Sha 315 Chinese Business and Economic Development Economic Reform

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SHA 315

Chinese Business and Economic Development

Economic Reform

Stages of Economic Change

1972-1978 - Political shift to west/death of Mao and Zhou Enlai

1978-1992 – Deng Xiaoping; trial and error; agriculture plus TVEs plus some FDI in SEZs; raise production and control prices; decentralize and grow out of plan; plan plus market

1992-2002 – Surge of FDI; explosion of exports; decline of SOEs and role of production planning with privatization and downsizing; reallocate resources and workers = some losers

2002-2010 – FDI remains high; exports grow as US declines; buildup of FE reserves; capital flows to US; US weakness – China strength; state capitalism

2012 – present - Exports decline; buildup of local government debt from stimulus; growth rate declines; more discussion of rebalancing
Over this period, China is transformed from an economic basket case to an economic giant
The Global Strategic Realignment of 1971-1979 was connected to the global economic realignment of 1978 – present
The decision for economic reform was a political decision
China’s national security (Soviet Union) requires access to better technology

Opening to the US leads to significant imports of machinery from West in petroleum and iron and steel by 1978

Significant political hostility to new role for foreigners in China – “an appendage of imperialism”

1976 – death of Zhou Enlai, Mao Zedong, and Zhu De

Hua Guafeng succeeds Mao

Political disturbances related to Zhou leads to Deng’s second purge in April 1976

October 1976 arrest of the “Gang of Four”

Chinese political system after Mao
With support of military governor of Guangzhou, Deng is restored to power in Beijing in July 1977

Radical leftists are isolated with arrest of Gang of Four

Broad consensus on the need for modernization: agriculture, industry, national defense and science/technology
Consensus rooted in recognition of China’s backwardness, its vulnerability, and its economic weaknesses between 1958-1978; concern over Soviet Union; rejection of radical ideology; experience of the Great Leap
Keen awareness of the rise of Asian miracle economies: Japan, Hong Kong, Korea, Taiwan, Singapore
Two broad factions in the 1978-1982 period:
“Maoist” - make limited points of contact with West; accept importance of a US alliance; limited reforms in command economy; narrow definition of socialism; culturally insular; Chen Yun is good example
Reformist/Internationalist – significant role for West in technology and investment; experiment with economic reforms based on markets/incentives; expansive/liberal definition of socialism; culturally internationalist; Zhao Ziyang is good example

December 1978 confluence of events

International US, Japan, Soviet Union, Cambodia, Vietnam
Decentralize economic decision making in managers
Focus on increasing agricultural production –

Side occupations must not be interfered with

Increase quota price by 20%; above quota price by 50%

Cut input prices by 10 – 15%

Increase urban food subsidies

Hint at need for independent judiciary

Rehabilitate those persecuted as “rightists” back to 1957
January 1979 – Deng visits the US
Democracy Wall

100 Flowers again

Open discussion provides critical information to central leaders

Democracy quickly reveals significant anti-CCP sentiment

CCP cannot work in a democratic China


Understanding Chinese economic reform
The basic elements of reform

  1. Process lasting many years

  2. Consistently market-oriented, with some backpedaling for political reasons

  3. Incremental: preserves important elements of command economy and of protection and of subsidies to various groups (clientalism)

  4. Global opening – over time a massive shift from a radically inward-looking to a radical outward-looking economic posture

  5. Maintains the strategic position of the state in control of developments; markets are controlled and managed

Economic systems in Asia are a different mixture of markets and governments - should not see these as in conflict. Asian states use markets to achieve economic growth – State capitalism

Major questions about the process and content of reform
1) Is this the obvious choice for China? What alternatives?

Reform in Soviet Union and Eastern Europe – Big Bang

What risks to rapid change to markets?
Chen Yun strategy – moderate changes in markets and incentives, etc.

