How China Escaped Shock Therapy: The Market Reform Debate
Isabella M. Weber
Routledge, $39.95 (paper)
In September 1793, British envoy Lord Macartney was given a tour of the Qing summer palace north of Beijing. Earlier in his trip he presented the Qianlong emperor with gifts of two enameled watches of “very fine workmanship,” a telescope, Birmingham sword blades, and fine British clothes, among other items meant to awe the aging monarch with the superiority of British technology and manufacturing and convince him to sign a trade agreement.
When the emperor’s personal assistant and two of the Qing’s most decorated generals led him around buildings filled with treasures and mechanical devices, however, Macartney was aghast. “The pavilions are all furnished in the richest manner,” he wrote, “with spheres, orreries, clocks, and musical automatons of such exquisite workmanship, and in such profusion, that our presents must shrink from the comparison and ‘hide their diminished heads.’” Nor was the emperor impressed: he sent Macartney back with a stern reply to King George, “As your Ambassador can see for himself, we possess all things . . . and have no use for your country’s manufactures.”
At the time of the Macartney mission China was the center of the world economy. The population had already embarked on exponential growth to reach around 350 million in 1800, and the two largest southern port cities, Guangzhou and Foshan, had over 1.5 million people, roughly the urban population of all of Western Europe. Regional specialization had long since taken place, with extensive handicraft and cash crop production contributing to expanding national and international markets, while Chinese merchants had established themselves in the South China Sea creating vibrant trade networks throughout Asia. Europe was only able to access this lucrative market late with the discovery of silver from the Americas, which in turn provided them access to Chinese porcelain, silk, and tea: a diagram of trade flows in the early modern world would show consumer goods flowing out of China and all silver flowing in. Indeed, the best estimates have China accounting for a third of world GDP in 1820, more than all of Europe combined and by far the world’s largest economy. Adam Smith put it most succinctly in the Wealth of Nations (1776), “China is a much richer country than any part of Europe.”
China’s dominance in the global economy would not last. Britain, determined to create a global trade regime in its image, went to war with China in 1839 and again in the late 1850s in the name of opium, imposing the “free trade” of drug consumption and a series of unequal treaties, which, among other things, saddled the Qing government with huge indemnities and the loss of control over its exports. By 1870 China’s share of world GDP had fallen to 17 percent and continued on a precipitous decline after further acts of foreign imperialism and economic exploitation. Revolutionaries and reformers in the nineteenth and twentieth centuries sought to rebuild China political, socially, and economically, but the inability to invest in the economy and modernize industry and agriculture made China one of the poorest countries in the modern world. The fall of the Qing in 1912 and rise of the Republic of China led to political and economic instability, and Japanese aggression and exploitation in World War II further devastated the struggling nation. When the Chinese Communist Party (CCP) came to power in 1949 at the conclusion of a civil war, China’s share of world GDP was less than 5 percent.
Today, of course, this fate has reversed once again. China now has the world’s second largest economy in terms of GDP, behind only the United States, and the International Monetary Fund (IMF) predicts that within a few years it will account for over a fifth of world GDP. China is the world’s largest manufacturer and exporter, and home to the greatest number of Fortune 500 companies. In 2019 GDP per capita was fifty times that of the 1970s.
How China regained economic dominance is a matter of debate. In the West, many scholars and commentators have been quick to credit Beijing’s embrace of markets for the phenomenal turnaround, placing China within the neoliberal trend of late-twentieth century capitalism—an analysis that fuels political accusations of Beijing’s unfair intervention in the economy and drives U.S. trade policies of condemnation and economic punishment. In China, meanwhile, ardent nationalists and conservative hardliners view the economic transformation as the triumph of a homegrown strategy—a distinctive “China model.” Rather than remain open to international ideas and engage in a cooperative foreign policy, the conservative nationalist position decries “foreign hostile forces” and champions party hegemony in ideas and practice. Framing the debate as a struggle between “Western anti-China forces” and a self-reliant China, proponents offer virulent arguments for projecting power internationally in a quest to recapture the glory of Qianlong’s prosperous age.
