China And Stability

Western attitudes toward China tend to oscillate between two extremes, often
with confusing rapidity. Not too long ago China was widely portrayed as an
emerging military and economic threat to the West. Its total economic output was
projected to surpass that of the United States in two decades. Its military
modernization was expected to provide China the capability to project its power
far beyond its borders (and the recent Cox report on nuclear espionage has
revived those concerns). And its authoritarian regime was supposed to be able to
retain its grip on power for a long time. Nowadays, however, the speculation
about China’s future has generally inclined toward pessimism. The influential
British magazine The Economist openly speculated about the break-up of China in
its last issue of 1998. Not long before that, the same publication ran a cover
editorial opining about the imminent collapse of the Chinese economy. And in a
speech delivered in April of this year, President Bill Clinton warned of the
dangers of an unstable China which failed to reform. Even within China, signs of
danger and nervousness abound. Arguably, the Chinese government now faces the
most severe challenge since the Tiananmen Square demonstrations a decade ago.

Unemployment is rising at a frightening rate. Several key anniversary dates
fraught with symbolic and real political dangers (such as the 50th anniversary
of the People’s Republic, the 10th anniversary of the Tiananmen Square
crackdown, and the 40th anniversary of the uprising in Tibet) have prompted the
government to maintain a tight watch over the country’s tiny dissident community
lest something akin to the 1989 movement break out again. In my judgment, the
current pessimism about China’s short- term prospects is as exaggerated as the
previous optimism about its long-term economic outlook. In fact, China is likely
to retain its short-term political stability despite many signs of potential
turmoil, but will face rising instability if the regime fails to undertake
significant political reform in the next decade. CHINA’S CURRENT DIFFICULTIES
While parallels between the problems China faces today and those it confronted
during the Tiananmen crisis a decade ago may be alluring, they are misleading.

In 1989, the Chinese Communist Party (CCP) faced a genuine crisis of political
legitimacy, which had its origins in 1978-79, when the leaders promised, but
repeatedly failed to deliver, political reform. By contrast, the challenges
confronting the Chinese government today are primarily economic, although
weaknesses in the political system make potential solutions more elusive.

Specifically, China’s economic difficulties today originate, externally, from
the aftermath of the East Asian financial crisis (falling exports and foreign
direct investment) and, internally, from weak consumer demand and severe
structural problems. The internal problems are far more daunting than the
external. It is well known that China’s two most perilous economic challenges
are an insolvent banking system (which has total bad loans of between 25 and 30
percent of gross domestic product) and rising unemployment due to the
restructuring and privatization of the loss-making state-owned enterprises (SOEs).

Many analysts believe that the latter poses the clearest threat to the Chinese
government, because any unrest by the unemployed, who are concentrated in urban
areas, would lead to a political crisis akin to the Solidarity movement in
Poland in 1981-82. Given the sheer numbers of unemployed and underemployed
people in China, this analysis is not without merit. The official China Daily
reports that, among urban dwellers, unemployment is about 11 percent (or 16
million people). In addition, as many as 120 million rural laborers are
considered underemployed. However, unemployment alone is unlikely to generate a
high level of political instability and is even less likely to bring down the
regime. (Can you recall the last time a regime was toppled by unemployment?) In
analyzing the political consequences and implications of economic crises, we
must understand that not all economic crises are created equal. Although all of
them are nasty and harmful to the societies they hit, they produce different
political outcomes because their effects are filtered through the political
system differently. In the case of high unemployment, its impact on political
instability tends to be limited for two reasons. First, unemployment principally
affects only one segment of society, namely, manufacturing workers. It would be
difficult for these workers to find political allies in other sectors. In China,
workers being laid off from SOEs are viewed as industrial aristocrats who have
had it pretty good for the last fifty years at the expense of the other segments
of society. Second, the ranks of the unemployed are relatively fluid. Many
unemployed, especially the most able, can