last three decades and lifted hundreds of millions of people above the poverty line—undoubtedly a spectacular historic feat for any developing country. The recent slowing of the growth rate does not tarnish the long-term shining performance so far.

I have discussed some of these features of Chinese development, particularly in a comparative assessment with Indian development, in my book Awakening Giants, Feet of Clay (Princeton, 2013)—incidentally, I should mention here that when a Chinese translation of this book came out in Beijing, the translator thought it fit or prudential to take out, without my permission, some of the passages in the book that criticized Chinese policy, while those critical of Indian policy remained.

I believe the Chinese governance system is a crucial part of the China development model, and in this article I shall concentrate on its special features, both positive and negative, which tend to be overlooked in the simplistic discussion on authoritarianism vs. democracy that tends to dominate the usual observations on the system. Authoritarianism is neither necessary nor sufficient for some of those special features. In many ways these features undergirding the Chinese polity and economy are quite distinctive, and their roots go long back in history. I shall focus here on the aspects of governance that affect economic development and less on their clearly repressive police-state aspects and gross abuse of basic human rights.

Political Meritocracy

It is often pointed out that unlike in most authoritarian countries China has a political meritocracy. China’s dramatic success has now convinced even some western scholars—see for example a recent book by Daniel Bell, The China Model: Political Meritocracy and the Limits of Democracy—not to speak of the members of the Chinese elite– that in terms of performance Chinese political meritocracy can achieve as well as (or even better than) a multi-party democracy.

Not merely are officials in China selected on the basis of an examination system that goes way back in imperial history, their career promotion depends on how well the local economy performs. This works better than in, for example,  democratic India’s top administrative system, where promotion is based more on seniority than on performance, even though recruitment is on the basis of civil service examinations.

However, an immediate question arises: in the political system who defines what is ‘meritorious’ and what is not?

It is possible that what may look like meritorious performance to the Chinese Party elite and Zhongzubu, its Central Organization Department, may not be considered so by many others in the general population, particularly in a large country with inevitable diversities and conflicts of objectives. Not to speak of the outlying regions where performance by centrally appointed provincial leaders considered meritorious by the Party may not be judged so by ethnic groups like Tibetans or Uighurs.

In general, how do we know what people consider as meritorious without institutions of downward accountability?

One of the distinctive features of democracy is that the criteria of meritorious performance arise out of open public discussion. Thus how much of a political leadership’s performance is meritorious may include considerations of pluralism and inclusiveness in the decision process itself (to the extent it is not captured by elite interests in an unequal society). Democratic performance emphasizes the process as much as outcome.

In this process citizens in a democracy are not treated as children: what is good for them is not decided by a patrimonial leadership, as is the case much too often in China (or Singapore). This is valid even when the latter leadership is wise and benevolent.

Also in a democracy the performance criteria are much more multi-faceted reflecting the pluralist agenda—it is uncommon to reward an official mainly on the basis of the growth rate of the local economy—and thus the incentives get diluted and are less effective. The same thing is happening in China now when other criteria (like environmental goals) enter performance evaluation.

Performance vs. Loyalty

The general understanding is that career concerns of top officials act as a key determinant of economic growth at the local level, particularly the county and prefecture levels. And job rotation of officials at that level provides useful on-the-job training at diverse localities.

Of course such performance incentives also generate plenty of side income opportunities (for example, from sales of local government land or mining rights), which while helping local revenue also illicitly lines the pockets of officials.

What about the large numbers of the rank and file of public employees, who mostly remain in one place and for whom career incentives through promotion are not that relevant? The evidence suggests that they help themselves to all kinds of supplemental compensations, perks and benefits making up for low salaries.

In other authoritarian countries such systems of supplemental compensation sometimes degenerate into local loot and plunder—the proverbial extreme case is that of Zaire under Mobutu, where soldiers and bureaucrats were not paid but left to fend for themselves (this tradition largely continues in the Democratic Republic of Congo even today). It is likely that in China this system for the low-level officials was constrained from being excessive by the career concerns of their bosses, the top local leaders.

