In the last decades of the twentieth century, the prevailing wisdom among Western economists was that post-communist countries should hasten their transformation into market economies by pushing for âBig Bangâ price reforms.
If China had listened to this advice, it might have ended up like Russia – an economic disaster, says Isabella Weber, author of the new book, “How China Escaped Shock Therapy: The Market Reform Debate. “
Instead, China has opted for gradual change, a cautious and pragmatic approach known as “crossing the river looking for stones.” But that decision only came after a fierce internal debate that, as Weber shows in his gripping tale, could have gone both ways. A defining moment was the protests in Tiananmen Square, fueled by rising inflation, which resulted in a massive bloodbath.
This week in the new economy
I asked Weber how these momentous events shape China’s approach to the world today.
Andrew Browne: You argue that China has become a global economic engine largely by ignoring the advice of most Western economists. Does this experience make China less inclined today to bow to Western pressures to open up its economy?
Isabella weber: This is not about the Western economy versus the Chinese economy per se, but rather free markets versus markets with active state participation. Chinese and Western economists have taken both sides of the debate, with some arguing for sweeping shock-like liberalization and others for a a more pragmatic approach that began with experimentation on the sidelines. Reform economists have often been inspired by the experience of post-WWII war economy transitions – a transition that is relevant today as the United States prepares to emerge from the Covid-19 pandemic with government spending at the war level.
Browne: Deng Xiaoping actually briefly tried the âBig Bangâ reshuffles, which led to corruption, inflation and mass protests in Tiananmen Square that nearly cost the Communist Party its grip on power. Is this how we should understand China rejection of neoliberalism?
Weber: By the end of the 1980s, agricultural reforms had triggered enormous productivity. But resistance to further commercialization grew when it became clear that not everyone would benefit. In this context, the idea of ââbig bang price liberalization became attractive to Deng. The reaction to state television announcements of comprehensive price reform has been panic, bank failures and the hoarding of durable goods. Deng was ready to make great sacrifices in the name of market reforms and economic progress, but he was not ready to risk social and political stability, and ultimately the communist state. Attempts at radical price liberalization have therefore been blocked. This is not to say that there were no neoliberal reforms in China after 1988. In fact, the 1990s and early 2000s were most of the neoliberal era in China, but there has been no attempt to overhaul the system as a whole overnight.
Browne: Was there an alternative route? Couldn’t China have ended up more like Poland, which embraces both markets and democracy?
Weber: Comparing, say, Poland with China, we have to remember that China was still a very, very poor country at the start of the reform. In 1980, China’s per capita GDP was still lower than that of Haiti or Sudan. It was faced with a challenge of industrialization and development, not just marketing. If the country had experienced a recession like Russia’s, it could have been a disaster of proportions difficult to estimate. In Russia, almost all indicators of human well-being fell sharply, but from much higher levels than in China. Sad to say, but unfortunately democracy doesn’t seem to be either a very stable result in several of the transition economies that have undergone forms of shock therapy.
Browne: The approach that China finally took left the state at the heart of the economy. In a way, didn’t that set up the conflict we see today between Western economies and the so-called Chinese âstate capitalism?
Weber: What puzzles me about the idea that the problem lies with Chinese “state capitalism” or the active participation of the Chinese state in the market, is that it is not unique to China. China. Other states have also historically had a fairly extensive industrial policy and state involvement. It appears that tensions between China and the West have increased since China moved from being a workshop to Western-based companies. create their own companies capable of reaching the technological frontier. This of course required the state, as China was starting from a position of relative technological underdevelopment.
Browne: Local experimentation largely explains China’s first economic successes. But these days the approach is more top-down. Is it a problem?
Weber: First of all, I think we have to recognize that the 80s are really that moment of great openness before a new paradigm takes hold. It’s kind of like what we can see right now in the American context, where all of a sudden all the premises we had in economics, especially in economic policy making, seem to be debated. Obviously, this opening moment cannot last forever. Eventually the fog sets in, and you get a new one, more consolidated system.
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