A new book by political economist Isabella Weber, How China Escaped Shock Therapy: The Market Reform Debate, calls both of these positions into question by tracing the intellectual roots of Chinese reforms to historical precedents, exchange, and experimentation. In her telling, reformers transformed China’s centrally planned economy to a market-oriented system while avoiding the neoliberal prescription of “shock therapy” that condemned Russia and Eastern Europe to economic upheaval and political instability. Instead, Weber shows, reformers emphasized a national developmental strategy that values economic growth above all else, including earlier political ideals. This strategy continues to guide Beijing’s policies today on everything from worker layoffs and peasant land sales to Made in China 2025 and the Ant Financial IPO debacle.
Weber’s book is about state engagement in the market, most immediately through price controls. It focuses on debates among Chinese economists in the 1980s under CCP leader Deng Xiaoping that steered China’s economy away from radical price liberalization and helped construct a political economy that facilitates productive state-market relations. Weber details the process by which Chinese reforms and leaders grappled with—and ultimately resisted—the neoliberal prescription of a sudden freeing of prices meant to “shock” the economy out of planning. She shows that rather than adopt the reform advice of the World Bank and Western economists, reformers pursed a path of gradual change by slowly liberalizing markets and ownership and relaxing price controls in stages.
This process unfolded over the long 1980s and was akin to “groping for stones to cross a river,” as key reformer Chen Yun put it at the time. Reformers worked to identify the best practices for economic growth and forged ahead “seeking truth from facts,” in the words of Deng Xiaoping, rather than following orthodox economic theory on marketization. Although the reforms began with the simple aim to improve the economy and living conditions of Chinese peasants, the piecemeal, gradualist approach—as opposed to a complete overhaul of all economic institutions and practices, as international organizations and neoclassical economists such as Milton Friedman recommended—resulted in a dramatic transformation of the Chinese economy. In 1978 China had a centralized command economy with controlled prices, state-run markets, and no private enterprise; by 1993 markets were open, prices were liberalized, entrepreneurship boomed, and Deng Xiaoping had toured southern China, touting Shenzhen as one of the world’s most successful free trade zones.
The resulting political economy is certainly not neoliberal, however—at least not in any simple sense. As Weber points out, the economic orientation is not a “full-fledged institutional convergence with neoliberalism” but rather a mixed arrangement whereby the state actively engages in the market to fulfill developmental goals. Like the industrializing economies of the nineteenth century and the East Asian and Latin American developmental states after World War II, the Chinese state participates in the market by creating favorable conditions for its firms through investment incentives and developmental practices. Beijing’s recent intervention in the commodity market is one exhibit of the continuing legacy of this economic model, where the state engages the market through the release of built-up commodity stock and price-lowering among state firms, rather than subsuming the market and forcing desired price controls. Neoclassical economics would have us believe that state action in the market is an aberration, and almost always harmful. But there is significant historical precedent for state-market relations—including in the United States—and Weber reminds us that state engagement in markets has been the norm rather than the exception for much of human history.
The book opens with a chapter on the Guanzi, a Warring States treatise (475–221 BCE) advising a ruler on how to run his state in an age of warfare and economic transition. The message is to actively manage supply-and-demand conditions by controlling the “heavy,” or important, essential goods, and releasing the “light,” or unimportant, unessential goods. This counsel was put into practice in the grain market, whereby the state purchased surplus grain from the peasants at the time of the autumn harvest when prices were low, or light, and money was heavy, thereby propping up the price of grain on the market and protecting peasants from selling too low to merchants. In the spring, when supplies dwindled and grain prices rose the state released grain and balanced the market. Institutionalized in the “ever normal granaries,” the practice was most effectively used by the Qing state, facilitating the prosperity of the Qianlong period.
A more recent example is that of the United States during World War II. Drawing out the universal character of market engagement for state identified ends, Weber shows how the United States instituted prices controls to balance wartime production needs with consumer demand. In 1941 the newly formed Office of Price Administration created constraints on 40 percent of wholesale goods and then moved to set a ceiling on prices. At the same time, wages were frozen and public stocks of grain and cotton were put on the market to stabilize agricultural prices. The result was low inflation, stable prices, and exponentially high production output. So successful was this practice that the United States instituted a similar system of price controls during the Korean War and the Vietnam War. Of course, none of it was specific to the United States. As economist and politician John Kenneth Galbraith put it, “Controls over prices and wages were the rule.”
