In March Toward Capitalism, China Has Avoided Russia's Path

TIMES STAFF WRITER

If the Soviet Union always seemed like the terrifying embodiment of Big Brother to the West, then for years it was something of a big brother to China toward the south.

Inspired by the same Marxist-Leninist ideals that first took root in Russia, Beijing alternately held up Moscow as its role model and, in times of disillusionment, its nemesis.

But since the Soviet Union's collapse, China has come to regard Russia as one thing only: its worst nightmare--a country with a political system in disarray; a society in sometimes violent flux; and, now, an economy in free fall.

In attempting to remake itself from a Communist behemoth into a capitalist beacon, China has studiously tried to avoid the path of its onetime idol, preferring a more gradual approach to change. Over the last 20 years, the result has been shaky but mostly upward progress: steady economic growth, an emerging middle class, a new breed of entrepreneurs.

As world leaders and economists reassess the wisdom of free markets amid today's global turmoil, the China model--from the perspective of Russia's collapse and the pain in lesser Asian countries that wholeheartedly embraced capitalism--looks wise enough.

Yet even as Beijing silently congratulates itself on the wisdom of its go-slow approach, analysts say that historical conditions here have been nearly as big a contributor to China's improvement as current policy.

And as in Russia, major domestic reforms--especially China's latest efforts to shed its money-losing state enterprises and streamline its bloated bureaucracy--have brought about a whole new set of problems, making the final outcome of one of the most ambitious economic transitions in history far from certain.

"It is too soon to say whether China's reforms will succeed," Nicholas Lardy, an economist with the Brookings Institution in Washington, wrote recently.

Like Russia, China has struggled to redesign a planned economy into a market-oriented one. But even though both were Communist in name, the two countries launched their modernization drives at very different stages in their development.

"The Communist revolution in the former Soviet Union was over 70 years old; the Communist revolution in China was 30," said Harry Harding, a Sinologist at George Washington University. "The former Soviet Union was more industrialized; China was still an agricultural, rural society."

China embarked on its transformation when Deng Xiaoping, the nation's late "paramount leader," officially ended Beijing's isolation in 1978 with a series of measures designed to open up and liberalize the world's most populous country.

The enormous rural communes set up by Mao Tse-tung were dismantled. Peasant farmers were permitted to sell food on the private market. Two years later, the doors to foreign investment were thrown open in specially designated zones along the southern coast.

Setting the Stage

Radical Maoism was dead, discredited after the 1966-76 Cultural Revolution, one of China's darkest periods, during which hundreds of thousands of citizens were killed.

Ironically, however, many scholars now argue that some of Mao's wrongheaded policies actually fostered the political climate and infrastructure necessary for the success of China's long march toward capitalism--or, in Deng's wordplay, "socialism with Chinese characteristics." Fanaticism was replaced by pragmatism and a thirst for a new national direction.

"The Cultural Revolution deinstitutionalized the political system and de-legitimized the Communist Party in ways that made reform both necessary and more possible," Harding said.

Under Mao, much of China's economic decision-making and planning had already devolved to local authorities. After Deng's reforms began, local officials used their knowledge and the fledgling industrial development across China to push for rapid industrialization of the countryside through a combination of tax breaks and enterprising schemes.

Labor was cheap--and plentiful. Three of every four Chinese toiled in the fields and could be redirected into industrial jobs and big, capital-intensive projects. In the Soviet Union, by contrast, industrialization was largely complete when the Soviet empire collapsed, leaving 75% of workers scrambling for hard-to-find jobs in new sectors of the economy.

Chinese cities such as Shenzhen, the first of the special economic zones, mushroomed with activity.

Shiny new skyscrapers now rise from a robust manufacturing base. Millions of Barbie dolls roll off assembly lines into the eager hands of children worldwide. The population of Shenzhen, a onetime fishing village with 30,000 inhabitants across from the Hong Kong border, skyrocketed a hundredfold to 3 million.

Traders work the Shenzhen stock market. This year, foreign investment through July totaled an impressive $1.6 billion.

Much of the investment in Shenzhen and throughout the rest of China comes from a natural resource that Russia does not have: the ethnic Chinese around the world who still feel strong ties with "the motherland" and who have become one of China's primary engines for growth.

Whereas the Soviet Union splintered along nationalist and ethnic lines after its breakup, overseas Chinese, about 55 million in all, have remained remarkably unified through their common cultural heritage across boundaries of state and time.

"Hong Kong, Taiwan, Singapore and the Chinese diaspora in South [and] East Asia and North America are filled with ethnic Chinese entrepreneurs who have proved to be valuable sources of knowledge and investment and who have served as important bridges to the world economy," Andrew G. Walder, sociologist and specialist in China market reforms at Stanford University, observed in the China Quarterly magazine.

Amazingly, between 75% and 80% of all foreign investment in China (including money from Hong Kong) comes out of the pockets of ethnic Chinese across the globe, whose ranks boasted three dozen billionaires in East Asia in 1994.

Although the regional financial crisis has pinched some of the capital flow from the outside, economists say that money keeps pouring in at a fast clip.

In addition to abundant foreign investment, a comparatively low foreign debt--thanks to Mao's insistence on national self-sufficiency--has been crucial to China's revival as one of the world's major economies.

