IF NOT FOR ITS SIZE, STRUCTURE, AND CULTURE...:

Broken China: Beijing can't clean up the environment, rein in stock speculation, or police its companies. Why the mainland's problems could keep it from becoming the next superpower (Pete Engardio, Dexter Roberts, Frederik Balfour and Bruce Einhorn, 7/12/07, Business Week)

The same Communist Party apparatus so proficient at censoring the Internet can't keep peddlers in the heart of Beijing from selling knockoff Callaway golf clubs and fake iPods, despite solemn promises to Washington since the early 1990s about enforcing intellectual property rights. Shanghai's stock exchange may be one of the world's hottest and may boast a state-of-the-art paperless trading system. But it was a casino when it opened in 1990 with eight listings, and after years of flaccid regulation it's an even bigger casino with 1,118. Beijing proclaims all sorts of green initiatives, yet heavily polluting new factories and coal power plants keep going up. The party has talked for decades about building a social safety net, yet as the working population ages the government isn't investing nearly enough to head off looming crises in health care, education, and pensions. China spends more than Japan on research and development, according to the Organization for Economic Cooperation & Development (OECD), but its record of innovation is underwhelming.

China observers dismiss these flaws as the growing pains of a nation making a breathtakingly fast transition from a command economy to a free market. But now it's becoming clearer that these and other structural problems aren't being addressed. The same policies that have been so successful at boosting the gross domestic product by developing new export industries and public works projects, it turns out, undermine initiatives that might move China's economy to a higher level. In its pursuit of growth at all costs, China skimped on investments needed to provide basic affordable health care and the regulatory machinery that can enforce environmental, safety, and corporate governance regulations nationwide. Solving these shortcomings will require a massive shift of the resources that are now being plowed into capital projects. While Beijing would like to cool the economy, however, it is wary of doing anything that would slow the high growth needed to generate jobs for the millions of youth pouring into the workforce each year, especially with a pivotal leadership conference scheduled this fall. "China's economic development model was based on the simple concept of expansion of production," says economist Chen Xiushan of People's University in Beijing. "This model has reached a critical point."

A more intractable problem is China's power structure itself. Although Beijing holds a monopoly on politics, local Communist Party officials enjoy wide latitude over social and economic affairs. They also have huge professional and financial incentives to spur GDP growth, which they often do by ignoring regulations or lavishing companies with perks. 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.