State capacity and the income tax

State capacity is a difficult concept to make concrete: a government’s ability to do stuff is obviously important, but how to tell if it is high or low? As a useful overview over at the Broadstreet blog shows, the most common way to measure state capacity in general is to measure fiscal capacity: the government’s ability to extract revenue from the economy. This makes sense historically, as the growth over the last few centuries of governments’ ability to do things like wage wars and provide social benefits went hand-in-hand with the development of tax systems and debt markets.

For the 20th century onward, the authors suggest a more precise metric: “To measure the fiscal capacity of the modern state, we use the share of income tax revenue in total tax revenue, as the collection of the income tax calls for high administrative capacity to ensure compliance.” This is an interesting choice, as on this measure China is a real edge case. Taking a quick look at the OECD Global Revenue Statistics Database, which covers over 100 nations, here is a list of the dozen countries with the lowest share of individual income tax revenue (for China only a 2019 figure is available, the others are the average of 2015-19):

CountryIndividual income tax,
share of tax revenue
Côte d’Ivoire0.3%
Antigua and Barbuda1.8%
Costa Rica5.7%
Source: OECD Global Revenue Statistics Database

A measure of state capacity on which China underperforms Nicaragua and Mali is probably a measure that is not capturing some important dimensions of actual state capacity. To take just some of the most obvious physical manifestations of administrative and technical ability, the governments of the other countries on this list are not operating their own rovers on Mars, or managing massive numbers of infrastructure construction projects both domestically and across borders. And whatever you think of China’s zero-Covid policies, it is unquestionable that local governments are displaying extraordinary logistical capabilities in organizing the mass testing of millions of people on short notice. The common claim that these policies demonstrate “China’s strong capacity for resource mobilization” is certainly correct (whether resources are being mobilized in the best way is another question).

Why does this measure get China wrong? To some extent, the focus on income taxes overly privileges a particular set of institutions as representing capacity. The actual structure of taxation reflects more than just administrative ability: which taxes are levied is a political decision. In recent decades, China’s government has consistently made the political decision to exempt most of the lower classes from income taxes, and to tolerate plenty of tax evasion by the upper classes.

It would indeed be difficult for China to build the administrative systems to levy a more broad-based income tax, but probably not impossible. China has, for instance, successfully administered a broad-based value-added tax for more than two decades. If you were to rank countries instead by the share of value-added taxes in total taxation, then China’s share of 30.2% would put it comfortably above the OECD average of 20.3% (and the US, of course, would be at the bottom with zero, as it has consistently made the political decision not to levy a VAT).

Nonetheless, there is still some useful information in the fact that China is an outlier in terms of this particular measure of state capacity. It suggests that the nature of China’s state capacity is different from that of your common or garden-variety Western social welfare state. The Chinese government’s ability to extract and mobilize resources does not work primarily through formal fiscal channels. It is well known that off-budget instruments like local-government land sales and the operations of state-owned enterprises are extremely important in the economy.

More broadly, both the strengths and the weaknesses of the Chinese state are tied up with its peculiar institutional structure and political heritage. China is a Leninist party-state that penetrates the private sector and civil society, operates more through political directives than formal legal instruments, and regularly undertakes mobilizational campaigns to achieve society-wide transformation. The capacity of its Leninist institutions is hard to measure precisely because they often hide behind conventional state forms, but is no less real for that.

What’s behind China’s boom in company formation?

Here is an interesting empirical fact about the Chinese economy that does not easily fit into the usual narratives: under Xi Jinping, more new private-sector companies are being created every year than at any period in its modern history. This of course is exactly the kind of factoid China’s government regularly trots out to demonstrate the vitality of its private sector. In March, the People’s Daily published a front-page article extolling the fact that the number of private companies had quadrupled from 10.9 million in 2012, when Xi took office, to 44.6 million in 2021. (I don’t actually read the People’s Daily every day, but I do subscribe to Manoj Kewalramani’s invaluable Tracking People’s Daily newsletter). Company formation is one of the ways of tracking what is usually called business dynamism: how much entrepreneurial activity is happening in an economy.

The figures are even more interesting than the propagandists seemed to realize. While the official publication of company registration data has been intermittent at best, the People’s Daily article and accompanying chart allow some of the holes in that published data to be filled in. The combined data provide a picture of private-company formation in China over roughly the past two decades. Before 2012, the population of private local companies was increasing by around 1 million or less every year (this is the net increase; there is even less data available on the gross number of new company registrations). Net company formation accelerated over 2013-15, and since 2016 has been running steadily around 4 million or more per year. There’s been an even more dramatic acceleration in the formation of new sole proprietorships (getihu: not companies with a separate legal existence, but businesses run as part of a household): the net increase was over 10 million in both 2020 and 2021, up from around 3 million in 2021.

That is a pretty dramatic change in the trend. The cause is well-documented: a systematic official effort, beginning around 2014 and continuing through the present day, to lower the costs and simplify the process of forming new companies (I wrote a piece about it back in 2014). The OECD is one of the few organizations that have attempted to systematically evaluate the effects of these changes (the much-maligned Doing Business survey of the World Bank was another). Here is some commentary from its just-published 2022 Economic Survey of China, which quantifies the administrative burdens on start-ups relative to other countries:

Enterprises in China are subject to somewhat lighter burden than in the average OECD country, though higher than in Japan, Germany or Italy. In some major non-OECD economies, such as Brazil or South Africa, the burden is much higher than in China. … Only one institution needs to be contacted to start a business in China, compared with the OECD average of around four. This is the same as in the frontrunner countries of Australia, Canada, Greece, Korea, Latvia, Lithuania or New Zealand, where to set up a new firm it is also enough to contact a single institution. There is neither minimum capital requirement nor monetary costs for registering a limited liability firm in China, which is in line with the best practice in OECD countries.

