Armchair economics defeated: how China escaped shock therapy

08/04/2022

How did post-socialist China become the world’s industrial powerhouse while post-socialist Russia deindustrialised? Isabella Weber’s award-winning book, How China Escaped Shock Therapy: The Market Reform Debate (Routledge, 2021), explores the economic policy debates behind China’s successful post-socialist transformation.

The Russian contrast

To contextualise China’s economic success, Weber starts by contrasting China with Russia and eastern Europe. Like their Chinese counterparts, Russian leaders also globalised their economy after the collapse of state socialism. However, in contrast to Chinese gradualism, Russia’s political elite subscribed to the blueprint of shock therapy. They liberalised and privatised as quickly as possible. The result was total economic chaos and “suffering of epic proportions,” as Kristen Ghodsee and Mitchell Orenstein show in their recent book, Taking Stock of Shock (Oxford University Press, 2021). As post-socialist countries rapidly liberalised their economies, the former socialist industry disintegrated and vanished.

Some countries, such as those in central and eastern Europe, managed to partially re-industrialise through foreign investment but lost control over the commanding heights of their economies by transferring state assets to transnational corporations. These purported central European success stories are also facing developmental bottlenecks that challenge the stability of liberal democracy in the region. 

Russia deindustrialised and relied on its oil and gas reserves. Its share of world GDP almost halved, from 3.7 per cent in 1990 to about 2 per cent in 2017, while China’s share increased close to sixfold. The hardest-hit post-socialist countries had not recovered their levels of economic development of the late socialist period by the end of the 2010s. In 2016, the real GDP per capita (in 2011 USD) of Georgia, Moldova, Montenegro, Serbia, Tajikistan and Ukraine was still below the 1989 level.

In parallel to this economic collapse, an unprecedented mortality crisis hit eastern Europe. The number of excess deaths may have been around seven million in the region between 1991 and 1999, with five million in Russia alone. In contrast, China enjoyed population growth rates of about 10 per cent throughout the 1980s and 1990s, and life expectancy has been improving without interruption.

Isabella Weber’s meticulously researched monograph tells the story of China’s fortunate break with the neoliberal economic policy mainstream, which allowed the country to escape Russia’s dismal fate. In Weber’s narrative, ideas are central. As she asserts, “China’s deviation from the neoliberal ideal primarily lies not in the size of the Chinese state but in the nature of its economic governance” (p. 3).

The Chinese reform debate

When Hua Guofeng, Mao’s heir, started a gradual opening after the Cultural Revolution, the country’s intellectual and political elites realised how much China had fallen behind. Deep poverty and global economic insignificance were not compatible with their definition of socialism, so they started to look for ways to reform the economy. When Deng took over from Hua in 1978, he accelerated reforms.

A group of young social scientists and economists previously sent to the countryside for ‘re-education’ during the Cultural Revolution played a vital role in these reforms (such as Chen Yizi, Xiaoqiang Wang, and Nanfeng Bai). They conducted surveys about the economic and social impact of household contracting, which played a crucial role in legitimising gradual market reform in agricultural production in the early 1980s. The first steps of the reform focused on extending household production and liberalising agriculture. The state maintained its role as buyer of last resort and owner of the land and heavy agricultural machinery, but households gradually became responsible for organising agrarian production. This reform brought enormous gains in rural living standards. 

Fuelled by this success, reform economists started to turn to the industrial core. The critical tool of these reforms was the dual-track price system that regulated production through state participation in the market. The reform economists argued that the state should continue playing a crucial role in stabilising prices and protecting consumers and producers from violent cycles as gradual liberalisation progressed. They saw shock therapy as a threat to the socialist industrial base that they wanted to modernise and transform into a competitive business sector gradually. For gradualists, the mounting inflationary pressure was not a sign of excess aggregate demand but a result of mismatches in different sub-spheres of the economy. The Coastal Development Strategy that internationalised the dual-track price system in China’s coastal regions was a central building block of this gradualist strategy.

However, by the end of the 1980s, Deng started to see radical reforms as the only way ahead because of growing corruption and inflationary pressures. Shock therapists argued that the only way ahead was to destroy the old industrial base and let the invisible hand of the market work its magic, which would create a new, much more efficient economy. For shock therapists, gradual tinkering with the socialist industrial base only prolonged the economic crisis and contributed to inflationary pressure. This resonated with the people’s fury at the corruption brought about by the dual-track system as well as with the rising, yet unsatiated, demand for political reform.

1988 was supposed to be the year of rapid mass liberalisation measures. However, inflation shot up partly because people knew about the state’s intention to terminate the dual-track system. They therefore started panic buying, so the (intention of) shock therapy brought about its own demise. As panic buying ensued and unrest grew, Deng had to put on the brake. Although the 1990s brought a renewed wave of liberalisation, China never implemented anything even remotely resembling post-soviet shock therapy.

Key insights

Ironically, the political leaders and reform economists who engineered China’s gradual opening lost their voice and influence, ending up on the margins of history. The advocates of gradualism had expressed their sympathies for the fledgling democratic movement in the 1980s. However, the political leadership eventually saw a threat in the movement, and repressed it, culminating in the 1989 Tiananmen Square protests and massacre. This also ended the career of the gradualist generation of reform economists. In contrast, shock therapists such as Wu Jinglian were better at the tactical game. They did not support the democratic movement and enjoyed stellar careers in the 1990s.

Despite the monograph’s breath-taking scope, as with all books, there remain some untold stories. Weber’s decision to foreground the price reform means she had to relegate privatisation and industrial policy debates to the margins. Teasing out the industrial policy lessons of China’s transformation would thus be an important addition – along the lines of the recent Financial Times essay that she co-authored with Daniela Gabor about the perils of ‘carbon shock therapy’ and the need for green industrial policy. We can only hope that the next book or article(s) will explore these topics in more detail. It is also essential to see that China’s success is massive but still relative. China’s development model trumps eastern Europe’s based on economic indicators but it has also kicked off a rapid growth of inequality and precarity, intensified ecological problems, and failed to facilitate democratisation so far. In fact, it has allowed for the emergence of a repressive surveillance state. Whether China can combine gradual economic liberalisation with political democratisation remains to be seen.Nevertheless, these unresolved issues do not diminish the extraordinary contributions of Isabella Weber’s book. The combination of historical depth with theoretical insight that also speaks to contemporary debates makes How China Escaped Shock Therapy a benchmark monograph in the literature on the political economy of China and shock therapy.

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