In stark contrast to Russia, China has not had to resort to crushing bailout packages by the International Monetary Fund to shore up its economy. While the government is struggling to keep expenditures in check as central tax revenue dwindles, Beijing does not need to devote huge resources to servicing short-term foreign debt; 80% of its debt is long-term, according to Hu Biliang, a senior economist with a French securities firm here.

Moscow, meanwhile, has buckled under the weight of $31.2 billion in IMF cash since 1992. And those loans have invariably come with political strings attached, reflecting one of the widest and most important divergences between China and Russia on the way to the free market: their different political systems.

For Russia, economic reform has gone hand in hand with political restructuring. At about the same time that Moscow relinquished its stranglehold on the economy, the Russian people also flung off the totalitarian Communist regime in one violent shudder.

Since then, prescriptions for a free market have been intertwined with efforts to build a free society. Economic shock treatment and the massive unloading of nationalized industries in Russia are bound up with ending the political monopoly of the Communist Party and building a raucous, but functional, democracy.

Beijing, on the other hand, represents the last great bastion of Communist control, a one-party dictatorship that oversees one-fifth of humanity. Its authoritarian rule has greatly loosened over the last two decades--some detect the signs of a civil society emerging--but the one-party Communist regime remains China's government.

As such, China's leaders can still rule by fiat, pushing through relatively unpopular measures when necessary, although the regime is careful not to push too hard lest it provoke a popular uprising such as the 1989 Tiananmen Square demonstrations. Even the ensuing massacre that year put only a temporary crimp in the economy, which flagged until Deng launched a "southern tour" of China in 1992 to jump-start greater economic liberalization.

Now many Chinese appear content to ignore the government so long as it allows some personal freedom, such as easier internal movement within China, and the liberty to pursue a higher living standard.

Beijing knows its legitimacy increasingly rests on its handling of the economy, and it has tried to help its citizens discover the truth of Deng's famous maxim: "To get rich is glorious." China's leaders are hoping that an economic overhaul is enough, without knitting it together with a political one, as happened in the former Soviet bloc.

"Where in Eastern Europe [economic] shock therapy and mass privatization are designed in part to dismantle communism and strip former Communists of power and privilege," Walder wrote, "in China gradual reform is intended to allow the party to survive as an instrument of economic development."

As a multi-party state, Russia is now full of vested interests jockeying for position. Politicians, elected by popular vote, must cater to them to stay in power.

The result has been a crony capitalism and democracy stage-managed by a handful of "oligarchs" behind the scenes, who have gobbled up the wealth and used it to wrest favors from Moscow.

So far, China has stayed largely immune to such stresses. But it has spawned a crony capitalism of its own that threatens the stability that the government is obsessed with maintaining.

Among those who have enriched themselves the most from Beijing's market reforms are not the laobaixing, or common people, but the families of high officials, who have used their connections to gain control of some of the most lucrative businesses in China.

Indeed, such corruption was one of the main grievances that drove the laobaixing to Tiananmen Square in 1989, marching for an end to Communist Party privilege and nepotism.

Fighting Corruption

The issue still ranks as China's No. 1 public beef. Frustrated locals and foreigners alike complain that preferential treatment for party "princelings" or through money passed under the table kills competition and undermines their ability to do honest business.

The Asian financial crisis has put enormous pressure on the government as exports have slowed and the economy tightens. Production surpluses in industries such as steel sit untouched in huge stockpiles. Devastating flooding across China has made government promises of an 8% economic growth rate this year ring hollow.

Unemployment, officially at 3.5% but probably higher, is rising as local authorities eagerly shed their small and medium-sized state-owned enterprises at a speed the government was evidently not prepared for. In some cases, the enterprises were sold for pennies on the dollar to friends and relatives of local officials, though not on the scale of the "false" privatization in Russia that concentrated assets in just a few hands, analysts say.

"There are as yet no media moguls like [Boris] Berezovsky or energy czars like [Viktor] Chernomyrdin, but localities are seething with resentment against those who appropriated local collective enterprises over the past five to 10 years," said Douglas Paal, president of the Asia Pacific Policy Center in Washington and former National Security Council senior staffer under Presidents Reagan and Bush.

Last month, in a sign of growing alarm, the Communist regime issued an official editorial calling for a halt to "blind selling of state-owned firms."

"Leaders in some localities have simplified these serious and complicated reforms, and have taken them to mean merely selling such enterprises," the New China News Agency said. Local authorities should "carefully study" the proper guidelines regulating such sales, it added.

With joblessness on the rise, Beijing has backed off from ambitious plans to make residents buy their own homes and to slash China's bureaucracy in half, a potential loss of 4 million jobs.

Worker protests have already broken out, from Sichuan province in central China to Heilongjiang in the northeast, but are not reported in the official media.

These days, no one is willing to write off China as a potential economic success story, but pessimism hangs in the air among economists and some citizens here over the current state of China's gradual, multi-pronged reform program. It seems clear, however, that the Russian strategy is not an alternative.

"There probably are no panaceas in this world," said Harding. "Neither the Russian model nor the Chinese model is perfect. Or, as the cynic once said, 'The grass is brown on both sides of the fence.' "

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