Deng Xiaoping’s ‘cat theory,’ parodied by the political cartoonist Rebel Pepper. (Rebel Pepper)Deng Xiaoping’s ‘cat theory,’ parodied by the political cartoonist Rebel Pepper. (Rebel Pepper)

Editor’s note: China’s rapid economic growth over the past three decades began with a privatization process pushed forward by former Chinese Communist Party leader Deng Xiaoping. Following the decade of extreme political oppression during the Cultural Revolution, Deng presented his famous “Cat Theory” to propagate his introduction of a capitalist market economy. The theory states: “It doesn’t matter if a cat is black or white; as long as it catches mice, it’s a good cat.” In essence, the “black cat” and “white cat” stands for “planned economy” and “market economy,” and Deng was saying that whichever one gets the job done will be adopted. However, more than 30 years after Deng’s proclamation, with China’s economy in the doldrums, massive government corruption, and extreme social inequality, many now question China’s economic model. The following blog article is an example.

In Deng Xiaoping’s home, there is a painting called “Two Cats” by renowned painter Chen Liantao. An inscription in Chinese calligraphy says:  “It doesn’t matter if a cat is black or white; as long as it catches mice, it’s a good cat.”

In 1985, Deng was voted “Man of the Year” by Time magazine. The white cat, black cat theory was also featured in Time magazine. That year, Deng’s “Cat Theory” spread from China to the world. Since the Third Plenary Session of the 11th Communist Party’s National Congress, the “Cat Theory” has become the theoretical mark of China’s transition to economic development.

Cats Catch Mice

Cats are born to catch mice. Human beings have human nature, without which people are not humans. But humans also have a selfish side, a tendency to look after their own self-interest. Almost everyone wants to get rich, from the emperor to the common people.

Enterprises share the same nature in terms of market competition. The impulse to “catch mice” is completely different in private enterprises and in state-owned enterprises. Private enterprises are driven by a strong impulse of self-interest, similar to the nature of a wild cat. State-owned enterprises are different, because “catching mice” is not directly related to “eating mice.” Therefore their nature has changed. For example, Chu Shijian created the Red Pagoda cigarette kingdom that paid tens of billions of yuan in taxes each year. But in the end, Chu was sentenced to decades of imprisonment just for stealing a “small fish.” The Chinese communist regime made the cat look at the fish, but didn’t allow the cat to eat.

Allowing All Cats to Catch Mice

Why can some cats catch mice, but others cannot? In a given social environment, it depends on whether they are allowed to do so, or which ones are allowed to do so. All cats have the nature to catch mice. But if some cats are locked up in a cage, they cannot catch mice. From this perspective, the statement “regardless of white cat or black cat, the cat who catches mice is a good cat” is a false proposition.

The same is true for a profitable industry. Take the financial industry for example, it is easier for state-owned capital to enter the field, but very difficult for private enterprises to enter. Is it that private enterprises do not know how to manage their finances? Of course not. In order to protect “state cats,” some “wild cats” are not allowed to catch “mice.” In an unequal market environment, it is not possible to know which cat is a good cat.

Cats catching mice is not the secret of success. The secret of success is that we can all catch mice. Why are you the only one allowed to catch mice?

Not All Rich Cats Were Good Cats

White cat or black cat, those who became rich first were not necessarily good cats. Letting some people get rich first was a strategy of the “Cat Theory.” This strategy enabled some people in China to become world-class tycoons. It also made China grow into the world’s second largest economic power. However, not allowing white cats to catch mice made black cats become very large. After black cats became rich, they did not have the intention to let white cats join them in catching mice.

In the three decades after China’s reform, the vast majority of rich Chinese entrepreneurs and tycoons have benefited to a certain extend from this inherent injustice in the system. The reason you caught mice was not because you were more capable than Jack Ma, but because you were allowed to do so by your master.

