Avoiding the Post-Communist Traps

The Chinese Economic Miracle was Based on Ignoring Advice from Central and Eastern Europe

25 June 2021

Reviews of Unlikely Partners: Chinese Reformers, Western Economists, and the Making of Global China by Julian Gewirtz (Harvard University Press, 2017) and How China Escaped Shock Therapy: The Market Reform Debate (Routledge, 2021) by Isabella M. Weber. Although each one is a work of independent scholarly research, there is a great deal of overlap between the two books, and this is why we have decided to review them together.

World-renowned Hungarian economist János Kornai has been apologising lately for having helped China become an economically robust, illiberal authoritarian superpower. He regrets having given advice to the Chinese leadership in the 1980s, without foresight as to the kind of threat China would pose in the coming decades to the Western liberal world.

In fact, as these two books demonstrate, it is unnecessary for Kornai to have any regrets. The Chinese economic miracle has taken place largely by ignoring the advice he and fellow Eastern European academics have offered. And they have offered a lot. In fact, it turns out from the research carried out by Gewirtz and Weber that they played a central role in the Chinese economic debates of the eighties.

Investigating Voices

As it is well known, the story begins with the death of Chairman Mao in 1976. It marked the end of an era, and allowed the new leader, Deng Xiaoping, to announce his policies of ‘reform and opening’, similar to Gorbachev’s ‘glasnost and perestroika’, terms that are more familiar to Central and Eastern European readers.

China’s opening to the world involved attempts to learn from other countries. It would have been unseeming for a socialist country to invite Western bourgeois economists straight away, and China’s relationship with the Soviet Union had deteriorated greatly. Therefore, initially the type of foreign advice they sought was from experts from fellow socialist countries but not the USSR. They were not interested in orthodox soviet style central planning, but rather in how to move away from it, introducing market-based mechanisms of efficiency while maintaining the overall framework of socialism. The kind of economist they were looking for, they soon realised, was likely to be an Eastern European dissident.

The first such Eastern European dissenting economist who got invited was WƗodzimierz Brus. He had studied in Leningrad (today St. Petersburg) after he had been forced to flee a Poland that was divided between Nazi Germany and the Soviet Union. He then returned to Warsaw and built a career as an economist and a communist, only to flee again, this time to the United Kingdom. He remained with one foot in the socialist camp, but with the other, he advocated introducing market mechanisms into the system. He belonged to the school of ‘market socialism’, a tradition going back to the Polish economist Oskar Lange.

Milton Friedman

It is notable that the next economist that was invited to Beijing was the famous market fundamentalist proselytiser, Milton Friedman, in 1980. He was of course not Eastern European but American although of Hungarian descent. Gewirtz describes how his visit got off to a bad start when he criticised the person that came to pick him up at the airport for having bad body odour and ‘dressing like a worker’. The man later turned out to be the vice director of the hosting economics research institute.

The visit continued by Friedman lecturing the Chinese communists on his characteristic categorical conviction that capitalism was faultless. The two sides were so far away ideologically that the meetings left both sides exasperated. Gewirtz believes that the Chinese economists had not been fully aware of Friedman’s markedly libertarian ideological convictions and his strong tendency to try to convert. They had obviously missed how political Friedman was, including his assistance to the far-right Pinochet regime back in the 1970s.

Editor’s Pick: Are the Visegrad Group Countries a Success Story?

The next Eastern European who received an invitation was the Czech dissident Ota Šik. He had been a member of the resistance during the Nazi occupation of Czechoslovakia, then went on to become the number one economist in the country after the war. He even translated Marx’s Das Kapital into Czech. He was famous for attempting to introduce market-based mechanisms into the communist system, and Alexander Dubček even made him vice-premier. During the 1968 Prague Spring, he happened to be on vacation in Yugoslavia. He decided not to return and ended up teaching in Switzerland instead.