However, and this in not widely known, as one climbs up the political ladder to the provincial levels and beyond, the performance factor seems to diminish in importance in career prospects, and the factor of political connections assumes significance—this is suggested in an analysis by Pierre Landry, Xiaobo Lu and Haiyan Duan (2017) of a comprehensive dataset of political appointments at the provincial, prefectural and county levels. This is also supported by an analysis of the biographical database of all provincial leaders from 1978 until 2012 and their promotion patterns, by Fubing Su, Mengyue He and Ran Tao (2016).

There are also quid pro quo transactions in those promotions. Using data for over a million land transactions during 2004-16, Ting Chen and James Kung have recently shown that provincial Party secretaries in selling local government land gave firms linked with Politburo members nearly 60% price discounts compared to others, and in return such discount-givers were estimated to be 23% more likely to be promoted to positions of national leadership—in general the larger the discount the higher was the chance of promotion. The recent crackdowns have somewhat reduced the chances for such promotions.

In any case such a general structure of promotion has at least one implication compared to other countries: since performance incentives operate at least at the lower levels, higher-level leaders, even when they are selected on the basis of their loyalty to the current leadership at the top, are likely to have some measure of field-tested competence and experience.

This balance of performance and loyalty over an official’s career path leads to a major advantage that China enjoys in the minimum quality of its bureaucracy, compared to many other countries (including, say US or India), not to speak of many authoritarian countries where loyalty rules over minimum competence.

Of course, this also means that competent officials who are not sufficiently well-connected to the top current leadership in China may reach a ‘glass ceiling’. Some of them may then turn to alternative ways of earning rewards (including some corrupt ways). These corrupt ways have now been substantially curbed in the recent anti-corruption campaigns. There is even some evidence that high-performers connected to previous top leaderships were particularly likely to be investigated, although the campaigns went much beyond merely penalizing rival power groups.

In India meritocratically recruited bureaucrats can be manipulatively transferred from one job to another; the threat of transfer to undesirable jobs or locations often ensures loyalty to their political masters. The lure of post-retirement plum jobs for ex-bureaucrats assigned by political leaders also work to keep the former pliant.

There are many stories about vertical corrupt transactions in buying and selling of positions in the Chinese bureaucracy, some of which have been revealed in the recent anti-corruption campaigns, just as there are stories about corrupt deals between Indian politicians and bureaucrats in the process of ‘transfers and postings’.

In UK such manipulative transfers are less common. The system in USA, on the other hand, is characterized by high turnover of senior civil servants (long before firing by twitter under the current President).

The political-bureaucratic distinction particularly at higher levels is, of course, blurred in China, as the Party is supreme.

But even in western democracies the political control over senior appointments and promotions in public service has increased over time. Even in the UK, the insulation of career civil service has declined somewhat, and this insulation has always been much weaker in USA than in UK (or Denmark or New Zealand).

The issue of such insulation or autonomy pertains not just to the civil service, but also to the various regulatory bodies that any complex economy requires—like the entities that regulate public utilities (e.g. electricity, telecommunication) and apex bodies regulating monetary or environmental policy or financial markets. Decisions in such regulatory bodies need special expertise and some insulation from the day-to-day political pressures and some independence from political interference.  Such independence is of course lacking in the Chinese system.

Even in democracies the balance between autonomous experts and the need for periodic public review of their decisions to ensure accountability has been difficult to achieve, and populist movements are now questioning the role of experts. This is apart from the issue of regulatory capture (where the regulatory body itself is captured by the special interests of those who are to be regulated). In India genuinely independent regulatory bodies are more an exception than the rule.

Organizational capacity to foster technological innovations

China, of course, has been very successful in the ‘catching-up’ process of development, of learning and imitating off-the-shelf technology. (As Chinese students recently arrived in the US from China always tell me) in some day-to-day application and

enhancement of existing technology (mobile payment, e-commerce, transport, etc.) China is now more advanced than the US.

