The snake and the hedgehog

2005: China - You could say that, in marrying state and market, China is pursuing the Third Way. But

Is it possible for China to build a civilised, socially cohesive society over the next few decades? Can it do this during the still early phase of its industrialisation, when there remains a huge rural reserve army of labour?

Since the late 1970s, China has enjoyed one of the most remarkable periods of economic growth ever seen. However, the country faces deep economic, political and social challenges as it moves into the next period of development. These challenges include a vast amount of poverty and rapidly growing inequality; a deeply degraded natural environment; the declining capabilities of the state; widespread corruption within the Communist Party; and the dangers of engaging closely with the global financial system, vividly exposed during the Asian financial crisis.

China's leaders are trying to deal simultaneously with the challenges of globalisation, transition and development. No other country has ever faced such a set of challenges. There are no textbooks to guide China along this path. The leadership's responsibilities are huge, as the price of failure is so great and the possibility of social and political disintegration is real. Every policy effort has to be directed towards avoiding this potential catastrophe.

There is intense debate among Chinese policy-makers, scholars and society at large about each of these issues. Some people argue that China has no alternative but to accept that this phase of development will be characterised by a harsh political and economic order. They compare this with the phase of "primitive capitalist accumulation" (from Marx's Das Kapital). Few people dispute that the main task for China's policy-makers is to ensure social stability. Many argue that the only way to achieve this in such a turbulent environment is through the exercise of social control: the process of accumulation must come first, or there will be no "development". Such arguments are typically supported with historical examples from early industrialisation elsewhere.

Others, both inside and outside the country, argue for regime change. They believe that the hard tasks which lie ahead can be resolved only with the sort of democratic institutions found in the west. However, many people in this camp believe that the model for China to aim at is the United States, not the "bankrupt" models of the European welfare states or "quasi-socialist" Japan. They believe that the smaller the role for the state, the faster China will progress.

Arguing against this, China's "new left wing" says that the country has taken a fundamentally wrong turning by moving towards a market economy that is increasingly integrated with, and dependent on, the global economy. This group believes that the country can ease its growing tensions only by reducing its reliance on international trade and capital inflow, and returning to the policies of the Maoist years.

Another perspective is that China must continue along the path it has trodden for the past two decades or so, but adapt this approach to the fresh challenges the country faces. For more than a quarter-century, China's leaders, in sharp contrast to the leaders of the former Soviet Union, have been groping their way forward from the planned economy of the Maoist period. Their approach throughout was influenced by the disasters that the country has experienced - the famine after Mao Zedong's "Great Leap Forward" and the suffering during the cultural revolution. They were determined to avoid such policy-induced disasters.

The process of reform has been treated throughout as a complex process of "system transformation", in which economic, social, political and psychological factors are considered as a seamless whole. Unlike the Soviet Union, China decided to address economic reform before considering political reform, though believing that this was not inconsistent with efforts to improve the capability of the bureaucratic apparatus at the same time. The leaders are alive to the dangers of system disintegration, which would render all previous achievements meaningless.

If by the "Third Way" we mean a symbiotic inter-relationship between state and market, it can be argued that China has practised its own Third Way for 2,000 years. The foundation of its hugely impressive economic and social development, the Chinese Third Way was not simply an abstract set of rules about intervening in the market. It was a complete philosophy that combined comprehensive thought about concrete ways of both stimulating and controlling the market with a deeply thought-out system of morality for rulers, bureaucrats and ordinary people.

When the system worked well, the philosophical foundation was supplemented by non-ideological state actions to try to solve practical problems that the market could not tackle. It is a complete misunderstanding (not least, by Karl Marx) to view the traditional Chinese state as a stagnant "oriental despotism". Confucianism produced a concept of "duty" that was the foundation of social prosperity and collective action. That the system went through regular cycles when these principles were poorly observed, that rulers and bureaucrats were corrupt, and that the economy and society foundered, should not blind us to the underlying coherence and lasting benefit from this integrated system.

China today is groping for its own Third Way in circumstances totally different from those of Europe during recent decades. Europe was already industrialised; it was militarily strong; it contained a host of powerful, globally competitive firms; and it was able until the 1970s to assert strong controls over international capital movements without incurring international pressure to do otherwise. Compared with the US, China today is painfully weak militarily. And the vast majority of the population still consists of poor farmers; that will remain so for a long period ahead.

China is still locked firmly in the phase of economic development where there are unlimited supplies of labour. The "global middle class" constitutes a tiny fraction of the population. The high-value-added modern sector of the economy is increasingly dominated by international capital, with close to $500bn in accumulated investments, forming complete production systems within China, and accounting for more than half of the country's export earnings. As the price for its participation in the international economy, China faces intense pressure to liberalise its financial system comprehensively.

Europe tried pursuing a Third Way to build a civilised society after it had already industrialised and developed. China is trying to construct a Third Way and a civilised society while it is still in the midst of economic development and industrialisation, with a huge surplus labour force, amid a turbulent international environment, and with a flow of foreign capital surging into the country. It is a challenging setting.

In the early 21st century, China cannot step outside the mainstream of world history. It cannot turn around and go back to the Maoist period. However, system survival necessitates using the market as the servant of the development process, and not allowing it to be the master.

Can free-market fundamentalism solve the problem of the rapid rise in social inequality within China? Can it solve the problems of the Chinese farm economy? Can it solve the Chinese environmental crisis? Can it provide China with an ethical foundation for building a socially cohesive society? Anglo-Saxon free-market fundamentalism, which reached its modern apogee in the 1990s, offers no hope for sustainable global development at the level of ecology, society or international relations. China's socio-economic challenges require creative, non-ideological state intervention with the market to deal with the practical problems that the market alone cannot solve. The biggest challenge lies in the relationship of China's financial system with the global economy, as this has the greatest potential in the near future to trigger system disintegration.

If China is able to marry the "snake" of the global market economy with the "hedgehog" of its ancient history (and more recent history, too) it will be able to offer a way forward for a stable, socially cohesive society. If it fails to do so, its entire political and economic system could collapse. This would be hugely damaging not only for China, but for the whole world. At the very least, China may be condemned to a long period of harsh social control to contain the surging tensions of its own high-speed growth.

During the Asian financial crisis, China had to make a "choice of no choice" (mei you xuanze de xuanze) to survive by "cutting the trees to save the forest" (ie, allowing Gitic, one of China's leading financial firms, to go bankrupt). If it wishes to survive today, it must again make the "choice of no choice" to re-establish social cohesiveness, confidently using its own past traditions as well as the best traditions from outside the country.

If China were to "choose" the path of free-market fundamentalism, including full liberalisation, it could lead to uncontrollable tensions and social disintegration. A crisis in the financial system would fan the flames of the combustible material in all sectors of society to which the financial system's tentacles extend.

However, the "choice" to increase and make more effective the role of the state in meeting socio-economic challenges can succeed only if the state, with the Communist Party at its core, can radically improve its efficiency and eliminate rampant corruption. State improvement, not state desertion, is the "choice of no choice" for survival. If this were done, China's survival could offer a beacon of hope for those who seek an alternative to the drive towards free-market fundamentalism. This is a crossroads not only for China, but for the world.

Peter Nolan is Sinyi Professor at Cambridge University. He is recently the author of China at the Crossroads (Polity Press)