How China escaped shock therapy in the 1980s: interview with Isabella M. Weber

The process of economic reform in China in the 1980s is not always well known or understood. ‘How China Escaped Shock Therapy: The Market Reform Debate’, published last year, is an important contribution to both understanding and debate. The first book by Isabella M. Weber, Assistant Professor of Economics at the USA’s University of Massachusetts Amherst, it won the 2021 Joan Robinson Prize, named for the renowned Cambridge economics professor and friend of socialist Asia.

The book details the complex debate that took place in China in the 1980s, which involved veteran Chinese leaders from the first generation of the revolution, young Chinese economists, Eastern European economists, and mainstream western economists from international financial institutions and elsewhere.

With the exception of the veteran revolutionary leaders, many of the participants in these debates were pushing a strategy which was to later become known elsewere as shock therapy. Their view did not prevail. Rather, what emerged was an “experimental and radical gradualist economic reform”, that drew from traditional Chinese economic statecraft, the leaders’ experience of hyperinflation before liberation, and the early results of the initial economic reforms in the countryside.

In this interview, originally published in the Czech language on Alarm, and then in English translation on the online East European socialist magazine LeftEast, Isabella expands on some of her book’s key themes. She notes that: “We have to remember that at that time China was unlike Czechoslovakia, Poland, or East Germany in that it was a very poor country. Mao’s reign laid important foundations for the economic reform, like basic healthcare system, public infrastructure, and industrialization, but nevertheless China was still a very poor country with a GDP lower than Sudan or Haiti. Of course, that doesn’t represent the whole level of development of the country, but it gives you a sense of what we’re talking about.”

Making a comparison to the economic reforms carried out in Russia from the end of the decade, Isabella describes this as an example of what was at stake for the Chinese. She draws a clear and very important distinction between the Chinese and Russian leaders and situations of the time:

“In the Chinese case in the 1980s the most powerful people in the leadership were first generation revolutionaries, so they approached the economic reforms with a very different perspective than Gorbachev or Boris Yeltsin. Another difference is that China started the reform coming out of the Cultural Revolution, which meant that at the beginning of the reforms the bureaucratic system was being re-established, whilst in the Russian case the bureaucratic system was very rigid.”

When today’s historiography refers to the debate about economic reforms in Eastern European countries during late communism, it often uses the term the “long transition”. It shows that the economic transformation from state socialism into neoliberalism was a process that took off in some of the countries in Eastern Europe in reaction to the oil crisis in 1973. Their debt was getting out of the control and it forced them to work more closely with Western financial institutions, but it also meant much deeper transformation of the world’s economic system with the end of the gold standard and Bretton-Woods economic system. Cooperation between Eastern European economists and Western financial institutions helped to shape the debate about the need for further economic transformation of state socialist economies. The most radical supporters of the neoliberal economic reform, later known as „shock therapy“, were influenced by Pinochet’s Chile or the military regime in South Korea. But at the same time, very similar debates over economic reform were taking place in China. Political economist Isabella M. Weber‘s astonishing new book How China Escaped Shock Therapy details the complex debate over economic reform in China in the 1980s between, on one side, young Chinese economists, Eastern European economists, and people from Western financial institutions that tried to push through “package reform“ (which would later be known as shock therapy), and, on the other, the old guard of the Chinese leadership who had first cut their teeth in the country. In the end, the latter group decided on their own experimental and radical gradualist economic reform that emerged from traditional Chinese economic statecraft, their experience of hyperinflation among during the Second World War, and the successful agrarian reforms of the 1980s. Why did the Chinese leadership decide that the neoliberal approach to economic reform was not an option for their country? We spoke with Isabella M. Weber,  a political economist and assistant professor of economics at the University of Massachusetts Amherst and the Research Leader for China at the Political Economy Research Institute.

When did the debate about the need for economic reform start to appear in China and what was the driving force behind this push for economic reform?

The debate started after Mao Zedong’s death, but even in the last years of Mao’s reign there were already less official initiatives to rethink the communist project. It also coincided with China’s reapproachment with the USA, which marked a radical shift in China’s foreign relationships. I think that the year of Mao’s death was crucial. The transition period between Mao’s reign and Deng Xiaoping is often overlooked in the historiography of China’s reforms. To my mind this period marks a radical break with the ideas of Cultural Revolution. It was a shift from mass mobilization and revolutionary forms of social organization to a more developmentalist and economistic agenda, but initially this agenda was in the spirit of the “Big Push,“ a ten-year plan that involved importing foreign technologies and capital goods in exchange for Chinese oil, which was predicted to be discovered in larger quantities back then. The problem was that these projected findings of petroleum turned out to be inaccurate, so this plan imploded within the span of two years. So when Deng Xiaoping came into power it was clear that a new economic model was needed.

What were the alternatives for the Chinese when they thought about the economic transformation of their country?

