China’s Market Reformers

China’s Market Reformers

While China is often seen as an outlier from neoliberal trends, its transformation in recent decades was not at odds with tectonic shifts in the global system of growth but an essential part of it.

Chinese Communist Party chief Zhao Ziyang (R) with Deng Xiaoping at a party conference in 1987 (Forrest Anderson/Getty Images)

How China Escaped Shock Therapy: The Market Reform Debate
by Isabella M. Weber
Routledge, 2021, 358 pp.

 

The extended crisis of globalization has led to increased interest in China’s path over the last four decades. China is the only large poor country to achieve a dramatic increase in wealth and status in the neoliberal era, and it did so while maintaining a powerful role for the state in the economy. Its authoritarian political system has been exceptionally resilient. During the upheavals of recent years—from the Great Recession to the eurozone crisis to the emerging markets taper tantrum to the worldwide failure to stem the COVID-19 pandemic—China has seemed to stand outside the chaos.

This apparent strength has provided fodder for a cottage industry on Chinese exceptionalism both inside and outside China. According to these accounts, China is either a sinister autocracy bent on dismantling the liberal international order or an accomplished meritocratic bureaucracy securing the welfare of its people against the implacable hostility of the West. The conviction that China is an outlier has deepened geopolitical tensions, encouraging Chinese nationalists in their demands for greater global influence while galvanizing the defenders of U.S. hegemony determined to prevent such an outcome.

In her new book, How China Escaped Shock Therapy, Isabella M. Weber offers a valuable corrective to such essentializing narratives. She provides a fine-grained account of the contentious economic reform debates that took place in China in the 1980s, and situates them in a larger historical and conceptual context. Unlike most of the former Soviet bloc and the former Third World, China did not suffer the debilitating effects of neoliberal shock therapy—the rapid transformation of a state-led economy to one dominated by market forces—and for Weber, the story of how China avoided this fate is key to what makes it different today.

Shock therapy consists of a set of policies implemented in quick succession: deregulation, privatization, tax cuts, public spending austerity, trade and capital account liberalization, and—particularly important in those countries moving away from a planned economy—a rapid switch from state prices to ones set by the market. In vivid detail, Weber shows how close the Communist Party leadership came in both 1986 and 1988 to unleashing such a storm on Chinese society. In contrast to most of the countries that did implement shock therapy, the Chinese version would have been entirely voluntary. China’s unique trajectory, then, was not predetermined, but came about through the contingent resolution of elite policy debates.

Earlier accounts of this period, like Joseph Fewsmith’s Dilemmas of Reform in China and Barry Naughton’s Growing Out of the Plan, remain essential, yet they are indelibly marked by the moment of neoliberal triumph out of which they arose. Their narrative—still common in the present—is of “reformers” fighting the good fight of freedom and utility-maximization against “conservatives” who protected special interests by veiling their opposition to reform in criticism of rising corruption or economic instability.

Weber’s approach is different. She argues persuasively that every participant in these debates, having fundamentally broken with Maoist orthodoxy, was a reformer. All were contending within a single paradigm that privileged economic development over social equality and asserted impersonal economic laws like the determination of value by the market against mass mobilization and political voluntarism. Despite these shared assumptions, passionate debates raged among different camps on the role of the state in the market, how to understand growth and inflation dynamics, and the right path for price and enterprise reform. The outcome of these debates helped set China on its unusual path.

 

As the 1980s dawned, the political struggle that followed Mao’s death in 1976—which pitted the orthodox Maoists against the party leaders who had been purged during the Cultural Revolution—was settled with the victory of the latter group. Deng Xiaoping and Chen Yun, who had been sidelined for much of the 1970s, were back in power, with Deng in charge of politics and Chen overseeing the economy. A major shift of resources from urban heavy industry to light industry and the rural majority was underway. More than just reallocating resources, the leadership was intent on deep reforms to the structure of the planned economy: decentralizing production decisions, prioritizing material incentives, and introducing market forces. High-level economic debates were not about whether to liberalize the economy, but how.

Weber’s core story is the battle between two groups of young economic advisers to China’s top leaders. The first group, defined by its support for gradualist reforms, was led by Chen Yizi and Wang Xiaoqiang and composed of urban intellectuals who had spent years living in the countryside as part of the Mao-era campaigns that sent youth from the cities to labor alongside peasants. This group played a central role in first investigating and then generalizing the ad hoc experiments in rural reform that had emerged in the late 1970s, which led to the decollectivization of agricultural production. After the spectacular success of these reforms when they were implemented nationwide in the early 1980s, members of this group went on to conceptualize and defend a dual-track price system that had emerged out of piecemeal market reforms.

