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Essay Number 19
July 2003 

Chinese Capitalism and Transparency:  Economic Argument for a Free Press

by Satya J. Gabriel

"The Political Bureau of the CPC Central Committee will work to ensure the smooth progress of the reform of the administrative system and the institutional reform and set the objective of government reform as building a government featuring standardized behaviors, coordinated operation, fairness and transparency, and honesty and high efficiency."

Wen Jiabao, Premier of the State Council

Despite what the propagandists would have us believe, the economic process we call capitalism does not always produce economic dynamism.  And even in social formations where capitalism has played a dynamic role in generating new wealth and expanded production potential, conditions can change in such a manner as to slow down the process of growth and development, produce stagnation, or worse.  In other words, the very specific set of social behaviors that define capitalism can produce different outcomes, as well as related rules of interaction, depending upon the overall gestalt of social and environmental conditions.  Therefore, my argument (in prior essays) that China is being rapidly developed into a capitalist social formation does not necessarily mean continuation of the rapid economic growth that has epitomized the past two plus decades.  Indeed, a good deal of that growth has been a side-effect of unleashing self-employment/ancientism, rather than capitalism, although one should not underestimate the importance of those rural capitalist enterprises referred to as town-village enterprises.  In any event, to make sense of the type of capitalism developing in China and its implications requires examining a wide range of related political, cultural, other economic and environmental conditions.  We have to, necessarily, do this a little at a time and our work will always be incomplete because the possible variant combinations of these political, cultural, environmental, and other economic conditions is very large.  In this essay, I want to briefly explore one of these related factors:  the free flow of information about corporate and governmental activities (transparency). 

I believe transparency is a critical element in producing a dynamic, rather than stagnant, version of capitalism.  In order to make the argument, we need to advance an analysis of the overdetermined nexus connecting the performance of capitalism (in growth and development terms) to transparency.  But before we can do this we need to think about the nature of transparency --- what are the specific social rules that determine transparency and under what conditions can those rules obtain in a capitalist society?  We can then move to the next stage of analyzing whether or not these conditions exist in China and, if not, whether there are mitigating factors that might still produce the desired economic results of economic growth and development over the longer term.

Orthodox (meaning neoclassical) economists almost always assume that transparency is innate to market processes, which they assume are comprised of equally powerless and omniscient beings engaged in exchange.  But anyone who has ever bought a used car or a house or Worldcom stock knows that transparency is hardly innate to market processes and the participants in such processes are never equal in any measurable way.  Markets work as efficient and effective signaling and allocation mechanisms not because they conform to the utopian vision of neoclassical economists but simply because they inexpensively generate useful information that can help economic actors to solve problems, such as whether or not there is a sufficient number of people willing to pay X price for Y units of commodity Z to make it worthwhile to produce Y units of commodity Z.  It isn’t really necessary that this result is optimum in any social sense (much less Pareto optimal).   It is even possible that a significant number of the human beings purchasing units of commodity Z at price X will suffer buyer’s remorse, feel cheated, and wish they had never seen that advertisement lauding the virtues of Z or listened to that relative who recommended it.

How often have you said, after buying a product, “I wish I had known that . . .”    Fill in the blank.  In our everyday experience transparency can be quite elusive.  But then “caveat emptor."  We could add many more caveats.  Even in a democratic society, voters rarely understand the implications of their votes or have the necessary information to make informed choices among candidates (or even a choice that includes the candidate they really would prefer).  Add to that the problems with majority voting processes, see the work of Kenneth Arrow and others since.   No, transparency is hardly built into market processes.  Instead, market relationships are rife with deceit, hubris, and confusion, among other things.  Transparency must be produced.  And in order for transparency to be produced, there must be social institutions, operating within appropriate rule frameworks, wherein individuals have the task/obligation/right of seeking out and exposing relevant information to the public.  The institution that has traditionally served this function is the press, at least the relatively autonomous, competitive version of the press (the so-called Fourth Estate).[1]  

When financial disasters, such as the recent debacles with Enron, Adelphia, and Worldcom, occur it is partly a result of a breakdown in the press.  Where were the investigative financial reporters?  The information on Enron and Adelphia were particularly easy to identify.  I know, having pointed out problems with both of those firms in my course in corporate finance prior to the fit hitting the shan.  The problem was that the financial press is not as autonomous or competitive as it should be in order to produce the level of transparency that would have resulted in early exposure of the shenanigans at Enron and Adelphia (or inside Arthur Andersen Accounting, which is implicated in far too many of these financial scandals).  What this means is that the sort of free press necessary to create transparency and push capitalist boards of directors and managers to behave themselves and produce value (the stuff of which growth and development are made) is one that is even freer than the press in the United States at present (where a significant percentage of the information producing machinery is now in the hands of huge conglomerates that have a vested interest in watering down or avoiding stories critical of key advertisers, business associates, or even their own senior management).  And without a free press to produce transparency, the agent/principal problem can become a full-blown agent/principal crisis, among other negative results. 