Substantially reducing the barriers to company formation to close to rich-country levels is a pretty decent accomplishment. It’s not a bad legacy for Premier Li Keqiang, whose signature initiative this has been and who is finishing his last year in office. What’s curious, though, is that the enormous boom in private-company formation in recent years has not had very visible macroeconomic effects. Economic growth is not any faster: growth in labor productivity has averaged 6.6% annually in the seven years since 2015, compared to 8.4% in the prior seven years. Of course, a lot of factors have combined to slow China’s economic growth recently, so growth might have slowed even more without this boom in company formation.

But there also hasn’t been any noticeable change in the structure of national income. Since barriers to company formation have fallen, and the pace of company formation has increased, we might reasonably think that a greater share of economic activity is now taking place inside legal corporate entities rather than in the informal economy. Yet the share of corporate profits in national income (technically, gross operating surplus in the fund of flows) has remained basically unchanged around 26% since 2015. Business profits generated by households rather than companies (through sole proprietorships, getihu), have also been stable around 5% of GDP. (The chart below uses the OECD’s presentation of China’s flow of funds, which is more standardized and easier to interpret than the one published by the National Bureau of Statistics; thanks to Bert Hofman for the pointer).

In other words, although the population of private companies in China has gotten much larger, the share of economic activity generated by those companies has not. Some of the increase in private company formation could thus be because it is now easier for people to create multiple corporate legal entities, rather than because there has been a true increase in the rate of entrepreneurship.

The flow of funds data goes only to 2019, and so doesn’t show what happened during the two pandemic years of 2020 and 2021. By all accounts, these were horrible periods for small businesses in consumer-facing services like restaurants and tourism. They lost huge revenues during the initial lockdown of 2020, enjoyed a few months of rebound in the latter half of 2020, and then settled in for months of disappointment in 2021 as waves of intermittent Covid restrictions discouraged travel and recreation. Things have obviously gotten even worse in 2022. Data from OECD countries show that new firm creation generally fell substantially in 2020, so the fact that in China net company formation actually picked up is surprising. Of course, China’s pandemic economic trajectory in 2020 was quite different from the OECD countries. But it’s also possible that the well-documented mass closures of small business during lockdowns are not fully showing up in the company registration data: companies could stop operating without canceling their registration. (Friends who have companies in China tell me that canceling your registration is difficult and time-consuming and often not worth the bother.)

The biggest surge in registrations has not been for private companies but for sole proprietors/getihu: the pace in 2020-21 was roughly double that of 2015-16. Because sole proprietorships have inherent limitations to scale (they can’t hire more than a few people) and no limited liability, they are usually more of a vehicle for self-employment. The desire to be an entrepreneur can be a reason to choose self-employment, but in developing countries like China, self-employment is often the result of a lack of more stable job opportunities. It can also be the channel for more modern forms of unstable employment: drivers for delivery and ride-hailing services often register as sole proprietors, which makes them contractors not employees. The increase in sole proprietorships does appear to be part of a broader structural change in China’s employment patterns: an important 2020 article by Scott Rozelle and colleagues documents a sustained rise in the share of employment in informal, low-wage service sectors.

It’s certainly not a bad thing that it has become easier for Chinese people to establish companies. But the rather ambiguous economic evidence suggests that the surge in private-company formation over the last several years is not a simple story of rising business dynamism.

Hong Kong in 1945

The backstory to why Hong Kong ended up still being a British colony after the end of World War II is interesting, and I did not previously know the details. At the time it probably appeared to be a small matter, but it did have big long-term consequences. This account is a from a recent review essay by Stephen Kotkin, Stalin’s biographer, in Foreign Affairs:

Arguably, with the exception of the Soviet capture of Berlin in May 1945 and the stern telegram that U.S. President Harry Truman sent to Stalin in August of that year warning him not to invade Hokkaido (one of Japan’s four main islands), the physical reoccupation of Hong Kong by the British in 1945 exceeded any other wartime episode in its strategic implications.

When Japan’s surrender suddenly appeared imminent in the summer of 1945, surprising Washington, the Truman administration hastily accelerated work on a plan for the hand-over of Japanese-occupied territories and assigned the acceptance of Japan’s surrender of Hong Kong not to the British but to Chiang Kai-shek’s Chinese Nationalist government. The British, however, undertook furious military and political preparations to reclaim Hong Kong for themselves. U.S. officials wanted to satisfy their British allies but also allow Chiang to save face, and so they cleverly suggested that the British could accept the surrender on behalf of the Chinese government. But the British refused that offer, and eventually, Washington acquiesced. Chiang acquiesced as well, dependent as he was on U.S. military and logistical support to reclaim other areas of China. The upshot was that Hong Kong passed from the Japanese back to the British and remained that way even after 1949, when the Communists triumphed over Chiang’s Nationalists in the Chinese Civil War but shrank from attempting to expel the British from the strategic southern port.

Had the British acquiesced rather than the Americans and Chiang, history would have played out very differently. As it was, the communist regime in Beijing was able to take extraordinary advantage of something it would not otherwise have possessed: a world-class international financial center governed by the rule of law. During the period of Deng’s reforms, British Hong Kong ended up funneling indispensable foreign direct investment into mainland communist China—from Japan and Taiwan, especially.

People often ask why Soviet Premier Mikhail Gorbachev, when attempting to reenergize the Soviet economy in the second half of the 1980s, did not follow the successful Chinese approach to reforms. Beyond the immense gulf between a highly urbanized, heavily industrialized country and a predominantly rural, agricultural one, the Soviet Union had no Hong Kong to attract and direct incoming investment according to market, rather than political, considerations. No British Hong Kong, no Chinese miracle.

