Thursday, October 02, 2003
It is not surprising that China has not carried out banking reform. No sane politician in that position would. Why change anything if there is so much money to go around. A prime case of this under very different institutional conditions is Japan. I only raise it as a puzzle in this dissertation to contrast against the whole Naughton optimism and the prevailing wisdom that insulated bureaucrats would automatically carry out reform. I also think you are on to something by comparing "money rent" with "oil rent." In a way, both are sort of "natural endowments," if you assume that savings rate is given by nature rather than by policies. Also, like an oil state, the banking system is really used to distribute rent to officials at every level to maintain their loyalty. This is why corruption in the grain procurement system is rarely investigated.
Your question of what would happen if savings somehow collapse is very intriguing. First, if China run into an Argentinean situation, its monetary sovereignty will be taken away by the IMF. China knows this, and it is partially motivating it to carry out incremental reforms. If an IMF takeover occurs, I think actually the Party people and the bureaucrats will unite to try to regain control of the banks. Both sides gain enormous amount of rent under the current system, although now the central bureaucrats benefit a bit more. I think they can solve the collective action problem in this case. Besides, if the IMF takes over the financial system, the CCP is in a world of trouble. It will have to stop subsidizing SOEs, agricultural procurement (which really is a way to subsidize rural cadres), and major construction projects, all of which distribute rent to CCP cadres. Without this rent, there is really no incentive for local officials to stay loyal to the Party.
I would not disagree with your point about 1994. I didn't have very good material for what happened in 1994, and I look forward to reading your perspective on it. My point is simply that Zhu probably established himself as a credible politician in that period, whereas he was just a technocrat before that point. This does not mean that he was omnipotent after that. He made many compromises in 1994 in order to push through the tax reform, which faced fierce opposition in many quarters. I think there will have to be a much deeper account of what happened in that year when the sources become available.