China’s Surveillance State Will Test The West

Digital surveillance could allow China’s leaders to succeed where previous authoritarian regimes have failed.

Anonymous for Noema Magazine
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Credits

Dimitar D. Gueorguiev is an associate professor of political science at Syracuse University. He is the author of “Retrofitting Leninism: Participation Without Democracy in China.”

 

When foreign athletes and select visitors arrive in China for the upcoming Winter Olympics, they will have the option of using China’s new central bank digital currency (CBDC). The e-RMB, or e-CNY, is as a convenient alternative to the familiar paper redback, the RMB. The move is part of a long running effort to internationalize China’s currency, but it is also central to a broader campaign for control that has rapidly moved from the analog to the digital realm, the subject of my recent book “Retrofitting Leninism.”

China’s rulers have long sought to optimize authoritarian control. These aspirations have typically manifested in coercion of the physical world, from labor camps to closed borders to mismanagement in the economic realm, where crises and shortfalls abound. In today’s China, control is increasingly exercised in the digital domain, where over one billion internet users — and nearly as many surveillance cameras — are networked into a sprawling system of monitoring and intimidation.

Heterodox economists like Friedrich Hayek and Ludwig von Mises have long argued that control regimes are bound to stumble due to their inability to collect all the information needed to make optimal decisions and the computational complexity of processing the information they have — challenges that that only a liberal society and free market can resolve. Indeed, central leaders still struggle with data fabrication and information hoarding across China’s vast administrative structure. Even in areas where micromanagement is strong, anecdotal evidence suggests attention remains as ever on loyalty, not efficiency.

The political mood of the present need not distract from the technological prospects of the future. China’s leaders are growing increasingly confident they can resolve the computational problems of managing a complex society without letting go of control. In recent years, authorities have overcome some top-down information gaps by enlisting the help of average citizens who volunteer bottom-up input, investing in centralized databases, and rapidly expanding artificial intelligence.

Now China is attempting to centralize digital control over financial transactions. The impending introduction of electronic currency will give China’s government unprecedented ability to track individual and institutional transactions. In the not-so-distant future, China’s government will not only have insight into how the people spend scarce resources — it will also have the vision to decide who deserves more and who will settle for less.

Most in the West are instinctively appalled at this dystopian prospect. Yet, retrofitting China’s analog system of control with technologies that facilitate both information aggregation and information processing could well allow it to avoid the pitfalls that made the Leninist model fail so miserably during the Soviet industrial age — and could place China ahead of the curve in strategic competition with the West.

The Computational Problem

Leninist organizations are bulky, bureaucratic and paternalistic by design. They are constructed in the belief that a single, vanguard party is uniquely positioned to internalize the preferences of the masses and mobilize their potential through policy. At its core, this belief is grounded in the assumption that an ideal organization can access and process all the information needed to exercise optimal political, social and economic planning. The hubris of this assumption manifested in both the murderous totalitarianism of Stalin and the chaotic revolutionism of Mao — leaders who were both frustrated by the challenge of informed control and thus opted for violence instead.

Versions of the information problem appear in standard critiques of authoritarianism. It is widely held, for instance, that authoritarian systems are less desirable, less enduring and less productive than their liberal peers. Nobel laureate Amartya Sen observes that authoritarian regimes lack the incentive or the infrastructure necessary for “enhancing the hearing that people get in expressing and supporting their claims,” the absence of which prevents government from acting in a responsive or accountable manner.

While some autocracies have tried to overcome these shortcomings by adopting the flawed trappings of democracy — rigged elections, weak legislatures and partial civil liberties — democracy purists like Larry Diamond contend that “it is just not possible in our world of mass participation and democratic consciousness to give people the right to think, speak, publish, demonstrate and associate peacefully, and not have them use those freedoms to demand as well the right to choose and replace their leaders in free and fair elections.”

