delanceyplace.com 4/12/11 - the fragile legitimacy of china's leaders

In today's excerpt - at the very moment that China has surpassed Japan to become the world's second largest economy, its leaders face questions of their own legitimacy and authority -- against a backdrop of a still-fragile global economy and an overdependence on exports. It is these leaders that must navigate the perilous path between inflation and real estate and stock market bubbles on the one hand and a pronounced domestic recession and high unemployment on the other, and it has left these leaders cautious and insecure regarding their own authority to make the necessary policy decisions:

"Chinese policymakers are rightfully concerned about asset-price bubbles and their aftermath, the balance sheet recession. Many ... are studying how Japan used fiscal policy to keep the economy going in spite of the massive fall in asset prices after the bubble burst.

"But today's fourth-generation leaders were not elected democratically, did not participate in the revolution, and have not achieved major successes on the economic front. As a result, they constantly face questions about their legitimacy. That has made them extremely cautious and prevented them from taking risks.

"Someone with [former leader] Deng Xiaoping's charisma and achievements could easily decide to move exchange rates or tax rates 10 percent in one direction, and, if that did not work, move 5 percent back. But none of the current leaders could afford such a mistake. A senior policyinaker once told me that: 'Ordinary Chinese do not think we are special -- they see us only as lucky people who happened to be at the right place at the right time, caught Deng Xiaoping's eye, and were elevated to power.'

"When setting policy, therefore, these policymakers seek the assurance that anyone in their situation would have done the same. On the issue of renminbi revaluation, for example, there are alternative policies that would also reduce the trade imbalance with the U.S. -- setting targets designed to boost imports from the U.S., say, or lowering the VAT rebate on exports. Given these alternatives, Chinese officials can revalue only if it is concluded that raising the currency's value would be a better option for China than all other alternatives. This kind of decision-making process takes time, particularly when the policy shift is a major one, because the leaders cannot risk a mistake.

"The officials' need to provide theoretical justification for their decisions sets them apart from past generations of Chinese leaders, and explains why academics have such high social standing in China today. Academics are critically important to the government for their ability to offer advice, design and run quantitative models to justify that advice, and conduct empirical studies. But their involvement also creates significant delays in the policymaking process. ...

"Another major problem facing the country -- and one that is directly linked to the legitimacy of the current government -- is the income disparity between the rapidly growing [wealthier] coastal areas and the [poorer] interior and rural regions. The legitimacy problem itself can be solved with elections because the elected representatives will then be able to claim that they were chosen by the people. China's senior leaders understand that, ultimately, this is the only way the legitimacy issue can be resolved. The problem is that, at present, only the 400 million people living along the coast, and not the 800 million in the interior, have benefited from economic reforms. Hence the income gap.

"If elections were held today, the 800 million who are unhappy with the current system would devour the 400 million who have prospered, causing the nation's reforms to collapse. If reforms and liberalization are to continue in an orderly fashion, therefore, elections will have to wait until this 8:4 ratio is reversed. Given that it took twenty-five years for the first 400 million to benefit from the reforms, this process will probably take another twenty to thirty years. But China's external imbalances have already reached the point at which immediate action is required. So while the nation's economic development will doubtless continue, it is also triggering a variety of domestic and international problems.

"The senior Chinese leaders I have spoken with demonstrated an excellent understanding of these issues. The people responsible for managing the economy are some of the most capable people in the world -- it almost seems as though the quality of the people available at the top is proportional to the size of the pool from which the nation has to draw."


author:

Richard C. Koo

title:

The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession

publisher:

John Wiley & Sons

date:

Copyright 2009 by John Wiley & Sons (Asia) Pte., Ltd.

pages:

245-247
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