The Man Who Modernized China

When Mao Zedong died in 1976 his successors seized the opportunity to reassess the wisdom of Chinas rigid commitment to Marxist doctrine.  With Deng Xiaoping in charge, China scoured the globe in search of economic expertise to put China on the path to domestic prosperity and ultimately global economic power.

The World Bank describes China’s growth as “the fastest sustained expansion by a major economy in history,” In today's video we try to understand what changes were made that allowed China to grow to become the second largest economy in the world.

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Transcript

So far this century we have seen a stunning decrease in global income inequality, bringing it down to levels not seen in well over a hundred years. The growth of China alone has contributed close to three-quarters of this global reduction in poverty. Close to eight hundred million people have been lifted out of extreme poverty in China over the last forty years because of the major policy shifts that occurred when Deng Xiaoping took power in 1978. During this period, China tried a number of economic and social experiments that reshaped not just China but the rest of the world. 

China was a “very poor” country in 1949 when the Communist Party took power. The country had emerged from four years of civil war, and before that, a crushing Japanese occupation. The economy mostly revolved around subsistence farming. Under Mao’s leadership, landlords and wealthier farmers had their land holdings forcibly redistributed to poorer peasants.

Mao’s Great Leap Forward, from 1958 to 1962, was an ill-conceived plan to industrialize the country. Millions of people died of starvation in China during the Great Leap, with estimates ranging from 15 to 55 million deaths, making the Great Chinese Famine that occurred the largest or second-largest famine in human history.

Policies around how farming was organized, and policies that incentivized the melting down of farm tools to increase steel production were disastrous. Sparrows were suspected of eating too much grain and were killed off – this led to a rise in the number of insects which decreased rice yields.

The Cultural Revolution, which Mao launched in 1966 aimed to remove what Mao saw as bourgeois elements throughout society that he thought were intent on corrupting his revolutionary vision.

Schools and universities were shut, historic buildings destroyed, and anyone accused of being a rightist was humiliated, imprisoned or killed. The Gang of Four became influential in 1972, and the Cultural Revolution continued until Mao's death in 1976.

When Mao died, China was an economically ravaged nation of nearly one billion people with a per capita GDP of only $175 dollars.

Up until 1966 China had a conventional soviet style centrally planned economy. In 1966 with the cultural revolution the country turned inwards breaking off a lot of its trade with the outside world and excluding outside ideas.  The Chinese had fallen out with the Soviets in the 1960’s so the one source of technology they had was no longer dealing with them.

Deng Xiaoping had been a major military figure in the Civil War and at one point had been Mao’s right-hand man.  He had, however, come under suspicion in the early 1960’s due to his involvement in advocating for a form of limited capitalism to reduce the effects of the famine. He had given a speech in 1962 saying the ownership of property should be allowed if it helped increase production.  Mao never forgave him for having abandoned socialism at this time and drove him into exile for five years. Mao’s chosen successor when he died was Hua Guofeng.

The Gang of Four – who were led by Mao’s widow had come to prominence during the Cultural Revolution and were hard line communists.  They pushed unsuccessfully to lead the party but ended up losing the power struggle, being arrested and imprisoned for life.

Hua had vowed to "uphold whatever policy decisions Chairman Mao made, and unswervingly follow whatever instructions Chairman Mao gave." These were known as the two whatever’s – and are to a certain extent what Hua is remembered for - in reality Hua advanced economic policies that bore little resemblance to Mao’s agenda.  These included establishing economic and research agencies to understand how to grow the Chinese economy and supporting the four modernizations.

Mao’s passing, as you can imagine gave the new leadership some scope for experimentation – as new leaders get to make changes in such a situation and if they don’t work out – they can blame the old guard – at least for a while.

At time of Mao death power and transportation shortages in China are estimated to have led to underutilization of as much as 30% of the country’s industrial capacity, allowing enormous room for improvement for the new leadership.

In 1976, China was at the start of its Golden age of economic growth, reform and transformation to intellectual openness. In 1977 industrial and agricultural production in China rose 10.7% and steel production rose 16%.  The country was in the first stages of its transformation from one of the worst economies in the world to what is the second largest economy in the world today.  