Japan – Korean option: export orientation; closed to FDI

2) Why reform? Why risk the regime on reform?
It makes a certain amount of sense, therefore, to locate the origins of China’s emergence as a potential technological competitor in the period following the Cultural Revolution, more specifically in the policy commitments first made by Deng Xiaoping at the 1978 National Science Conference and reaffirmed, modified, and strengthened in the 25 years since then. (chinatechpol.pdf 13)
3) Why was the basic direction of change toward liberalization? Each action taken to backpedal from liberalization was tactical and temporary and quickly reversed with greater liberalization than before.
4) Why was reform incremental and not a full swoop of liberalization?
5) How was the policy of increasingly liberal reform maintained across three different leadership groups? Chinese economic policy in 1949-1978 was chaotic. Why did this become more consistent in a 180 degree different direction?
6) What factors and/or events could have derailed reform?
The outward orientation and large FDI role for foreign investment conflicts with China’s history of foreign encroachment and exploitation and given the policy of xenophobia?
One indicator of the change in policy was the level of openness of trade:
1970 – IM + EX = 5% of GDP

2005 – IM + EX = 65% of GDP

China shifts from extremely closed to the most open large economy in the world
Why didn’t the conflicts and social dislocations of economic growth (especially from increasing markets) derail the liberal strategy?
7) How does China’s policy of economic development compare with:



Taiwan, Korea, Singapore, Indonesia, Philippines, India

Economic reform in China (1880-1900; 1912-1936; 1953-1957)

ZHAO, ZIYANG (赵紫阳 1919-2005) Zhao Ziyang was one of the most willing of the major Chinese leaders to couple political reform with economic reform. He is most famous for demonstrating sympathy for student protesters in Tiananmen Square in 1989, and during his time as General Secretary Zhao moved the nation toward political liberalization. He proposed limiting the role of the Communist Party in the political life of the nation, particularly in the courts and in artistic expression. Combined with rising inflation, the significant rise in free discussion was partly responsible for the explosion of protest in 1989, which led to Zhao’s political demise.  

Zhao was born in 1919 to a landlord family and joined the Communist Youth League (an outreach group of the Party) in 1932. He was involved in many of the dramatic events of the next thirty years and rose to party secretary in Guangdong Province in the 1960s. Zhao was purged during the Cultural Revolution, but his career was revived by Zhou Enlai in the mid 1970s and he was sent to the remote Sichuan Province. Charged with promoting economic reforms to help overcome the disastrous economic effects of the Cultural Revolution, he distinguished himself by expanding private plots and market opportunities for peasants and dissolving the communal farms. The result was a rapid growth in agricultural production. Industrial reforms initiated by Zhao involved expanding market access and flexibility, resulting in even more rapid growth than in agriculture. These successes led to his position as Prime Minister from 1980 to 1987 and General Secretary from 1987 to 1989.

Zhao played a major role in developing the economic reforms of the 1980s, which meant working to create an economic space for freer markets and a correspondingly diminishing role for the planned economy. These changes were primarily incremental, based on a broad political consensus within the leadership of the Party. This included decentralizing economic responsibility to local and provincial governments, limited privatization of state-owned enterprises and mitigating the effects of global market forces on China. Zhao’s previous successes in reforming agriculture were extended to the entire nation and he helped promote and later expand the creation of special economic zones to attract foreign direct investment. The relationship of markets and planning was complex, with efforts to retain important features of central planning even as price controls were lifted for more products. Though not without considerable difficulties, these arrangements contributed to a relatively stable economic transformation in China.

Zhao is most famous for his role in the events relating to Tiananmen Square. During the days culminating in the decision to use force against the demonstrators, Zhao appeared in the square to plea with the students to disband even as he made clear his anguish over the coming fate of the democracy movement. Zhao was removed from all his positions in the Party and lived out the remainder of his life in near house arrest.

Nathan, Andrew and Perry Link (eds.) (2001), The Tiananmen Papers, New York: Public Affairs; Naughton, Barry (2007), The Chinese Economy: Transitions and Growth, Cambridge: MIT Press; Shirk, Susan (1994), How China Opened its Door, Washington: Brookings.

Thomas D. Lairson
DENG, XIAOPING (邓小平 1904-1997). Chinese paramount leader after Mao Zedong, Deng Xiaoping was the chief architect of Chinese economic reform since 1978, who promoted the socialist market economy and opened China to the global economy.

Born into a locally prominent landlord family in Sichuan Province, Deng’s elite status allowed him to travel to France for five years of study and work from 1920-1925 and then to Moscow for almost two years. In 1924 he joined the French branch of the Chinese Communist Party (CCP) and worked with Zhou Enlai. In 1926 he returned to China and engaged in military and political work to support revolutionary change. He attached himself to Mao Zedong’s faction, survived the Long March and assumed important military responsibilities in the war with Japan. Following the CCP victory in the civil war in 1949, Deng assumed increasing responsibility in government positions reaching the Standing Committee of the Politburo.

