A Shot Across the Bo

The Chinese Communist Party's takedown of party boss Bo Xilai shows just exactly how much talk about "democracy" it's willing to listen to.

BEIJING – China is a democracy. Just ask the Communist Party secretary of Chongqing, Bo Xilai, who was abruptly removed from office on Thursday, March 15. "Multiparty cooperation is an important symbol of democracy," he said in February in the lead-up to the National People's Congress (NPC) annual meeting, the pageant where delegates pass laws and revel in Communist Party rule. Last week, during his first public statements about a brewing corruption scandal involving his former police chief, he told reporters, "We need to take the road of democratic rule."

Saying the word "democracy" in China isn't necessarily a crime, and many high-ranking officials pay lip service to the term. But perhaps Bo said it a bit too loudly. Nowhere is the gulf between propaganda and reality so wide as in the Communist Party's view of its own democracy. Despite curbs on freedom of speech and expression, persistent crackdowns, and the lack of universal suffrage, the Communist Party portrays the country it rules as a multiparty democracy, brandishing its eight "democratic" parties as proof. Bo's comments held no subversive irony for the censors; in fact, the second comment headlined Bo's political obituary published March 14 in the state-controlled media. Bo was a good Communist, but also a bit too much of a populist for China's tightly controlled system. He made the mistake of trying to rally public opinion in favor of his now-defunct bid to join the Politburo Standing Committee -- behaving almost like China was the democracy he said it was -- instead of leaving the decision entirely up to the party. And the party always wins.

Communist cadres can praise democracy, as long as it's China's. Fang Ning, who runs the Political Science Institute at the Chinese Academy of Social Sciences, has argued that China's democratic system is superior to that of the West; he thinks capitalist democracy is merely a tool to "gain legitimacy for a regime," something he probably learned to recognize after studying his own country's model. Indeed, China, which boasts eight "democratic parties," puts the United States' duopolistic system to shame, numerically. So does the sheer size of the NPC, which stands at close to 3,000 members, with some 800 coming from the "democratic parties" that are permitted to exist -- as enshrined in the Chinese Constitution -- "under the leadership of the Communist Party of China." A 2007 white paper describes this arrangement as an "inevitable choice" -- an oxymoron much like the "people's democratic dictatorship," also mentioned in the Constitution. The democratic parties cooperate with the regime, not oppose it. "They supposedly give advice," says Willy Lam, an expert on Chinese politics at the Chinese University of Hong Kong. "However, their real purpose is for PR reasons: to put together a facade of unity. And they have made it clear they follow the instructions of the party."

The NPC and its sister conference, the Chinese People's Political Consultative Conference, where delegates tackle various pressing social issues -- from the alarming lack of civil liberties to the alarming lack of breast-feeding -- are meant to proudly advertise China's brand of democracy in action. This year's pomp was slightly undercut by Bo's fall from grace; it's not often that a party secretary gets summarily dismissed at the end of a normally bland legislative session. Despite the drama, the democratic parties dutifully played their role. The China Democratic National Construction Association diligently raised concerns over wage arrears for migrant workers, while the Chinese Peasants and Workers Democratic Party conscientiously brought up soil pollution.

The eight junior parties, whose membership ranges from 2,000 to 200,000, have no reason to challenge the 80 million members of the Communist Party, not only because they have no effective power, but also because they depend on the Communist Party for their existence. They fall under the purview of the United Front, a government department that is also responsible for galvanizing overseas Chinese support for the People's Republic. "They are adjuncts or subordinate units" of the Communist Party, says Lam, the functional equivalent of a toothless corporate board from the Enron era. For the average Chinese person, they're just decoration: huaping, or "flower vases."

Perhaps the biggest display of those huaping is in Chongqing, Bo's seat of power (until recently), at the Democratic Parties History Museum of China. The museum, which opened in March 2011, is attached to a site of historic significance for the democratic parties: a villa where the China Democratic League (CDL) -- currently the largest democratic party -- was founded in 1941. Mao Zedong visited several times during the war against the Japanese, when Chongqing was the Nationalist capital and Mao was embroiled in unsuccessful negotiations with Chiang Kai-shek to unite against the invaders. He dubbed the place the "home of democracy."

