China needs political reforms for future growth

Thirty years ago, a small fishing village called Shenzhen led China’s economic miracle. Now, it has a more challenging mission. President Hu Jintao said Shenzhen should test political reforms. Although changes may be disruptive in the short run, more checks and balances and rule of law are key for sustainable growth.

China’s authoritarian system has shown its merit during the global financial crisis. When Western banks stopped lending, China’s state-owned banks kept pumping credit into the system. The centrally planned economy was also good at funnelling cheap capital and resources to industries. That has helped China to continue its transition from a poor rural economy into a global manufacturing powerhouse.

Yet the shortcomings of the system have also become more evident. A centralised government overwhelms the power of the market. New policies aimed at rebalancing this face resistance from various interest groups. One of China’s biggest challenges is to get its people to spend. But as long as the state controls the bulk of the wealth and power, ordinary people can’t afford to consume more.

More balanced growth requires political reforms. Beijing needs to let the market play a bigger role in setting input prices, if it is serious about promoting energy efficiency and technological advances. Citizens need to have more voting power in order to create checks and balances in the system. Rule of law is needed for economic and political stability.

Those changes may be painful in the short term. Market-based input prices will make Chinese goods more expensive. Local government and powerful interest groups will resist changes. Democracy can’t be learned in a day.

Yet China can’t afford not to change. To reduce wasteful investment, China needs to reduce the concentration of resources at the state level and give people more wealth. As ordinary Chinese get richer, they will demand more political rights.

Thirty years of economic success has made the Communist Party popular and powerful. China’s future hinges on whether some of that power and wealth is shared more evenly with its people.(http://blogs.reuters.com/columns/2010/09/07/china-needs-political-reforms-for-future-growth/)