The Great Leap Forward (1958-1960) was the beginning of a conflict between Deng and Mao, which eventually resulted in his purge during the early stages of the Cultural Revolution (1966-1976). Condemned as ‘China’s Khrushchev’ and for following the ‘capitalist road,’ Deng was sent into rural exile. After publicly apologizing for his errors to Mao, Deng was rehabilitated and reinstated in the leadership in 1973. His efforts to reestablish order in the wake of the Cultural Revolution led to conflict with the radicals and he was purged a second time in 1976.

Following Mao’s death in 1976, the Chinese Communist Party experienced considerable internal political struggle, focused on whether to reject the Cultural Revolution and its leaders.  The arrest of the ‘Gang of Four,’ Deng’s return to the leadership and the demotion of Mao’s successor Hua Guofeng marked the ascendance of Deng to control of the Party by 1980.

Rejecting ideology, Deng launched China on an effort to increase the productive forces of the nation. This was based on a belief in the role of national economic strength, linked to a dynamic, market-based economy, in promoting the regional and global power of China. Deng understood, at least in general terms, the necessity for attracting capital, technology and knowledge to China via global capitalist firms. His reference point was the great success of other Asian powers, including Taiwan, Hong Kong and Singapore, in achieving economic growth.

The first steps were taken in reforming agriculture, where the huge system of collective farms was changed to expand the incentives for family production, resulting in rapid growth in output. Acutely aware of the need for foreign capital and technology, Deng moved to create special economic zones with the incentives, infrastructure and rules to entice foreign firms to invest and produce in China.

Deng’s greatest contribution to economic reform was the ability to use his preeminent political position to develop and refashion a coalition favoring change.  He helped shift thinking in the party toward pragmatism and merit, sustained a commitment to an opening to the capitalist world, and pressed for a much greater role for freer markets as the basis for economic development.  Deng maintained the party’s monopoly over political power, supported the crackdown at Tiananmen Square and opposed democracy for China. Nonetheless, his actions contributed greatly to dramatic economic improvement for hundreds of millions of Chinese and ultimately to a more open and responsible China.

Dittmer, Lowell (1994), China Under Reform, Boulder: Westview; Naughton, Barry (1993), ‘Deng Xiaoping: The Economist’, China Quarterly, 135 (September) 491-514; Shambaugh, David (ed.) (1995), Deng Xiaoping: Portrait of a Chinese Statesman, Oxford and New York: Oxford University Press.

Thomas D. Lairson

CHEN, YUN (陈云 1905-1995). One of the most important leaders of the Chinese Communist Party, Chen is significant as someone who spanned the Mao Zedong and Deng Xiaoping eras and influenced events for nearly 60 years. Chen had great experience in managing the command economy and is noted for his support for a limited version of economic reform after 1978.

From a working class family and a survivor of the Long March, his main international experience was in Moscow in the 1930s. Though lacking formal education, Chen focused much of his work on the economy. More conservative than Deng and even more willing to stick to Mao Zedong thought, Chen also adopted a more pragmatic approach to economic management than Mao. Chen was a main architect of the centrally planned economy and of the first Five Year Plan in the early 1950s. Within that context, Chen favored greater importance for markets and for decentralization of decision-making, even during the early years of the construction of a command economy. He was critical of the Great Leap and was accused of following the ‘capitalist road’ during the Cultural Revolution. In the aftermath of the disasters of the Great Leap, Chen worked to reconstruct the economy based on a limited but significant role for market incentives. This contrasted sharply with Mao’s approach of using mass mobilization and ideological fervor to spark growth. For these efforts he was purged during the Cultural Revolution.

Following Mao’s death, Chen returned to positions of influence and became an important advocate of rejecting Mao’s thought as the basis for policy. Expressing concern over the Party’s ability to retain its legitimacy among the people, Chen asserted the need to expand production and to improve the life of the Chinese people. His political support was essential to the success of Deng Xiaoping in gaining preeminent power and in moving toward economic reforms. His main contribution to economic reform was to promote a greater role for markets even as central planning provided a basic framework for production decisions. Probably inadvertently, this effort to introduce markets gradually helped promote the ultimate success of the reforms as contrasted to the much more radical introduction of markets in the former Soviet Union. Chen’s preference for gradualism led in 1984 to significant differences with Deng over the pace of marketization, which led to considerable inflation and later to political unrest at Tiananmen Square in 1989.  