Deng Xiaoping’s rise from 1975-1977 is possibly one of the most dramatic turnarounds in modern political history.  He went from being an out of favor - sidelined character to the ruler of China in two years – which is quite amazing.

Mao’s chosen successor Hua had done what Deng and other moderates had needed him to do, which was to get rid of the most radical left-wing elements from the cultural revolution – the gang of four.  

After that had been done, Deng began to use his deep connections in the CCP to ease Hua out of office. The army was one of Deng’s strongest points of connection.  His military history as a great commander during the civil war gave him credibility with the senior leadership of the armed forces which put him in a very powerful position. 

The CCP can be thought of as a network more than anything else, and while there may be a huge membership, there were not many like Deng who had deep connections with the early revolutionaries, strong links with the Soviet Union, and the respect of the military.  He was connected to and admired by the most important and influential people and seen as a man who could get things done.

While Hua had been given the leadership role – as decreed by Mao – he quickly realized that he was surrounded by people with greater loyalty to Deng than to him.  He made the wise decision to step back – not entirely willingly, but peacefully, and this worked out for him.  

Deng didn’t have him arrested, killed or exiled; he instead gave him a secure job within the party.  Up until 2002 he was still healthy and attending politburo meetings – he was allowed to go into a gentle retirement and passed away in 2008 at 87 years old.

Deng’s treatment of Hua showed that while he was ruthless about attaining power, he was not ruthless with the victims of his power as long as they “played the game.”

Deng Xiaoping was at the age of 74 now the ruler of China. Obviously in the United States 74 would be considered quite young to be given a leadership role like that – but in a lot of the rest of the world it is considered quite old. Deng was by no means ready to retire.

Deng Xiaoping was born in the Sichuan province the son of a landowner.  His family was not wealthy, but they were said to have lived in the most beautiful house in their village.  The year he was born, the Chinese imperial examinations were abolished meaning that he was the first generation to study modern subjects.

Deng travelled to France at the age of 16 as part of a work study program.  Unfortunately for him, the company sponsoring him when bankrupt when he arrived, and it turned into simply a work program.  He found himself working at a Renault car factory and at the Le Creuset iron and steel plant where he was shocked by the conditions of the ordinary workers in France.  He joined the Chinese Communist youth league in Europe and later travelled to Moscow to study at the “University of The Toilers of The East” – which I would argue is not very aspirational name for a university to have…

He returned to China in 1927 where he first met Mao in Wuhan, he rose in the ranks of communists in China organizing protests and fought in the Chinese civil war.  

The Long March was a military retreat by the Communist Red Army from advancing Nationalist forces during the Chinese Civil War in 1934 through 1936. While costly, the Long March gave the CCP the isolation it needed, allowing its army to recuperate and rebuild in the north. The Long March solidified Mao's status as the undisputed leader of the CCP, though he did not officially become party chairman until 1943.  Other survivors of the march like Deng went on to be prominent party leaders too.

Deng rose alongside Mao but fell out of favor for giving a speech advocating for a form of limited capitalism to reduce the effects of the famine brought about by the “great leap forward.” Mao feared that the reformist economic policies supported by Deng could lead to restoration of capitalism and end the Chinese Revolution. For this and other reasons, Mao launched the Cultural Revolution in 1966, during which Deng was forced to retire from all of his positions within the party.

During the Cultural Revolution, Deng and his family were targeted by Red Guards, who imprisoned his eldest son who was tortured and jumped out, or was thrown out, of the window of a four-story building, becoming a paraplegic. In 1969 Deng Xiaoping was sent into exile to work in a tractor factory as an assembly line worker for five years.

Following Mao’s death, Premier Hua Guofeng pardoned Deng restoring him to his positions within the party.

In the era of Deng Xiaoping’s leadership as China transformed from a poor country to a global economic power reformers often used the phrase “Crossing the river by feeling for the stones” to describe their method for advancement. It implied that the country would move forward by trial and error with no clear end point defined.

One of the biggest differences between Deng and Mao, was Deng’s ability to admit his lack of expertise and reach out to experts.  Deng who had spent time in France and the Soviet Union was not afraid to speak to international experts either.

As soon as Deng took power, he began normalizing relationships between China and the rest of the world, no longer seeing them as adversaries. He introduced a policy that year called Reform and Opening Up which would set the People’s Republic on a new course. Deng was named Time’s man of the year in 1978.

