Reform or Perish

The Communist Party knows what it needs to do. What's missing is the will.

BEIJING — Now for the hard part. After three decades of astonishing economic growth, powered by a first set of radical reforms in the late 1970s and early 1980s and a second set in the mid-1990s, China's incoming leaders are facing what might be the country's greatest economic and political challenge. They must create a new growth model, with a very different financial system, a substantially modified state sector, and the political reforms necessary to accommodate both.

How these seven (or nine) men respond to these challenges in the next five to 10 years will determine the country's long-term growth prospects. If they succeed, China will continue to grow, albeit more slowly, and could even one day join the tiny club of formerly poor countries like South Korea that have attained developed-country status. If they mismanage the adjustment, growth will evaporate, leaving China stuck in the notorious "middle-income trap" from which few developing countries have ever escaped.

Given its astonishing success in implementing economic reforms and engineering rapid growth, it is tempting to believe that Beijing has the talent, far-sightedness and determination to make the transition successfully. History, however, suggests otherwise. Many countries that followed variations of China's investment-driven model have grown miraculously for a decade or more, but few managed the move to developed-country status.

Take the Soviet Union. By the 1960s, the USSR had generated nearly three decades of exceptional growth, leaving most analysts convinced that it would soon surpass the United States economically and technologically. It didn't happen. Real productivity growth stalled by the late 1960s, and today, nearly 50 years later, Russia's GDP is smaller in relative terms from its peak. Brazil saw extraordinary growth from the late 1950s to the late 1970s, but fell back during the "Lost Decade" of the 1980s and has still not achieved the economic successes many expected nearly a half century ago.

China's spectacular growth over the past 30 years, like that of the USSR and Brazil before it, was made possible mainly by the ability of policymakers to control credit and unleash waves of investment when needed. This allowed Beijing to keep growth rates high regardless of the circumstances and no matter how the leadership managed domestic problems. It was able to avoid a surge in unemployment when it restructured the hugely inefficient state-owned industries in the 1990s by sharply increasing infrastructure investment. Investment spending helped it smooth over the social dislocations caused by its rigid and antiquated political structure. It eased political conflicts and factional fighting by directing billions of dollars into pet projects, much of which the politically connected have since siphoned off. China grew vigorously through the Asian crisis of 1997, the Chinese banking crisis a few years later, and, the collapse of the global economy in 2007-08. In each case, unrestricted access to savings allowed China to power growth by pouring cash into the projects of its choice.

But no longer. Officially, government debt is under 25 percent of GDP, but it's likely much higher. Investment has reached its limit, and now excess investment has itself become China's greatest economic problem. Many years of high and often wasted investment in such baubles as empty airports, bridges to nowwhere, vacant office buildings, and underutilized steel factories have resulted in debt levels growing much faster than the ability to service that debt. And more "investment" only worsens the problem.

With the loss of its most powerful tool for economic management, Beijing must change its growth model. And it will. The fierce debate among Chinese economists and policy advisors over the past two years suggests that Beijing knows it must sharply reduce investment rates.

But doing so causes two problems. First, without the ability to increase investments at will, China's economic volatility will increase sharply. Second, if China can no longer depend on investment growth to drive high levels of economic activity, it must increasingly rely on growth in household consumption, which, at 35 percent of GDP is the lowest seen anywhere in modern history.

What can Beijing do to ensure continued rapid consumption growth? Contrary to myth, China's low consumption rate has nothing to do with the fabled Chinese propensity to save. Because China's wealth distribution is extremely unequal, the rich consume a far lower share of their income than the poor, reducing consumption overall.

More importantly, at under 50 percent of GDP, Chinese households control a very low share of the country's total income. While their wealth has grown substantially in the past few years, the economy overall has grown far more quickly, leaving them with a constantly falling share of the total.

To spur growth in household consumption, Beijing needs to redistribute wealth and spur the growth of household income. The former is always hard to do, and if economic activity slows with the reduction in investment growth rates, as it must, the latter will also be difficult.

Beijing must directly or indirectly transfer to the household sector some of the tremendous wealth accumulated by the state sector over the past three decades, for example, by privatizing companies and using the proceeds to shore up the social safety network, or granting land title to peasant farmers. Chinese households could then substantially increase consumption to compensate partially for a rapid reduction in investment. This would keep China's economy growing in a healthy way.

Beijing, in short, must bring investment rates down quickly before the country experiences debt problems. But to keep growth from collapsing it must also boost household consumption by transferring wealth from the state and the elite to the middle and lower classes. The scale of these transfers, however, will disrupt domestic politics and will require the kinds of reform in political and financial institutions that are sure to unleash substantial opposition.