But in any future advances beyond the existing technological frontier China has a major advantage and a major disadvantage.

The advantage follows from the large size of the population and of the domestic market. Innovations that thrive on economies of scale, network effects and big data feedback loops will find hospitable ground in China.

The disadvantage for China follows from the lack of an open system that could encourage free spirit, critical thinking, and diversity (rather than conformity), which are necessary ingredients of many types of creative innovations. The current system of state promotion and guidance of globally successful large private technological enterprises is worth examining from this point of view.

Will the Chinese state allow the full forces of ‘creative destruction’ that the Austrian economist Schumpeter used to associate with innovations?

Are today’s successful incumbent firms (private or public) too big to fail?

What will be the role of venture-capital funds? (There are inherent problems of state-run or -controlled venture-capital funds).

It also depends on the nature of future innovations.

Some innovations are of the ‘disruptive’ kind that challenge incumbent firms (which the US private innovators in collaboration with venture capitalists are good at and a politically-connected large entrenched organization usually is not).

Other innovations are of the steady ‘incremental’ kind that adds up to significant gains (the Japanese call it kaizen), in which some large organizations in Germany, Japan and South Korea have excelled. It is likely that the Chinese system is more conducive to this incremental kind of innovations.

Upward vs. Downward Accountability

Apart from some degree of two-way accountability between the Politburo and the provincial officials, it is probably correct to say that the Chinese system is mainly one of upward accountability.

Downward accountability provides more political legitimacy to democratic governments, but such accountability can sometimes degenerate into pandering to short-run interests and pressure groups, particularly at election time.

Short-run cyclical official behavior before the Party Congress is not unknown in China, but in general it is much easier for leaders to take long-run prudent decisions under the Chinese governance system.

But a severe flaw of the upwardly accountable Chinese system is that mistakes in such top-level decisions or outright abuse of power take longer to detect and to correct (as the flow of information upward is tortuous or choked, and the tendency to cover up is often too strong).

The recent abolition of term limits for the President and the decline of the collective leadership that Deng had put in place will make this problem more acute.

In multi-party democracies the open adversarial relation between the government and opposition parties and the media (to the extent it is not hampered by commercial interests) usually uncovers the mistakes and abuses much sooner, and corrections are prompted by public protests, agitations, and ultimately electoral sanctions.

Business-Politician Nexus in Governance

Over the last quarter century, there has been a tight, often collusive, relationship between business and politicians in China. This is evident not just from frequent interchanging of positions between executives in public sector companies and the Party’s Central Committee, but some of China’s richest private businessmen are members of the National People’s Congress (China’s Parliament) and the People’s Political Consultative Conference, an important advisory body. (It has been estimated that the average net worth of the richest 70 members of the National People’s Congress in China is several times that for the richest 70 members of the US Congress or the Indian Parliament).  There are accounts of large “donations” made before such businessmen are selected for these bodies. This is apart from the top political families (“princelings” and their relatives) who have long been in lucrative business.

There are many accounts of resultant influence-peddling, policy manipulation, politically connected firms getting favors in loans from public banks and access to prime real estate, monopoly mining rights, etc.

Even to take an example from a different area, like public health, drug prices are usually much higher in China than, say,   in India, even though the single-payer system in Chinese health care should have given the government more bargaining advantage vis-a-vis the drug companies. People attribute this to the more entrenched kickback system between drug companies and doctors, hospitals, and officials in China.

It is likely that the business-politician collusion in governance, while rampant, is somewhat more subject to public scrutiny in India than China, and the courts are more independent in India (though clogged and corrupt, particularly at the lower levels).

It should, however, be mentioned that the relation with the all-powerful Party is somewhat precarious for the Chinese business tycoons, as any perceived political disloyalty is punished more harshly than in India. Indian politicians may be a bit more dependent on businessmen in view of the need for large election funding, much of the process being quite non-transparent (now abrasively so under the anonymous election bond system).