We have to remember that at that time China was unlike Czechoslovakia, Poland, or East Germany in that it was a very poor country. Mao’s reign laid important foundations for the economic reform, like basic healthcare system, public infrastructure, and industrialization, but nevertheless China was still a very poor country with a GDP lower than Sudan or Haiti. Of course, that doesn’t represent the whole level of development of the country, but it gives you a sense of what we’re talking about. The most prevalent question in the early years of the economic reform was how to develop the countryside. So the reform started from the countryside and the success in agricultural reform was the key breakthrough that created momentum for more broad reforms. 

Agricultural reform seemed to be the keystone of the future development of China. What were the main aspects of this reform?

On the surface the agricultural reform was experimental and gradualist, but it was also radical. The state tolerated a new kind of organization of agricultural production in very poor areas that hardly contributed to the national grain system, which proved very successful. The experiment started in these very poor and remote areas and then it followed a bottom-up logic, with the state step-by-step implementing it across the whole country. In this sense we can say that it was experimental and gradualist. It eventually amounted to the dismantling of the people’s communes in a span of just two years. People’s communes were previously the political and economic backbone of Mao’s economy. It was the predominant economic system of the country and also the  political locus of decision making and basic political processes. From this perspective you can see that the economic reform of China started in countryside. The main debates about the economic reform of China happened over the question of how to go about implementing economic reform in the urban industrial economy.

What lesson did the economists learn from the agricultural reform?

There were two camps of reform economists in China in 1980s. One camp of reform economists came out of this experience in the countryside. They were young economists who during the Cultural Revolution had been sent to the countryside where they lived for years. They formed an alliance with the first generation of China’s communist political leaders who had a deep connection to the countryside because the communist revolution in China was ultimately won through the support of the peasants. In the 1940s they undertook an economic struggle that underpinned the revolutionary efforts by reorganizing the political economy of the countryside. These two generations had a sort of common experience and they shared the view that the countryside was critical for successful reforms. When the question of the urban industrial economy became the main focus, they ended up arguing that the dual track price system and dual track reform system that had emerged in the countryside could be transformed into an urban industrial economy.

What was the dual track price system?

The breaking up of the people’s communes into households happened organically in the countryside. Households had to deliver their share of the planned quota for agrarian goods that they produced. If they were able to produce more, they could produce it for the market at market price. Basically, you had two prices and you also had two logics of operation. On the one hand planned fulfilment and on the other market products. This also meant that people in countryside started to earn cash incomes, because they were selling stuff on the market. Some of them also started micro-enterprises. This new cash income meant that people in the countryside now were able to purchase consumer goods from urban industrial areas like bicycles, sewing machines, or wristwatches. This meant that there was a new demand for goods from urban areas that came from the people who were not otherwise a part of the urban economy. It was a demand that was outside of the plan. Similarly, the township and village enterprises created a demand that was outside of the plan for the energy and steel industries. So there was a market demand in the urban industrial economy that had already created a market track. Market demand was always there in some sense as there had been previously some kind of black market and grey economy, but now this started to become more prevalent as a result of the agricultural reforms. The question for the Chinese leadership, then, was do they suppress these market activities that are already there, or do they encourage them to continue and systematize them into a bonified reform model.

How did this model work when applied to the whole economy?

The idea was that each company would have to fulfill their plan, but they also could produce beyond the plan for the market. The Chinese leadership considered that there were certain areas of the economy that were more important than others. For instance, the steel and energy industry was considered crucial, because you basically need them for everything, whereas the production of some products was considered secondary. The logic was to liberalize the inessential parts of the system, but for the essential parts to keep the plan running to ensure the industrial backbone of the economy. Those companies could grow into the market. Rather than destroying the plan to make way for the market, they added something to the economy. This was how the reform went according to the camp of reformers that ultimately prevailed in China.

Who was the other camp of reformers that didn’t succeed in the end?

The alternative reform model in China was influenced by Eastern European emigrée economists that visited China, but also by Chinese economists who were academics that had studied in 1950s and 1960s. Their experience was highly different compared to the first camp of reformers who brought their experiences from the economic warfare of the revolution in 1940s. Unlike those early revolutionaries, this later generation had experienced more stable economic development, at least until the Cultural Revolution when they were banned from their position, but they returned in the 1970s and were at the forefront of Western economics in China. The World Bank played an important role in this process when it sent people to China like Wlodzimierz Brus, Oto Šik, János Kornai, and others. They were chosen by the World Bank because they were good neoclassical economists who had experienced socialism, but who had also learned mainstream economics in the West. Then you had people like Milton Friedman who also visited China frequently in 1980s. This group thought about the question of economic reform from the perspective of design of the target model, where the question is not what is the next step that we can take towards enlivening the economy, but rather what is the target model that we should be pursuing for our reform and what should that model look like. In other words, they choose their desired model and then figure out how to get there in a certain number of steps. This approach was also gradualist in the sense that it took a number of steps to get to the desired economic model, but it had a very different logic from the first group of reformers we mentioned who worked their way from step to step to establish new economic model.

What were the steps that the target model economists thought China should have taken?