However, the one economist who attracted the most attention was János Kornai from Hungary. He had been a devoted communist during the early Stalinist period in the fifties, and an economics editor of the communist daily. He was later disillusioned and went on to build a very successful international career based on trying to dismantle any hopes left with regards to economic planning. While remaining a Hungarian citizen, he accepted a teaching position at Harvard in 1985. His Economics of Shortage became an international bestseller. Kornai was also to become the most celebrated Eastern European in China.

Conferences of Influence

In 1982 a conference was held in the beautiful mountain resort of Moganshan, with the participation of Brus, the former Polish price commissioner Julius Struminsky, the former Czechoslovak deputy prime minister Jiří Kosta, as well as the Paris-based Hungarian dissident Péter Kende.

Beijing also saw a visit by Hungarian deputy prime minister József Marjai, the most reform-minded member of the communist nomenklatura of the time, whom Margaret Thatcher had invited for a visit to London as a sign of appreciation. Later on, the Hungarian top leader János Kádár himself would also visit Beijing. Chinese economists then went on a tour of Hungary and Yugoslavia, where they met with figures like Rezső Nyers and Jenő Fock, architects of Hungary’s ‘New Economic Mechanism”, as well as Márton Tardos of the National Planning Bureau. The interest in Hungary was paramount because it was the one socialist country that was deemed to be closest to China in terms of its reform attempts, in spite of the geographical distance and the cultural gap. Yugoslavia was believed to be a model one step too far, while in the rest of the Eastern Block marketisation had been halted.

Then, there was the famous Yangtze boat conference in 1985. Participants included Nobel prize laureate James Tobin, Brus again, Alexander Bajt representing Yugoslav economics, as well as Kornai. Lectures and debates were held aboard a luxury cruiser floating down the river, with Chinese economic reformers in the audience.

As can be seen from this list, Chinese interest in Eastern Europe was extensive.

The inquiries of the Beijing leadership focused on price liberalisation. Chinese communists had preserved extremely stable prices for decades, which, as Weber points out, was a key part of their legitimacy. They had been the ones to stabilise prices after the hyperinflation of the Chinese civil war and managed to maintain price stability for long decades. However, by the 1980s, it became clear that a transition from the rigid plan towards a system that takes supply and demand into consideration at least partially will inevitably lead to significant inflation. The question was how different speeds of marketisation would lead to varying surges of inflation, and whether resulting public anger would undermine the reform and the position of the party.

Most of the Eastern European experts and dissidents pointed to the fact that their region had become caught up in an eternal reform process that was leading nowhere. This implied primarily Hungary and Yugoslavia since the rest of the Eastern European region still adhered to the classical Soviet centralised model. As Weber points out, the advice of the experts was for China to avoid this mistake and move forward in one bold step and liberalise all prices. This was often referred to as the Big Bang approach.

China Ignoring CEE Advice

Interestingly enough, Kornai, who was probably the most economically right-wing figure in the group, toned down his message. Gewirtz quotes him admitting that he wore ‘two faces’, one for Budapest and one for China. Instead of directly stating that any form of socialism was unviable, as he did in the Eastern European debates, on the Yangtze he concentrated his message on the need for hard budget constraints for state-owned enterprises. The variety of capitalism that the Chinese leadership eventually opted for, the Far Eastern development model, was famously the opposite. State-owned enterprises and large domestic champions from the Japanese keiretsus to the Korean chaebols, as well as Taiwanese and Singaporean corporations, benefited from these soft budget constraints. Not only did the state assist their development for long decades with heavily subsidised access to capital and technology, as well as weak trade unions, but they were also repeatedly bailed out whenever they were about to fold. Kornai’s criticism of soft budgets constraints held true for the Soviet-style statist system but not for Far Eastern state capitalism.

Importantly, Kornai never really subscribed to the varieties of capitalism approach, which would have enabled Hungary to choose a milder form of capitalism. His public interventions back home always relied on contrasting the dichotomy of ‘socialism’ and ‘capitalism’.

