China’s Biggest Gamble
Can it have capitalism without democracy? A prediction.
By Henry Blodget
Posted Friday, April 22, 2005, at 9:38 AM PT

On my last evening in Beijing, I walked west on the long blocks of the city’s main drag toward Tiananmen Square. The sun was setting when I arrived, and, on the north side of the road, beneath the portrait of Chairman Mao on the Gate of Heavenly Peace, crowds of tourists were streaming out of the Forbidden City. On the south side, in Tiananmen Square itself, kites and flags were flying, and entrepreneurs posing as "students" were cruising around entreating foreigners to visit a nearby art "exhibit" in which their works were purportedly displayed. The students’ story was clever and well-choreographed, but I’d already fallen for it once that day (enduring a guided tour of machine-made paintings being sold to fund a "trip to America"). So, I just wandered around the square and watched the sun set over the Chinese flag.

The story of what happened in Tiananmen in June of 1989 is different in China than the one we tell in the United States. In America, we remember the student protests as a plea for democracy, for our form of government (who has forgotten the students’ mock-up of the Statue of Liberty?). But in China, people describe the students’ goals as not democracy, per se, but as the end to corruption, the ability to air grievances, and the right to more control over their lives (or, as one person put it, the right to refuse to be shipped off to some dumpy factory for 40 years—a fate that would drive anyone into the streets). Although these ideals were closer to our form of government than China’s was in 1989, they were not the "one man, one vote" system we hold so dear, the one that, in America, we herald the Tiananmen students as having died for. And, by local estimation, Chinese have gotten much of what the students were really hoping for 16 years ago.

In Beijing, as in Shanghai, the businesspeople I spoke to seemed more concerned about preserving their ability to make money than about gaining the ability to vote leaders out of office or to express themselves however they pleased. One expects businesspeople to tend toward this end of the idealism scale, but in the U.S., democracy and freedom of speech are so fundamental to our sense of ourselves and our country that even our businesspeople can’t imagine life (or economic success) without them. So, it is interesting to see China succeeding—on the surface, anyway—without them.

The question remains: Can the Chinese model—capitalism without elections or free expression—succeed forever? The common Western theory is that the more China’s wealth grows, the more the pressure will build, until one day, the Communist Party’s chokehold on power will break and American-style freedom of speech and democracy will follow (or, alternatively, that, in a desperate attempt to preserve itself, the party will revert to Cultural Revolution-style oppression and stop the economy cold). Both theories presume that free speech and elections are high on the average Chinese citizen’s agenda, but, for now, a strong economy seems to take priority. ("The average guy wants to buy a car, eat vitamins, and get his kids into Berkeley," said one Beijing entrepreneur. "As long as the government doesn’t screw that up, he’s willing to play along.") The Western theories also presume that the transition from socialism to capitalism inevitably includes a transition from one-party rule to elected, multiparty democracy, but perhaps this isn’t so. Especially when the leaders of the one party know exactly what keeps them in power—fat consumer wallets—and are willing to go to extraordinary lengths to control the spread of potentially destabilizing ideas.

For China’s economy to continue to thrive—and for its companies to grow strong enough to compete globally on something other than price—the government will have to continue to reduce corruption, strengthen property and legal rights, and develop a more efficient capital allocation system (including a securities market in which government connections are not a prerequisite for raising cash). In a democracy with a free press, the pressure that forces such changes often comes from decision-makers’ fear of being ravaged in the media and/or voted out of office. In China, the repercussions may not be so immediate and direct, but based on the government’s actions over the last decade, it knows well that continued economic reform and success are not only good for the country but key to its survival. The pressure is there, in other words, with or without the media, and the government continues to make progress in reducing corruption and buttressing legal and property rights.