It is unclear whether the Chinese reformers at the heart of Weber’s book were aware of these practices and history, but it serves as herbackdrop. In 1949, for example, many of the people who would become key actors in the 1980s reforms cut their teeth grappling with the problem of runaway inflation in the new People’s Republic of China. Having inherited an economy in tatters, where the population had no trust in the currency and was prone to panic buying and hoarding, CCP policymakers moved not to assert political command over the economy but rather to intervene in the market to shore up prices and restore financial trust. Drawing on CIA files from the time, Weber shows that they did this by issuing price lists to state retailers for essential goods but not imposing these prices on private firms or other sellers. State traders would then distribute goods at list prices through the state retailers. Once the public began to see consistent price stability and have faith in the currency, the government gradually released prices back to the market. “This practice prefigured the dual-track price system of the 1980s,” Weber writes.
Shock therapy is the opposite of these measured approaches to managing the economy. Emerging out of Bretton Woods and what would come to be known as the Washington Consensus, the doctrine aimed to move an economy from plan to market very quickly through the immediate implementation of prescribed reforms. The current articulation of the concept in its economic form is usually traced to Jeffrey Sachs in discussion of Poland in 1990—although he used “big bang” and repudiates the term “shock”—and has more recently been popularized by Naomi Klein as the “shock doctrine.”
In theory, the prescription consists of four “package” parts: price liberalization, privatization, trade liberalization, and austerity. In practice, however, only the first and fourth parts are emphasized. As a 1990 International Monetary Fund report on the Russian economy put it, “Nothing will be more important to the achievement of a successful transition to a market economy than the freeing of prices to guide the allocation of resources.” On this view, the market is reduced to a singular idea of free prices. As Weber argues, “the bias toward price liberalization lies in the neoclassical concept of the market as a price mechanism that abstracts from institutional realities.”Because the market relies on free prices, the logic goes, the removal of price controls will enable markets to take their natural form and operate as they should in the facilitation of exchange and creation of equilibriums.
Russia followed this prescription in the early 1990s, and it resulted in disaster. The “shock” in shock therapy lived up to its name and has continued to reverberate throughout the society and economy. Distrustful of planners and bureaucrats, and eager to distance themselves from the Communist Party and its era, newly elected leaders sought a quick transition and integration with the markets of Western Europe. Freeing prices and wages from all controls, the economy quickly ground to a halt and inflation shot through the roof—“If the units were in context the chart would put the inflation line above the building,” Weber said in a recent presentation when showing a slide of the Russian GDP to inflation index. This was only the beginning. Russian share of world GDP nearly halved from 3.7 percent in 1990 to 2 percent in 2017; the average income of 99 percent of the population declined, and mortality rose beyond all prior rates of industrialized countries.
In retrospect, this result is not surprising. Weber notes that shock therapy aimed less at creating markets than conditions out of which they were supposed to emerge automatically: once the market had been “shocked to death,” the invisible hand was expected to intervene and begin to operate on prices and goods. What actually happened was less magical: the jump in prices absorbed all liquidity in the economy, not just the excess, and sucked all savings into the exponentially increasing cost of goods. In theory, this state of affairs would impose short-term austerity and curb excess demand, but because the elite held their wealth in fixed, non-monetary assets, it resulted in a massive distribution of assets from the bottom to the top. “Forcing market relations on society overnight hinged upon imposing greater inequality,” Weber writes.
China nearly followed the advice of the shock therapists, once in 1986 and again in 1988. Both times, leaders were poised to liberalize prices and quickly push China’s state-controlled economy into a market economy. Both times, however, they pulled back at the last moment and instead trod a path of gradual reforms that eased the Chinese economy into the market through a slower process of price reform, privatization, and market openings that were guided by experimentation. As scholars have long emphasized, the goal of China’s reforms was economic growth and stability, not marketization. Contrary to the historical context in Russia, the CCP still held power, and leaders were wary of social and political disruption, especially after the chaos of the Cultural Revolution (1966–1976). Reformers did not need to distance themselves from the past politically and move closer to the West economically; rather, they needed to create the conditions for China to prosper and the nation as a whole to grow economically. As Deng Xiaoping most famously said, “It does not matter if the cat is black or white as long as it catches mice.”