Japan surrenders Hong Kong to the UK

Why GDP growth targets are underrated

These are not good times for the credibility of China’s GDP growth targets. Just weeks after unveiling an ambitious target of 5.5% real GDP growth for 2022, the central government effectively ensured that target will not be met by requiring local governments to impose strict lockdowns to contain the spread of Covid-19. The restrictions cover most of China’s major cities, have had a clear negative impact on economic activity in March that will only worsen in April.

The government is now in a lose-lose situation: if it stimulates growth enough to actually meet the target, then it will overheat the economy (as it did in 2020); if it doesn’t, then its growth targets become less credible. The credibility was already not high after the 2021 target was set a 6.0%, a figure so disconnected from the reality of a cyclical bounce that delivered 8%-plus growth as to be almost meaningless in practical terms. If China’s government doesn’t even try to ensure that GDP growth is close to its target, then why bother having a target in the first place?

These kind of problems are among the reasons why well-meaning economists have for years been urging China’s government to give up GDP growth targets. They don’t seem to actually function well as a guide for macroeconomic policy. And the crude focus on increasing economic aggregates has been blamed for everything from worsening environmental pollution to driving the unsustainable accumulation of debt. The conventional wisdom about China’s GDP growth targets was well captured in this piece from 2014 by an old colleague at The Wall Street Journal:

The target is a relic of the Stalinist planned economy, the basis on which the government planned the allocation of scarce resources for industrial production. Its continued existence is testament to how far China has to go to fully embrace a market economy, one that operates according to market signals.

While this is an understandable view, I believe the events of recent years have strengthened rather weakened the case for GDP growth targets. Given China’s actually existing political economy, GDP targets are, if not exactly optimal, then certainly a reasonable second-best policy framework. And so far their track record is better than the alternative.

The belief of most economists, both Chinese and Western, that I have interacted with over the last couple of decades is that China would be better off moving away from GDP growth targets, as doing so would improve economic management and lead to more rational policymaking. So when Xi Jinping opened his second term in 2017 by announcing that the government would in future focus less on the quantity of GDP growth and and more on its quality, there was a general feeling that this was a natural, inevitable and generally positive evolution.

I did not have such a good feeling about this shift. Back in 2017 I wrote a piece for my employer arguing that if growth targets were de-emphasized, “then what’s left will be a confusing welter of political, social and environmental mandates.” Rather than being a victory for rationality and reform, the de-emphasis on growth targets was actually a signal that economic decision-making would become more politicized:

Xi now wants to orient the government around delivering a “better life” for people rather than economic growth alone. But determining what exactly a “better life” consists of is a top-down process managed by the Communist Party leadership, rather than a bottom-up process driven by local exploration. It is very unlikely to mean a more hands-off attitude towards economic management: Xi’s administration has shown a decreasing tolerance for volatility in economic growth and market prices. Since he doesn’t trust local governments to do the right thing, Xi actually wants to have more centralized direction of the economy in the future, not less.

I think it’s fair to say this prediction has been completely vindicated, particularly by the “regulatory storm” of 2021 with its multitude of highly interventionist policies aiming to reshape entire industries. Limiting the power of large private companies was even a fairly explicit goal: it’s probably not a coincidence that the main targets of last year’s political-regulatory campaigns were real estate and the internet, the two economic sectors that have created the biggest private-sector fortunes. All of this was certainly enabled by Xi’s dictum that there are more important things than GDP growth. The costs and economic downsides of the regulatory storm were put aside in favor of other goals.

What should now be clear is that GDP growth targets were not actually the main cause of excessive or ill-considered government intervention in the economy. That tendency comes from something much more fundamental: China’s Leninist political system, which is organized around mobilizing officials to direct social transformation. As Ken Jowitt put it: “The definitional tendency of Leninist regimes [is] their attempts to control and specify the substantive dimensions of social developments, not merely the framework within which such developments occur.”

De-emphasizing GDP growth targets would have done what liberal reformers hoped for if had been accompanied by fundamental political changes in the mission of the government. That is, if the government had accepted a role as a more neutral regulator and provider of public goods, and been content to provide a framework in which private actors could pursue their own goals.

Instead, what happened is that Xi Jinping carried out a grand project to reorient the Communist Party’s mobilizational machinery away from the pursuit of economic growth and toward a broader set of goals, which can be summarized as the pursuit of “national greatness.” These include things like technological independence, greater income equality, and a better natural environment. Xi’s idea that there is more to life than economic growth seems to be long-held and sincere: he articulated it back in 2001 when he was a mere provincial governor. But the shift to goals defined more by political and social values rather than quantitative measurements has led to economic management occurring through politicized campaigns.

The trick about GDP targets is that they are compatible with both the Leninist focus on achieving society-wide goals, and the liberal preference for allowing individual agents to pursue their own goals. Growth is a collective accomplishment for which the government can take credit, but the exact means by which growth is achieved can be left up to individual actors.

The focus on growth thus functioned to smuggle some liberalism into China’s Leninist political system. When Deng Xiaoping formally shifted the Party’s goal from class struggle to economic development back in 1978, he opened up much more space for individual choice and decentralized action in China than had previously existed. Entrepreneurs and local governments could pursue their goals without having to check them for ideological consistency.

As Joseph Fewsmith has argued, this process eroded the effectiveness of the Leninist political machinery, something that Xi has worked hard to fix. The de-emphasis on GDP growth, rather than being a technocratic or pro-market reform, is fully consistent with Xi’s renewed focus on ideology and political discipline.

But Xi also knows that continued GDP growth is necessary for his project of achieving national greatness to succeed, so he can’t completely ignore economic realities while pursuing his transformational political campaigns. By the end of 2021, the economy had slowed sharply enough that it was becoming obvious that a change of course was necessary. In December, when when Xi chaired the annual Central Economic Work Conference, the signal was clear: the priority is now the “stability” of the economy.

