From Portside Culture <[email protected]>
Subject China’s Market Reformers
Date October 14, 2021 12:00 AM
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[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.]
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Jake Werner
October 1, 2021
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_ 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. _



_How China Escaped Shock Therapy
The Market Reform Debate_
Isabella M. Weber
ISBN 9781032008493

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

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

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

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

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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