Under the planned economy, all producers had been responsible for an output quota that was sold to the state at set prices. The central plan coordinated the flows of raw materials and finished goods; market transactions were considered illicit. In the early reform period, enterprises still had to meet production quotas at lower state prices, but they were permitted to profit by selling any over-quota production on the market at higher prices. The consumer goods sector was fully liberalized fairly quickly, but goods considered essential—grain, cotton, steel, coal—were kept on state prices for some time. This dual-track system allowed the state to gradually increase the sphere of the economy ruled by market relations while maintaining overall stability.

The second group, which was fiercely critical of the dual-track system and advocated shock therapy to end it, included Wu Jinglian, Zhou Xiaochuan, Lou Jiwei, and Guo Shuqing. Wu went on to become China’s most prominent free-market commentator, while the latter three assumed some of the most powerful economic policymaking positions in the country. They had come into economics through formal schooling and were drawn to the systematizing elegance of dissident Eastern European economists like János Kornai and neoclassical economists like Milton Friedman. Theoretically rather than empirically oriented, they rejected the messy gradualism of the first group in favor of immediately ending the state’s active role in shaping the market. The centerpiece of this program was a “big bang” price reform that would realign prices with market values overnight, combined with austerity to counteract the inflation that would follow a sudden increase in prices at the core of the economy. A few years later, Russia and other Soviet bloc economies would apply this formula to disastrous effect.

Each of the two groups found older patrons within the state. The gradualists connected with economic policymakers whose formative experience was the hands-on management of the wartime and immediate postwar economy. They had overseen the Communist Party’s successful efforts to bring hyperinflation under control and revive growth with stunning speed by linking the value of money to the economy’s crucial commodities and by using the state purchase and sale of goods to balance market volatility and drive speculators out of business.

The shock therapists were aligned with a slightly later generation of top academics who had formalized Stalinist economic orthodoxy in the early years of the People’s Republic and established its economics educational system. Both groups contended for the favor of Zhao Ziyang, who, first as state premier and then as general secretary of the Communist Party, led economic policymaking from 1980 to 1988.

The first great face-off between the two groups came in 1986. Market reforms in the countryside had produced rapid economic growth, spurring the leadership to debate similar ideas for transforming the urban industrial pillars of the economy, which continued to produce primarily for the state plan. At the same time, the dual-track price system was widely blamed for inflation and the corruption of well-connected officials, who often used the price system as an opportunity for graft. In this context, the shock therapists won Zhao over, and he set planning in motion to execute rapid abolition of the dual-track system.

Before the reforms were enacted, however, the gradualist reformers pushed back, arguing that price reform was targeting the wrong problem: the source of inefficient investment and inflationary pressures was not macroeconomic irrationalities but the microeconomic foundations. Factories had been given incentives to produce for profit but, with easy access to credit from state banks, the pressure of market discipline was limited. At the same time, the Mao era’s structure of labor relations remained intact. Workers in the state sector enjoyed secure jobs, good wages and benefits, significant power in the workplace, and longstanding relationships with managers because of low levels of turnover. Enterprises had every reason to be responsive to their employees and faced few obstacles to raising wages and prices or making unwarranted expansion decisions. The gradualists argued that the focus of reform should be strengthening the power of the market over labor and lending practices. To make this argument, they drew on their survey research on the positive consequences of the dual-track system and a mission to Hungary and Yugoslavia to study the outcome of market reform there. In the end, they won the debate and prevented self-inflicted shock therapy.

Afterward, Zhao pursued the gradualists’ path of enterprise reform, combining it with a proposed coastal development strategy in which the private and quasi-private manufacturers that had emerged in great numbers in the eastern provinces over the previous decade would be integrated into the global economy on the model of export-led sweatshop development pioneered in South Korea, Taiwan, and Hong Kong. China’s cheap labor would draw foreign investment and earn foreign exchange, which could then finance energy imports and industrial upgrades to the most important state-owned enterprises. In the 1990s and early aughts, a different set of Chinese leaders implemented this basic strategy with stunning success. As Mary Elizabeth Gallagher showed in Contagious Capitalism: Globalization and the Politics of Labor in China, foreign investment and joint ventures proved instrumental to China’s market reform, not just bringing in hard currency but also facilitating technology transfer, managerial autonomy, and the destruction of the power of labor.

