Did oligarchs cause the crash?

The Wenzhou train disaster is the latest signal China’s economic miracle is not all it seems: local officials and powerful monopolies are leading the nation down a treacherous path, writes Tang Hao.

Some argue the root cause of China’s fatal rail crash on July 23 – the latest in a series of rail mishaps – is an approach to development that sacrifices quality and safety for the sake of rapid economic growth. “China, please stop your flying pace, wait for your people!” said one Chinese blogger, quoted in The New York Times.

Indeed, compared to sluggish economic growth elsewhere, China’s surge has been relentless – understandably, people draw a link between unremitting growth and the recent tragedy. But the speed of development is not to blame for China’s problems, which actually stem from a distortion of the country’s economic structure. This distortion means that development will always be problematic – no matter whether it is fast or slow.

In China today, economic power does not lie in the hands of business, the market and consumers, as it would in a market economy. Nor is it in the hands of central government, as would be the case in a purely planned economy. In fact, the two major forces in China’s economic development are local governments and monopolistic corporations. They have become the leaders of economic development. China has neither a planned economy, nor a pure market economy – instead we might call it an economic oligarchy.

Aristotle judged the political oligarchy to be the worst of all political systems. In that vein, the economic oligarchy is among the worst of all economic systems. The holders of economic power neither work for the public good, nor open the way for individuals and companies to pursue similar gains. Instead, they focus solely on their own narrow interests, using their monopoly position and political power to compete unfairly.

Of course, a centrally planned economy can create inflexibility and inefficiency, but its consideration of the economy as a whole provides certain guarantees of overall economic security and development. And while a market economy advocates free competition between companies, it is subject to different controls: when it overheats, individual economic players – companies – can adjust accordingly; consumers can make choices based on information provided by a transparent marketplace; and macro-control can be exercised using economic levers, such as government spending, tax and fiscal policy. An economic crisis in one sector may even lead to the optimisation of the economic structure overall. In other words, the control of a market economy is in the hands of myriad businesses and consumers – known collectively as “market forces”.

But in China, the situation is different: the rise of local government-led economic development has caused the central government-planned economy to lose control in many areas. Meanwhile, dominant enterprises have squeezed others out of the private sector, leaving market forces unable to play their regulatory role. The economic oligarchy is a product of the planned economy, but once it exists it pursues its own interests, outside of central control. Even the State Council – China’s highest administrative organ – seems to have been unable to control the Ministry of Railways during the Wenzhou rail incident.

With neither central government nor market forces acting as a safeguard, the decentralised actions of these oligarchs could easily trigger a complete loss of economic control. Local government and monopoly firms act in all-out pursuit of growth, making it impossible to slow down the rate of expansion. This is a sign of an economy already partially out of control.

The oligarchy has managed to supplant the market and become the heart of China’s economic structure thanks to political, rather than economic, decisions. From government legitimacy to social stability to officials’ report cards, political interests too often rely on economic development. But it is development not of the regular, private economy, but the government-led economy and world of state-owned monopolies. Local authorities are acting like the central government: becoming increasingly involved in economic matters and even making comprehensive plans for the local economy. Meanwhile, state-owned monopolies are acquiring greater privileges and, in some key sectors, overwhelming private operators, or simply excluding them from the market entirely.

Cases such as the bankruptcy of Tieben Steel several years ago, or the move by Shanxi province to take back a mine from Wenzhou-based investors, demonstrate how wary some authorities are of private involvement in fields such as energy and steel. Against this backdrop, it is hard to imagine that the Ministry of Railways, with its administrative, police and economic powers, will one day spontaneously open up to privatisation and marketisation.

These oligarchs are out-of-touch officials and capitalists concerned only with profit, and their dominance has distorted economic and social ethics. This is not just a matter for the Ministry of Railways. CNPC’s oil-price hikes, Sinopec’s
extravagant spending on alcohol – these and other cases have long caused public anger in China. The frequent rail accidents we see today are only the most recent example. Let’s look at how the collision at Wenzhou was handled: there had been no safety assessment of the line; the accident was blamed on lightning before there was any reliable evidence to support the claim; after the fatal accident, there was no safety assessment as the scene was hurriedly cleared and the line reopened.

What does the fact that reopening the line was more important than the rescue operation tell us about to the priorities of administrative monopolies and their leaders? This disregard for public safety has reached a point where it can no longer be ignored. We see no government spirit of public interest, nor any entrepreneurial spirit of the private economy. We see only the worst of bureaucracy and capitalism – and the public, of course, is angry. The social injustice and discontent triggered by these monopolies are new sources of political instability. And so, economic growth led by administrative monopolies and local government interacts negatively with social and political development.

The quality of that economic growth is itself also in question. When economic power lies in the hands of extremely inefficient monopolies, and when the best economic resources are divided up between bureaucrat businesses and local government, economic growth can appear very rapid while suffering severe failings. From 2001 to 2008, state-owned and state-controlled firms made total profits of 4.9 trillion yuan (US$761 billion). But the sector’s unpaid interest, rent and resource fees, combined with government subsidies received, totalled 6.4 trillion yuan (US$995 billion).

This is the truth behind monopoly profits: oligarchs stifle the market economy to win profits, but when their inefficiency results in losses, they are propped up by the achievements of the market economy. The market economy is twice exploited, and its successes become spoils for parasitic oligarchs to divide up.

With local governments and monopoly corporations engaged in frenzied and uncontrolled pursuit of gain, that pursuit has become the aim for everyone. But when a nation relies too heavily on economic growth, that growth inevitably gets distorted and political and social development neglected. In these circumstances, even if economic development slows down, the problems would remain – and other concerns such as employment and social security may worsen. 

In the past decade, central government has sat and watched the unopposed rise of local authorities and monopoly industries. Today, these players can manipulate the progress of the economy, putting social stability and political security at risk with their mistakes. China may be flourishing superficially, but in reality it has reached a turning point: now is the last chance to reconsider its development path and change course.

Tang Hao is an associate professor at South China Normal University, a Fulbright scholar and columnist.  

Wenzhou crash in facts and figures

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