On Chinese Kleptocracy: Stationary versus Roving Bandits

Analysis of the John Hempton argument that “China is a kleptocracy.”

The individuals that make up the regime in China steal, but they also think about maintaining control of the country over the long-term. The people under their rule overwhelmingly remain poor but are still better off in economic terms than they were 30 years ago. The big game is not theft of deposits to go to the children of Politburo Standing Committee members trust funds; it is to produce sustained economic growth that allows the Party to stay in power. To use Mancur Olson’s phrase, the Party is a stationary bandit, not a roving one. A roving bandit takes everything and moves on. The Party acts as a stationary bandit, to maximize its take over time it is interested in increasing the size of the pie so that there is more to steal in the future. The regime is not stripping factories bare thinking about only today, it is navigating a complex route to continued rule through continued economic development.

Thieves versus Mafia

At the level of metaphor, I believe that thinking of the regime as a mafia instead of thieves is more accurate. Thieves don’t think about the long-run in the same way that organized criminals do. The party-state hierarchy is too complex and multi-faceted to be solely about optimizing incomes for members in the short term. A secretive society that looks after its own and tries to increase opportunities for business is more reflective of the way that the Party works than an image of looters taking from the state treasury.

“Economic growth comes from moving peasants into the modern economy”

Moving millions out of low productivity agriculture into high productivity industry obviously is a great part of China’s economic growth. The low starting level of wealth in China gave room for tremendous growth, yet it should be noted that not every country with tremendous poverty in 1980 has followed China’s trajectory. In fact, none of them have. The lives of the vast majority China’s population have improved from 1980. When that improvement took place is a matter of some debate and difference based on one’s reading of the evidence and prior economic situation [Huang Yasheng’s more pessimistic take on the 1990s versus Barry Naughton’s more positive one].

“The one-child policy drives massive savings rates”

Again, that the one-child policy leads individuals to increase their savings is not controversial. However, this is one of many instances where the simplifications of the argument lead to drawing too sharp of a conclusion. The regime, if purely a short-minded kleptocracy, would not be expanding various social services and pensions around the country. What thief would give back to the people what could be stolen? And in particular, the argument made is about forced savings being the source of the fuel for the regime’s thievery. By beginning to weave together a social safety net, the regime is reducing the need for individuals to save. In fact, the regime is doing what it (and everyone else) says it should be trying to do: encourage increased consumption to move the economy away from reliance on investment and exports.

“Low and middle income Chinese have very limited savings options”

This is certainly true, although Tom Orlik had a nice piece in the WSJ’s China Real Time Report blog today illustrating the increased importance of Wealth Management Products [http://blogs.wsj.com/chinarealtime/2012/06/11/charting-the-brouhaha-over-chinas-banks/].

Bank deposits, life insurance, and the Chinese property market as a savings mechanism in China

The combination of capital controls and statutory limits on deposit rates at or below inflation rates gives individuals few attractive savings mechanisms. Bubbles in the Chinese property, stock, art, garlic, etc. markets attest to the desire for positive returns.

“Negative returns on bank deposits and the Chinese kleptocracy”

This is the core of the argument. Deposits go into state-owned banks receiving negative real interest rates, those deposits are turned into loans given to state-owned enterprises. These SOEs are looted by bureaucrats but remain solvent because of the negative real loans.

“The cost of funds in China and the willingness to hold foreign bonds”

The holding of foreign bonds, in particular US Treasuries, is not about looting the peasants as much as it is about retaining the competitiveness of Chinese industry and agriculture in the world market. Allowing the yuan to appreciate would lead to massive layoffs. Fear of these layoffs keeps the pressure on the regime to keep the value of the RMB down. By doing so they do impoverish their citizens’ ability to purchase foreign-made goods, but for stability the regime is willing to make that trade off.

“Monetary threats to the Chinese establishment”

The surprising conclusion of the piece is that the regime fears deflation or even low levels of inflation more than it does high levels of inflation. This fear is not “unstated” but is instead constantly talked about. Deflation would come with China’s economic growth grinding to a halt. Without rapid economic growth, many argue that the regime might collapse. That they don’t state it in monetary terms is irrelevant. The argument also isn’t clear on the mechanism by which deflation causes revolution. Step 1. Deflation undermines the kleptocracy. Step 2. … Step 3. The people revolt.

In sum, I think that the piece boils down many of the essential ingredients of the political economy of contemporary China. However, it boils them down a bit too far and ends up oversimplifying in putting theft at the top of the list of concerns of the party over remaining in power.

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2 Responses to On Chinese Kleptocracy: Stationary versus Roving Bandits

  1. Pingback: China Punks 16: Workin’ For Soros « China Punks

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