Deng travelled to Japan in 1978 – his first time in a capitalist country – other than France I guess… He toured factories and markets in Japan and saw what prosperity could look like if a country followed objective economic laws. Japan would go on to be an important source of financial and technical expertise for China in the coming decades.

In 1979 the United States and China announced normalization of diplomatic relations. Deng set out right away to tour the United States where he visited factories like Ford and Boeing to better understand how modern manufacturing worked. He visited universities and beamed at the television cameras wearing a cowboy hat on his visit to Texas.   

In November 1979 Deng declared that it was time for China to get rich – and pursue policies that would allow wealth and power to flow into China. He went on to say “The gang of Four said that it was better to be poor under socialism than rich under capitalism – this is absurd” He had no interest in a form of socialism that simply boiled down to “shared poverty.”

China – who had been a founding member of The World Bank in 1944 at the Bretton Woods Conference – invited the Institution back into the country and asked them to prepare a report on China’s economy. China received its first loan for higher education from the World Bank in 1981.

The Ford Foundation began working with Chinese academic institutions in the 1980’s to modernize the fields of economics, law and international relations.

Deng’s goal to be clear was economic liberalism – not social liberalism, he was a firm believer in the CCP and its authority.  Throughout his life he imposed strict limits on expression. Deng initiated an anti-crime campaign in 1984 where government quotas were set for executions, and it is estimated that 24 thousand people were sentenced to death at the time.  According to those close to him, the only emotion he ever showed was for the revolution – other than that he appeared entirely emotionless even towards his own family. 

Deng determined that economic expertise would be critical in creating a socialist system that could successfully incorporate market mechanisms and renounce a state of perpetual poverty. He began sending delegates of economists and theorists to bring back as much knowledge as they could about how successful economies function.

In the past China had only looked to the Soviet Union for inspiration, they now realized that Soviet Style Communism was failing wherever it was implemented and looked to countries like Hungary and Yugoslavia who appeared to be undertaking genuine reforms.

They invited the Polish economist Włodzimierz Brus whose book The General Problems of the Functioning of the Socialist Economy argued that both democracy and market mechanisms were a necessity on the road to socialism. They invited the Czech economist Ota Sik who was in favor of market elements within central planning.  They invited Janos Kornai a Hungarian economist noted for his analysis and criticism of the command economies of Eastern European communist states. They invited the American economist James Tobin who advocated the need for government intervention to stabilize output and avoid recessions.

The Chinese at this time took an extremely open minded and internationalist perspective.  They looked at America and Britain which were quite capitalist, The Soviet Union – which they already knew quite a bit about – and they could see was decaying – and the middle way which to them was the eastern European reformist communism and that is what Deng and his advisors were trying to understand and balance.

In 1980 the Chinese invited the American Nobel Prize winning economist Milton Friedman – who was probably the most famous economist in the world at the time and an advocate of “Free Market Fundamentalism” to give a series of talks.

Friedman delivered four lectures on topics such as “the mystery of money” and “the Western world in the 1980s.” His audiences of officials and scholars listened as he dismissed the idea that inflation appeared only in capitalist societies. Inflation was neither innately “capitalist” nor “communist.” Instead, he said, government itself was the root cause of inflation, which could be cured only by “free private markets.”

Friedman’s speech proved to be too much for the older generation of party members who attended.  To the Chinese economists in the audience, these ideas were radical; to many of the country’s less liberal leaders, they were menacingly extreme.

The next day a group of Chinese economists went to Friedmans hotel room and delivered a long lecture on the triumphs of the Chinese Communist Party before he left the country.

Although Chinese economists disagreed with each other as to which foreign economists should be listened to, they did agree that it was necessary to increase the level of technical sophistication of Chinese economists.  They reached out to top US universities for education on mathematical economics and econometrics.

One of the major economic conferences of the era was held on luxury cruise ship – the unusual venue was chosen so that none of the delegates would be able to leave the venue or be distracted by other work commitments.  They were meant to make the most of the opportunity to learn from the leading economists in the world.

With Deng Xiaoping in power, the decision was made in China that some enterprises should be allowed to have greater autonomy which included getting to keep a share of profits.  Market forces were unleashed in China, and the Chinese people leapt at the opportunity.