In the late 1980s, he even wrote an Incensed Pamphlet in which he argued against any kind of third way theorising, as opposed to opting for the free market. In the early 1990s, he famously called for the dismantling of what he believed was a ‘premature welfare state’ inherited from the 1980s.

Social policy professor Zsuzsa Ferge and social historian Miklós Tomka both aptly demonstrated that no such premature welfare state had existed and that the whole notion of a welfare state being ‘premature’ was absurd.

Editor’s Pick: Confucius Institute Threatens Critics of China

Nevertheless, Kornai threw in his prestige towards dismantling whatever little redistribution remained, accompanying the newly introduced capitalism. The result of too little investment in education, healthcare and social policy was a country with the lowest level of social mobility in the European Union. Both capitalism and democracy were discredited by voters’ lack of attachment, preparing the way for Viktor Orbán’s illiberal takeover, as has been demonstrated recently in books by Ádám Fábry and Gábor Scheiring.

If Kornai should have any regrets, it would have to be about his public interventions in his native Hungary. It is an ironic twist of history that Orbán has lately become an admirer of China although at home he prefers crony capitalism to the Far Eastern development state that is based on massive augmentation of human capital.

When 2008 brought about the global collapse of the neoliberal era and anger turned against the top 1%, who had captured states, Kornai intervened to warn that people should not be angry at those who grow rich. He remained uncritically apologetic about capitalism, choosing to ignore the entire literature on the harm done by corporations and oligarchs around the world during the decades of neoliberalism.

Found in Translation

Of course, Kornai’s influence in China was also not constrained to those few days of the cruise on the Yangtze. According to Gewirtz, leading Chinese economists themselves admitted that they still needed time to digest everything that had been said there as they were often not familiar with even the most basic concepts of Western economics.

No Chinese translations existed at the time for terms as simple as ‘macroeconomic management’, pushing translators to tears according to accounts of the conference. Kornai’s Economics of Shortage was then published in Chinese in 1986 in 100 000 copies, arousing somewhat of a ‘Kornai fever’. It was clear that he had provided the most comprehensive account of what was wrong with centralised planning.

After heavy internal debates, Beijing initially decided to act upon the advice of the Eastern Europeans. Chinese leader Deng Xiaoping pushed for price liberalisation, which started in the 1986-88 period. However, it soon became apparent that the population was going to respond with political protests, bank runs, hoarding, as well as violent rummaging of stores.

Zhao Ziyang

A crisis ensued by the end of 1988. At this point, Prime Minister Zhao Ziyang decided to invite an unlikely advisor, especially in light of the misfortune of his prior China trip: Milton Friedman. The libertarian professor spoke in Shanghai where he was given an honorary degree by Fudan University.

This was probably the peak point of uncritical Western-style marketisation in China. Much like his earlier intervention in Chile — where he had opined that the drastic market liberalisation of the Pinochet regime was leading to economic collapse not because there was too much of it but because there was not enough — Friedman again urged Prime Minister Zhao to continue liberalising pricing with one bold move. True to his economic philosophy of monetarism, he advocated controlling inflation by tightening the money supply and withdrawing all budgetary support for enterprises. Zhao understood that Friedman’s advice was untenable and treated the meeting as a public relations exercise to re-enhance his weakened position. He later met with Stanley Fisher, an internationally renowned World Bank expert on inflation, who advocated the opposite of Friedman, gradual liberalisation.

However, by this time public anger was mounting. In 1989, the Tiananmen Square student demonstrations put an end to radical price liberalisation. While Chinese authorities have by and large erased all memories of those events, Western accounts have also distorted them as having been solely a democracy movement and nothing more. In fact, according to unbiased analyses, the Tiananmen protests were just as much about rising inflation and economic uncertainty, as well as frustration with the government’s vacillation about how to reform the economic system. Gewirtz quotes Western academic studies, according to which although workers sympathised with students on the square, they did not support their calls for ending socialism.