The irony of Bo's five-year reign over the birthplace of Chinese democracy is that it has been anything but democratic. His "Chongqing model" involved cracking down on the mafia and resurrecting the Communist Party's red roots through patriotic singing campaigns, while hounding defense lawyers and threatening newspapers with lawsuits. Last year, when the Chongqing Municipal Committee voted in favor of a list of items intended to increase the democratic rule of law, Bo explained what it actually meant: that "leaders of all levels … shouldn't make rash decisions." Democracy, for the Communist Party, is a sort of code for wider consultation and greater accountability -- but changing the system is not an option.

When the Democratic Parties History Museum was opened, it wasn't to celebrate democracy -- or consultation and accountability, for that matter -- but instead to mark the 90th anniversary of the founding of the Chinese Communist Party (CPC), a little odd given that the party isn't really overtly featured in the museum. Out of ideological arrogance, the Communist Party maintains that the socialist democracy it practices is more enlightened. But the party's presence is felt everywhere. At the museum's ribbon-cutting ceremony, Bo was quoted as saying, "The CPC's history is the history of the democratic parties." The exhibits feature sanitized histories of each, from the China Zhi Gong Party, which consists mostly of returned overseas Chinese and their descendents, to the Revolutionary Committee of the Chinese Kuomintang, which was once committed to overthrowing the Chiang regime.

But for a sense of intellectual hierarchy, visitors need only look to the museum's hushed grand foyer, where a tableau of bronze sculptures depicts the leaders of the democratic parties gathered around Mao, listening -- the silence echoing the hollowness of his promises of a democratic China. Although some parties, like the CDL, embraced the Communists during the war and in the early days of the new People's Republic, their history has been co-opted, which makes it hard to praise them for any accomplishments without stealing the credit. The museum compensates by taking on the resigned tone of a parent whose kid always comes in second place. "The party is the head," said a woman who worked at the museum and gave her last name as Zhang, "and the democratic parties revolve around it."

The exhibits unsurprisingly place great emphasis on the parties' constructive roles at meetings of little or no importance, their frequent field inspections of car factories, and the plaques they received for promoting education campaigns. (One law they seem to have managed to get adopted is an amendment to the Chinese Constitution explicitly recognizing their subordinate status.) Most of their efforts are described in empty terms reminiscent of a sketchy résumé: "contributing suggestions," "participating and deliberating," "answering the call." But despite the museum's best efforts to dilute their history, it's hard not to forget that these parties, all founded before the 1949 creation of the People's Republic of China, were at one time actually democratic and possessed a real hope for the new China. They wrongly believed that cooperating with the CPC at the end of the war might actually engender democracy instead of stifle it. Zhang Lan, one of the founders of the CDL, became a vice chairman of the People's Republic (the equivalent of vice president), but died before the Hundred Flowers Campaign in 1957, when Mao asked Chinese intellectuals to contribute advice for running the country -- only to have many imprisoned for speaking out. During the Cultural Revolution, the National People's Congress stopped its annual meetings, and the eight "democratic parties," already under Communist Party control, effectively ceased to exist. Revived after Mao, "there was hope [the democratic parties] would become a new avenue for reform," says Jean-Pierre Cabestan, head of the department of government and international studies at Hong Kong Baptist University. But after the 1989 Tiananmen Square crackdown, "they were called on to toe the line."

Today the parties are shadows of their former selves. In fact, they aren't really parties at all, and they don't appeal to those with dissident or liberal democratic views. Anybody who tries to start his or her own new party is likely to be exiled or thrown in jail. As James D. Seymour, a senior research scholar at Columbia University, observed in work done in the late 1980s, the eight satellite parties have taken on a corporatist flavor. The members of the Jiu San Society consist mostly of intellectuals in the sciences and technology; the China Association for Promoting Democracy is made up of intellectuals in culture, education, and publishing; members of the Taiwan Democratic Self-Government League are mostly Taiwanese in favor of reunification.