Though an advocate of markets, Chen was firmly committed to socialism and not to capitalism. Chen favored economic growth and was ready to use Western technology and even capital to accomplish this. But he was also very suspicious of the effects of foreigners and concerned about retaining socialism as the ultimate goal for China. His conservatism about the capitalist features of China’s economic reform resulted in his resignation from the Central Committee in 1982. Nonetheless, he retained considerable influence until 1989 and the Tiananmen Square crisis. Chen remained an important political source of the turn to reform but he also reflected the considerable challenge reform presented to the communist tradition in China.


Lardy, Nicholas R. and Kenneth Lieberthal, (eds.) (1983), Chen Yun’s Strategy for China’s Development: A Non-Maoist Alternative, Armonk: M.E. Sharpe; Lieberthal, Kenneth (2003), Governing China, New York: W.W. Norton, 2nd Edition.

Thomas D. Lairson

The content of economic reform
Basic initial views of Chinese reformers
Economic growth is the highest priority

Growth was the goal not reform; reform was a means not an end

Did not dismantle the command economy
Fix the economy and deal with unmet needs in consumer goods

Allow more entrepreneurial effort based on markets to meet consumer demand

Initial focus of the plan is on food production – change the system of agricultural production
TVEs are OK outside the plan – help growth and investment

Focus on increasing agricultural production by changing incentives for food production

Side occupations must not be interfered with

Increase quota price by 20%; above quota price by 50%

Cut input prices by 10 – 15%

Farmers keep 100% of production above quota

Increase urban food subsidies
Small loosening leads to experiments by party/political leaders

Zhao Ziyang in Sichuan leads to rapid increases in output in one of the poorest areas of China – supports much more latitude for individual plots

Many collectives engage in similar experiments – what works is copied and expanded – indication of new speed of information flow inside China

1981-1982 – shift away from collectives to “household responsibility system”

Quick expansion to 50 year contracts for land

Increase in grain output is 33% from 1978-1984

Production of cotton and meat increases even faster

Rural labor also flows into TVEs

Government retains much control over output as monopoly buyer of most produce at below market rates – slow relaxation of this process from 1980-2000. Thus, free markets in food production do not occur until more than 20 years after reform begins.
Breakdown of collectives

Health care in rural areas

Public goods – irrigation, dikes etc.
Rural systems under reform

Deep urban-rural divide under Mao

Stringent controls on rural-urban migration

Household registration system – urban vs rural status

Hukou – urban residence permit

Exploitation of farmers with low grain prices, collectives, restrictions on work

Very favorable treatment of urban population: jobs, low prices, health care, pensions, education, housing

Slow liberalization of migration restrictions:

1978 – 18% urban residents

2005 – 43% urban residents

2011 – 50% urban
Markets and the planned economy
Apply the dual track arrangement in countryside to industrial economy
Grow out of the plan; fixed size plan and market sector grows
Two-tier pricing system: state set for transactions under the plan; market set for production above the plan (market prices are legal in 1985)
Decentralize authority for decisions to managers in firms and local officials
Allows Zhao to maintain a consensus behind the effort to radically scale back the command economy mostly by building out a market economy
Rush of local start ups (TVEs, local collectives) provide increased competition
Shift SOEs from fulfillment to profitability
Rapid increase in household savings permits high investment
Cycles of expanding reforms followed by some retreat (trial and error) – all retreats are tactical and followed by more liberalization
Reform without losers

The international dimension of early reform

China and negative legacies of foreign economic role in China

Legacy of autarchy – self sufficiency

Double airlock system of foreign trade under the command economy

Exports and imports as a necessary evil

Reformers see foreign technology as absolutely essential

To import technology, China must export

Export-oriented economies of East Asia as model
Trade opening must be a big part of reform, but trade has significant political and economic risks

Controlled opening to Hong Kong, Macau and Taiwan via SEZs in:

Shenzhen (Hong Kong),

Zhuhai (Macau),

Shantou and Xianmen (Taiwan)
This was a place to experiment, gain access to money and technology, with the Chinese government providing plants, infrastructure and a trained labor force

Large incentives from allowing local governments to keep tax receipts and foreign exchange