Since then, various political slogans and campaigns have been much less in evidence and the focus has been on more practical short-term measures. Senior officials have even promised not to introduce policies that “adversely affect market expectations”–effectively admitting that they had been doing just that in the recent past. Veteran economist Li Yang, in a commentary in January, seemed to breathe a sigh of relief at the change in policy tone:

At the beginning of reform and opening up, our Party clearly proposed to change its focus from “class struggle” to “economic construction.” This shift was a milestone: it brought us forty years of rapid growth that made China’s economy the second largest in the world and made China a country that the world does not dare to underestimate. However, this phrase has been said less often in recent years, and this meeting reiterated it, which is quite significant.

Such cautious optimism that the pendulum was swinging back to the “good old days” of more growth and fewer political campaigns has probably not survived the drastic Shanghai lockdown, which is widely perceived as being driven by a political imperative to demonstrate victory over the virus rather than pure public-health considerations. Covid policy is being personally directed by Xi, who used a Politburo meeting in March to require “perseverance” in the strict approach. The Party’s propaganda system also continues to churn out material supporting Xi’s long-term shift of aspirations away from simple economic development toward the more values-based “better life” framework.

In this context, the more that China’s government talks about how to keep economic growth humming, the better for business and investor confidence. A policy framework that focuses on steady growth in national income over time is certainly better than a policy framework that lurches from campaign to campaign. The debate over whether the government can achieve this year’s GDP target is a sideshow: it probably can’t, and it won’t cause a crisis of confidence to admit that. What’s really important is whether or not the government is re-committing to a growth-based policy framework.

The science fiction of social stagnation

Henry Farrell recently recommended Walter Jon Williams’ novel Metropolitan, and after devouring it quickly I will second the recommendation: it’s sharp, thoughtful, and engrossing. Nothing dates faster than visions of the future, but the vision in this 1995 book still seems strikingly contemporary. The book presents mind-blowing technological power that coexists with depressing stagnation, its extraordinary capabilities diverted mostly to bureaucracy and status-seeking.

This theme is comes out into the open at one point when one of the characters starts ranting about the inability to build new buildings, a synecdoche for the broader problem of social stagnation:

“Nothing changes in our world,” he says, “because the cost of change is so enormous. Not the least is simply the cost of space. Consider what’s needed simply to build a new building. There will be something on the site already, so the old building must be purchased, and all the people living or working there moved. All those displaced people will have to go somewhere else, at enormous cost, and even if the builders manage somehow not to pay the displacement fees, somebody will. So every new structure is a drain on the economy before it even starts. …

Nothing can be transformed in any significant way, because the cost of transformation is just so high.

The resonance with the contemporary debates over why it’s so hard to build stuff in the US is pretty obvious. Because it’s a novel and not social science, there’s no explicit argument about what has caused this problem in the fictional world.

But the world-building makes an implicit argument that stagnation is the result of the closing of the frontier. The conceit in the title is that virtually the entire surface of the earth, apparently including the oceans, is covered by cities. There is literally no usable space that is not already occupied by some structure and some political entity. Hence the problem that any new construction requires removing whatever is already there.

Furthermore, the universe beyond the earth is not visible or accessible, with the sky, sun, moon and stars walled off by a barrier called the Shield. This feature reinforces the book’s cosmically claustrophobic atmosphere, portraying a world in which people are trapped into zero-sum competition over a limited pool of resources. (As I recall, there’s a similar theme running through Iain M. Banks’ Against a Dark Background, though I read it some time ago.)

There is definitely a real difference between places where things can be built from scratch and places where building requires first compensating and removing the existing users (and it’s not just a US issue–compensation for residents displaced from their homes by new development has been a long-running political problem in China). But the the tradition of American science fiction, in which space travel is often the most important indicator of technological progress, is somewhat biased toward the idea that progress depends on having new frontiers of empty space to exploit.

We should hope this idea is not true. In general terms it probably is not: the American frontier was declared closed in 1890, but technological progress and economic growth in the US has been faster after 1890 than before. Nonetheless, I found Williams’ portrayal of stagnation pretty convincing and it will stick in my head for a while.

What I’ve been listening to lately

  • Byard Lancaster – It’s Not Up To Us. The star of this piece of free-jazz marginalia from 1968 is the criminally under-recorded electric guitar innovator Sonny Sharrock, delivering an early example of his extraordinarily forceful attack. When I saw Sharrock live in the early 1990s, he kept a stack of guitar picks on his amp, and wore them out at a furious pace–a physical approach to guitar noise that no one has matched. The theme “John’s Children” from this album was later reprised in more epic fashion as “Many Mansions” on Sharrock’s late-career masterpiece Ask The Ages. For more on his career, see this 1989 interview.
  • Sonny Rollins & Coleman Hawkins – Sonny Meets Hawk. The Jazz Great Meets Jazz Great formula beloved of midcentury record producers was not very reliable at actually generating good albums, though a few classics did result. Among them are Coltrane’s session with Ellington, and this one from 1963. I had not sought it out before because I just assumed it would be a courteous, traditional blowing session. Nothing could be further from the truth: it’s actually one of Rollins’ more adventurous recordings, featuring young avant-gardists like Paul Bley and Henry Grimes. Hawkins, whose own avant-garde credentials go back to his “Picasso” of 1948, meets them on that territory and plays wonderfully.
  • Dave Easley – Byways Of The Moon. Fellow practitioner Susan Alcorn has called the pedal steel guitar “the last musical instrument borne of the mechanical age” and its potential in a jazz context has still been barely tapped. In this recording, the Louisiana-based Easley demonstrates the fiendishly complex instrument’s capabilities in a recital of tunes by Monk, Miles, Coltrane and Carla Bley, also throwing in a couple of transformed pieces from the rock repertoire (Led Zeppelin, Brian Wilson). It sounds great.
  • William Parker – O’Neal’s Porch. Recorded in the opening months of this century but unheard by me until recently, this is a stunningly good session. It’s recognizably in the “freebop” mode of Ornette Coleman’s quartet (sax, trumpet, bass, drums) but with a radically different and funkier rhythmic approach from Parker and longtime comrade Hamid Drake on drums. Right now, I can think of few recordings that better mine the tension between rhythmic drive and vertiginous improvisation that is one of the singular pleasures of jazz. This 20th anniversary appreciation has good context on how the album fits into Parker’s impressive career.
  • Ben Goldberg – Everything Happens To Be. Improvisational counterpoint is one of my favorite things and there’s plenty of it on this new-ish session from an unusual quintet. The woody tone of Goldberg’s clarinet mixes wonderfully with the dry, breathy sounds from Ellery Eskelin’s tenor sax and Mary Halvorson’s guitar. And the rhythm section of Michael Formanek on bass and Tomas Fujiwara on drums is one of the best in jazz right now, one of the few rivals to the Parker-Drake combo.