The task is urgent but difficult, one that is likely to cause tremendous strain on the political system. Powerful sectors and families will resist any elimination of the distortions that have rewarded them so bountifully. But if these distortions are not eliminated, China's economy, like that of many before it, will stall, and its astonishing transformation will be a thing of the past.

The more successful China's new leaders are in managing this adjustment, the better for everyone -- not just in China but all over the world. The United States and Europe should accommodate a China that implements real structural reforms and rebalances its economy in a healthy way by tolerating some flexibility in the trade and capital accounts as Beijing as it faces its most difficult reforms yet.

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Democracy Lab

It's the Brazilians, Stupid

Meet Brazil's James Carville -- and the other political consultants who are shaking up Latin America's electoral landscape.

RIO DE JANEIRO -- Let's say that you're an incumbent president with a life-threatening illness. Your economy is a mess, with inflation pushing 25 percent a year and store-bought goods like milk and eggs rare as buried treasure. Bridges are collapsing, a giant oil refinery goes up in a deadly fireball, and flipping a switch may or may not turn on the lights. So much the better for the busy criminals, who have turned your city streets into some of the bloodiest in the world. What can you possibly do to win re-election?

Call João Santana, of course. That, at any rate, is what Hugo Chávez did ahead of the hotly disputed presidential elections in Venezuela last month. Sure, the Venezuelan clown prince was already a political legend, and his heavy-handed use of electoral resources -- such as his near-unchallenged domination of the media and the judiciary and the looting of the state treasury to finance handouts to voters -- didn't hurt. But sometimes even the gods need a hand, and after 14 bruising years in office, with his own popularity sagging and a united opposition rising fast, Chávez knew that it was time for reinforcements. And in Latin American electoral politics these days, that means bringing in the Brazilians.

These days the Brazilian consultant to beat is Santana. After running winning campaigns at home for Workers' Party (PT) President Luiz Inácio Lula da Silva and his successor, Dilma Rousseff, Santana has gone on to lead dark horses and dullards to power across the Americas, from onetime coup-maker Ollanta Humala in Peru to the wonky economist Danilo Medina in the Dominican Republic. But in Venezuela, he had his work cut out for him. Chávez was convalescing from three straight bouts of surgery for an unspecified cancer after doctors removed a baseball-sized tumor from his pelvis. The ailment kept him shuttling back and forth to Havana for weeks for punishing bouts of radiation therapy that left him bloated and exhausted. His challenger, Henrique Capriles -- smart, youthful, and telegenic -- was running at the head of the first truly unified opposition campaign in recent memory. (It says a lot that Capriles also hired a team of Brazilian consultants.)

Santana went to work with a will. He skillfully airbrushed the Chávez campaign, compensating for the president's visible fatigue and long absences from the public eye with heroic close-ups and slow-motion takes of the candidate hailing imaginary multitudes. Instead of resorting to familiar imagery of the irrepressible showman wading through adoring throngs or thundering from the dais, the campaign spun Chávez as statesmanlike and avuncular, waxing beatific in carefully edited sound bites. "The Heart of My Fatherland," was the official campaign slogan.

All this played well on the airwaves. "The campaign was masterfully orchestrated," admits Diego Arria, an ex-Venezuelan diplomat and former presidential candidate himself. "There were six or seven camera crews following Chávez around and shooting every rally. The Brazilians gave a shot in the arm to Venezuelan politics." In the end, Chávez romped to a 55 to 44 percent victory over Capriles, the incumbent's third-straight election triumph, and one that extended his mandate until 2019.

Santana and his ilk have had plenty of practice. The rise of the Brazilian political consultant is part of the backstory of a remarkable shift in fortunes sweeping Latin America. As electoral democracy has reawakened across the hemisphere, the scramble for votes has grown intense. These days -- in stark contrast to the era when dictatorships reigned -- dozens of political wannabes throughout Central America, the Caribbean, and South America angle for seats, from city hall to the presidential palace. To grab voters' attention, brand a candidate, and sway doubters in an ever more competitive field, professionals and pretenders alike are increasingly turning to hired political advisors from within the region.

Not so long ago, campaign strategizing in Latin America was still the province of an elite group of U.S. super consultants. They parachuted into foreign venues, rewrote the rules of campaigning, and checked out again, collecting fortunes in fees. Bill Clinton's campaign guru Dick Morris coached Felipe Calderón to victory in Mexico, in 2006, and Vicente Fox before him. Morris also advised Argentina's Fernando de la Rúa and Uruguay's Jorge Batlle. The web-savvy Ravi Singh squired Colombia's Juan Manuel Santos to victory in 2010. James Carville, one of the engineers of Clinton's presidential election victory in 1992, was also a frequent flyer to Latin America.