Their idea was that China would need a universal market system. For such a system you would need free prices, because if you don’t have freely moving prices than you don’t have a chance to rely on the market as you have no market signals. This is something that was articulated also in later shock therapy programmes by people like Jeffrey Sachs. Price liberalization is the first step to create market system. Price reform became the most important focus of the reform from this point of view. The idea that became more dominant in these circles was very much aligned with the idea that was later known as a shock therapy. Some of the economists suggested that instead of liberalizing all the prices in one go you first need to adjust the prices by some sort of calculations. The idea was that if you adjust prices that you have to some sort of equilibrium and then you liberalize them; the market would sustain these equilibrium prices. The problem with this theory was that the economy did not really function in that way. This idea was put forward by people from the Economic System Research Institute who studied previous attempts at price liberalization in Hungary and Yugoslavia and warned that if this kind of economic reform would be implemented then the prices of the most essential goods would shoot up because those goods were still relatively scarce and were needed by anyone who wanted to engage in industrial enterprise. Eventually this would lead to prices shooting up for consumers as well. You’d risk inflation getting out of the hand and that would be the end of the reform itself. The other side of the critics, mainly from Eastern European countries, suggested that if you pursue a dual-track system and a gradualist system than you’d have two problems. One would be corruption because in one system the price would be low and at the other system it would be high, leading to systematic corruption. The other problem is that you risk getting stuck if you don’t seize on reform momentum while it lasts and you’d never create a functioning market system. 

When you talked about how Chinese economists thought about shock therapy it seemed like their main issue was with the fact that there was a strong possibility that this transformation would lead to social unrest in the country and possible political change. What was the main signal for them back then that the shock therapy was not an option for China?

Social stability was absolutely crucial for Chinese leadership. There was a keen awareness of the overall stability of prices, but also of the stability of prices for certain products. Adrian Wood, a World Bank economist, once wrote in his notes: “The communist dictator who cannot adjust the price of matches by two cents.” At the time matches were essential for China in the 1980s because people were heating and cooking with appliances that required matches, so any change in the prices of matches would have an enormous impact on ordinary Chinese citizens. It was an essential commodity back then, similar to the price of gas nowadays. The concern about such social security was one of the key aspects of the decision not to go ahead with the package reform. The package reform was a very tempting solution as it promised one solution for all of the problems that China was facing. In 1988 the announcement of price reform caused a tense situation in which people started to panic buy and bank-run. They withdrew their savings from the banks and tried to buy whatever they could, which then added to already inflationary dynamics as more and more prices were entering into the market track. This created a sudden price hike, which was enough for the Chinese leadership to turn around and cancel all of the economic proposals and put the whole economic project on hold. By 1989 the dual-track system had been operating for several years and by then the problems with package reform started to be seen by the countries that had implemented it. It was clear that not everyone profited from this system. Early economic reformers who promoted package reform started to warn against it. 

In your book you mention the Russian economic reforms after 1989 as the counterpoint to the Chinese economic reforms. The Russian economy eventually collapsed, while the Chinese economy flourished. I was wondering if there was some sort of intellectual exchange between Chinese and Russians about the economic reforms back in the 1980s?

Yes, there was an intellectual exchange between China and Russia. Chris Miller’s book The Struggle to Save the Soviet Economy looked at this economic reform from the Russian side. He stated that Russians tried to emulate some of the policies that the Chinese were implementing in the 1980s. I looked at the Russian economic reforms only from the perspective of the outcome of the whole process to show what was at stake for the Chinese. It illustrates how crucial these decisions were. It doesn’t necessarily mean that the Chinese would end up with the same result, but it shows you the importance of the whole debate back then. But there are some differences between the Russian and Chinese approaches that are worth talking about. For example, in the Chinese case in the 1980s the most powerful people in the leadership were first generation revolutionaries, so they approaches the economic reforms with a very different perspective than Gorbachev or Boris Yeltsin. Another difference is that China started the reform coming out of the Cultural Revolution, which meant that at the beginning of the reforms the bureaucratic system was being re-established, whilst in the Russian case the bureaucratic system was very rigid. The other thing is the agriculture reforms, which were crucial in the Chinese case. Its designers took a lot of inspiration from Chinese traditional statecraft techniques and also from the civil war. So they had a models for the state to use the market that were part of the intuitive institutional arrangements that were inherent in the local practices, also something very different from the Russian case. My impression from what I read about the Russian economic reforms is that there are often misinterpretations of what gradualism meant in the Chinese context. Gradualist reform was described as some sort of planned step-by-step reform towards some target, whereas in the Chinese case it was a radical experimentalism. Its logic was to unleash new dynamic forces through experimentation and then to try and channel them into the system.

So what was perceived in China as a gradualist economic approach might be something entirely different than what Eastern Europeans labeled as a gradualist economic reform?

Yes, when Eastern European economists visited China in 1982 they always emphasized that in Eastern Europe gradualism was a failure. But when they took their study tour around the Chinese countryside, they realized that in China the agricultural reforms were actually flourishing even though they were a form of gradualism. But ultimately Eastern European economists advised that China should reform all at once and that was worlds apart from what Chinese were trying to do.

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