Much of the events and trajectory of the reforms we already know thanks to many excellent studies of the process. By all accounts, the reform period was initiated in December 1978 at the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China (often referred to simply as the third plenum). Recognizing the shortcomings of the command economy to realize the goals of modernizing the country, and overtly concerned with widespread poverty in the countryside, leaders decided to undertake a series of initial steps on economic reform. This included loosening prices and allowing limited markets, as well as granting greater autonomy to firms over their operations, investments, and production.
The efforts began with agriculture. Under the command economy, planners had set prices low and limited investments in order to focus resources in the development of industry. The imbalance meant that peasants paid for the rapid industrialization of China’s economy (which saw annual output growth of 9.7 percent from 1957 to 1978) but suffered deprivation and falling living standards. Moreover, the prices of manufactured goods and agricultural inputs remained high, limiting agricultural growth. The third plenum sought to reverse these trends. Calling agriculture “seriously damaged” and “gasping for breath,” the meeting’s resolution argued that the first priority of development was to increase agricultural production, which required funneling more resources to agriculture. Leaders thus loosened production quotas on the peasant communes and raised prices on agricultural goods. Furthermore, and perhaps most consequentially in the long term, they allowed private production in the countryside for exchange on non-state markets. This was the beginning of what would be known as the “household responsibility system,” where peasants were turned into farmers who would sink or swim on their own.
Price reform was key to making these reforms work, for only the market would be able to hold firms and producers accountable, improve efficiency, and enable them to incur profits and losses. Under the command economy, producers had been responsible for production quotas but received all inputs from the state, so that no matter how much they produced, they would receive the same returns; they thus had little incentive to increase production or efficiency. Overall, firms and communes operated more like bureaucratic departments rather than enterprises. By lifting price controls and allowing markets to determine profits and losses, and making managers responsible for their costs, firms would either increase their productivity and make profit or fail.
Through exchanges with Eastern European economists, however, Chinese reformers opted not to follow the shock prescription and quickly liberalize prices, but rather to institute a dual-track pricing system. The dual-track framework instructed firms to meet production quotas for the state, as before, but quotas were lower and all production over quota could be sold on the market at market prices. Dual-track began in agriculture and a select number of industries in 1979; it was then expanded and became national policy in 1984.
Neoclassical followers found much to fault in dual-track pricing. Not only did they decry it for delaying the goal of freeing prices and fully opening markets, but they also claimed that it created imbalances and friction in the economy. Most immediately, a two-tier price system enabled illicit dealings, where entrepreneurial individuals could buy cheap and sell dear. In this case, one could purchase a good at the low, state-set price and then turn around and sell it at the higher market price, pocketing the difference as profit. To take an example from the mid-1980s, a peasant might purchase a truck for the plan price of Rmb20,000, as he was entitled to do according to his allotted inputs, then sell it at the market price of Rmb35,000, for a profit fifteen times the average annual urban wage. This scheme spread beyond just the individual peasant, of course, penetrating the factories as declining managerial oversight lead to widespread corruption and graft. Neoclassical economists saw frictions in the two-tiered pricing system as hindering growth and dooming the reforms. Far better, they claimed, to quickly liberalize prices.
Weber has dug up some illuminating sources to illustrate how these arguments were thwarted. Instrumental in countering the neoclassical leading economists, or “package reformers,” were a group of young economists close to key leaders she calls “dual-track reformers.” (Maurice Meisner refers to these two groups as marketeers and adjusters, respectively; others speak of reformers and conservatives.) These economists were born between 1940 and 1960, and as young urban intellectuals most were caught in the Cultural Revolution and sent down to the countryside to be “re-educated” by the peasants, where they experienced what they viewed as the poverty and backwardness of the Chinese countryside, which left deep impressions. With the rehabilitations after the death of Mao in 1976, these young economists returned to Beijing and formed the Rural Developmental Group (RDG) on economic conditions and development. Weber finds that one of the key projects of this group was to investigate the changing conditions of the countryside and develop an economics in accordance with the ongoing agriculture price and markets experiments.