But those days are over. As popular elections spread from Mexico to Chile, the drive-by political snipers were replaced by native experts, who were fluent in the local culture and vernacular. Digging in for weeks or even months, they developed a shoe-leather feel for the territory and issues driving each campaign, and never blinked at the quirks of Latin politicians and powerbrokers. ("I remember one president interrupting a cabinet meeting to take a call from his mother," says Ralph Murphine, an American consultant who has spent his career in Ecuador.)

Nowhere is the change more visible than in Brazil. In Latin America's biggest nation, the political consulting industry grew out of a combination of historical happenstance and social engineering. After a long night of autocratic rule (1964-1985), Brazil gradually thawed to democracy. As the military eased its grip, a generation of appointed mayors and governors was replaced by elected leaders. The process culminated in 1989, when the popular vote for president was finally restored after a 29-year hiatus. Now it's the rare calendar year when there is no election somewhere in this continental country. This fall, more than 15,000 candidates vied for votes in mayoral contests in 5,568 Brazilian cities and towns, each one with a pitch slicker than the next.

With the return to wide-open elections came worries about how to level the playing field. Policymakers wanted to encourage political newcomers and prevent elite contenders with deep pockets from dominating the scene. The solution -- a pearl of populism dating from the early 1960s and resurrected in the 1988 constitution -- was to set aside generous timeslots on the national airwaves for free political advertising. The Free Electoral Hour put campaigning on steroids, driving the country's fractious parties to strike up alliances of convenience to amass TV time.

Thanks to Brazil's wildly popular television novelas, or soap operas, that draw tens of millions of faithful viewers, ad wizards had learned to hawk everything from credit cards to shampoo during station breaks. The Electoral Hour gave them a laboratory to try out their riffs and jingles before nationwide audiences. "From early on, Brazilians learned how to tell a story in 30 seconds," says Chico Mendez, a Brazilian strategist who advised Chávez's rival, Capriles.

Another crucial advantage was that Brazilian strategists had learned to crunch numbers. Thanks to professional census-taking dating back to the 1950s, campaign advisors found a wealth of demographic data that enabled them to target key voters, size up swing states, and hone their pitches. "Pollsters need to have a statistical data base to work out samples, and Brazil has had outstanding surveys since the 1940s and 50s," political scientist Amaury de Souza told me before his death earlier this year. "You need the same techniques to sell products and services used to sell politics, personalities."

Many of the initial campaign programs were laughably forgettable, but Brazilians, consummate couch potatoes, were fascinated to watch democracy bloom in their living rooms. In time, Brazilian consultants got so good at selling politics at home that they began to peddle their services abroad.

One of the first test cases for Brazil's flying consultants was Angola, the former Portuguese colony, which in the early 1990s was emerging from a bloody civil war. In the country's first-ever national multiparty election in 1992, the Marxist president José Eduardo dos Santos faced a formidable challenger in Jonas Savimbi, the charismatic guerrilla leader whose insurgent UNITA party had the blessings of Washington and the apartheid regime in South Africa. Santos knew he needed advice but was loath to ring up marketers from Portugal, Angola's erstwhile colonizer. Instead he looked across the Atlantic to Brazil.

At the time, Brazilians had just elected Fernando Collor de Mello, a fire-breathing young governor from the boonies who was virtually unknown as a national figure until his campaign alchemists recast him as an avenger on a white horse. In the 1989 election, Collor bested a crowded field of alpha politicians, ultimately defeating the already legendary ex-factory worker Lula in a runoff. (Collor was later impeached for corruption, but his rocket rise to power remains a watershed in Brazilian electoral politics.) The makeover was not lost on Francisco Romão, Angola's ambassador to Brazil, who contacted Collor's campaign manager, Claudio Humberto. Humberto introduced him to consulting firm Propeg.

One of the reasons for Propeg's success was Ricardo Noblat, a career journalist who had been sacked by his newspaper but soon found other ways to put his intimate knowledge of the electoral system to use. By 1992, Noblat was on a plane to Luanda to join Propeg's team in the mission to retool Santos's struggling campaign. He ran a team of nearly a hundred advisers, led by a cadre of eight Brazilian campaigners whose numbers grew to 44 before the race was over. The imported marketers started from scratch.