Deng Xiaoping began opening special economic zones, particularly in coastal cities.  He said our “guiding ideology is not to restrain, but to free.”

The gradual introduction of free-market capitalism and allowing foreign investors to invest in China brought about rapid development.

This transition to what Deng described as a “Socialist Market Economy” was by no means easy, there was a strong conservative element in the CCP who hated the liberalization that was occurring.  Deng became a master at twisting the meaning of Mao’s sayings in order to appear to not be deviating too far from the original revolutionary path.  

One of Mao’s most famous sayings was that you should oppose book worship and by that he meant that the Chinese should abandon books all together because the cultural revolution was about ideology rather than expertise.  Deng twisted the meaning of that phrase saying that it meant the Chinese people had to be pragmatic – and not only read communist texts, but also read books about science technology economics, and books from all over the world. 

The huge growth that was occurring in China was beginning to cause inflation.  A problem that socialists like to describe as the capitalist disease.  The CCP were concerned about this for a number of reasons, a big one being that it could cause political instability.

One of the main criticism’s that the Austrian school of Economics had of socialism was that economic planning would never be feasible because central planners would never be able to successfully calculate, prices, output and other key variables.  This meant that there would always be shortages of goods or mispricing.  They argued that free markets were the solution to the shortages that occurred in socialist economies.  Hayek argued that the “man on the spot” was always better at spotting trends and responding to economic changes than a government bureaucrat.

Socialist economists began to argue in the 1980’s that modern computers now had the processing power to make these calculations that would easily outperform Hayek’s “man on the spot.”

Ota Sika a prominent Czech economist, struck the right balance for the CCP in the 1980’s.  He asserted that the goal of price reform is a complete transition to free-market prices, but on the way it is necessary to move incrementally.  He emphasized that this incremental adjustment was particularly impartant when demand exceeded supply as it currently did in China.

He suggested that the Chinese government make use of advanced computer price calculations to conduct large-scale input-output analysis under a two-channel price system based on both labor and capital.

The Chinese decided to implement this program and began building a computer system using data from thousands of products, factories, farms and shopping centers.

This approach did not work and in the mid 1980’s inflation was over 12% despite the fact that the government was spending well over twenty percent of state expenditures on subsidies to keep daily necessities affordable.  In 1985 the prices of raw materials skyrocketed by 18%.

Hua Sheng – a young Chinese economist came up with a better approach of moving towards free market prices – known as the dual track price system. 

Under this system, enterprises would still have to meet planned quotas, and everything they produced to meet the quotas would still be sold at a state‐​set price. But beyond those quotas, enterprises could produce whatever quantity of goods they wanted and sell them at whatever price consumers would pay. With the “dual‐​track” system: the old system remained in place, but the idea was that it would very quickly became only a small part of a much larger and more vibrant economy. You could think of the old planned economy as a shriveled bonsai tree; It’s gardener didn’t suddenly stop watering it, he just planted a forest around it.

The dual track system did incentivize factory production, and helped transition to free market prices but allowed those in power to reap huge personal gains, and ultimately led to large-scale official profiteering and corruption.

Under the policy growth skyrocketed, but it was a temporary solution and the problem of prices remained a thorn in the side of China’s rulers. In the summer of 1988, Deng Xiaoping finally lost his patience and ordered an overnight liberalization of the price system. 

A crisis immediately followed. A fear of inflation seized the country, there were bank runs, panicked buying of gold and other nonperishable supplies. A survey of 32 cities revealed that prices rose nearly 25 percent in the month of August alone.

It was decided at the highest levels of government to seek help from a leading foreign economist – In 1988 Milton and Rose Friedman – considered experts in dealing with inflation - were invited back to China.  Friedman spoke at a conference organized by the Cato institute and his message about ending state authority over the economy found fewer converts than he had hoped it would.

At the suggestion to his Chinese hosts Friedman submitted a memorandum to General Secretary Zhao Ziyang, a steadfast reformer within the CCP.  In it he argued that the Chinese economy was no different than any other economy that the acceptance of free market principles was necessary and that the CCP should end any attempts to control prices, and end inflation by tightening the supply of money and called for China to move ahead with establishing true free private markets, and not just markets.  Beware of getting stuck halfway through the process, Friedman warned.