The government also seems to be deciding that, at least in the realm of business and finance, greater press freedom helps advance its economic goals and lessen its regulatory burden. Business journalism keeps companies honest and makes customers and investors comfortable that they at least have a forum in which to complain. Such freedom is not all good—in the media’s eagerness to advance its own economic agenda, it often manufactures scandals where there are none and spins normal free-market processes into institutional or regulatory failures. But just as a free market is more effective than central planning at, say, managing crop production and pricing, a free press enhances the regulatory abilities of a government and creates the information flow that capitalism requires.

But the Chinese government will probably continue to stifle the press’s freedom to criticize it. As demonstrated by the government’s subtle, sophisticated control of all forms of media and its ongoing penchant for firing, beating up, jailing, and perhaps even killing journalists who cross vaguely defined lines, we won’t see a Michael Moore of China anytime soon (see Perry Link’s essay in the New York Review of Books). But I doubt this will hinder the ongoing development of China’s vibrant economy.

The key test of China’s version of capitalism, of course, will be during the bust that inevitably will follow the current boom (some day). If elections were held today, many in China suggest, the current leaders would win the popular vote. On the whole, thanks to the economy, people feel they have done a good job. During the bust, the pressure for change will increase, with or without the press. If the government is to maintain control in such an environment, it will probably have to engage in a practice that has long been a fixture of oligarchies and democracies alike: blame. As long as the countrywide pain can be laid at the feet of an individual or group, instead of the system—and as long as the scapegoats can be tossed out on their respective rears—the public pressure for revolutionary change can probably be controlled. If China can survive that inevitable economic crisis without a political uprising, we will probably be able to conclude that a dynamic free-market economy need not, in fact, go hand in hand with democracy.

Addendum: A few weeks ago, in a piece about the fake-DVD business, we met the American fake-DVD entrepreneur Randolph Hobson Guthrie III, who was awaiting a verdict and sentencing in Shanghai after being tried for "operating an illegal business," a crime that carries a maximum sentence of 15 years in a Chinese prison. The Wall Street Journal reported recently that Guthrie was convicted of a lesser crime, selling fake goods, and sentenced to a lighter-than-expected two and a half years.

China’s Biggest Gamble
Can it have capitalism without democracy? A prediction.
By Henry Blodget
Posted Friday, April 22, 2005, at 9:38 AM PT

On my last evening in Beijing, I walked west on the long blocks of the city’s main drag toward Tiananmen Square. The sun was setting when I arrived, and, on the north side of the road, beneath the portrait of Chairman Mao on the Gate of Heavenly Peace, crowds of tourists were streaming out of the Forbidden City. On the south side, in Tiananmen Square itself, kites and flags were flying, and entrepreneurs posing as "students" were cruising around entreating foreigners to visit a nearby art "exhibit" in which their works were purportedly displayed. The students’ story was clever and well-choreographed, but I’d already fallen for it once that day (enduring a guided tour of machine-made paintings being sold to fund a "trip to America"). So, I just wandered around the square and watched the sun set over the Chinese flag.

The story of what happened in Tiananmen in June of 1989 is different in China than the one we tell in the United States. In America, we remember the student protests as a plea for democracy, for our form of government (who has forgotten the students’ mock-up of the Statue of Liberty?). But in China, people describe the students’ goals as not democracy, per se, but as the end to corruption, the ability to air grievances, and the right to more control over their lives (or, as one person put it, the right to refuse to be shipped off to some dumpy factory for 40 years—a fate that would drive anyone into the streets). Although these ideals were closer to our form of government than China’s was in 1989, they were not the "one man, one vote" system we hold so dear, the one that, in America, we herald the Tiananmen students as having died for. And, by local estimation, Chinese have gotten much of what the students were really hoping for 16 years ago.

In Beijing, as in Shanghai, the businesspeople I spoke to seemed more concerned about preserving their ability to make money than about gaining the ability to vote leaders out of office or to express themselves however they pleased. One expects businesspeople to tend toward this end of the idealism scale, but in the U.S., democracy and freedom of speech are so fundamental to our sense of ourselves and our country that even our businesspeople can’t imagine life (or economic success) without them. So, it is interesting to see China succeeding—on the surface, anyway—without them.