Dysfunctional Distribution System

For a long time, a dangerous economic policy tendency has prevailed: the introduction of “demand side” or “supply side” policies. These ended up furthering the interests of a few people by letting them reap profits. In fact, many times polices were made to benefit the entire population, but they often ended up benefitting only a small number of people. This is the reality.

The “demand side” and “supply side” reforms developed by western economies are unable to unlock China’s economic gridlock. The real issue of the Chinese economy is that its mechanism of “distribution” is degenerating. It cannot regulate the fair distribution of social benefits. The “distribution side” of the machine has rusted and shut down. In fact, it is accelerating the process of the wealthy getting richer, and the poor getting poorer.

In the past, we used to refer to dysfunctions in the distribution system as a problem of income distribution. In fact, this is a one-sided view. In today’s Chinese society, the ways to become wealthy are diversified, with income being only one of the channels and no longer the main channel. Regardless of how rich the wealthy are, who became rich through labor income? Very few.

Having the majority of people become rich cannot be limited to labor income. Income from labor is limited. One needs knowledge, capital, human relationships, and opportunities. For example, if a small shopkeeper wants to open up a shop or expand his business, he needs liquidity. Getting the capital is critical for him. Without capital and relying only on savings from his income, he may not be able to achieve his dream of opening a shop.

Financing opportunities are related to the distribution of capital, access to knowledge and education. Opportunities to accumulate wealth are related to social equality and fairness. How a society distributes resources equally among all members of society is not only an issue of income distribution, but also an issue of fair competition. Without fair competition, opportunities are controlled or monopolized by a few people and society will accelerate the polarization of wealth.

Why are black cats fatter than white cats? It is not because there is a difference in their genes, or that black cats are smarter, more capable, or work harder. The problem resides with the owner.

Fan Di is an independent economist and part-time professor of Peking University and Sun Yat-sen University. He obtained a Ph.D. at the University of California, Berkeley, supervised by Li Yining of Peking University and Nobel Prize winner George Arthur Akerlof. Fan has been a senior executive and consultant at major banks, financial firms, and large companies. This is an abridged translation of an article posted on Sept. 9, 2016 on his public WeChat account.

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A general view of Qian'an steelworks of Shougang Corporation on January 20, 2016 in Tangshan, China. (Xiaolu Chu/Getty Images)A general view of Qian'an steelworks of Shougang Corporation on January 20, 2016 in Tangshan, China. (Xiaolu Chu/Getty Images)

When China’s capitalist economic system formed a union with the red regime, it created a unique political and economic structure that can neither be called socialism nor democratic capitalism. I call it the Communist Party’s capitalism. I coined this term to refer to the capitalist economic system under the leadership of the Chinese Communist Party (CCP). The CCP uses the capitalist system to strengthen its authoritarian regime, which is the essence of the Chinese model.

The CCP’s goal in the past was to eradicate capitalism. Maoist red China completely eliminated private ownership, and the majority of capital assets were taken away from the people. At that time, other than political privileges, the CCP’s ruling elite and the “red second generation” did not own or inherit any businesses or property from their ancestors.

But beginning with the Deng Xiaoping era, the red regime and the capitalist economic system joined hands. Not only did the CCP allow the development of capitalism, the Communist Party elite itself turned into China’s richest and most powerful capitalists.

Cheng Xiaonong (New Tang Dynasty Television)

It’s not a new revelation that socialist countries will sooner or later become capitalist countries again. In 1988 a seminar discussing socialist reform was held in Vienna, Austria. An economist from communist Hungary made a shocking statement at the meeting. He said that so-called socialism is nothing more than a transition from capitalism to capitalism. According to him, socialism is short-lived, and countries that have turned from capitalism to socialism soon return to capitalism. A year later, this Hungarian’s opinion was confirmed by the disintegration of the Soviet Union and the Eastern European communist bloc.

Does this mean that crony capitalism is the only way to reform socialist countries? Is the Chinese model unavoidable? After years of research on the transition from socialism, I discovered that there are at least three paths to return from socialism to capitalism, and China has chosen the worst one.

