Victor Shih: “This Cultural Revolution shock committed the post-Mao leadership to pursue decentralisation policies throughout much of the 1980s”

Mao’s rampages a driving force of regional growth

June 7, 2013

John Garnaut

The risks are growing that China, which underwrites the Australian economy, will succumb to a financial crisis. This has not sunk in for Australian policy makers, perhaps because the implications are just too large, but it is the view forming among a large number of investors and economists who watch the data and investigate ground-level conditions closely. It looks as though China is in the middle of one of history’s great credit expansions, and all that money is no longer generating growth in gross domestic product. The accelerator is pressed to the floor, the tank is getting low, but the wheels are not getting traction like they used to.

Uncertainties abound. Foremost among them: can China’s new leadership implement the bold economic reforms that will be necessary to get the vehicle moving? The answer depends on how you think Chinese policy decisions are made.

Research by economist Victor Shih and Chinese colleagues, who do not wish to be named, suggests that China’s enviable 35-year economic record has been shaped by historical forces and patterns that are much greater than the leaders who have traditionally taken credit.

They show how the underlying dynamism of the economy has waxed and waned in inverse relationship with the strength of the Communist Party’s central apparatus. When party central is weak, local economies have thrived, and when the centre is strong the regions have suffered.

This finding has enormous implications. One of the most intriguing conclusions is that the conditions for China’s post-Mao reforms may have been created by Mao Zedong himself during the Cultural Revolution, when he purged most of his elite colleagues and gutted the central apparatus.

“This shock committed the post-Mao leadership to pursue decentralisation policies throughout much of the 1980s,” Dr Shih says in his forthcoming paper Credible Decentralisation in Authoritarian Regimes: The Case of China.

A separate paper by Dr Shih and other Chinese colleagues takes the decentralisation findings further.

Anyone who has travelled around China to do business has seen the striking contrasts in economic performance between cities that appear to share similar cultural, geographic and policy characteristics.

Wenzhou and Ningbo, in Zhejiang, province are the beating hearts of Chinese private capitalism. But neighbouring cities in the same province, such as Quzhou and Huzhou, are not.

What do these thriving local economies have in common? The answer, according to the second

paper, Guerilla Capitalism, is they were all bases for local Communist Party guerillas during the 1930s and ’40s. These were viable only where local communist leaders forged a symbiotic accommodation with local private sector elites.

When the “southbound” troops from party central swept through China in 1949 – bringing their extractive tendencies – they had to reach accommodation with these local leaders. The central forces derived power from above, at party central, but the guerillas continued to be empowered from below.

This pattern of allegiance was maintained right through the Mao era because of a series of historical accidents. The guerilla leaders never got promoted, which meant their power base remained with local elites rather than central patrons. But they never got totally crushed by their southbound colleagues, either, thanks to their relative empowerment in Mao’s otherwise destructive rampages.

After Mao’s death, guerilla bases nurtured a foundation for thriving private enterprise where elsewhere it had been crushed. They did this by “imposing self-constraints on predatory behaviours, providing public goods such as localised property rights protections, and generating growth-enhancing institutions, formal or informal, to deliver visible economic benefits to their constituents, which guarantees robust long-term growth”.

Similar patterns can be seen in Guangdong province, where President Xi Jinping’s father pioneered reforms; Dongguan is the greatest export manufacturing centre in the world while, across the Pearl River delta, a “special economic zone” at Zhuhai has been left for dead.

The implications for today? Party central rebuilt itself for three decades until it reached a point where it could impose its will over local elites and suffocate their underlying dynamism. That meta-trend ended with the intersection of the global financial crisis and central leadership instability, where the game reverted to empowering and paying off local elites.

But this time they got credit, rather than the policy autonomy that previously nurtured economic reforms. The question now is whether the decentralisation trend will continue. If so, can Xi change the game by replacing the cash with local autonomy to retain local support, as his father did at Dongguan 35 years before?