The question remains: Can the Chinese model—capitalism without elections or free expression—succeed forever? The common Western theory is that the more China’s wealth grows, the more the pressure will build, until one day, the Communist Party’s chokehold on power will break and American-style freedom of speech and democracy will follow (or, alternatively, that, in a desperate attempt to preserve itself, the party will revert to Cultural Revolution-style oppression and stop the economy cold). Both theories presume that free speech and elections are high on the average Chinese citizen’s agenda, but, for now, a strong economy seems to take priority. ("The average guy wants to buy a car, eat vitamins, and get his kids into Berkeley," said one Beijing entrepreneur. "As long as the government doesn’t screw that up, he’s willing to play along.") The Western theories also presume that the transition from socialism to capitalism inevitably includes a transition from one-party rule to elected, multiparty democracy, but perhaps this isn’t so. Especially when the leaders of the one party know exactly what keeps them in power—fat consumer wallets—and are willing to go to extraordinary lengths to control the spread of potentially destabilizing ideas.

For China’s economy to continue to thrive—and for its companies to grow strong enough to compete globally on something other than price—the government will have to continue to reduce corruption, strengthen property and legal rights, and develop a more efficient capital allocation system (including a securities market in which government connections are not a prerequisite for raising cash). In a democracy with a free press, the pressure that forces such changes often comes from decision-makers’ fear of being ravaged in the media and/or voted out of office. In China, the repercussions may not be so immediate and direct, but based on the government’s actions over the last decade, it knows well that continued economic reform and success are not only good for the country but key to its survival. The pressure is there, in other words, with or without the media, and the government continues to make progress in reducing corruption and buttressing legal and property rights.

The government also seems to be deciding that, at least in the realm of business and finance, greater press freedom helps advance its economic goals and lessen its regulatory burden. Business journalism keeps companies honest and makes customers and investors comfortable that they at least have a forum in which to complain. Such freedom is not all good—in the media’s eagerness to advance its own economic agenda, it often manufactures scandals where there are none and spins normal free-market processes into institutional or regulatory failures. But just as a free market is more effective than central planning at, say, managing crop production and pricing, a free press enhances the regulatory abilities of a government and creates the information flow that capitalism requires.

But the Chinese government will probably continue to stifle the press’s freedom to criticize it. As demonstrated by the government’s subtle, sophisticated control of all forms of media and its ongoing penchant for firing, beating up, jailing, and perhaps even killing journalists who cross vaguely defined lines, we won’t see a Michael Moore of China anytime soon (see Perry Link’s essay in the New York Review of Books). But I doubt this will hinder the ongoing development of China’s vibrant economy.

The key test of China’s version of capitalism, of course, will be during the bust that inevitably will follow the current boom (some day). If elections were held today, many in China suggest, the current leaders would win the popular vote. On the whole, thanks to the economy, people feel they have done a good job. During the bust, the pressure for change will increase, with or without the press. If the government is to maintain control in such an environment, it will probably have to engage in a practice that has long been a fixture of oligarchies and democracies alike: blame. As long as the countrywide pain can be laid at the feet of an individual or group, instead of the system—and as long as the scapegoats can be tossed out on their respective rears—the public pressure for revolutionary change can probably be controlled. If China can survive that inevitable economic crisis without a political uprising, we will probably be able to conclude that a dynamic free-market economy need not, in fact, go hand in hand with democracy.

Addendum: A few weeks ago, in a piece about the fake-DVD business, we met the American fake-DVD entrepreneur Randolph Hobson Guthrie III, who was awaiting a verdict and sentencing in Shanghai after being tried for "operating an illegal business," a crime that carries a maximum sentence of 15 years in a Chinese prison. The Wall Street Journal reported recently that Guthrie was convicted of a lesser crime, selling fake goods, and sentenced to a lighter-than-expected two and a half years.