Although the parties have grown at a moderate pace in recent years, the Community Party restricts membership, and they aren't always easy to join. The application process, at least in the 1980s, was so rigorous that the most common reason for rejection was not having a senior enough background in one's given field, according to Seymour. This selectivity has allowed the Community Party to cultivate a pool of quasi-independent intellectuals who can be tapped for advice. For those intellectuals, joining can have some perks as well: greater access to the people in power than they would have as nonmembers and even the chance of being picked for a real government role (the current minister for science and technology is a member of the China Zhi Gong Party). When I reached a member of the Chinese Peasants and Workers Democratic Party -- the party that brought up soil pollution at the NPC -- I asked how many delegates her party had sent to the highest congress in the land. "That's something I don't know," she said, refusing to give her name. "This is just the propaganda department."

In the end, Bo, it seems, might have benefited from a little more democracy. There are no opposition parties to protest his dismissal, no independent media that will listen to him contest it. And with no way for him to defy the Communist Party's authority, he'll likely become a prisoner of history, just like the museum he helped create.

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Argentina's Dubious Boom

Argentina's economy has been coasting on its past successes. Don't be fooled.

When Argentina defaulted on its sovereign debt in 2002, few predicted that the country would soon bounce back -- much less rank as one of the fastest-growing emerging economies over the next decade. Yet, aided by aggressive fiscal and monetary stimulus, Argentina has enjoyed an Asian-style 7.6 percent average annual growth rate since 2003, with commensurate gains in employment and declines in poverty. Indeed, Argentina's success in thumbing its nose at foreign creditors has emboldened some observers to suggest that Greece and the other debt-ridden eurozone economies try default as an alternative to the harsh austerity prescribed by the IMF and the European Union.

It seems that Argentina managed to turn "Washington consensus" policy on its head and get away with it. Or maybe not: A closer look at Argentina's post-crisis economy suggests the boom is living on borrowed time, that the chickens will soon come home to roost.

The model for Argentina's post-crisis boom was the Perónist policies of the 1940s and 50s. Corporatist Perónism accommodated the interests of business, labor, and the poor through collective bargaining managed by the state. Resources were skimmed from the country's highly productive agricultural sector to cover the cost of wages and profits in excess of competitive levels.

But Perónism promised more than it could possibly deliver. Expansionary macroeconomic policies led to ever-rising inflation, stagnant productivity, and battles among highly organized interest groups that spurred popular unrest and increasingly repressive government reactions. Argentina was left with anemic public services, crumbling infrastructure, profitless industries, and paralyzing union demands for wage increases unsupported by productivity gains.

Juan Perón was overthrown by a military junta in 1955. Yet the legacy of Perónism survived, its peculiar mix of corporatism, populism, and nationalism rising and ebbing across the tumultuous 1980s and 1990s. Argentina was especially hard hit by policy experiments designed to curb inflation that left the economy uncompetitive in global markets, burdened by a huge external debt and committed to an overvalued exchange rate pegged to the dollar. Its economic troubles culminated in a financial crisis in 2001-02, with the collapse of the fixed exchange rate and a sharp recession accompanied by fierce unemployment and a wave of bankruptcies.

The economic policies of the post-crisis administration of Néstor Kirchner (2003-2007) appear to have initially taken into account the hard lessons of unsustainable policies. While Perónist in spirit (and optics), Kirchner's economics initially amounted to a pragmatic response to the massive income redistribution precipitated by the financial crisis and subsequent recession. On the one hand, the crisis wiped out household savings, increased unemployment to twenty-four percent, and impoverished large segments of the middle class. On the other, the depreciation of the currency made exporters (and domestic industries vying for market share with importers) more competitive and greatly reduced the burden of their debts denominated in pesos.

Kirchner suspended payments on the country's sovereign debt, relieving the government budget of massive ongoing obligations. He also echoed Perónist tradition by favoring domestic industry through policies that maintained the now-grossly-undervalued peso exchange rate, by plowing huge sums into expanded social programs and by imposing price controls on key sectors (such as energy) to suppress inflationary pressures.

On their face, these policies hardly seemed sustainable. But in a stroke of luck, his programs coincided with the start of a global commodity boom that provided the government with windfall revenues from export taxes. As a result, Argentina was able to clear its debts to the IMF in 2005 (well ahead of schedule), freeing Kirchner from the IMF's calls for fiscal prudence and its demands for a shift to more market-oriented policies.

