Johns Hopkins University

Spring 2008
Vol. 5, No.2


Amateur Hour

Inspired Intersections

>The More Things Change...

A Decade of Discussion

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The More Things Change...

China has embraced capitalism in a big way. But don't look for democracy to follow anytime soon, says political scientist Kellee Tsai. Here's why.


"For years, we've assumed that capitalism and democracy fit hand in glove. We took it as an article of faith that you can't have one without the other.... Well, maybe we've been a bit naive."
—Former Labor Secretary Robert B. Reich

From Nixon to George W. Bush, American presidents have spent their White House careers betting that opening China's markets, fomenting free trade, and promulgating foreign investment would eventually cause the downfall of the Chinese Communist Party (CCP), now approaching its seventh decade of rule. Zanvyl Krieger School of Arts and Sciences political science professor Kellee S. Tsai has spent her career proving that this fundamental assumption is seriously flawed, especially the expectation that agitation for regime change will come from China'sexploding entrepreneurial class.

That China has embraced private-sector development is beyond debate: In 1978, China had 300,000 registered private businesses. By 2005, there were nearly 29 million. Half of China's gross domestic product and more than two-thirds of its industrial production now come from entrepreneurial ventures. Nearly 100 million Chinese work in these businesses, experiencing the benefits of capitalism firsthand. Marx urged "workers of the world to unite" to promote communism, but American policymakers have been hoping that these workers' bosses, these emerging Chinese entrepreneurs, would join together and push for democracy and the benefits of the rule of law. Instead, they've opted for maintaining the status quo, life under an authoritarian regime.

Inside the Beltway, the policy wonks are stumped, but not Tsai.

Kellee Tsai                

It's not surprising that Tsai has a soft spot for entrepreneurs. Tapping into their competitive mind-set, their needs, fears, and goals is second nature to Tsai, who watched her diminutive mother rule the family's New Jersey jewelry business. "I remember she'd take me into the diamond district in New York City, this small Taiwanese woman bargaining really hard with the Hasidic Jews on 47th Street," laughs Tsai. "I remember being really impressed by that." Up and down the coast, Tsai and her family would visit small shops and sell jewelry, the profit from which put Tsai through first Barnard College and later Columbia's School of International and Public Affairs. "I grew up with immigrant parents who were peddlers," she says with great pride and an empathy that has served her well in her professional career.

A short post-graduate career on Wall Street ended when Tsai realized she was more interested in how money was raised than in how much money she could make. She soon found herself in southern China, doing a PhD thesis. It looked at micro-lending in poverty-ridden areas, the type of tiny peer-to-peer loans—think $50 to $100—that could buy a home wool-maker a new loom and spell the difference between starvation and survival. It's the same field of study that yielded Muhammad Yunus ("an absolute genius," says Tsai) a share of the 2006 Nobel Peace Prize, and eventually led to Tsai's first book, Back-Alley Banking: Private Entrepreneurs in China (2002, Cornell University Press).

With her Taiwanese background and command of Mandarin, Tsai says most people she talked with in China saw her as "another Chinese. They assumed that. It made it easier," she says. It also gave her access to the many ways Chinese entrepreneurs did business under the communist regime. "I was intrigued by them because they were completely marginalized and persecuted during the Mao era. Even through the '80s and early '90s, it was really risky being a private entrepreneur," says Tsai. What she quickly realized was that, with less than 1 percent of all state bank loans going to the private sector, people secured money any way they could. Micro-lending was but one option. During her fieldwork Tsai met loan sharks, financiers of underground money banks, people doing business in ways "completely unsanctioned by the People's Bank of China, even illegal in some cases."

What most amazed Tsai was how many of these entrepreneurs, instead of hiding in the shadows, boasted about their role in helping China grow. As important, Tsai began to learn how they felt about their country, its leaders, and what it was like doing business under the banner of communism. What she saw and heard conflicted with the notion that China's growing capitalism would create a class of powerful, financially secure individuals intent on replacing communism with the Western ideal of a liberal democracy.

Four years of investigating, one large national survey, and 317 interviews later, Tsai has published her findings in her new book, bluntly titled Capitalism Without Democracy: The Private Sector in Contemporary China (2007, Cornell University Press).

The book has garnered the attention and admiration of Tsai's colleagues. "She's combined quantitative and qualitative analysis in a way that's not too common," says Kevin O'Brien, a political science professor who chairs Berkeley's Center for Chinese Studies. "It's a real model of mixed-method research."

Noted China scholar Professor Andrew J. Nathan of Columbia University, who was Tsai's PhD dissertation advisor, calls the work exemplary. The current Chinese government, he observes, is "almost like a bumble bee that flies but shouldn't. This state-dominated, authoritarian system shouldn't co-exist with capitalism, but it does. "It presents a big mystery," he says, which Tsai has tackled squarely, "not through speculation, but fieldwork."