What happened to common prosperity?

Xi Jinping rolled out his new slogan of “common prosperity” with great fanfare in 2021, using it to declare inequality a “major political issue” that would not be permitted to worsen further. The term was written into the five-year plan, highlighted in major speeches, and constantly promoted in state media. Common prosperity looked like one of the key concepts that would govern Chinese policy in Xi Jinping’s third term.

Yet the slogan of the moment is almost completely missing from the government’s official policy agenda for 2022, at least as it is presented in the documents for the annual legislative session that got underway this weekend. Premier Li Keqiang’s government work report, for instance contains exactly one mention of common prosperity (共同富裕), which is rendered as “prosperity for all” in the official English translation. And it’s a pretty generic statement:

We must act on the people-centered development philosophy and rely on the efforts of everyone to promote prosperity for all, so as to keep realizing the people’s aspirations for a better life.

The Ministry of Finance’s budget report also contains exactly one mention of common prosperity, which is simply a note of a provincial initiative: “We supported Zhejiang in be coming a leader in the exploration of new ways to promote common prosperity through public finance at the provincial level.” But the budget sets no goals for the central government relating to common prosperity, which is a bit strange as the Ministry of Finance would be in charge of any changes in taxes or spending to narrow income inequality.

The National Development & Reform Commission, the super-ministry that coordinates much economic policy and planning, seems to be taking the slogan more seriously: its annual development report does mention common prosperity a few times, and calls it a “major goal”. But the priority does not seem particularly high: common prosperity is listed as the last of the 10 tasks for its work in 2022, as an umbrella term for improving public services:

With a correct understanding of the main goal of common prosperity and the way to reach it, we will do everything possible within our means to constantly improve public services and resolve issues affecting the wellbeing of the general public.

This is all a bit puzzling coming after the massive propaganda push for common prosperity in 2021. It seemed reasonable to think of common prosperity as one of the planks in Xi’s “re-election campaign” for the 20th Party Congress later in 2022. He could argue that one of the reasons why it is important and necessary for him to have a third term is so that he can deliver common prosperity and solve the problem of inequality. Therefore I expected the messaging around common prosperity to ramp up this year, and get more specific and ambitious over time. Instead, it has turned more low-key.

Partly I think this reflects some of the incoherence that has been part of this slogan from the beginning. The rhetoric of common prosperity has simultaneously featured a call for revolutionary change and a denial that any fundamental change to China’s system is needed. As I wrote in an earlier contribution to a CSIS discussion on common prosperity:

It is remarkable how much of the official discussion of common prosperity consists of listing the things that cannot and should not change. Xi states that the common prosperity campaign cannot be allowed to hurt incentives for entrepreneurship, innovation, and hard work, nor can it be the occasion for the government to make “promises that cannot be fulfilled.” In other words, Xi is going out of his way not to promise a “new deal” for Chinese citizens, even though he has pledged to increase transfers to lower-income regions, adjust taxation, and boost the level of public benefits. There is thus something of a mismatch between common prosperity’s very broad political goals and the constrained policy instruments available to achieve them.

These contradictions make it hard to propose specific policies that would actually achieve the objectives of common prosperity, and even to articulate concrete objectives in the first place. That’s why I think common prosperity is more of a political campaign of gestures and symbolism than a technocratic economic agenda. Barry Naughton’s take is probably even more cynical than mine; as he said at UCLA event in February:

As a first approximation, the role that ordinary working people have in the Chinese Communist Party’s policy formulation is zero, and this is not an overture to them. It’s an effort to do two one things: one is to slap down this new capitalist elite and tell them you should know your place, and it’s not at the top, and the other is to put together a nice program that sounds good going into the 20th Party Congress.

So one interpretation of the recent downplaying of common prosperity could be that the rhetoric is simply collapsing under the weight of its own internal problems and difficulties. Yet I don’t think we’ve seen the end of common prosperity: the government is still pledged to deliver a plan for common prosperity, a process that will force it to articulate a somewhat more coherent agenda. The NDRC’s approach suggests that will center around improving the social safety net, an objective with plenty of political support.

Xi himself has certainly not abandoned the term; in a meeting during the legislative session, he said “As long as we consistently follow the road of socialism with Chinese characteristics, we will be able to continue to realize the people’s aspirations for a better life and continue to advance the common prosperity of all people.” I’d expect Xi to still use the common prosperity slogan prominently in his speeches around the Party Congress.

A different, though not incompatible, interpretation would be that the political context for this slogan has changed more than originally expected. Common prosperity probably made sense as a slogan during the triumphalist year of 2021, when China’s growth was strong and long-term goals seemed within reach, but perhaps makes less sense during the worrisome year of 2022, when growth is sliding and the world is in turmoil.

