From talking to friends much more knowledgeable that I am it seems that the 17th CPC Plenum, which will be opened next week, is turning out to be much more fractious than expected, and it is not clear that it will lead to a resolution of factional infighting.There will be no clear victory, apparently, for either of the major factions.
I can't comment on other aspects of what a divided leadership will mean, but I do worry that without clear lines of responsibility and control it may take longer than ever to resolve the large and growing imbalances in China's monetary condition. There seems to be a fight between those on the one hand who worry most about the consequences of excess financial expansion and those, on the other hand, who don't want anything done that might slow down employment growth in the near term.
As I see it, to take the bull by the horns and start applying the brakes is a no-win solution. If you are unsuccessful and overdo it, thereby precipitating a crisis, you will be blamed for it. If you are successful and save the country from a financial disaster, but do so at the cost of a short-term rise in unemployment, you are still vulnerable to criticism. You can't prove that you averted a crisis but you certainly can be blamed for the misery you caused.
In that case, there is less reason to take the risk of addressing the problems directly. Instead of simply convincing your boss that something must be down, and that there will be a cost to doing it, but that the cost is much less than the consequence of not doing it, you have to avoid getting blamed for any downturn. Even if what you do is right, if it allows your factional enemies to undermine you it is better not to do it.This cannot be a good thing if you believe, as I do, that some very difficult decisions need to be made as quickly as possible and then implemented without hesitation.
One of the more interesting papers I've read on the Communist Party of China's internal structure is "One party, Two factions"
http://www.carnegieendowment.org/files/Li.pdf
I'm less concerned about "factional infighting." There has been factional infighting in the Communist Party since 1978, and it's been more healthy than not. What has happened is that over the last several decades, the existence of factions has assured that a problem gets looked at from all angles, and that decisions are made slowly and incrementally.
First of all, I don't think that who is or is not in the Politburo will make a huge amount of difference as far as economic policy goes. The driving factors for PRC decision making are mostly institutional rather than personal.
Second, when dealing with complex systems like economies, I think it is almost always a bad idea to implement decisive political changes without a lot of discussion and consensus. The reason for this is that arguing about an issue gives you some broader perspective and also makes more much more subtle and sophisticated policy. The need to preserve employment is a valid policy goal, and I've found that in arguing about an issue that you often end up with creative solutions. The thing that makes policy tricky is that you never will know what happened if you didn't undertake a policy. Yes, maybe by boosting unemployment, you end up avoiding the disaster. Then again maybe not. it's possible that one's economic principles were wrong in the first place, and by boosting unemployment you just made the problem worse.
Something that is important is that Chinese decision making leaves under the shadow of the Great Leap Forward and the Cultural Revolution. Saying that some massive pain is necessary in order to avoid disaster insure a great future is something people heard before, and are really skeptical of now. Sure your theory says that we might do X to avoid disaster Y, but maybe your theory is wrong.
Finally, in a situation where you have real economic growth, it makes sense to delay difficult decisions until later, because the longer you delay the decision, the more economic growth you have, and the more economic growth you have, and the more options you have for fixing the problem. Also making a difficult decision generally leads to new problems and new difficult decisions.
The entire history of Chinese economic reform since 1978 has been the history of political compromises and delaying difficult decisions for as long as possible. In hindsight, I think that this has been a wise move since there are things we now know about the Chinese economy that we simply did not and could now have known in the past. For one to argue that this time "bold decisive action" is necessary, one has to explain how "this time is different." And since 1978, there has been no shortage of people arguing that "this time things are different." I don't think they are, and the key thing that makes things the same is that we don't know what is going on.
Reading back since 1978 there have been a whole slew of papers that have argued "China is doomed unless they give this incremental approach to reform, and take bold action now" and in hindsight these papers have been wrong and the course of action suggested by these papers would have been sub-optimal for reasons that were unknown at the time the papers were written. One thing that is humbling is to go back in time, and read papers that describe policy suggestions at a point in time pretending that you know only what people knew them. It's amazing what people just got wrong, and there is no reason to think that we are going to be less incorrect with our own predictions of the future.
If you go and ask most people in the Chinese bureaucracy what the key to Chinese success has been, I think that the answer is not in particular decisions, but rather in a philosophy and a mode of decision making.
"Seek truth from fact" (which by the way was a phrase used first not by Deng Xiaoping but rather a 17th century Chinese philosopher) means "don't seek truth from theory" whether the theory was written by Karl Marx, John Maynard Keynes, or Milton Friedman.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (2) for "Difficult decisions postponed?"
- 10/7/2007 1:48 PM
November, 2007