Reform and the Non-State Economy in China: The Political Economy of Liberalization Strategies Review

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Reform and the Non-State Economy in China: The Political Economy of Liberalization Strategies ReviewThe title of this book almost screams "Academic, Boring!" However, those that read Dr. Hongyi Lai's (Associate Professor at the School of Contemporary Chinese Studies, University of Nottingham) book will be fascinated by his account of how China began its economic transition - especially the political adeptness of Deng Xiaoping, General Secretary of The Chinese Communist Party (CCP) and leader for 15 years.

Deng joined the CCP in 1923, led a failed uprising against the Nationalists in 1928, was a "Long March" veteran, led several military campaigns against Japanese occupiers and the Nationalists, survived seven assassination attempts, and became a close Mao associate. However, because Deng saw Mao's 'Great Leap Forward' as a failure, he was purged three times, including twice during the Cultural Revolution. The first two times he was banished to rural farm-work, the last time placed under house arrest. Faced with increasing economic problems, Mao brought Deng back into influence shortly before he died. Mao's immediate successor, Hua Guofeng, floundered in efforts to improve the economy through another 'Great Leap' program. Meanwhile, Deng began laying the foundation for change by writing an editorial to propose rethinking the Cultural Revolution, supported citizens making comments about it on the Freedom Wall (1977-78), declaring that China was only in the early stages of socialism, they needed to "seek truth from facts" before moving forward, "socialism and a market economy are not incompatible," they should focus on modernization instead of class struggle, "Poverty is not socialism," and that Mao was "seven parts good, three parts bad." These were all aimed at freeing leaders and the people from Maoism where it was believed "better to be poor under socialism than rich under capitalism."

Coincidentally, during this same time period 18 farmers secretly divided up their collective farm in Anhui Province and rejected communal living - the result was a substantial production increase and they no longer had to beg for food. The party responded by slowly relaxing commune requirements, and by 1983 most had disappeared. This created an enormous flood of migrants into the cities who needed alternative employment, and changed the political debate to a focus on results. Meanwhile, Hong Kong's successes created a demand for additional nearby workers, and at least two mainland areas petitioned to become 'special economic zones' (SEZs) that allowed outside investment and innovation, and other economic freedoms - with the Chinese diaspora more than willing to lead. Fortunately, those two provinces had relatively small state sectors, and did not have strong alliances with conservative CCP leaders, making it easier for Deng and his fellow leaders to approve.

Use of 'experiments' made overcoming resistance easier - Deng had only one ally among the top eight leaders. Also fortuitous was the fact that neither China nor the Soviet Union had made much economic progress to-date and the CCP leadership was leery of another violent uprising after the 'Cultural Revolution.' Deng emphasized pragmatism - saying they were "crossing the river by feeling the stones," and pointing out that "it didn't matter whether a cat was black or white - as long as it caught mice." Those CCP leaders worried about plots to topple or erode Communism were told to "Say less, and do more" - to refocus on practical steps to build the economy. Deng also had a vision of where he wanted to take China, thanks to a 1978 visit to Japan where he saw the comparative luxurious life of Japanese auto workers who benefited from an export-oriented economy that brought in funds and mandated product quality. Deng also saw a need to restrain military spending to help finance economic improvement - possibly similarly garnered from visiting Japan.

Instead of trying to mandate changes to the state bureaucracy, Deng encircled them through new forms of business - private firms, town-village enterprises (TVEs - owned by local communities), and foreign investments in SEZs. These put competitive pressures on the state-owned enterprises (SOEs) and they soon demanded comparable flexibility and benefits (eg. lower tax rates granted to private firms because they had to pay for their inputs; hiring selectivity instead of crony referrals). (Workers resisted paying bonuses, however, preferring equality or seniority-premiums.) An assertive labor movement in Poland led China to back away from worker self-management - its hard to get foreign investment is you can't provide reliable workers. Currency devaluation provided an additional sales boost.

Key to success was Deng's conflict management strategy: 1)"Two steps forward, and one step back" - depending on the political tide of events, Deng would push ahead, or temporarily retreat. Leadership consensus, not directives from Deng, were used. This longer-term perspective was enabled by the stability inherent in Chinese government. 2)Finding common ground with opponents. Conservatives trusted Deng because he was seen as trying to save the regime, not undermine it. This held even during the Tienanmen Square Protests of 1989 - Deng ordered the Army in, though its not clear he supported the bloodshed that followed. 3)Controlling the military. Deng's background of leading anti-Japanese and anti-Nationalist military efforts gave him the respect needed to do so; further, it was the military that brought him back into leadership after Mao's death. 4)Utilizing the power to appoint cadres. Deng initiated replacement of much of the top leadership in the CCP and government, pointing out that they were old and largely untrained. Replacements tended to be supporters of Deng and his reforms - Maoists fell from 52% of the 1977 Politburo to 12% in 1982, while reformists went from 8% to 32%. (Deng often, however, had to accept new conservatives as the price for getting older ones to retire.) At the province and local levels, Deng made economic growth the primary criterion for evaluating and promoting officials (helped enable government decentralization), party monitoring was reduced (though again, this was sometimes reversed due to significant opposition), and initiated downsizing through a massive mandatory retirement/buy-out program. Many units began town/village enterprises to help employ workers freed up by agricultural reforms.

Low-skilled, high labor-contend exports became the focus, as with the earlier "Four Tigers" for the same reasons - brought in foreign currency, was not 'fakeable (Mao's government officials often lied about results to avoid being punished). Successful exports also boosted national esteem. Foreign capital was welcomed, though the biggest need was foreign management and technology skills. SOE managers were also given more autonomy and allowed to reinvest some of their profits.

China did not follow the U.S. recommended "Big Bang" approach to transitional economics (immediate privatization, marketization, and deregulation, as well as closure of inefficient state firms). Clearly that strategy failed for the Soviet Union, bringing a drastic decline in GDP and lifespans, weakening of the central authority, and looting of state assets by plutocrats. Deng and China did benefit from having a smaller state sector than the Soviets - 24% of total employment, vs. 88%, and the pioneering work of Japan, South Korea, Taiwan, Hong Kong, and Indonesia. However, China's transition was not easy either, and was encumbered by less-educated managerial leadership and more initial CCP interference than existed in the Soviet Union.

The Tienanmen Crisis was partly motivated by concern over inflation caused by converting from administered to market pricing, and corruption. Closing/downsizing many SOEs, and ending the prior social safety net (health care, pensions, education) were also difficult. Imposing population controls proved highly unpopular. Today, income inequality, pollution, and quality of some consumer goods have become major new problems, and millions more rural residents impatiently wait to join the global economy.

Summarizing, China has not completed its economic transition - partly the price of taking a slow deliberative and consensus-dominated process, and partly because the task was so large, constantly evolving, and never -ending. The CCP is still firmly in control, hundreds of millions have been lifted out of poverty, China's government became decentralized, downsized, and a 'helping' rather than 'grabbing' hand, and China's citizens are proud and much more optimistic about the future than Americans.

Bottom-Line: Though doubtful that he even stood five feet tall, Deng Xiaoping is a towering figure in world history. Hongyi Lai's book is an invaluable accounting of how Deng brought massive political and economic change to China and the world.Reform and the Non-State Economy in China: The Political Economy of Liberalization Strategies Overview

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