Will China Suffer similar fate akin to Soviet Union?

By Anthony Jerdine| February 04, 2016

One could draw many parallels between the former Soviet Union and contemporary China, but what is most interesting of late is how China’s response to weakening economic growth and the effect of that response will compare with that of the Soviet leadership. Like the Soviet Union did in the latter half of the twentieth century, the Chinese government is realizing the limits of its economic growth model and the implications that has for its hold on power. But while trying to respond differently than the Soviets did to these economic problems, the final outcome may end up being the same.

Soviet Collapse
For much of the twentieth century, the authoritarian political system and centrally planned command economy of the Soviet Union appeared as a legitimate alternative to Western democracy and capitalism. A largely illiterate and agricultural society had seemingly managed to transform itself into an urbanized industrial and military powerhouse in an unprecedentedly short period of time.

The so-called economic development miracle of the Soviet command economy, however, was more illusory than most realized at the time. The inefficiency and wastefulness of the economy have come to be well known. For example, raw materials used in producing final goods were 1.6 times greater than in the U.S., while energy use was 2.1 times greater. Also, the average time for constructing an industrial plant took five times longer in the Soviet Union than in the U.S.

The inefficiencies and technological backwardness of the Soviet economy compared to the West were recognized as early as the late 1950s by the Soviet leadership. A series of reforms beginning under Nikita Khrushchev in 1957 and later with Alexander Kosygin in 1965 were implemented to allow for more decentralized control and greater freedom in economic decision making. But each time, the government would find itself unsatisfied with the results and re-impose its central authority over the economy.

With economic growth and productivity quickly declining, it had become clear by the early 1980s that partial reforms were not working. The increasingly dismal situation motivated the implementation of a radical set of reforms—perestroika and glasnost—in the latter half of the 1980s by Mikhail Gorbachev. These reforms aimed at a greater decentralization of economic authority, allowing for private incentives and rewards to encourage greater individual decision making and a greater openness to information.

While the reforms appeared to have an initial positive impact, the rapidly declining price of oil would lead to a severe balance of payments crisis. The lack of competitiveness in manufactured goods made the Soviet Union heavily dependent on oil exports to pay for its vast grain and food product imports. As the price of oil declined, so too did the Soviet’s external trade position, leading to a dwindling of hard currency reserves and a full-blown financial crisis.

With the economy in crisis, the liberalization reforms of Gorbachev backfired. While some would place the blame directly on the perestroika reforms that decentralized economic control, the greater transparency allowed by the glasnost reforms made possible critiques leveled at the very foundational institutions of the Soviet command economy. Either way, the inability of the Soviet leadership to deal with the deteriorating economic situation put its legitimacy into question, eventually leading to the collapse of the Soviet Union in December 1991.

The China Miracle That Legitimated Communist Rule
Like the Soviet Union before it, China’s “miraculous” economic growth since Deng Xiaoping became the leader of the Chinese Communist Party (CCP) in 1978 have led many to believe that China’s economic system is a legitimate alternative to that of the U.S. Beginning with a set of more liberal market-oriented reforms in the late 1970s, the Chinese economy grew at an average annual rate of nearly 10% for three decades, and in purchasing power parity (PPP) terms, has surpassed the U.S. as the largest economy in the world.

In terms of livings standards, Deng’s reforms that initiated rapid economic growth have helped to pull more than 500 million Chinese people out of poverty. It has also led to the growth of a sizeable middle class, which was noticeably absent from the Soviet Union. While this a definite improvement over the Soviet Union and may appear to lend a greater sense of legitimacy to China’s economic structure, the middle class also generally represents a more informed and critical section of the population.

The Middle Class and Its Discontents
Despite liberal market reforms, China remained a primarily Communist country with a centralized command structure, and the rapidly rising middle class would begin to press for more economic and political reform as early as 1989 in the Tiananmen Square protests. Fearing the situation would get out of hand, the CCP forcibly suppressed the protests with tanks and heavily armed troops that opened fire and crushed anyone in the way. Since these protests the CCP has assumed greater control over the economy by shifting greater wealth and ownership from private companies to state-owned ones.

Even though the middle class continued to grow for another 15 years following the protests, since 2005 the middle class has been shrinking and income inequality is on the rise. Indeed, the gap between China’s rich and poor has recently become one of the world’s highest, as its Gini coefficient has grown from 0.3 in 1980 to 0.61 as of 2010. While the Soviet Union may have lacked a middle class, its citizens were arguably less poor than China’s and far less numerous, with about a billion Chinese people considered poor out of a total population of 1.3 billion.

Such inequality, especially in a nation that seemingly originated based on “egalitarian ideals,” has led to increasing social unrest. But it is not just issues of inequality that have motivated this growing unrest—environmental issues have also become a substantial concern. Indeed, protests and riots in China have increased from 8,700 incidents in 1993 to more than 180,000 in 2010.

Realizing the revolutionary potential of the middle class and the need to try and satisfy their demands, China’s newest President, Xi Jinping, promised reforms that will go beyond those of Deng. Economically, he claimed to give the market a greater role in determining economic outcomes while politically, he claimed to give “more clout” to the constitution.

Subsequent to Xi’s reform proposals, a newspaper in Guandong province attempted to publish an editorial piece arguing in favor of constitutional government, but was ultimately censored. An ensuing protest demanding greater freedom of the press broke out, which resulted in numerous arrests, an “episode” which The Economist claims, “ushered in a crackdown on civil society of greater duration and intensity than any since the dark days that followed the Tiananmen protests.”

The Fragile Legitimacy of the CCP
In the midst of increasing social unrest, China’s economic growth model appears to be reaching its limits. China’s rapid growth was fuelled by an investment and export-oriented model. But with demand for its exports slowing and industrial overcapacity limiting the returns to investment, the country grew at its slowest rate in 25 years in 2015.

Believing that much of the legitimacy of the Soviet leadership depended upon the performance of the economy, the CCP is frantically doing whatever it can to maintain a good front, regardless of whether real economic performance is actually improving.

With economic growth on the wane, the Chinese government facilitated a stock market boom in the first half of 2015 by cutting traders’ fees and having state-owned media publish articles encouraging stock market investing. But the plan would backfire, as late June saw the beginning of a nearly $4 trillion stock market rout triggering a panicked Chinese government to intervene.

The interventions may have stalled the stock rout, but they also hurt the credibility of the CCP and Mr. Xi’s proposal to give markets a greater role in determining economic outcomes. While the need for such reform is recognized, the government’s actions reveal fears associated with giving up too much control over the economy too quickly. In fact, it is precisely Gorbachev’s radical reforms that were quickly followed by the Soviet Union’s collapse that the CCP is trying to avoid.

Ironically, however, it may just be Xi’s resistance to actually implementing more liberal reforms that serves to undue his party’s hold on power. What he and the CCP are failing to recognize is that their legitimacy rests not so much on strong economic growth as it does on the happiness of Chinese citizens. So long as economic performance fails to translate into greater happiness, the legitimacy of any government will be in question.

The Bottom Line
There are obvious similarities between the former Soviet Union and contemporary China, but it may be the CCP’s failure to see the subtle difference that will lead to their eventual demise. Like the Soviet Union, China is realizing the limits of its economic growth model. Yet, while slowing, China’s economy is far from the crisis mode that preceded the Soviet Union’s collapse. The CCP’s fear of declining growth and reluctance to follow in Gorbachev’s footsteps are keeping them from loosening their hold on the economy and implementing much-needed reforms. Meanwhile, social dissent continues to grow, and it is far from obvious that the CCP will be able to suppress the various forces tearing at its hold on power.
Anthony Jerdine

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