An important intervention from this group involved decisions on dual-track pricing. Heeding arguments that dual-track pricing not only created economic frictions but also amounted to a tax on peasants by forcing them to sell a portion of their produce to the state below market prices, RDG researchers designed an experiment in Hebei to test the system. Headed by Song Guoqing, the son of a peasant and former production brigade leader in a rural commune who went on to study microeconomics at Peking University, the researchers were initially sympathetic to the neoclassical argument and proposed a monetary tax in place of quotas. The design and process of the experiments are a little unclear from Weber’s telling, but it appears that when grain supply boomed and prices fell, peasants rushed to sell at the higher state prices. The group thus concluded that rather than acting like a tax upon peasants, dual-track pricing actually protected peasants from price fluctuations and market uncertainties.
That was in 1984, the same year that the dual-track pricing system was nationalized and the economy was redefined as a “planned commodity economy.” Production was strong and growth was rapid; market reforms continued apace, so that most goods were traded as commodities on the open market but important production materials—like coal, oil, steel, and chemicals—were regulated. That year Deng Xiaoping toured the developmental zones in Guangdong and made his famous pronouncement of “socialism with Chinese characteristics.” Industrial restructuring was expanded, giving state firms greater autonomy in investment and production decisions, and in 1986 contracts replaced quotas and targets. In the countryside, the communes were dismantled and local enterprises and manufacturing excelled beyond imagination. By 1987 annual output growth was well within double digits.
As growth soared and prices liberalized, however, inflation mounted. Prices had begun to rise in 1985 to a height of 8.8 percent on the consumer price index (CPI) before falling thanks to retrenchment policies. But as reforms picked up again with the contract responsibility system—according to which firms keep all profits and only pay a tax—inflation rose again with a 9.1 percent CPI increase. Furthermore, bank credit had grown annually at a rate of 20 to 25 percent since 1986, far outpacing growth. Concerned about the impact on reforms, leaders sent a delegation to Brazil in 1988 to study the Latin America development trajectory, where they learned, “In every country, in the period of high-speed development, there will be inflation,” according to their report to Zhao Ziyang. This finding, along with another visit by Friedman, led reformers and especially Deng Xiaoping to push forward and prepare to implement shock therapy despite rising prices.
On August 19, 1988, state media announced a plan for price and wage reforms. The simple report that shock therapy would begin sparked fears of financial upheaval, rising costs, and economic disruption among the public. Panic buying, bank runs, and worker protests spread, and inflation rose dramatically over the course of mere months, shooting from 12 percent in July to 23 percent in August and peaking around 28 percent in April 1989. For the first time in China’s reform period the rise in the CPI had outpaced GDP growth, leading Deng to call a halt the reforms, rolling back the program, recentralizing power, and reintroducing price controls. It took a year to bring inflation under control, but by that time discontent had mounted and students and workers were out on the streets calling for political reforms.
Weber notes that though her sources and interviewees were not necessarily in agreement over the causes of the inflationary crisis of 1988, “they agreed that the disastrous failure of the push of price reform in 1988 was critical for the political crisis that culminated on June 4, 1989.” In short, the near implementation of shock therapy led to a different kind of shock: the People’s Liberation Army gunning down workers and students in Tiananmen Square.
In accounts of China’s economic transition, it is hard not to be struck by actors’ unsparing commitment to economic growth. Across the political hierarchy and among the various economic circles, from Deng Xiaoping to Song Guoqing, all spoke about development not only as their foremost concern but also as the ultimate goal of the reform program. Package reformers and dual-track gradualists—the two antagonistic camps in Weber’s study—may have disputed implementation and institutions, but both agreed on the bottom line of constructing conditions for rapid economic growth. All sides, Weber writes, “shared one common goal above all others: economic progress.” They further agreed, despite their differences, that markets and various degrees of marketization were necessary in pursuit of this end. Deng Xiaoping best articulated the collective sentiment in a 1978 speech framing the national goals: “To rid our country of poverty and backwardness . . . to catch up with [or] surpass the advanced countries.”