And yet in China, the press is not only less free than the press in the United States or France or Great Britain, but there are ambiguous signs of whether or not the Communist Party of China led government has any intention of changing the rules of the game in such a manner as to allow greater press freedom in future.  The authorities still shut down newspapers, magazines, and web sites[2] on a regular basis because they don’t like the substance being produced.  Sometimes that censored substance is just the facts necessary to create more transparency and to motivate better decision-making in official positions, whether in senior management of huge state-owned enterprises or within the governmental bureaucracy.  Transparency is all the more critical in a society where governmental authority is monopolized by a single party and continues to play a major role in the economy.  But it is no less important in a society where economic decision-making powers are becoming more decentralized and diffused, including decentralization and diffusion of the power to appropriate and distribute capitalist surplus value.  Indeed, unlike the utopian vision of the neoclassicals, capitalism always has the potential to generate corrupt behavior, value destroying behavior, and the conditions for wide scale economic problems or even crises.  To the extent that transparency exposes such behavior and creates possibilities for intervention to correct problems before they get worse or, alternatively, encourage behavior that would prevent the problems from happening altogether, then transparency can generate a better variant form of capitalism than an environment of relative information scarcity.

And in fact one of the reasons for the resiliency of capitalism within democratic social formations (as opposed to the more mixed picture for capitalism in less democratic social formations or social formations where democracy is only an occasional luxury) is that the effect of signaling from a range of sources, the ballot box, the market places, the free press, results in better public policy choices, as well as better economic decisions within enterprises.  Problems are less likely to grow unnoticed in such an environment.  And solutions are likely to exhibit greater flexibility in the range and quality of choices.  Ironically, China's economic development has been aided dramatically by the flexibility of the CPC, which has been able to shift policies several times since 1949, as a result of internecine power struggles among various factions of the CPC, as discussed in earlier essays in this series.  This is one of many factors to distinguish and give advantage to the Chinese social formation under a communist led government vis-à-vis the now defunct USSR (where flexibility was stifled by Joseph Stalin, if not completely exterminated).

Transparency is, in this sense, just as important as market processes in creating an environment where the necessary signals can be produced and communicated to relevant parties.  Capitalism, in the presence of such transparency, will be more flexible for the same reason that capitalism in the presence of more competitive market driven decisions will be more flexible than capitalism with less competitive market driven decisions (or administrative/bureaucratic driven decisions).  Most importantly, transparency (and voting and market processes) act to signal impending crises and provide valuable information during crises.  Although there is no guarantee that government officials or enterprise senior management will respond appropriately to information (or even that the public will be paying attention), it is more likely that the quality of decisions will be considerably better in an environment of transparency.

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[1] The existence of a press is not sufficient to generate transparency. Transparency is more likely to occur in the presence of a relatively large number of autonomous institutions within the press who are partly motivated by competition over information consumers and status as effective agents of information dissemination. To the extent that the press role is monopolized/oligopolized by a single or small number of press institutions, there is a reduced probability of aggressive investigation and reporting of information. In China, government officials have the power to command agents of the press to comply with implicit or explicit guidelines for reporting. Officials have been known to tell agents of the press not to publish certain stories or to only write positive stories about government activities or policies. To the extent these powers are reproduced in future, the press will not be autonomous enough from the government to serve the oversight role of providing reliable information on governmental (or other) activities. This makes it less likely that misfeasance or malfeasance by government officials (or their cronies in business) will be exposed and corrected. Similarly, as China has discovered, market processes can sometimes work at odds with generating reliable information (transparency). When information is commoditized, it becomes possible to buy custom designed information reporting, including the production of fabricated or distorted information. Chinese officials have expressed concern about news stories being commissioned by firms, the content of which was not completely in accord with the facts. This behavior is recognized as a form of corruption. These officials have also expressed concern about the linkage between advertising, as this form of information dissemination grows in importance, and the writing and reporting of news stories. These are concerns that go directly to the heart of transparency.

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[2] The widespread optimism that the Internet would serve as a major medium for exposing the public to news the authorities might have censored had not been completely unfounded. There is evidence that the Internet (and cell phones) provides a medium for the rapid and relatively uncensored dissemination of information and that the effect it has on public opinion can influence public policy decisions. However, the ability of the Net to have even greater impact hinges, in part, upon the problem of credibility, more so than unavailability despite government efforts to censor the Net. The public doesn't know what is credible on the Net and there is often conflicting information. Nevertheless, it does appear that, at least for young people, whose experience with this new medium and computer technology, more generally, allows them to better filter the facts from the fakes, the Internet has become a major source of information. All over the world, there is a very dynamic tug of war going on between those who would keep the Internet open, making it a source of transparency, and those who would tame this medium and make it serve corporate and/or bureaucratic interests.

(The following citation was added 17 June 2005): Johan Lagerkvist has an interesting essay on this topic titled, "The Rise of Online Public Opinion in the People's Republic of China," in China: An International Journal, Volume 3.1, 2005, pps. 119-130. If you have access to Project Muse, this journal is available through that online source.

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Copyright © 2003 Satya J. Gabriel, Mount Holyoke College. All Rights Reserved.

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