A key element in Kirchner's post-crisis recovery strategy was the preservation of the aforementioned undervalued exchange rate. Toward this end, the government once again pegged the Argentine peso to the dollar -- though this time at an exchange rate that effectively protected domestic industry from foreign competition. The government maintained this rate by intervening in the foreign exchange market, even though the high prices of Argentina's key commodity exports suggested that a market-driven strengthening of the peso was needed to fight inflation. Indeed, the exchange-rate peg was complemented by domestic monetary policies that fed the fires of inflation.

On other fronts, Perónist populism ruled the day. The government went to war with commodity exporters, protecting the purchasing power of Kirchner's constituents in an inflationary environment by restricting food exports and imposing price controls.

When Kirchner decided not to run for reelection and handed the presidency to his wife, Cristina Fernández de Kirchner, in 2007, many hoped that she would begin liberalizing the economy. But that has not happened. And in what amounts to Perónist déjà vu, the failure to allow both currency and product markets to adjust to supply and demand is now exacting a toll on both Argentina's productivity and it competitiveness in international markets.

The economic consequences are nowhere more apparent than with energy. Argentina has abundant deposits of natural gas: the country appeared on the verge of becoming a major exporter in the early-2000s. But price controls have reduced the profitability of investment in the sector to such an extent that domestic shortages are now forcing Argentina to import natural gas. Ironically, this has made it necessary for the government to subsidize imported gas, even as it refuses to allow natural gas producers to charge for the full cost of production. Recent estimates place the sheer waste associated Argentina's energy policy at about $8 billion, or close to two percent of GDP.

The government's tilt toward its urban industrial constituents has also taken a toll on farm output. Argentina has a clear comparative advantage in agriculture: the country's vast fertile plains potentially make it an export powerhouse to rival the American Midwest. Yet early in Cristina Kirchner's rule, farmers went on strike to protest the government's efforts to skim the cream from the commodity boom by increasing taxes on exported wheat, soy, and meat.

Under Ms. Kirchner, the total tax on agricultural exports has risen to 75 percent, effectively curtailing new investment into the sector. Instead, investment is instead flowing into uncompetitive sectors favored by Perónist politicians and bureaucrats.

The most bizarre example is the government's import-substitution program in frigid Tierra del Fuego. In 2009, Ms. Kirchner sought to create jobs in this desolate region isolated from markets by distance and geography by encouraging production of consumer electronics -- that's right, TVs and smartphones. To this end, she doubled the value-added tax on imported electronics (which largely come from Asia), a move she later backed up with restrictive import-licensing requirements. She also lowered the already-minimal taxes paid by electronics companies (notably, Samsung) that assemble products in the region. The baksheesh, including exemptions from the income tax, value-added tax and taxes on imported parts, have cost the Argentine treasury about $1.3 billion -- more than $100,000 for each of the 10,000 jobs that have been created.

Argentina now faces the double whammy of a slowing global economy and productivity-sapping domestic economic distortions. The deteriorating balance of international payments is stimulating speculation about a new peso devaluation, while the country's increased levels of protectionism are generating threats of retaliation from its regional trade partners.

Less tangible, but more ominous, there has been a decline in the quality of governance across the decade. Argentina has seen a marked deterioration in the World Bank's measure of government effectiveness and the rule of law, even as the government's increased reach has produced a significant drop in most dimensions of economic freedom.

Argentina's post-crisis model is thus coming unraveled, and the economy appears on course for another reality check. As in past run-ups to disaster, Argentine wealth is fleeing the country despite the government's tightening of capital controls. A new financial crisis could be especially devastating because the country's differences with foreign debt holders (other than official lenders like the IMF) are still unresolved, effectively freezing it out of global capital markets.

Plainly, this unsustainable economic model holds little promise for debt-strapped eurozone countries seeking a fresh start. However, Argentina's initial post-crisis successes do offer some insight into the applicability of the Washington Consensus approach. IMF-type stabilization programs that focus on austerity are extremely expensive in terms of lost output and falling living standards. By contrast, aggressive Argentine-style stimulus in the wake of a large devaluation could offer an attractive, short-run solution.

Note that emphasis. It is imperative to make the transition from a demand-oriented strategy to one focused on expanding production for external markets as soon as recovery is well underway. In Argentina, the lingering power of Peronist interest groups has led Argentina to miss this transition window -- although recent moves to reverse subsidies suggests that the government is beginning to realize the seriousness of the country's economic plight. One can only hope that this realization has not come too late.