Xi Jinping’s most prominent public remarks at the legislative session this week have focused food and energy security, themes he has long favored but which now have much greater resonance as oil and commodity prices spiral upward. As Li Keqiang said in his work report, in a classic piece of understatement, “this year our country will encounter many more risks and challenges.” Common prosperity probably needs to go on the back burner for a bit while leaders deal with more urgent short-term concerns.

Reviving and reversing the Sino-Soviet trade bloc

Over the last month or so, since Vladimir Putin’s meeting with Xi Jinping in Beijing on the eve of the Winter Olympics, it’s been commonplace to say that ties between China and Russia are tighter than they have been since the Sino-Soviet alliance in the 1950s. In the joint statement issued after the meeting, the two countries went even further, asserting that “the new inter-state relations between Russia and China are superior to political and military alliances of the Cold War era.”

Doing a bit of reading, I discovered the parallels between 1950 and 2022 are pretty striking. Consider the sequence of events in both cases: the leader of the junior partner travels to the capital of the senior partner, where an agreement is announced formalizing ties between the two. Shortly afterward, the junior partner engages in military adventurism that results in US sanctions, making the junior partner even more economically dependent on the senior partner.

In the first iteration, the junior partner was of course China. Mao Zedong arrived in Moscow on December 16, 1949, just two months after declaring the foundation of the People’s Republic, seeking a treaty with the Soviet Union. Although Stalin dragged out the talks for weeks to emphasize Mao’s lower status, they signed the Treaty of Friendship, Alliance, and Mutual Assistance on February 14, 1950. Mao’s officials had only a few months to do follow-up work before North Korea invaded South Korea on June 25, 1950. On October 19, China’s own forces crossed the Yalu River and entered the war. On December 3, the US Department of Commerce announced a trade embargo against China (these dates are all matters of public record, but here I’m relying on the narrative in Jason M. Kelly’s recent book Market Maoists).

The terms of the embargo against China were even stricter than the one already in effect against the Soviet Union, intensifying China’s dependence on its socialist “big brother.” The arrangement between the two was simple: the Soviet Union would supply China with the technology, equipment and specialists it needed to build up its own industrial capacity, which China would pay for with exports of commodities and Soviet loans. Here’s an old-school infographic from a 1959 CIA report that captures the structure of China’s trade dependency nicely: it sold the Soviet Union farm products, metals and textiles, and bought machinery and weapons.

The second iteration unfolded on a much more compressed timescale. Putin landed in Beijing on February 4 for the opening ceremony of the Olympics, and the two governments issued a joint statement on their “future-oriented strategic partnership” the same day. The closing ceremony of the Olympics was held on February 20, and Russia began moving troops into Ukraine on February 21. The US announced its first sanctions on February 22, ramping to a joint announcement with allies of financial sanctions on February 26. The dizzying cascade of corporate announcements and market turmoil since then has starkly highlighted how China is now one of Russia’s most important remaining trade relationships.

There’s no question that Russia is the junior partner this time around; it accounts for less than 2% of world GDP while China is now over 20%. The pattern of trade dependency is also the mirror image of what it was in the 1950s. As these nice visualizations from the Observatory of Economic Complexity show very clearly, it is now Russia who is the supplier of commodities and raw materials to China.

In turn, China now supplies Russia with machinery, electronics, and a range of consumer and capital goods.

Given that history is repeating itself in such an unusually straightforward way, it’s worth recalling that the Sino-Soviet alliance of the 1950s did not prove to be a stable arrangement. The explicitly hierarchical relationship was distasteful to China’s Communists, who were strong nationalists. But it was seen as a necessary temporary arrangement to rebuild the war-damaged Chinese economy. The supply of machinery and technical knowledge from the Soviet Union was a key part of a crash program to create China’s own socialist industrial base and achieve self-sufficiency. China never intended to be in an ongoing relationship of dependency. Eventually China lost faith in the Soviet Union and decided to exit the relationship to pursue self-sufficiency on its own terms, through Maoist projects like the Third Front.

For now, China and Russia seem happy to bond based on their shared criticism of the US and its aggressive assertion of authority over global trade and finance, which has resulted in sanctions on both countries. But I can’t help but wonder whether Russia is going to eventually find itself just as unwilling to acquiesce to long-term economic dependence as China was in its day.

Socialist, capitalist, Leninist: what to call China?

Does it matter what we call China? Does it really make a difference what term we, as outsiders to China’s political and economic system, attach to that system? Certainly it is not going to make much of a difference in terms of what actually happens in China whether foreigners prefer to call it communist, socialist, fascist, state capitalist, or what have you. Arguments about terminology are the classic academic dispute, the kind of thing only pedants can get excited about. Yet despite the low stakes involved, I’ve found myself repeatedly returning to this question, picking away at it like an unfinished home improvement project. The label may not make a difference to China, but it does make a difference to us: for better or worse, we use these simplifying labels to think with, and if the label is wrong then our thinking will be off.

The issue is simply stated: China calls itself a socialist country, and is ruled by a Communist Party. But many people are reluctant to just accept that and call China socialist. The actually existing realities of the Chinese economy and society bear little resemblance to what socialism was generally understood to be in the middle decades of the 20th century. As Jude Blanchette remarked in his excellent talk “What’s ‘Communist’ About The Communist Party Of China?: “It’s patently obvious that China is not a state for workers and the proletariat, and has become one of the most deeply unequal societies in the world. On any measure of what we would want to see from a socialist system, your European welfare state will do better than China.”

