Can China’s Economy Overcome the ‘Autocracy Handicap’?

The West tends to look at China through the lens of its rocky relationship with the United States. This year, however, the spotlight will likely shift to China’s domestic challenges. For all the importance of Sino-American ties, China’s biggest struggle is always with itself. Xi Jinping’s November trip to San Francisco stabilized relations with the United States so he could buy himself time to tackle his most pressing problem: a faltering economy. After decades of success, Beijing’s vaunted economic progress is looking shaky. The International Monetary Fund estimates China’s growth slowing to 4.6 percent next year due to growing debt, a troubled real estate sector, and other challenges. But the economy’s real problem may be even more fundamental: Is the political economy that reliably fueled growth in the past still able to deliver?

After the Cold War, rich democracies thought they could sit back and wait until China’s surging economy brought political freedom in its wake. Instead, the opposite happened. Strong growth seemed to validate Beijing’s “state capitalism,” with a vibrant private sector flourishing under the party’s control. After Xi took over in 2012, party influence only deepened.

Democracy is not a prerequisite for economic takeoff. In fact, China and other autocracies can be especially adept at mobilizing the labor and investment needed to spark growth. But autocracies are not so good at getting economies over the finish line to developed status. In the Organization of Economic Cooperation and Development club of the world’s richest economies, most are some type of democracy. The only outliers are city-state Singapore and resource-rich places like the United Arab Emirates, Saudi Arabia, and Kuwait.

China may have made remarkable progress since opening its economy in 1979, but it is not rich yet. With per capita GDP of about $12,720, China is one of 75 countries in the World Bank’s “middle-income” group. In this cohort, the link between development and democracy is ambiguous: the ranks include democratic Colombia and Brazil, but also autocracies like Egypt and Myanmar.

The majority of middle-income countries succumb to the “middle-income trap” and stagnate. Those that escape usually do so by boosting labor productivity—and are typically democracies. That is not an accident. Autocracies tend to overinvest in unproductive sectors, and China is no exception. After 2008, China’s productivity growth sagged as planners emphasized infrastructure, real estate, and state-owned companies over the more efficient private sector. According to the International Labor Organization, GDP per hour worked in the United States is around $70, versus about $15 in China.

China’s state capitalism is increasingly a liability. In other words, an “autocracy handicap.” That’s why Xi Jinping faces a fundamental contradiction. Above all, he wants the party to keep its monopoly on power. He also knows that for most Chinese, party legitimacy rests on delivering a higher standard of living. Spurring growth, however, now means letting private economic forces play a stronger role—an approach counter to Xi’s proclivity for asserting political control.

Those contradictory inclinations are everywhere: party crackdowns on entrepreneurs and education companies and “guidelines” for boosting private sector confidence. Official pronouncements on economic “security” and a new government agency to support the private sector. Raids on foreign companies in China and Xi Jinping’s warm words to U.S. business titans during his visit to San Francisco last November.

Contrary to widespread misperceptions abroad, the party is not always oblivious to public sentiment. In practice, leadership often tries to address problems that could threaten its authority. The autocracy handicap may be the party’s toughest challenge to date. Last month’s Central Economic Work Conference, Beijing’s annual economic planning exercise, reiterated Xi’s longstanding priority of “high-quality development” and chose creating a “modern industrial system” as the leading priority, followed by a range of earnest goals such as “expanding domestic demand” and “deepening supply-side structural reform.” For an economy facing such stiff headwinds, the Central Economic Work Conference pronouncements sound more like kicking the can down the road than profound reform.

For Beijing, growth is vital not just for prosperity, but for the party’s authority. China’s state capitalism worked better and longer than expected. While there may still be some dregs in the tank, the long-term reality is stark: autocracies simply do not deliver the economic goods as well as more politically open systems.

The stakes are high: China is now the world’s second-largest economy, and the first- or second-biggest trading partner for most of the world’s major economies. Even in an era of “de-risking,” an economically potent China is a planning baseline for global business and investors. Xi Jinping has given himself breathing space by putting ties with the United States on a firmer footing. How he uses it will determine whether or not China can revive growth—and the party’s basis for imposing its legitimacy.

Hanscom Smith is a senior associate (non-resident) with the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, D.C.

Hanscom Smith
Senior Associate (Non-resident), Freeman Chair in China Studies