In an in-person meeting with Zhao, Friedman argued that the state is organized from the top down and that markets are organized from the bottom up and that these two structures are incompatible with each other.

Friedman left the meeting optimistic about China’s future. In a December 1988 interview with Forbes, he predicted that major pro‐​market changes were imminent. In the Chinese press, Friedmans visit was reported in laudatory terms. The People’s Daily wrote glowingly about the meeting.

However, events far beyond the confines of economic conferences would knock the plans of Chinese reformers far off course.  After collapsing from a heart attack at a Politbureau meeting, Hu Yaobang – the general secretary of the CCP died.

It was a long-standing tradition in China that the death of a well respected figure could trigger demonstrations. In this case students around China used the occasion of his death to organize protests against the continuing role of the CCP in public life.  On the 4th of May, students held up signs in Tiananmen Square reading “hello Mr. Democracy.”  In Spring 1989 Tienanmen square was the scene of an unprecedented demonstration.  TV cameras from news stations around the world were there to record the first visit of the reforming Soviet leader Mikael Gorbachev and this demonstration was a profound embarrassment to the CCP.  

There are many explanations behind what led up to the events that occurred in Tiananmen square – whole books have been written on the topic – but the protests were partially about the desire for greater political openness, but also about the economic situation and the way inflation was affecting the students and workers in China at the time.

There were demonstrations in other cities in China at the time such as in Shanghai where the leadership managed to calm things down without violent confrontation.

At the height of the protests it is estimated that close to one million people assembled in the square.  By June 1989, the demonstrations in Tiananmen square had dwindled to only thousands, but they showed no signs of moving.

On June 2, the CCP's Politburo Standing Committee made the decision to use military force to clear the square, leading to clashes between the military and demonstrators. Deng Xiaoping came down on the side of the hardliners.  Estimates of the death toll vary from several hundred to several thousand, with thousands more wounded. The vast majority of those killed were civilians, though a small number of soldiers also died.

The surprising thing after the Tiananmen square massacre is possibly what did not happen afterwards.  The country did not plunge into civil war or reverse the economic reforms.  It didn’t close itself off to the outside world either.  For the next three years politics did go into a deep freeze.  The liberal trends that had fueled the protests were now regarded as evil winds of bourgeois liberalism, but in 1992, Deng, the man who had sent in the tanks who was now 88 years old went on what was knows as his Southern Tour.  By visiting Shenzhen the boomtown on the border with Hong Kong, Deng indicated that the economic politics of reform were not going to be abandoned.

In 1993, the Chinese constitution was amended from saying "The State practises planned economy on the basis of socialist public ownership. To The state practices socialist market economy.  Dengs reforms were now enshrined in the country’s constitution.  In the months and years after this change, the new generation of reform oriented leaders that Deng Xiaoping had helped bring to power made large strides towards achieving his goals.

Deng Xiaoping died in February 1997 following years without any public appearances.

In a speech marking the 40th anniversary of reform and opening back in 2018, Chinese President Xi Jinping made it clear that he would continue to tighten CCP controls over the economy and society — even as he lavished praise on Deng and highlighted the successes of reform and opening. 

One of the defining themes of Xi Jinping’s first decade in power has been to promote self-sufficiency – looking inward like Mao did. Xi has cracked down on Chinese companies and placed government officials on the boards of some of the more successful firms.  

In other areas of domestic politics, Xi continues to hew to Deng’s line — especially when it comes to the need to maintain the CCP’s absolute grip on power. For all his reforms, Deng was always at heart a Leninist and strongly believed that China needed the CCP to provide leadership and prevent instability. Xi has inherited this strong sense of Leninism, and in his praise of Deng emphasized that China needs the party to uphold its sovereignty and weather future uncertainty.

Today China is the world’s second largest economy with GDP per capita up fifty fold since 1978.  Its share of the global economy has gone from 1.7% in 1978 to 18.4% today.

In the end, the economy will likely be the most important factor in deciding whether Chinas current political system will endure. 

Thanks for tuning in to this week's podcast – if you enjoyed it send a link to a friend. Have a great week and talk to you again soon.  Bye.