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Understand China, understand its tycoons

By Oliver August.

28 July 2007
The Globe and Mail

Entrepreneurs operate in a grey area created by Beijing, which wants to have its pseudo-capitalist cake and eat it too.

The longest-running immigration case in Canadian history is now entering its seventh year. Lai Changxing, who is variously referred to as "China's most wanted man" and the "kingpin smuggler," first appeared at an asylum hearing in Vancouver in July of 2001. Since then, opinion about him has become ever more divided.

There are those who fear Canada will turn into a haven for foreign criminals and those who are fighting to protect the legal guarantees for victims of foreign regimes. Both have merit. But throughout Mr. Lai's case, neither side has really understood who he is and what role he played in China. And without such an understanding, his case cannot be resolved.

During a successful business career in a rapidly transforming society, Mr. Lai was neither a victim nor a criminal, in the classic sense. Instead, he was collaborator of the Communist Party – the same party that now wants to imprison him. For years, he was a willing participant in a political system where rule-breaking is the rule, where only men like him can truly prosper.

To obey the laws of China's pseudo-capitalist jungle is to ignore them. No major business deal is done without a backhander. An official's palm is always waiting to be greased, and an honest man will not be a rich man. Some paths are more crooked than others, but rules will have to be bent somewhere along the way.

Mr. Lai supplied evidence of this phenomenon. While he lived and worked in Xiamen, on the southern Chinese coast, the city's growth rate was about 20 per cent a year. When he left and the government temporarily cracked down on illegal schemes in the area, growth dropped to zero.

This is not to say that all business in China is illegitimate – far from it. But to overcome obstacles such as greedy officials and antiquated rules, one needs to be at least cavalier with the law. And many are. The resulting economy is a gymnastic blend of authoritarian controls and anarchic privateering.

Who is responsible for creating it? Not Mr. Lai and other entrepreneurs. Not them alone. Beijing has encouraged the development of a grey economy by failing to guarantee private property rights, by refusing to make government business transparent, by drawing few clear policy lines, by tolerating official extortion rackets.

But, immigration lawyers judging Mr. Lai might ask, why do such a thing? How could Beijing possibly benefit? My Lords, it benefits tidily.

Beijing is dependent on strong economic growth to stay in power. Without the creation of millions of new jobs every year, it cannot hold down its restive population. And to generate growth, it needs entrepreneurs who take financial risks setting up businesses and factories. Beijing has learned that much since the days of Chairman Mao.

At the same time, it is afraid of the entrepreneurs and their ambitions. Mr. Lai and those like him are accumulating fortunes and accompanying political power that makes them independent of the Communist Party. To rein in the entrepreneurs, Beijing plays favourites. Men such as Mr. Lai are offered tax breaks, land deals and sweetheart contracts.

In turn, they are expected to curtail political ambitions – and hand out cash. The academic name for this is state capitalism, a system in which the government combines economic freedom with a firm hold over private business.

Beijing has long pursued such a system. By leaving the rules of the game unclear, it manages to boost both economic growth and political control.

An example: Throughout the 1990s, China charged very high import tariffs. Foreign-made cars cost twice their price in the West. Beijing was prepared to lower tariffs, but only if trade partners, mainly the United States and the European Union, would follow suit. And so the partners negotiated. For 13 years, they haggled over the terms of China's entry to the World Trade Organization.

In the meantime, China's booming economy fuelled a desire for ever-more foreign cars. This was where the crafty Mr. Lai came in. Instead of paying the high official tariff on imported vehicles, he paid a lower, unofficial "tariff" direct to the customs and military officers who controlled the shipping lanes and dockyards. The result was that Chinese market prices for foreign cars dropped and more people could afford them.

The same happened in many other markets, benefiting the economy and its political masters. China had it both ways. It maintained a strong negotiating position in the trade talks while benefiting from cheap imports, including fuel, electronics and cigarettes.

Then, in 1999, Beijing finally agreed to terms for entry to the World Trade Organization. Mr. Lai was no longer useful. Amid the crackdown, he fled to Canada.

But not only had Beijing previously tolerated grey areas such as the one in which Mr. Lai operated, it had practically mandated them. So to indict Mr. Lai for corruption and smuggling was simply shameless. Beijing created him. It bears the moral responsibility.

The real issue here is not corruption and smuggling but a system of government that grants unlimited power to officials. A good deal of corruption could be eliminated overnight by taking away what they have to sell: arbitrary control. Therein lies responsibility for corruption, not with citizens who are subject to these official whims.

Until this is understood, there can be no satisfactory end to Mr. Lai's immigration case. No, he is not the innocent victim his lawyers make him out to be. But nor is he a criminal kingpin.

(c) The Globe and Mail

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