"The communist government was trailing in nearly every region of the country," says Noblat. So they slicked up Santos's pitch, softening the hard-knuckle Marxist's image. Taking a cue from former São Paulo mayor Paulo Maluf, they ginned up a fence-mending slogan, "Peace and Order," that went over well in a country still torn from its long civil war. Angolans loved television and were huge fans of imported Brazilian soaps, but were bored by politics as usual, with its cookie-cutter campaign ads and plodding Portuguese-style TV editing. So Noblat's team juiced up the media campaign, cutting up-tempo takes of Santos on the move and toggling to slow-mo shots of adoring crowds, all set to lushly scored sound tracks for the nationwide state broadcast network.

On the hush, he hired a Brazilian folk guitar duo, Sá e Guaiabira, to write a soft-touch campaign theme song, Angola in My Heart. "We had to invent a story that these were Angolan musicians," says Noblat. The jingle caught on and became kind of a popular anthem in the vein of the 1985 charity anthem We Are the World (minus Michael Jackson and Dionne Warwick). "It was a kind of musical exaltation of Angola," says Noblat. "To this day, Angolans sing it on patriotic occasions."

Luck also helped. Noblat's crew stumbled upon a political marketing plan that an unwitting Savimbi staffer had left behind in a restaurant. It also didn't hurt that in the middle of the campaign Pope John Paul II touched down in Luanda to a red carpet welcome by the communist head of state who promptly squired the pontiff around the country. Santos surged in the polls and won the first round of voting, but fell a few thousand votes shy of the absolute majority of ballots needed to win outright. A runoff was called, and Santos's popularity soared. But when violence swept the country, Savimbi quit the race and took refuge in the jungle, where he turned up dead a few years later. Santos won the election by default and has remained in power ever since, though not always democratically. He was last re-elected in September -- with the help of João Santana.

Few Brazilians can boast Santana's political scorecard. Affable and quietly intellectual, Santana is surprisingly publicity-averse for the heat-seeking métier of professional politics. (He did not return this reporter's many phone calls.) He also has become arguably Latin America's most formidable kingmaker. A onetime political reporter, he learned his chops on the campaign trail as Brazil's reset from dictatorship to popular democracy, then parlayed his story telling skills into a communications consultancy. With a languid twang typical of his native state of Bahia, in northeast Brazil, he earned his name grooming candidates in some of the toughest electoral contests in Brazil and abroad.

In 2006, President Lula saw his prospects for re-election sinking as some of his top advisors were fingered in a massive vote-buying scandal known as the mensalão, for "big monthly payoff." (The Brazilian Supreme Court has just found 25 people guilty for corruption in the payola case, including Lula's closest confidants.) He turned to Santana, who promptly flipped the narrative, recasting Lula in polished campaign spots as a radiant everyman, worshipped by the meek and maligned by envious rivals. "Let the man work!" was the campaign money note. Lula roared back, winning handily in the runoff vote.

After crowning Lula, Santana went on to craft the winning campaign for the workingman hero's successor, Dilma Rousseff, Lula's former chief of staff and a consummate bureaucrat who had never run for office. Santana put her in designer suits, powered up her coiffure, had her teeth straightened, and flattened her brow with Botox. Most importantly, he sent her to mingle with the povão, the common folk, turning the stiff contender that critics dismissed as a walking spreadsheet into a winning candidate.

Today, Santana is to the resurgent Latin American left what Carville and George W. Bush confidant Karl Rove were for Democratic and Republican hopefuls in the 1990s, with less lip and slightly lower consulting fees. Though he has worked all shades of the political spectrum, Santana has excelled at electing little-known socialists. In 2009, he led former leftist guerrilla fighter Maurício Funes to victory in El Salvador. Last year, he "Lulafied" Peruvian firebrand Ollanta Humala, turning the onetime coup-maker into a solid centrist in sober blue suits, winning over conservatives and middle-class Peruvians after a hotly contested runoff vote. And last month, he split his team between continents, deploying one platoon to Santos' campaign in Angola and another to the Caribbean, coaching economist Danilo Medina to office in the Dominican Republic.

On Oct. 28, Santana added yet another push pin to his political map when a little-known client, Fernando Haddad, a former education minister so lackluster his rivals derided him as a "light pole," came from behind to become mayor of São Paulo, trouncing seasoned former governor José Serra in the runoff. (Haddad is shown in the photo above at bottom right, hugging Rousseff during the race last month.) The pundits were quick to credit the win to Lula, who had squired the neophyte Haddad into politics just as he had groomed his successor, Rousseff. "From pole to pole, we are lighting up Brazil," Lula quipped. What he neglected to mention was the quiet figure behind it all, throwing the switches.