In the Barracks, Not the Markets

Chinese President Jiang Zemin is right in his bold decision to order the People’s Liberation Army out of commerce and industry. The world’s largest army runs a business empire that generates $10 billion a year. But its economic clout--and corruption--has become a problem in China’s march to modernization. Jiang cannot succeed in adapting China to fast-changing economic realities if the men in uniform and their families insist on hanging onto commercial ventures that are shielded from competition and resented by civilian companies because of the preferential treatment they receive.

Jiang--the first leader since the 1949 revolution without a military background--apparently is confident enough in his power to have ordered the military to divest its businesses as part of a nationwide crackdown on smuggling. He said the smuggling was being perpetuated by segments of the Communist Party, the government and the army. In this extraordinary public acknowledgment of corruption in public sectors, the president also said that all party, law enforcement and government offices would have to sever ties to companies they now own.

Whatever the political motives of the president’s anti-smuggling campaign, its economic implications are many. Smuggling costs the government more than $12 billion annually in lost tax revenues, according to the New China News Agency. Asia’s financial crisis has contributed to the rise in smuggling, which in turn has led to falling prices and oversupply.

The turmoil accompanying China’s internal economic adjustments has also stifled Beijing’s quest for growth and thrown many workers out of jobs. Premier Zhu Rongji, who heads a task force established earlier this month to crack down on smuggling, says the government needs to find sources of revenue for a mammoth spending program to spur economic growth and create jobs to replace those lost when inefficient state-owned enterprises were closed.

Ironically, a shakeout in military-owned businesses, which sprouted in the 1980s as defense appropriations were slashed, could exacerbate economic problems. But whatever the short-term hardships, China will march further along the capitalist road if Jiang succeeds in dismantling army businesses, rooting out corruption and creating a more transparent way of doing business.