Mostly as a consequence of this popular backlash, Beijing chose to ignore the advice of the Eastern European intellectuals. China escaped shock therapy, as the title of Weber’s book underlines. Liberalisation took place, not in a single Big Bang, but gradually, over a period of decades, as Weber demonstrates.

The main thrust of economic reform was based on what was called the ‘coastal development strategy’. This idea had been devised by a State Planning Commission economist called Wang Jian although PM Zhao later endorsed it as his own.

The idea behind it is that assembly and manufacturing in Asia had expanded first to Japan, then to the Asian Tiger economies of South Korea, Singapore and Taiwan, and that in the next wave the coastal seaboard of the PRC could benefit from the expansion. This has effectively become the main logic of the strategy that was central to China’s rise.

The PRC did not simply adopt a generic market-based model, it adapted specifically the Far Eastern development model. It certainly did not opt for any kind of market socialism, as imagined by Brus or Šik. However, it also did not opt for complete marketisation, as Friedman had advised, or what Kornai pushed for in Eastern Europe. The Chinese model has preserved the central plan, a large number of state-owned enterprises, capital controls, almost complete state control of the financial system and therefore investment, and a large number of other tenets that would have been unacceptable to Friedman or Kornai.

The contrast with Russia is striking. Moscow did opt for shock therapy, as advised by Jeffrey Sachs (another one with posterior regrets) and Anders Åslund (no regrets). Weber quotes the results.

Russia’s share of World GDP almost halved, from 3.7% in 1990 to about 2% in 2017 whereas China’s share increased sixfold, from a mere 2.2% to about 1/8 of global output. Russia underwent deindustrialisation, while China has become the workshop of the world. The average real income of 99% of Russians was lower in 2015 than in 1991, while China has famously lifted 800 million people out of poverty, effectively eliminating poverty in the country, as acknowledged by the World Bank.

The PRC achieved all this by not listening to the advice of the Eastern Europeans. The origins of the Chinese system today can be traced back to the Meiji Restoration in Japan, General Park’s South Korea, or the ten major projects and the industrialisation policies of Taiwan. Not to speak of President Lee Kwan Yew of Singapore, with whom Deng Xiaoping is known to have had a cordial relationship, explicitly expressing his wish to learn from the city-state. Singapore’s pioneer finance minister, Dr Goh Keng Swee, became an official advisor to the PRC government. It is this Asian model of state capitalism that China shifted to from the 1990s onwards. Eastern European experts have no reason for regret, they did not define the Chinese miracle.

In addition, it is also worth considering that even with President Xi Jinping’s current retrenchment, China is a much more globally open society today than it was in the seventies. It might be illiberal and authoritarian, but under Mao it was totalitarian. There is nothing to regret about Western engagement in China.

 

Isabella M. Weber is an assistant professor of economics at the University of Massachusetts, Amhurst.

Julian Baird Gewirtz has been Senior Fellow for China Studies at the Council on Foreign Relations, a fellow of the Columbia-Harvard China and the World Program, an Academy Scholar at Harvard’s Weatherhead Center for International Affairs, a lecturer in history at Columbia University, and a lecturer in history at Harvard University.

 

Featured Photo by Jerry Wang.

Photo of Milton Friedman from http://www.thefamouspeople.com/profiles/milton-friedman-167.php
Image Credit: http://reason.com/blog/2012/07/31/vid-happy-100th-birthday-to-milton-fried

 

Zoltán Pogátsa

Associate Professor at the University of Sopron

Your Central European Intelligence

Democratic security comes at a price. What is yours?
By subscribing or donating now gain access to analysis, forecasts and scenarios by leading analysts and reporters who monitor democratic risks and develop policy debate from Central Europe on Central Europe.

Newsletter

Weekly updates with our latest articles and the editorial commentary.