In 1988, before Zhao’s initiative could advance very far, another attempt at big bang price reform was attempted, this time pushed by Deng Xiaoping himself, in the hopes of breaking a political deadlock over the course of reform. The gradualists again mounted a campaign against the idea, this time to no avail. In August, when the decision to abolish the dual-track system was announced publicly, chaos ensued. The value of money was thrown into doubt, immediately causing bank runs and panic purchases of durable goods. Strikes and demonstrations began to spread.

The government quickly withdrew the proposal, but the incident kicked off galloping inflation and catalyzed simmering discontent into the great protest movement that was violently suppressed in the Tiananmen Square massacre of June 4, 1989. Zhao Ziyang, who had reached out to the protesters, was purged from the party, scapegoated for the inflation, and held under house arrest for the rest of his life. His followers in the gradualist camp variously suffered arrest, went into exile, or abandoned politics for private business. The shock therapists, meanwhile, quickly condemned Zhao and rose to prominence, despite the politically damaging effect of their policy victory.

 

The intricacies of this history, captured so effectively in Weber’s book, are essential to interpreting the larger meaning of China’s reform path. Weber’s narrative shows how an alliance between two generations of pragmatic and empirically oriented reformers, whose formative experiences arose from practical management of economic problems, together resisted the ideologically driven demand to remake the system all at once. Weber’s findings favor practice over theory, the concrete over the abstract, and gradualist experimentation over dogmatism. The book’s rich biographical detail highlights the contingency of the outcome: had a few key figures followed a different course, China might have implemented shock therapy.

One important question beyond the scope of the book is what produced the conditions in China that made these events possible. The specific timing and nature of the Chinese Revolution was a pivotal factor. The experiences of earlier decades that shaped the gradualist coalition—including the task of bringing hyperinflation under control after the civil war, the tumultuous course of economic policy in the Mao years, and the practice of dispatching urban youth to labor in the countryside—set China apart from the Soviet bloc countries. This history weakened the institutional apparatus of state planning and shaped leaders with more varied approaches to economic problems, creating both space and a constituency for gradual reform.

The Revolution likewise differentiated China from the countries of Latin America, Africa, and Southeast Asia that suffered structural adjustment, the International Monetary Fund’s version of shock therapy. The strength of nationalist and autarkic currents in the party insulated China from the danger of externally imposed economic restructuring. Even as China welcomed massive amounts of foreign direct investment, it has maintained low levels of foreign debt and strong capital controls. As a result, the course of liberalization in China has been more like the experience of the wealthy countries than that of the Global South: a gradual process in which periodic adjustments are made in response to public pressure, rather than a sudden and traumatic transformation.

Finally, the developmental achievements of the Revolution—levels of literacy, education, health, industry, and infrastructure highly unusual for such a poor country—combined with the Mao era’s extreme urban–rural inequality, perfectly positioned China to dominate low-wage exports starting in the 1990s. Incomes in the former Soviet bloc, though ravaged by shock therapy, were still too high to be competitive with the enormous numbers of impoverished rural migrants in China, while most other poor countries could not match China on the quality of infrastructure or the capacity of the state to suppress workers’ demands.

 

While the history of the Chinese Revolution and the reform debates of the 1980s help us understand the specific course followed by China in recent decades, Weber’s framing question of what made China different risks losing sight of a broader point: China’s transformation was not at odds with tectonic shifts in the global system of growth but an essential part of it.

China’s reform era involved a fundamental remaking of the social fabric. In the late 1970s, the earlier dominance of egalitarianism, homogeneity, and mass regimentation began to steadily deteriorate. Large-scale state organization gave way to market coordination; economic stability and security were displaced by social and geographic mobility; collective participation was superseded by individual self-definition and personal responsibility. China was early to embrace a global transformation emerging from the worldwide crises of the 1970s, throwing off what had come to be experienced as the stultifying routines of social conformity and bureaucratic rationality in favor of entrepreneurialism and difference.