Transitional Paths From Socialism to Capitalism

Once a communist country bids farewell to the Stalinist socialist model, it embarks on a path of institutional transition. The so-called transition refers to economic system liberalization or economic restructuring, which includes replacing public ownership with privatization and substituting the planned economy with a market-oriented economy, as well as political transition in terms of democratization. From 1989 to the present, communist regimes around the world, except for North Korea, have completed the transformation or are in transition. Looking at the paths of transition, we can find that economic transformation was relatively easy and political transformation was more difficult. In the 1980s, China was once a pioneer of economic transition. Socially and politically China now lags behind due to the rejection of democracy.

In all communist countries, once transition starts, the red elite try to highjack the country using their power. However, this situation is not inevitable. So far, there are generally three models of economic and political transformation of former socialist countries.

Central European Model

The first is the central European model that included Poland, Hungary, the Czech Republic, and Slovakia. The political transition in these countries was dominated by oppositional intellectuals, and the involvement of the red elite in economics was curbed. The main stance of oppositional intellectuals was not to share power or to reconcile with anyone from the red elite, but to eradicate the remnants of the Communist Party culture as much as possible.

In the eyes of the people in central Europe, Communist Party regimes were merely puppets of the Soviet Union that should be cast aside. As a result, red elites in central European countries could not do whatever they wanted during the transformation; they faced enormous social pressure. They could not manipulate the parliament or make a fortune through privatization. Therefore, the red elites mostly failed to benefit from the restructuring. The socio-economic status of approximately one-third of red elites dropped, with about half going into early retirement.

Some U.S. scholars refer to the central European transition model as “creating capitalism without capitalists.” This argument is subtle; it means “without red capitalists.” The old capitalists had already been eliminated during the communist era. If many newly-rich emerged within a short time after restructuring, then most of them had to be from the red elites. In short, the central European model was to rebuild capitalism without the red elites. Such a transformation path is stable. It bids farewell to the red regimes without reverting back.

Russian mandarin second-hand dealers at a market on the Russian-Abkhazian border outside the Russian town of Sochi on Dec. 19, 2006. (Denis Sinyakov/AFP/Getty Images)

Russian Model

The second path is the Russian model where the former red elites became democrats. They shared the benefits of the transition and made huge profits. At the same time, the people were also part of the privatization process and were able to obtain property.

This is the typical path of “old elites bring in new social model.” Compared with the central European model, the Russian model was “comrades’ capitalism.” The new elite consisted mostly of former cadres. This is also a type of crony capitalism. Unlike in the Chinese model, members of the new elite that transitioned from the old establishment are no longer Communist Party members. Under the Russian model, the democratic system can be easily manipulated by the old elite, although not completely reverted. So the new system carries deep traces of the old system.

Chinese Model

The third path is the Chinese model. Its main features are: the CCP abandoned the socialist economic system set up in the first 30 years during the Mao Zedong era, such as comprehensive state ownership and a planned economy. But it uses Communist Party capitalism to strengthen the authoritarian system set up by Mao.

The red elite and their relatives were the most likely ones to get rich, and they protected their privileges with political power. Elite families have horded a huge amount of wealth while the country has suffered serious corruption during the privatization process.

This political corruption inevitably leads to social inequities. When wealth and opportunities are solely controlled by the upper social class, the large underclass will inevitably become resentful toward the elite, officials, and the wealthy.

Dr. Cheng Xiaonong is a scholar of China’s politics and economy based in New Jersey. He is a graduate of Renmin University, where he obtained his Masters degree in economics, and Princeton University, where he obtained his doctorate in sociology. In China, Cheng was a policy researcher and aide to the former Party leader Zhao Ziyang, when Zhao was premier. Cheng has been a visiting scholar at the University of Gottingen and Princeton, and he served as chief editor of the journal Modern China Studies. His commentary and columns regularly appear in overseas Chinese media.

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