China today obviously does not look like much like China in the 1960s, or the Soviet Union in the 1950s, or Yugoslavia in the 1970s: all uncontroversial examples of actually existing socialism. Back in the days when there were a lot of socialist countries, it was pretty clear what being socialist meant. A 1983 article by Stephen White, “What is a Communist System?,” laid out three generally agreed-upon characteristics: a formal commitment to Marxism-Leninism, an economy in which the basic means of production are in state or public ownership, and a vanguard Marxist-Leninist party exercising a leading role in society. Janos Kornai in his classic book The Socialist System offered a similar definition: a socialist system is one which a Marxist-Leninist party exercises undivided power, and uses that power to at least attempt to eliminate private property.

“Socialism,” in other words, is a package deal: it refers to a combination of political and economic structures. There is not just a Communist Party but also an attempt to implement Communism. China in 1978 broke up that package. It preserved the trappings of a socialist political system–Party, propaganda, Politburo–while jettisoning its ideological goals of class struggle and the elimination of private property. Instead its political system is oriented toward the pursuit of economic development and national greatness, and since the 1980s, the majority of its economy has been under private ownership. My own estimate is that the private sector accounts for about 60% of economic output. This was a development that Kornai, for all his insights, never anticipated: he did not think a socialist political system could tolerate a privately owned market economy.

So what should we call this combination of institutions? Insisting that China still “really” Communist or “really” socialist has the virtue of consistency–the Communist Party is still there, after all–but is rather ahistorical. I find that people with first-hand experience of Mao’s China are rarely comfortable calling today’s China “socialist,” as the differences are just too dramatic. I respect their judgment.

There are a number of alternatives. China’s official formulation is that it is a “socialist market economy with Chinese characteristics,” which despite its origins as a compromise political slogan happens to be a fairly accurate description. I’m on record as preferring the term “state capitalism,” which I think does a decent job of conveying to a general audience the basic fact that China has a market economy subject to extensive government intervention. But ultimately I feel that both of these terms are less than satisfactory because they focus only on the nature of the economy, and elide the question of the political system. Economies are enmeshed in social and political institutions, not the other way around, so to describe China’s system only in economic terms is incomplete.

The key to solving this puzzle is to realize that politically China is not unique. This was brought home to me by reading Ken Jowitt’s 1992 book New World Disorder: The Leninist Extinction, a collection of essays comparing the political culture of socialist states. I discovered that the Chinese Communist Party under Deng Xiaoping was not the first Communist Party to abandon the ideological imperative of class struggle and turn to other goals instead; indeed, China was very late to that change. The Soviet Union under Nikita Khrushchev began the shift, starting with his famous secret speech to the 20th Party Congress in 1956 that called out Stalin for his purges and personality cult. In that speech Khrushchev said essentially that Stalin’s purges were worse than a crime, they were a mistake: the violence of class struggle was no longer necessary because the struggle had already been victorious.

Lenin taught that the application of revolutionary violence is necessitated by the resistance of the exploiting classes, and this referred to the era when the exploiting classes existed and were powerful. … Stalin deviated from these clear and plain precepts of Lenin. Stalin put the Party and the NKVD up to the use of mass terror when the exploiting classes had been liquidated in our country and when there were no serious reasons for the use of extraordinary mass terror.

Khrushchev’s shift away from class struggle became even more overt in the 3rd Program of the Communist Party of the Soviet Union, passed at the 22nd Party Congress in 1961. The long document includes this famous passage declaring the class struggle over:

Having brought about the complete and final victory of socialism–the first phase of communism–and the transition of society to the full-scale construction of communism, the dictatorship of the proletariat has fulfilled its historical mission and has ceased to be indispensable in the USSR from the point of view of the tasks of internal development. The state, which arose as a state of the dictatorship of the proletariat, has, in the new, contemporary stage, become a state of the entire of people, an organ expressing the interests and will of the people as a whole.

This was not a minor shift in wording, but a dramatic ideological change that caused turmoil in other socialist countries. In particular, Mao Zedong thought the Soviet Union was betraying socialism, and therefore that China would have to increasingly go it alone. Relations between the two countries rapidly fell apart. As Jowitt explains:

The Sino-Soviet conflict was more than anything one between regimes with opposing developmental-institutional interpretations of Leninism. It was not primarily a clash between nations with “ancient enmities.” …According to the Chinese, their differences with the Soviet Union began with Khrushchev’s de-Stalinization speech at the Soviet 20th Congress in 1956. It was not Khrushchev’s attack on Stalin per se but rather Khrushchev’s rejection of class struggle as the central tenet of Party rule that became the pivot of a widening, issue-filled dispute.

Mao Zedong and Nikita Khrushchev in 1958, before the Sino-Soviet split

While Deng Xiaoping did not exactly come out and say, in so many words, that Khrushchev was right after all, the political changes that he pushed through in China in 1978 and afterward were clearly parallel to those that Khrushchev had implemented earlier in the Soviet Union (and which were also pursued by many eastern European countries). Both attempted to keep the political system intact while reorienting it toward more popular and less destructive goals. The 1961 Program even laid out a series of ambitious economic objectives, including calling for the Soviet Union to “surpass the strongest and richest capitalist country, the United States, in production per head of population.” Of course, in economic terms China’s reforms were much more successful than the Soviet Union’s, but the way those changes of direction were articulated in the political system was quite similar.

Political scientists studying socialism thus early on had to face the problem of what to call a political system that is no longer pursuing the actual ideological goals of socialism, but still has significant organizational continuities with socialism. Their solution: call it Leninism. This term puts the focus on the structural features of the political system independent of the particular details of its policies, economic and otherwise. David Shambaugh offered a very good and clear summary of the political characteristics of Leninism in this recent podcast:

  • a “hegemonic” or all-dominant ruling Party
  • the Party’s total penetration of all institutions in society
  • a nomenklatura system in which the Party appoints top leadership positions throughout society
  • the use of United Front or co-optation strategies with non-Party elements in society
  • the use of repression, terror and coercion when co-optation fails
  • state censorship and information controls

All of these features were present in China before 1978, and are still present in China today despite many other changes. For Lenin himself, the designer of the system, politics was always the most important thing. He was the first to experiment with the combination of Communist Party rule and a market economy, in his New Economic Policy of the 1920s. The NEP was an important reference point for Deng and other leaders in the early years of reform, and it’s not unreasonable to see China’s entire reform era as a “long NEP.”