Despite their conflicts, both of Weber’s contending groups of economists shared these aims. For the shock therapists, the destination loomed so large and with such clarity that it impeded their ability to navigate the rocky shoals that stood in the way. Weber makes a powerful case that the more flexible thinkers of the gradualist camp charted the better path. But by the mid-1980s they were just as committed to establishing private incentives and market hegemony as their rivals. More seriously than their antagonists, they argued for breaking the power of workers to ensure the autonomy of business leaders.

The logic of the process they helped set in motion transformed not just the organization of the economy but their own assumptions and values. Some members of the gradualist group came to admire Hayek’s free-market fundamentalism and Pinochet’s violent economic reforms. What began as an attempt to improve the desperate conditions of China’s hundreds of millions of peasants developed into something quite different.

Weber’s account ends with June 4, but it is significant that the purge of elite ranks that followed did not fundamentally alter China’s course. Zhao Ziyang and the gradualists were gone; Chen Yun’s “conservative” followers, largely marginalized in economic policymaking in the 1980s, seized the reins. Yet far from repudiating neoliberal reform, the new elite configuration consolidated and accelerated it. The “conservatives” established a privileged position for the state to manage and repress the instabilities that accompany marketization, while the remaining “reformers”—mostly shock therapists—brought gradual price reform to completion in 1993 and then turned to the gradualists’ program, privatizing much of the state sector, subjecting the remaining state-owned enterprises to market forces, and destroying workers’ power and protections through mass firings and the rapid expansion of sweatshop competition.

This unusual state-centered form of liberalization allowed China to capitalize on the otherwise unpromising opportunities afforded poor countries in the neoliberal global economy. The remarkable economic expansion that resulted—China has made the largest contribution to global growth every year since 2006—sustained authoritarian neoliberalism in China and allowed neoliberal globalization to put off reckoning with its own systematic suppression of wages and consumer demand. But for all the benefits it brought, growth also imposed tremendous costs on the people of China: some 1.7 million workplace deaths over the last two decades, massive inequality and corruption, devastating pollution, and the reinvigoration of undemocratic state power.

 

Today the Chinese leadership, like elites around the world, has been deeply shaken by the economic dangers and popular discontent that are the downsides of the neoliberal growth model. Despite the superficial appearance of social stability and state authority, since 2008 Chinese society has been roiled by the same forces upending the rest of the world: declining growth and productivity rates, huge real-estate bubbles, the dangerous expansion of shadow banking, volatile financial markets, broad anger over corruption and inequality, hunger for personal and collective purpose beyond making money, rising fears of foreign threats, and intensifying pressure on those who are different to conform to a national ideal.

To overcome the social and economic fragmentation of neoliberalism and revive growth and legitimacy, the Chinese leadership is experimenting with post-neoliberal forms of nationalism, combining belligerence in foreign relations with a domestic policy of economic levelling and violent assimilation targeting ethnic minorities and political dissidents. On both sides of the Pacific Ocean, this nationalism is imagined as setting China apart when in fact it makes China similar to the other major powers.

However, just as events during the Mao era cultivated the potential for a new approach when the existing system collapsed, so China’s unique path through neoliberal globalization has developed possibilities that could contribute to remaking the global system today. Countries around the world are now questioning the neoliberal era’s abdication of social priorities to the market. Because the state was so integral to its process of economic reform, China is better positioned than other major economies to transition to something else. If the leadership makes good on its professed aspirations for rapid decarbonization and egalitarian growth, for example, this history will have been a decisive factor.

Likewise, because China escaped shock therapy and avoided free-market orthodoxy in its distinct form of neoliberalism, it achieved unusually strong growth but was also targeted for heavy criticism by the dominant powers. In consequence, China developed both a sense of injustice at the global status quo and the power to exert itself internationally.

Such experience has prepared the way for reactionary nationalism designed to sustain China as a ruthless global competitor within the sharply unequal international hierarchy. Yet it has also shaped a different vision within the Chinese leadership—expressed in rhetoric around the Belt and Road Initiative, support for development as a human right, criticism of neoliberal conditionality on multilateral aid, the promotion of global public goods, and proposals to democratize global institutions—in which that hierarchy could be flattened through international cooperation on behalf of global development and a just global climate transition. As in the 1980s, which of these clashing visions will triumph is not fated but will be decided by those making the history.


Jake Werner is a historian of modern China and Postdoctoral Global China Research Fellow at the Boston University Global Development Policy Center.


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