Deng proclaims Shenzhen a success in 1984 – SEZs are extended to 14 more coastal cities, including Shanghai and existing SEZs are increased in size

In early 1990s, after the Tiananmen Crisis, Pudong and Hainan Island are designated as an SEZ and 18 technology zones are defined

Today nearly the entire country is an investment zone, either recognized by the central government or established by local/provincial governments

Today localities compete to provide best terms for FDI

How was China able to maintain a consistent commitment to greater liberalization in its reform policy in spite of the radical changes and conservative opposition?
Reform mostly works to increase economic growth

Deng Xiaoping uses political power and prestige to sustain and extend reform

Win support from local officials via tax revenues and SEZs

The Tiananmen Crisis

Macroeconomic imbalances and changes from rapid growth intersect with emerging expectations of participation and many discontents to create massive demands on government
Legacy of Cultural Revolution:
Urban young sent to countryside return to Beijing in mid-1980s demanding housing
One child policy in countryside – forced abortions, female infanticide, anger over restrictions
Egalitarianism in SOEs – anger at incentive system
Rising economy = more corruption
Contradictions over the limits to intellectual expression (Hu Yaobang)
Minorities are emboldened to protest

Uighur protest nuclear testing in Xinjiang

Supporters of a more open society and democracy

Demonstrations against rigged elections

Hostility toward restrictions on expression
Political response by CCP

Party hardliners attack liberals

Purge of academics and intellectuals from positions

1987 Deng joins critics of bourgeois liberalization

Hu Yaobang is purged by Deng and hardliners assert control of public expression

But Deng also prevents hardliners from attacking economic reform

Maneuvered political system to put Zhao Ziyang plus Li Peng in charge and move forward on economic reform

Deng remained in charge as Chair of the Military Affairs Commission

Macroeconomic problems

Production was unable to keep up with demand (savings was very high but not high enough)

Inflation reached as high as 26% in many urban areas in late 1988
Death of Hu Yaobang on April 15, 1989

People’s University students (many children of Party cadres) use the occasion to launch a demonstration

Other students in Beijing join in the demonstrations in Tiananmen Square

CCP is split and hardliners win – issue condemnation of students

Students defy the criticism – CCP is paralyzed by May 4 anniversary and later by Gorbachev visit

Hunger strikes lead to efforts by Li Peng and Zhou Ziyang to have dialogue

Martial law is declared on May 20

Initial entry of troops is blocked by Beijing citizens

Troops surround Tiananmen; government holds back for 2 weeks

Military strikes on June 3-4

Several thousand die – probably

Reports of battles between different military units

Fall of Zhou Ziyang (house arrest) and rise of Jiang Zemin as General Secretary

Rise of role of President of China and merging of this role with General Secretary of CCP

Tiananmen is wiped from memory of the young in China as focus turns to making money
Global context

Extensive global TV coverage

Precedes by months the collapse of communism n Eastern Europe

Muted condemnation by US and Europe – talk but little substantive action except for an arms embargo

China’s image in west declines – Olympics is the major effort to restore positive image

Is China a developmental state?

From: Richard F. Doner, Bryan K. Ritchie, and Dan Slater, “Systemic Vulnerability and the Origins of Developmental States: Northeast and Southeast Asia in Comparative Perspective,” International Organization 59, Spring 2005, pp. 327-361
“organizational complexes in which expert and coherent bureaucratic agencies collaborate with organized private sectors to spur national economic transformation.”
Where do developmental states come from?
(1) the credible threat that any deterioration in the living standards of popular sectors

could trigger unmanageable mass unrest; (2) the heightened need for foreign

exchange and war materiel induced by national insecurity; and (3) the hard budget

constraints imposed hy a scarcity of easy revenue sources. We call this interactive

condition "systemic vulnerability."
these institutional apparatuses have enhanced information flows both within and between the public and private sector, giving bureaucrats the wherewithal to help firms compete with global rivals in more challenging economic activities. Just as critically, these institutional

arrangements have given bureaucrats the political clout to make credible but conditional commitments and thus to withdraw support from firms that underperform in spite of state assistance. Solving information and commitment problems has helped these states coordinate multiple actors and pursue long-term economic objectives. The result has been an impressive level of "upgrading": shifts, based on growth in local innovation capacities, from lower-value to higher value economic activities within global commodity chains. In other words, these countries combined export promotion with industrial deepening
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