"History is philosophy teaching by example." (Lord Bolingbroke)

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Saturday, February 18, 2006

China's Trillion-Dollar Crisis

Beijing takes on local-government mafias

Mafia-like societies still exist in China as they did under Soviet Rule in Russia and the former republics. Apparently in China a crisis is about to erupt, reaching deep ing the "very structure of power of the Communist Party: the bureaucracy," and could bring real problems to Communist Party rule.

Hiring thugs for dirty work has been an important tool of local administration in China. It keeps the police out of shady business and creates a dangerous liaison between high local officials and "black societies", mafia-like organizations that can be used for matters of "social concern" or for the private interests of officials. But they also can start a life of their own, growing independent from their former "official" masters. The use and encouragement of these thugs can then provide the environment for the growth of mafias, which next to the Communist Party itself are now the most efficient organizations in China. Therefore, in this environment, the mafias could in time become the most serious challenge to party rule.

The He Feng sentence thus had two goals: to signal to the whole country that Beijing will no longer turn a blind eye to blatant complicity with local mafias and, moreover, that Beijing will no longer cover up for local governments speculating on the sale of land against the interests of residing farmers.

Farmers have been run off their land by thugs for the benefit of entrepreneurs and local officials, sometimes one in the same. (Sounds like Chinese-style Eminent Domain to me!)

This land was then sold to real-estate companies and industries, which invested in them by building apartment blocks or factories, producing a final value of more than five times the sale price. The total amount is then about $3 trillion, an amount considerably higher than China's 2005 GDP. This may lead us to think that there is some serious overestimation of the phenomenon. But even taking a cautionary view, it proves that there is a huge economy that moves outside of the banking circuit.

Furthermore, it is interesting to consider where 90% of the sales profits go. More than $500 billion went into local coffers, feeding local administrations and their needs, and into the pockets of local officials. Taking a cynical view, bribes are partly necessary, as they motivate officials in favor of market reforms. With such a very concrete incentive in sight, the officials push for economic development rather than hindering it.

These officials and their cronies then give birth to new middle and rich classes in previously poverty-stricken farmland. However, since only a small portion of the sales money goes to farmers, they are left out of the process, possibly poorer than before. Had a higher price been paid to them, they would have had a little capital to start other activities.

The first order of business is to protect the pool of cheap labor that fuels China's export businesses. The second is to prevent local officials from "wandering too far off the farm," (no pun intended), as they could then become a danger to the central command in Beijing. A third is to keep the hands of police free from corruption, and, a surprise to me, to limit the power of the press.

Entrepreneurs exist in China exist in a gray area: not really legal but more and more necessary in today's changing and complex world.

China's system is complex and difficult to control:

As local officials are constantly in contact with farmers and entrepreneurs, they may have the opportunity to create new problems for the entrepreneurs and put the blame for these new troubles, as well as the old woes of the peasants, on the central government. Besides, they have some capital, that $500 billion accumulated over three years, to advance their cause and maneuver in the internal political arena, where money plays a rising role.

While these structural changes appear necessary, in the long run they could be dangerous for the country's stability. By redistributing money that otherwise would go to individual officials, the chain of command is broken. This is dangerous, as these officials need to feel that their personal interest is generally consistent with that of their country.

Certainly, even in the past there were differences of interest between the provinces and the center. But this situation involved various large entities and it was basically solved first by inviting representatives of the strong provinces into the Politburo, and second by constantly changing the heads of important provinces and cities. But in this case, the conflict is at a lower level: in districts, in counties, and China has thousands of them. It is impossible for the center to take care of the problems of every single district, and it is very difficult to monitor the rotation of officials in those districts. In fact, this new clash calls for a general reconsideration of the whole local-government bureaucracy.

In the short run, the party, which still has a very strong structure, will have no problem sustaining the stress. But the party discipline in the long run might not be enough. There is a classic historic example. In France in the 18th century, when the king tried to bolster his position against the power of the aristocracy, dominating the country and its administration, he sought the support of the newly emerging bourgeoisie. He created a conflict with the aristocracy but successfully concentrated the power in himself. Eventually, however, the growth of influence of the bourgeoisie and its conflict of interest with the absolute power of the king created the conditions for the French Revolution.

Read it all.

Why should we care what goes on in China? At one time we asked the same question about the Middle East. China owns trillions in American dollars and securities and much of what we buy cheaply at Wal-Mart is produced there. China has a huge land military force and a growing deep-water navy. Not only is China forging alliances with neighboring countries such as Russia and India, China is quietly gaining a presence in the Caribbean and other parts of the Americas. Analysts feel that China is gearing up to challenge the United States on all fronts.


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