Broken China: A dysfunctional nation

As a result, China has built a bureaucratic machine that at times seems almost impervious to reform. Even if Beijing has the best intentions of fixing problems such as undrinkable water and unbreathable air, it is often thwarted by hundreds of thousands of party officials with vested interests in the current system.

Beijing knows it must change course. China's $1.2 trillion in foreign reserves -- the most ever amassed by any country -- and soaring trade surplus may seem like signs of strength, but they're actually evidence of an overreliance on exports, weak domestic consumption and a primitive financial system (see "China: Tons of money, wanton waste").

And a dearth of social services makes a widening income gap between urban and rural areas politically explosive. Conjuring ancient Confucianism, President Hu Jintao harps repeatedly on the need to attain a "harmonious society," implying that China today is anything but.

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In March, Premier Wen Jiabao labeled the economy "unstable, unbalanced, uncoordinated and unsustainable."

Some reforms are under way

To their credit, Chinese officials have unveiled a blitz of corrective measures. Regulators this year shut more than 180 illegal food producers. A directive ordering government agencies to use legitimate software has helped cut the share of pirated programs to 82% from 92% in 2001. Beijing is launching health-care initiatives, trying to tame the runaway stock market and passing stringent environmental rules. And in 2006 alone, nearly 30,000 officials were prosecuted for corruption.

If this reformist agenda fails, watch out. The working assumption from Washington to Tokyo is that China is on a trajectory to become a modern market economy and a responsible global citizen. But if its problems persist, the world will have to keep living with a giant trade partner that can't guarantee safe products, control piracy or curb pollution. China could keep growing rapidly for years, but a scenario of dysfunctional administration calls into question whether it will really become an economic superpower with world-beating corporations that challenge the West in innovation -- a Japan Inc. on steroids.

China doesn't lack the finances to fix its shortcomings, and it has the legal structure for regulating the environment, health care and worker safety. What Beijing does lack is the will to overhaul a political structure that gives party officials down to even the smallest villages huge influence over many facets of economic life.

"The laws in China compare with some of the best in the world," says activist Liu Kaiming, the founder of the Migrant Workers Community College in Shenzhen. "But it is not able to enforce the laws fully because local governments are focused on pleasing the big bosses in companies."

What's more, few of the country's enterprises are proving they can move beyond low-cost commodity goods and succeed on a global stage with innovative products, a function of both their limited managerial vision and flawed high-tech policies from Beijing.

The roots of China's ersatz capitalism go back to devil's bargains made in the 1980s and '90s to accelerate China's takeoff. Late paramount leader Deng Xiaoping declared it was OK to "get rich" (see "Luxe life in China"), a green light for legions of cadres to discard their Mao suits and rush into business, often by setting themselves up as middlemen or grabbing stakes in communal assets.

• Not my father's China

Beijing also granted great latitude to provincial and local officials to manage development and social services such as education and health care. The two requirements: Remain loyal to the party and meet high economic-growth targets.

The system spans China's 657 municipalities, 2,862 counties and 41,636 townships. Because roughly 70% of a typical official's annual performance assessment is based on GDP growth, says Kenneth G. Lieberthal, a China expert at the University of Michigan, the cadres shower local businesses with perks. These can include access to cheap credit, land, licenses, protection from competitors and exemptions from regulations. The opportunities for graft are staggering.

"What is unsaid, but understood, is that if your locality becomes wealthy, so do you," Lieberthal says. "Instead of the Chinese Communist Party, it ought to be called the Chinese Bureaucratic Capitalist Party."

Continued: Conflicts of interest

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