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China 30-year reform series, Part 1

In celebrating 30 years of economic reform in China, I plan to post a series of articles and commentaries on the topic.  Today, David Pilling writes on FT:

China’s ‘warp-speed’ industrial revolution

By David Pilling

Mao Zedong was right all along. Deng Xiaoping was a “capitalist roader”. Thirty years ago this week, at the catchily named third plenum of the 11th party congress central committee, Deng wrested power from the old guard loyal to Mao and launched China on the path of market reform.

Of course, history is never so clear-cut. Struggle and counter-struggle had been raging within the Communist party since Mao had died two years earlier. Deng, forced to work at a tractor factory during the Cultural Revolution because of his “rightist” tendencies, had long believed rigid communist ideology and overweening state interference were leading the economy down a dead end.

Yet today is as good a time as any to take stock. Deng’s China, to this day a pragmatic blend of capitalism and communist state control, has lasted 30 years. That is one year more than Mao’s China, born in 1949 with the victory of the Red Army and subsequently dragged through the madness of the Great Leap Forward and the Cultural Revolution. What have those 30 years brought to China and to the world?

A degree of economic prosperity, undoubtedly. By 1978, China had begun to recover from the brutal distractions of the later Mao years. By dint of its sheer scale, it was already the world’s 10th largest economy. But annual income per capita was still pitifully low at $190, making it, according to the National Bureau of Statistics, 175th in the global pecking order. Three decades of compounding nearly 10 per cent annual growth has brought income per head to about $2,500, and much higher than that on the prosperous eastern seaboard. Although that still ranks only 132nd – other countries have not stood still either – China has become the world’s fourth biggest economy, second on a purchasing power parity basis.

As a trading nation, China has gone from 27th to third. It runs trade surpluses with the US far larger than those Japan mustered in the late 1980s when one US congressman made a show of smashing a Toshiba radio cassette recorder in protest at the rising economic threat from Tokyo.

China’s warp-speed industrial revolution – “a compression of developmental time” in the phrase of James Kynge, whose book China Shakes the World captures the historical significance of its rise – has transformed the global economy. Its foreign reserves, at nearly $2,000bn, are easily the largest in the world, providing the liquidity that helped inflate the global bubble. Its export of cheap goods has allowed the world to consume far more than it once did. On the demand side, China’s ravenous appetite for steel, iron ore, coal, petroleum, grains, oilseeds and so on pushed prices to vertiginous heights until its abrupt economic slowdown this year helped bring them crashing down again.

Yet the process by which these astonishing changes have occurred owes as much to accident and experiment as to grand design. Deng likened his non-ideological, gradualist approach to “crossing the river by feeling for the stones”. Many of the so-called market reforms were little more than giving space – often by turning a blind eye – to what China’s entrepreneurial citizens were already doing. The month before Deng seized control, 21 farmers in Xiaogang village in eastern Anhui province concluded a secret pact to divide their communal land into individual farms. So daring was their act that they made provision to look after each other’s children should they be arrested. A few years later an estimated 300m rural households were parcelling out land, often regaining control over plots to which their ancestors had held title for generations.

The same happened in industry, where so-called “red hat” capitalists set up private businesses in the guise of state enterprises. Many raised capital from family or underground banks. As long as such freedom created wealth and did not challenge party authority, Deng was prepared to let a hundred flowers bloom.

He and the leaders who followed him did take some top-down decisions that helped unleash China’s economic potential. In 1980 he set up the special economic zones, such as Shenzen, which became magnets for foreign capital and expertise from Taiwan, Hong Kong and other free-market economies China was seeking to emulate. But other reforms went wrong. When Deng freed prices in 1988, it triggered the high inflation that was at least a proximate cause of the Tiananmen Square protests.

The Communist party appears to have brought 30 years of spectacularly smooth growth, even allowing for the statistical manipulation that sometimes occurs. But that obscures often desperate flailing as the party cranks this lever and that to produce the economic progress on which its survival ultimately depends. Beneath these shifting policies lies one inalienable understanding: “We’ll give you growing prosperity, if you don’t question our right to absolute power.” Yet there is an inherent contradiction between exerting unyielding political control and trying to unshackle entrepreneurial creativity.

That does not mean the arrangement is under imminent – or even mid-term – threat. Both Singapore and Japan offer evidence that one party can maintain power, even without the benefit of force. But for all China’s impressive economic progress, the past 30 years have owed much to cobbling together policy and struggling to reconcile contradictions. The problem with fumbling from slippery rock to rock is that there is always the danger of falling in.

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