As time goes on and technological connectivity advances, such critiques are coming into question. Popular autocrats like Russian President Vladimir Putin and Turkish President Recep Tayyip Erdoğan appear quite attuned to public sentiment, if only to exploit it for short-term political reasons. For its part, China’s one-party government often comes across as hypersensitive to public opinion, citizen complaints and social media sentiment. As the Australian political scientist John Keane has noted, China’s leaders are so fearful of the loss of control that comes along with democracy that, paradoxically, they act like elected officials in the West who constantly plumb the public mood in the hope of winning the proverbial ballot.

“China’s government will have insight into how the people spend scarce resources — and the vision to decide who deserves more and who will settle for less.”

This may be so, but governance demands more than pandering to populism. In particular, the computational complexity of micromanaging a political economy presents the autocrat with a predicament. Autocrats can constrain economic actors, hobble their administrations and suppress citizen voice in an effort to simplify their computational problems. Unfortunately, the more the regime coerces down these problems, the more corrupted a system it is left with, thus contributing to the loss of control that coercion was meant to tame.

In extremis, we have seen such tragedies transpire countless times, from the disaster of the Great Leap Forward under Mao or even today as North Korea is, not for the first time, on the brink of famine. One need not invoke crisis to appreciate the inefficiencies of control. In China, for instance, customs borders and strict capital controls make it easier for the state to collect taxes and restrict capital outflow, but they also reveal limitations in the state’s ability to collect a more diverse array of domestic revenue or regulate a more dynamic domestic financial industry.

If an authoritarian regime relinquishes some control, say to the market, it can free itself from complex computational challenges like setting prices. While this may result in a more vibrant economy, it comes at the cost of governance challenges by proliferating nodes of power outside the control capacity of the regime. The Soviet Union, for instance, collapsed in part due to its failure in managing an energized economy. For its part, China’s central government still struggles on issues like preventing local government debt from seeping into a bloated banking system or in getting companies to comply with environmental regulations.

Thanks in part to the advent of digital technology, however, China’s leaders are now at a point where they believe they have the tools to overcome and move past the computational challenge of managing ever more complexity by deepening control through connectivity.

Control As A Means And An End

Digital control in China operates as a dual-use technology — repressive in a security sense but progressive from a socialist one. On the one hand, it serves a conventional coercive function by keeping tabs on 1.4 billion people and letting them know it. On the other, it facilitates public polling, responsiveness, oversight and probabilistic forecasting enabled by massive caches of aggregated data on individual and group-level behavior.

Smartphones and facial recognition, for instance, make it near impossible for dissidents or protesters to organize; they also make it easier to fine jaywalkers or redirect traffic in case of a jam. Public complaints about corruption can be weaponized for political purges, but they are also a tool against self-serving officials who embezzle or waste public funds. Social credit scores will help the state coerce a preferred form of citizenship, but they also help alleviate mistrust and risk in China’s unruly consumer market. 

“Digital control in China operates as a dual-use technology.”

This is hardly a perfect system. The information generated through public polls or online complaints is bound by perceptions about what the state deems appropriate, rightful and legitimate. Even the passive surveillance provided by hidden algorithms will be biased by the conscious or subconscious self-censorship of their unwitting victims. Social credit scores can and will be exploited.

Yet, the system, so to speak, does not seem to care. And it is not obvious why it should. It cares less about nuance and more about deviations of any kind that would escape the cosseted design of society imposed by the Party’s vision. Just as a bat need not see the color of its prey to know exactly where or how to catch it, the CCP cares little about why the public prefers one policy over another or whether the dangerous dissident was in fact a constructive critic.

In other words, the CCP operates in a system of echoes in which the data points of individual behavior, crude as they may be, add up in large numbers and offer the regime a remarkably detailed picture from which to exert control — or what it calls “stability.” 

The Allure Of Control

All authoritarian regimes have a predilection for control, but today’s PRC has a particularly strong affinity, and experience has only bolstered its appetite.