It is clear enough why China’s leaders and reformers were so concerned about the economy, for the collapse of the command economy and persistent rural poverty loomed large. But why settle on this particular form of the market and its embrace of global capitalism? Weber’s study greatly illuminates the stakes of debates about how best to achieve growth, but it does not approach this larger question. Her protagonists constantly speak about the problem of the economy, the poverty of the peasants, or the need for growth and development, but they never manage to link these limited frames to larger visions of emancipation. All their actions and ideas are guided by a single-minded pursuit of the economy and a search for the best economic practices to modernize the nation. In the late 1980s, Weber notes, Deng Xiaoping could be deterred neither by social protests nor by inflation as he pushed forward with reforms to achieve even higher rates of output and growth.
Lost to the economic ambitions of the leadership were the larger ideals of the revolutionary project. The relentless focus on development subordinated earlier revolutionary visions pointing not to the smallness of wealth but to the “greatness” of individual freedom and the capacity to collectively determine the future of society. In the wake of the Qing unraveling through internal rebellions and foreign imperialism, late nineteenth- and early twentieth-century revolutionaries and reformers pursued national projects to realize not the economic imperatives of global capitalism but the aspirations of ordinary people to lead larger lives. “If we wish the nation to be secure, rich, and honored,” wrote Liang Qichao in the late Qing, “we must first renew the people.” His contemporary He-Yin Zhen echoed this view in her discussion of women’s liberation, noting that economic freedom is not separate but complimentary to the primacy of shared liberty and collective freedom. Sun Yat-Sen had roused the nation to revolution in 1911 on the principles of democracy, nationalism, and peasant livelihood, not economic growth. On his deathbed he emphasized his devotion to the national revolution aimed at “winning freedom and equality for China.”
Further sacrificed on the altar of economic growth were the aspirations of Chinese workers and peasants. In 1980 workers were denied control of the factories, as CCP leaders—and specifically Deng Xiaoping—favored turning over command to management. As managers obtained greater autonomy, workers were further reduced to wage earners, to be hired and fired at will; they eventually revolted in the late 1980s and 1990s over issues of economic uncertainty and workplace belittlement. Similarly, peasants were decollectivized in 1982, often against their will, creating vast inequalities as they were atomized and left to struggle on the cyclical waves of the market and suffer deprivations by local officials. Rather than empowering people to shape the economy through alternative institutions such as peasant-run cooperatives, worker-controlled factories, and independent labor unions and community organizations, leaders subordinated workers and peasants to the totalizing goal of growth. Although GDP rose and wages increased, inequality has soared, working conditions have deteriorated, millions have been thrown out of work or lost their land, and industrial pollution and environmental degradation have destroyed communities and left countless dead. China’s leaders may have escaped shock therapy, but in the course of doing so they have exposed the nation to the brutal logic of capitalism.
China’s transition from plan to market aligns with the onset of neoliberalism the world over, articulated most forcefully in the political projects of Margaret Thatcher and Ronald Reagan. With this book Weber has given a convincing narrative of how China avoided the neoliberal fate of shock therapy that felled Russia and other economies. Yet, as Weber has argued elsewhere, China still integrated very readily into the global capitalist system and has become a fundamental part of the international economy today. A form of marketization that prioritized state guidance of the market and resisted privatization, she writes, “reintegrated China into neoliberal globalization without pursuing a wholesale adaptation of neoliberal economic policies.”
This is the other story, ever-present but still hidden in How China Escaped Shock Therapy, connecting the betrayal of worldwide revolutionary visions of humanity to the embrace of markets and development above all else. Seen in this light, China’s reform project is not simply the rejection of one key aspect of neoliberalism but also a concession to it as a stage of late-twentieth century capitalism, part of a global shift away from statism and social solidarity toward market fundamentalism. Weber has written an illuminating book on China’s resistance to neoliberal economic thought. At the same time, her protagonists’ willingness to sacrifice equality for growth—their readiness, on all sides of the debate, to take some form of capitalism more or less for granted—reminds us that we need an account not just of how China escaped shock therapy but why its leaders, reformers, and even population came to abandon the ideals of human emancipation for liberalized capital flows, free trade zones, and labor market flexibility. Such an account would not only deflate the fallacy of a sui generis “China model” but also, as Adam Przeworski recently wrote in these pages of a similar shift among the European left, help resurrect a language of revolution to guide the collective making and imagining of our social worlds.