Sitting in her office in Mergenthaler Hall, Tsai expands on the book's central concept, which she calls "adaptive informal institutions." These informal institutions—which include numerous technically illegal and unsanctioned business activities as well as handshake agreements between local officials and private entrepreneurs that circumvent the central government's letter of the law—are at the heart of the growth of Chinese capitalism. But they're also key to the CCP's survival, as reformers within the party have shown a tremendous willingness to both tolerate these informal institutions and bring some capitalist concepts under the auspices of the party, even if they originated in democratic countries. Deng Xiaoping's leadership, unlike Mao Zedong's, was marked by economic reforms that escalated under Jiang Zemin. To reformers within the party, "Deng Xiaoping said they should judge economic policies by their effectiveness, not their ideology," says Tsai. China's huge private sector growth in the last 30 years "enabled elites to make deeper reforms against the objections of conservatives who didn't want to dismantle socialism."

Tsai's tales of modern Chinese business read like a cross between a primer in survival and a night in Rick's Cafe in Casablanca. On one side are local officials, often corrupt and content to forgo rules if it means a growing economy will make them look good in the eyes of their Central Party superiors. On the other side is an unlikely cast of characters, peasants and laid-off state workers alike, who are struggling to establish businesses while navigating labyrinthine bureaucracies. The end result is Tsai's "adaptive informal institutions" that give each side what it needs while keeping the central government, if not completely satisfied, at least off the players' backs.

red hat illustrationTsai's favorite example of such an institution is what Chinese call "wearing a Red Hat." Drawing from Marx's Das Kapital, the CCP had long declared that "private" businesses with eight or more workers were considered exploitative and forbidden (those with fewer than eight were encouraged and called "non-exploitative household producing units"). Businesses with more than eight employees were allowed, but only if they were registered as public collective enterprises, as in the public held ownership. And that's exactly what happened: Hundreds of thousands of private businesses "wore a Red Hat," registering as public collectives and receiving the benefits (i.e., lower tax rates, less bureaucratic harassment) off-limits to smaller private enterprises. "This takes local collusion," says Tsai. "Local officials are helping local entrepreneurs come up with ways of getting around rules that are anachronistic or inconvenient, all in the interest of local economic development."

Similarly, when foreign investment was encouraged by the state with tax incentives (foreign-invested businesses didn't have to pay tax until two years after they first showed a profit), savvy Chinese entrepreneurs learned to play the offshore game. "They sent their money on a little trip through the Cayman Islands. Then on to Hong Kong. It made their businesses look foreign," says Tsai.

"When I flat-out asked if entrepreneurs wanted democracy in China, the vast, vast majority said, 'No. Democracy would be destabilizing. We're too poor of a country to support a mass democracy.'"

—Kellee Tsai

This massive move toward privatization and keeping money on the local level has strained the state's coffers, theoretically making it ripe for the type of change American foreign policymakers long envisioned. But Tsai's extensive research—the aforementioned national survey covered 1,525 private entrepreneurs—shows why visionary political leadership isn't likely to come from the burgeoning rolls of those in business for themselves. Tsai notes they're too diverse a group, too consumed with their own competitive infighting to ever form a cohesive, united class. And forget about overthrowing the ruling party. At this stage of their economic development, entrepreneurs appear to have loyalty to only one ideal: stability. "When I flat-out asked if entrepreneurs wanted democracy in China, the vast, vast majority said, 'No. Democracy would be destabilizing. We're too poor of a country to support a mass democracy. Look at India. See how poor it is. If we became a democracy the country would fall apart and economic growth would slow down,'" says Tsai.

Even those with the greatest opportunity to create regime change—China's 106 billionaires—aren't likely to do so, says Tsai. "Those whom the Chinese Communist Party have to worry about the most, those with the most resources to finance a genuine competitive political party, are investing in exit strategies. They're diversifying their assets. They don't want it all in China. They're sending their kids to Hopkins. I'm finding them in my classroom. They're hedging."

As is the CCP as a whole. Whereas entrepreneurs were once shunned, harassed, or outright arrested by the party, now they're actively sought out as members. What Tsai says started out as a "permissive environment, an experimental attitude to get China's economy back on track" under Deng Xiaoping has turned into, if not an outright embrace of capitalism by the party, at least a desire to snuggle up with it, make nice, and see if capitalism can be folded into its concept of 21st-century socialism under an authoritarian, one-party regime. The CCP's 2004 revision of its constitution introduced the notion of protecting private-property rights, signaling to close political observers the party's willingness to move with the times. "The big misconception is that the Chinese political system hasn't changed," says Tsai. "In fact it's a dramatically different entity than it was 20 or 30 years ago. An entire sector that couldn't in the past engage in private profit now can."

And, she adds, the party's continuing flexibility may well frustrate pundits who insist that capitalism will eventually yield democracy in China. "I think that the CCP's change, ironically, is a source of authoritarian regime resiliency and durability," says Tsai. The CCP has shown an "an adaptive capacity for endogenous change," she says, "rather than having to fall apart to change the system, or go through a dramatic revolution to change the system, or face external imposition or foreign occupation to try to create a democracy."



Freelancer Mat Edelson, who lives in Baltimore, writes frequently about issues pertaining to public policy.