Lenin used the term “state capitalism” to refer to that system: while admitting that Germany also practiced state capitalism, he insisted that state capitalism in Soviet Union would be different because the Communist Party was in charge. That is not too different an approach from Xi Jinping’s more recent insistence that Communist Party leadership is the most important feature of Chinese socialism. Ultimately, what makes China’s economy operate differently from those of Western countries are not technical differences in monetary or fiscal policy, but the fact that it is governed by a Leninist political system.

For a one-word description of China’s system that is both analytically precise and historically accurate, “Leninism” does the trick.

The virtues of competition among states

An interesting theme running through some recent work in economic history is that competition among states can have positive long-run economic effects. Mark Koyama’s review essay of Walter Scheidel’s book Escape from Rome is a nice short summary of this theme. Both authors have tackled different aspects of the thesis that “a competitive and fragmented state system was a necessary condition for the eventual economic rise of Western Europe.” Fragmented refers to the fact that Europe was long divided into numerous small states, none of which could establish persistent dominance over the others. Some economic historians argue that the political and military rivalries among these states gave their rulers incentives to try to govern well and effectively, “invest in state capacity” in the jargon, while creating room for experimentation with different ideas and government policies.

Although this idea was developed mostly from work on the early modern period, around the 16th to 18th centuries, it has plenty of recent resonance. The Cold War rivalry between the US and the Soviet Union pushed both sizes into investing in new technologies like space exploration and the internet (Nasa was the earliest and most important customer for the nascent US semiconductor industry). If anything, competition among states has increased since the end of the Cold War: “a competitive and fragmented state system” seems like a reasonable summary of the contemporary “multipolar” global order, in which even superpowers struggle to enforce their will over other states.

Competition among states is of course bad when it takes the form of outright military conflict and the loss of life. Today, the existence of nuclear weapons means that any continued economic and human progress for the world is contingent upon powerful states being willing to impose limits on their competition. Even a non-nuclear confrontation among major powers, for example if the US and China were drawn into conflict over Taiwan, would be massively disruptive. It’s possible that, as Tyler Cowen has suggested, the lack of major wars may be taking some of the edge off of interstate competition. Neither the US nor China actually fear being taken over militarily by the other, nor does (at least most of) Europe need worry about being absorbed into a Russian empire. The worries are somewhat less existential, and therefore perhaps less pressing.

Rational self-preservation does limit how much competition among states can take the form of military conflict. But in that case their competition in other areas could becomes more rather than less intense. In particular, the US-China relationship has become increasingly competitive over the past decade. A recent piece by Ryan Hass of Brookings captures this dynamic well:

The US and China are both central powers within a single global system — and they compete for leadership in virtually every domain within that system. Both sides recognize the dense connectivity that binds them together within the existing system (e.g., supply chains, financial flows, knowledge production, scientific exchanges, ecological interdependence, etc.). Even as each side seeks to limit vulnerabilities from dependence on the other, neither side views it as plausible to disentangle entirely from the other at tolerable cost or risk.

Given these circumstances…both sides will be pushed to find opportunities to gain relative advantage over the other in long-term competition. This is where the bulk of both countries’ efforts are likely to be focused for the coming decades.

Hass argues that both countries are competing for global prestige and influence, and are focused on “which country’s social, political and economic system will demonstrate capacity to outperform the other.” He distinguishes between ideological competition, which he views as largely unproductive, and competition based on “performance,” which he views as creating pressure for more tangible actions. If geopolitical rivalry between the US and China does in fact leads to greater investment in state capacity and technological innovation, both countries could benefit. Authorities in the US are for instance increasingly aware of China’s demonstrated competence in building infrastructure fairly quickly and at reasonable cost. Competition with China could stimulate greater interest in addressing the insanely high costs of construction projects in the US, so that the comparison with China is not quite so embarrassing.

Perhaps the most fruitful venue for global competition among states would be in responding to climate change. You often hear about the need for the US and China to cooperate on climate change, which is because international agreements are often seen as the key mechanism for reducing emissions. This emphasis on cooperation is probably overdone: as Deborah Seligsohn argues in a useful piece, “cooperation isn’t the linchpin for driving down emissions to net zero.” She points out that the actual reduction in emissions will come from major changes in energy and other technologies, which will be largely produced and deployed by private companies. Competition among those companies is a powerful force for pushing technological progress, and in this sense the more competition between the US and China, the better.

For its part, China’s leadership clearly views the response to climate change as an arena for competition among countries not just companies. The transition to green energy is seen as a historic opportunity for China to establish global industrial leadership. The transition promises to disrupt the established hierarchy of existing technologies and companies that China, for all its successes, has struggled to overturn: think of how electric vehicles could erode the dominance of US, German and Japanese automobile companies and their internal-combustion-engine platforms.

Such concrete successes would matter a lot more to China than the intangible benefit of being perceived as a good global citizen in climate-change negotiations. China may well be resistant to establishing international agreements with strict and binding emissions-reduction targets, as many Western critics complain, but this is because its politicians (rather unsurprisingly) resent being forced to do things by foreigners. China’s own industrial plans and domestic propaganda make it quite clear that the government wants to lead the world in the decarbonization transition, for its own benefit. Embracing an explicit global competition between the US and China in creating and deploying emissions-reducing technological breakthroughs might yield more substantive progress than international negotiations, in which these geopolitical rivals are likely to struggle to achieve consensus.