Decentralization and Structures of Local Accountability

Chinese political centralization (in the imperial authority in the past and in that of the Party in recent decades) has been historically tempered by a unique blending of political centralization with economic and administrative decentralization—another distinctive feature of the Chinese governance system.

The Chinese system has been described by the economist Chenggang Xu as ‘regionally decentralized authoritarianism’, in contrast with most authoritarian systems that are highly centralized.

India in some sense is the obverse—combining political decentralization (regional power groupings have been quite strong in recent decades) with economic centralization (the vertical fiscal imbalance in the sense of concentration of fiscal power in the central government, for example, is quite severe).

In general the fiscal system is much more decentralized in China, where sub-provincial levels of government tend to spend about 60% of total government budgetary expenditure, compared to less than 10 per cent in India (this is not including the large off-budget revenue-raising and expenditure of local governments in China). The much worse performance of sub-provincial local bodies in India is partly attributable to this (even though Chinese local governments have much larger responsibility for infrastructure-building and public services).

Jurisdictional competition for mobile resources and business and regional competition in growth rates influencing career promotion of officials have played a very important role in Chinese local development, to an extent unthinkable in India.

But in recent years the pace of experimentation and trial-and-error pilot projects in local areas, which characterized the early reform period, has slowed down in China. The current regime’s more centralized and loyalty-based leadership has made experimentation even more difficult. This is on top of the policy paralysis of a bureaucracy made nervous by the massive anti-corruption campaigns.

A growing literature in decentralization all over the world has pointed to the problem of capture of local governments by the elite (including officials and intermediaries) and the frequent diversion of benefits and resources to non-target groups.

In India there is plenty of evidence of local landed interests undermining decentralized welfare programs for the poor, apart from the provincial political administration and legislators hampering devolution of power to the elected village/municipal governments.

China’s more egalitarian land use rights distribution after de-collectivization may have prevented the rise of a landed oligarchy that has often captured local governments in parts of rural India.

However, in recent decades Chinese decentralization has not been able to avoid the problem of serious local elite capture.

Chinese local business in collusion with local officials has been at the root of problems of arbitrary land acquisition, toxic pollution, and violation of safety standards in food and in work for factories and mines.

Such collusion is much more rampant in China than, say, in India, primarily because China has fewer checks from below on abuse of power.

On safety standards, for example, Chinese coalmine death rates are reported to be many times higher than that in India. In general there is now evidence that politically connected firms in China have higher workplace fatalities.

There are also fewer checks on debt-fueled over-investment and excess capacity in state-controlled or politically connected firms (currently a source of major macro-economic problems in China). China’s central leadership is now trying to rein in the debt problem of local governments and their dependence on the shadow banking system.

Systemic Stability

One concern about the Chinese governance system is about the mechanism through which a system that can go off-equilibrium on account of various kinds of political or economic shocks is restored to equilibrium.

In the face of a crisis the Chinese state often tends to over-react, suppress information and act heavy-handedly, thereby sometimes magnifying the dimensions of the crisis. This also generates low tolerance for short-run economic volatility and the rush to reckless fiscal policies that exacerbate the staggering problems of capital misallocation that China faces.

The institutional mechanisms for structural reform have arguably become weaker as the resolution of internal governance conflicts is now more dependent on personalized channels.

There also remains the larger institutional issue that China has historically faced: how to institutionally guarantee the rule of a ‘good emperor’, as opposed to a ‘bad emperor’, or that of a good emperor not turning bad. The recent disruption in the conventions of collective leadership and the acceleration of the cult of personality in leadership can only worsen this problem.

As the economy becomes more complex and social relations become more convoluted and intense, the absence of transparent and accountable processes and the attempts by a ‘control-freak’ leadership to force lockstep conformity and discipline will generate acute tension, conflicts, and informational inefficiency.

Democracies based on pluralist foundations and institutionalized checks and balances are usually more resilient, although in recent days the strains in that system are also becoming much too serious.