China’s socioeconomic system: challenges ahead

Shahab Sabahi

Energy and Environment for Development – Policy Analysis Research Group

China has managed a complex transition from centralized planned economy to some sort of open and dynamic economy with outstanding competence. China has exhibited an effective managerial style in adopting a series of realistic macroeconomic policies and foreign policies over the course of two decades. China’s governmental system has shown a quality for making quickly complex decisions in the context of globalization and when crises hit socioeconomic structure.

However it may be a question that China’s model a version for capitalism would be reliable and sustainable forever? Can it transplant in other part of the world with hopes to get the same outcomes?

It may be only a suitable model in regions inside East Asia where the Chinese cultural values are dominated. The model is strongly based on the Chinese political philosophy whose principle is embedded in government building and limited the people participation in macro decision making process.

The model cannot be sustainable in the long term. Neither export –driven growth nor the top-down approach to decision making will keep yielding positive and desirable results forever. By blocking open discussion about upcoming public policies, stopping any independent exploration and investigation on the failed public policies, in public, the socioeconomic system would not receive any feedbacks to rearrange itself. It translates that the entire socioeconomic system will lose its consistency and converges to its decay.

For more than 2000 years, China’s political and socioeconomic system has evolved around China’s chronic issue, lineage and kinship preference in social interactions. The Chinese moral philosophy had shaped around the objectives which could build, based upon a just, fair and quality government to address this issue. It was believed that then this government could guarantee a steady state for China’s socioeconomic system.  Now China is rapidly growing. The absence of public debate may be swept under carpet, power abuses committed in the middle and low level of the government’s hierarchy system. It can ignite the public anger which will cost the government. It should be kept in mind that the Communist Party has committed to equality with distribution of wealth over the society.

Economic growth will create middle class. If we assume the Chinese middle class, its number increasing, will behave in the way middle class do in other part of the world, this phenomenon will be another source of internal pressure. Middle class may not compromise social status and political participation with money.       

These arguments suggest that China’s model for socioeconomic system is not sustainable. It works in the time of crises, but not forever. It could survive, IF the export-based growth share lowers and replaced with more domestic consumption growth, however it puts the national security of China at stake (middle class pressure). Also China needs more cultural influences beyond its boarders. Besides being determined in foreign affair, a strong state should appear decisive and tough in collecting tax. In long term people will say “No Tax without participation”.  

Powerful state capitalism - Chinese version of capitlism

Shahab Sabahi

Energy and Environment for Development – Policy Analysis Research Group

Economic redistribution, tax preference regime and austerity are new socioeconomic measures that politicians and people are circulating these days. They, with ideological bias, favour one these measures and claim that they get the fittest strategy to solve today’s crises. Some says “it is not rocket science”. Other put its blame on lack of political wills. One views Wall Street as the source of the crises.

Indeed. it is not easy as it may seem. I wish it would have been a rocket science, and then human being could quickly come up with a solution. The problem falls in the realm of social science and it should deal with a big variety of individuals’ interests and behaviours. It enormously contributes in the complexity of the problem.

It is a general consensus that Liberal democracy is the default ideology around much of the world today. In part because it is facilitated by certain socioeconomic structures. From liberalism perspective, one can formulate an abstract framework and prescribe based upon a straightforward solution such as tax cut. Or one with more sympathy to democracy may prefer taxing riches the most and one from the far-left advocates economic redistribution. Despite liberalism offers a well-built socioeconomic structure which has well performed in national and regional levels in developed countries, in our day’s challenges liberalism faces difficulties particularly when its socioeconomic structure is implemented in global scale.

Let me add the liberal foreign policy dimension to the standard assumption which is made by liberalism in regional level. The mobility of money and workforce has lubricated international investments and trade. It has contributed significantly in improving standard of life globally!! This move has generated enormous profits for investors and also increased the number of world-class milliners. It has generated middle class in developing countries while new classes in developed nations emerged in the vacancy of the past middle class. It draws new division lines in labour market.

They are all the fantastic side of a liberal foreign policy.

To analyse some implications of what liberals or liberal democrats prescribe, I take a global perspective and look into the issue in the context of globalization.

Liberals with far-right tendency prescribe tax cut. Giving the above mentioned context, when investors and riches can easily invest WHERVER they wish, at any points of the world (quite literally) where tax level is as low as zero, and can reside wherever they love,

§               HOW can an old fashion tax code in national level which does not accommodate the realities of our days, be effective?

Developed nations have long restructured their economies. New social classes have emerged and political parties are overwhelmingly polarized

§               How can an old fashion tax system guarantee distribution of wealth? Or in fact which wealth? (Liberal democracy advocators’ prescribe falls short)

One of the credits, in the idea of liberalism, is Strong State. It, side by side with the rule of law and accountability, has long proven the sustainability of states. No matter the size of government, strong state is needed to guarantee tax collection, existence of social benefits and services, and the solidarity of nation.

England’s Glorious Revolution was the starting point for modern liberalism. It created a strong state and the constitutional principle that state could not legitimately tax its citizens without their consent. And citizens without paying tax, were not included in.    

Given globalization and mobility of money, lack of a strong global governance and institution, political polarity (and all facts counted above),

§               Does one expect imposing/cutting tax would help to sustain economic growth in developed world?

§               Can one hope a strong state emerge with sufficient authority to collect tax?

§               Can one see a day when states would not owe any penny to private creditors?

Liberalism has always been the finest ideology that has provided a suitable platform for human beings to live up their needs and realize their dreams. It explains why liberalism has been and will remain the default ideology. HOWEVER there is a chronic problem with liberalism as the conservative economist Joseph Schumpeter wrote in his 1942 book Capitalism, Socialism and Democracy, that capitalist society was culturally self-undermining.  

So it won’t be easy to solve financial crisis with the means of tax in the context of globalization, unless capitalism can adapt with external forces…..It would be critical moment to chose, being Whig, China-like capitalism, adapt realism and…..or…..