As millions of protesters gathered across various parts of China in the spring of 1989, there was a palpable sense that the regime was about to collapse. Indeed, given the diverse range of groups attending — from students to soldiers — it was hard to imagine how it could be otherwise. Nevertheless, with a brute show of force, the CCP leadership reasserted control to such an extent that it felt comfortable proceeding in earnest with some of the same reforms — price liberalization and mass layoffs — that had helped precipitate the protests in the first place.

Throughout the 1990s and 2000s, residency controls allowed China’s new capitalists to exploit hundreds of millions of migrants without the mass slums and labor market shocks that have accompanied similar population flows in countries like India and Brazil. When the global financial crisis struck in 2007, these same residency controls made it easier for idle migrants in the cities to return to the countryside, while rigid capital controls shielded financial institutions from some of the volatility. Most recently China has proven almost uniquely capable of controlling the spread of the coronavirus, despite the risks posed by its large and densely packed urban centers.  

These triumphs have emboldened the regime to pursue further controls, digital and analog, across more and more platforms, from restrictions on entertainment and education to regulatory crackdowns on national champions in the corporate sector.

The Costs Of Control

Time and again, the CCP has proven remarkably willing to let the economy and citizens absorb the costs of control. Such developments should be seen not so much as miscalculations on the part of administrators but as a testament to their tolerance for inflicting damage on their own economy in the service of control.

Recent regulatory crackdowns, for instance, have wiped more than 1 trillion dollars in market value from the books of leading Chinese tech companies. Investigations into the banking system are thought to have accelerated a looming default in one of the country’s largest property firms, Evergrande. Most recently, large swaths of the country have fallen under electricity blackouts due in part to national efforts at reducing emissions in China’s exceedingly dirty energy sector.

These costs are not trivial. State censorship over China’s media, for instance, has undercut the country’s soft power abroad. The China Global Television Network (CGTN), China’s flagship international network, commands only a fraction of the audience enjoyed by Qatar’s Al Jazeera English. It is only reasonable to expect that the CCP’s increased assault on scholars and entrepreneurs will have a similar effect on China’s research and innovation potential.

The CCP may be increasingly inclined to impose costly controls because it feels powerful enough to reap the political benefits while socializing the economic costs. Some of this attitude is on display in the form of good old-fashioned coercive redistribution — take, for example, the new “Common Prosperity” campaign, which obliges China’s rich and powerful to give away portions of their fortune to the poor and up-and-coming.

“The CCP may be inclined to impose costly controls because it feels powerful enough to reap the political benefits while socializing the economic costs.”

Another possibility is that the regime feels competent enough to trade off the costs of control against potential efficiency gains on offer. Take, for instance, recent anti-monopoly controls in China’s predominantly private big-tech sector — a drama which, by the way, is also playing out in the United States and Europe. One big risk here is that government intervention will deter private investment and innovation and, in China’s case, cede opportunities to less efficient state-run firms. But what if the tech-enhanced Chinese state now feels competent enough to direct capital into productive state ventures on-par with or better than private hands?

Naturally, the computational problem comes to the fore here and the empirical record continues to show that state planning consistently underperforms market forces. Yet, markets are not perfect. As recent supply chain failures and the compounding tragedy of climate change make clear, markets have a hard time absorbing shocks and pricing externalities. Even in the best of times, market transactions suffer the inefficiencies of unwanted variability, or what the Nobel prize winning economist Daniel Kahneman refers to simply as “noise.”

Cashless Communism

In 2010, cash made up more than half of all economic transactions in the U.S. Today that figure is about a quarter and falling. In China, cash is disappearing at a faster rate. According to the 2020 McKinsey Global Payments Report, cash in China declined from over 99% of transactions to 41% over the last 10 years.  

Nevertheless, most transactions are still handled by traditional finance with fees and delays that disproportionately hurt smaller transactions and the poor who make them. In both countries, however, digital currencies are poised to take over and disrupt. Depending on how this transition occurs, it will either deepen the chasm between the two economies or place them on trajectories that will make it increasingly hard to differentiate one from the other.

China has by and large chosen its path, piloting state-backed digital currency while laying waste to mining and finance activities tied to decentralized cryptocurrencies like Bitcoin. Unlike paper RMB, e-RMB operates around an immutable distributed ledger, making it both infinitely easier to track and impossible to corrupt, thus offering the CCP its preferred blend of capacity and control. Importantly, digital RMB will likely be highly attractive to China’s tech-savvy population — an e-RMB wallet app is already available in the Apple and Android stores.

Digitization makes it easier for China’s planners to optimize capital disbursements and micromanage transactions at home. When the Chinese government injected consumer stimulus in response to the large-scale COVID lockdown in the spring of 2020, it did so with time-sensitive digital vouchers that had to be spent on local goods and services. Soon, large amounts of digital transaction data and blockchain strategies will make it possible to train probabilistic models for selective stimulus to residents, targeted investment in public and private directed firms and even for pricing complex market externalities like carbon emissions.

Digital currency also offers safer vehicles for challenging the U.S. dollar abroad, such as by offering preferential financing to other countries using China’s Interbank Cross-Border Payment System (a competitor of the Belgian-based SWIFT system) or by invoicing trade via e-RMB smart contracts. To the extent that such a system gains traction, China’s central planners will see domestic fiscal control and international monetary influence grow in tandem.

In the U.S., pressure is also growing on the Fed, Treasury and regulators to jumpstart plans for a digital dollar — and there is growing indication that the powers that be are taking note. For some, like Fed Governor Christopher Waller, a dollar-based CBDC is unlikely, given the diffuse nature of American banking at the federal, commercial and regulatory levels. This may not be a big problem, so long as decentralized cryptocurrencies, as well as central bank-issued cryptos in other countries, remain notionally linked to the dollar. This status will, however, fade as digital transactions become less dependent on American financial infrastructure.

“Digital currency also offers safer vehicles for challenging the U.S. dollar abroad.”

This is where it gets more theoretical. A digital dollar would involve at least some Americans holding digital wallets directly with the Fed, substantially augmenting the central bank’s capacity to inject stimulus and allocate credit throughout the economy, not unlike China’s central bank aspires to do. Even so, it is unclear if the Fed could capitalize on such capacity given that it delegates nearly all financial activities to the private sector.

The U.S. Federal Reserve, all-powerful as it may be, is relatively ignorant about the average consumer, borrower or beneficiary. This is not for want of data. As Shoshana Zuboff argues in “The Age of Surveillance Capitalism,” information on the economic habits, wants and liabilities of everyday Americans is remarkably well registered and available, but the data is thoroughly commodified by and decentralized across commercial interests. A digital ledger run by the Fed could provide both means and motive to claw back some of that information.

While liberal values and small government principles are sure to stand in the way of Chinese-style financial monitoring in the U.S., a growing cacophony of health care claims, social spending programs and entitlements will offer a source of temptation. A single digital ledger would empower government agencies to directly distribute program funds to recipients; it would also give the state insight into how those resources are mobilized by recipients. Such concerns may have prompted Sen. Pat Toomey, R-Pa., to recently opine that “we shouldn’t design a central bank digital dollar that allows the government to spy on Americans’ every transaction.”

More likely the U.S. will adopt a mixed strategy which sees a loosely controlled CBDC that operates in conjunction with traditional banks for the formal economy, alongside a loosely regulated but still decentralized blockchain cryptocurrency for the less formal economy.

Such an arrangement would serve as a nod to liberal values and may be enough to justify why the dollar ought to remain the international currency of reference, even as countries adopt more diverse baskets of reserve.

Then again, such a mixed strategy would mean that the Fed and U.S. policymakers would be competing against China with one hand tied behind their back. When push comes to shove, and with technology at hand, America’s leaders may learn to love control just as much as China’s.