China

Chinese capitalist growth happened in spite of the state not because of it

BY Rainer Zitelmann   /  24 April 2019

At the end of the 1950s, 45 million Chinese died as a result of the greatest socialist experiment in history, the so-called “Great Leap Forward,” which was initiated by Mao. In recent decades, however, China has become the world’s leading export nation and the percentage of Chinese living in extreme poverty has fallen from 88 to just 1 percent.

When I was in China in 2018, I spoke with Professor Zhang Weiying, one of China’s leading free-market economists. He repeatedly stressed that the Chinese economic miracle is widely misunderstood – both in the West and, unfortunately, increasingly in China itself. China’s success is not, as is often claimed, proof of the superiority of a “third way” between capitalism and socialism, but solely the result of the fact that the former pure state economy was successively pushed back and more space was created for private property ownership and market forces.

Following the human and economic catastrophes of the Mao era, China started to look at what was happening in other countries. For leading Chinese politicians and economists, 1978 marked the beginning of a busy period of foreign travel to bring back valuable economic insights and apply them at home. Chinese delegations made over 20 trips to more than 50 countries including Japan, Thailand, Malaysia, Singapore, the US, Canada, France, Germany and Switzerland. They were surprised to see the high standard of living even ordinary workers enjoyed in capitalist countries.

The delegations’ findings were widely circulated in China, both within the Communist Party and among the general public. Having seen with their own eyes the high standard of living enjoyed by workers in Japan, for example, members of the delegations started to realize the extent to which communist propaganda about the benefits of socialism as compared to the misery of the impoverished working classes in capitalist countries had been based on lies and fabrication. It was obvious to anybody who actually travelled to these countries that the exact opposite was true. “The more we see of the world, the more we realize how backward we are,” Deng Xiaoping repeatedly avowed.

However, this newfound enthusiasm for other countries’ economic models did not lead to an instant conversion to capitalism, nor did China immediately ditch its planned economy in favour of a free-market economy. Instead, there was a slow process of transition, starting with tentative efforts to grant public enterprises greater autonomy, that took years, even decades, to mature and relied on bottom-up initiatives as much as on top-down, party-led reforms.

After the failure of the Great Leap Forward, peasants in an increasing number of villages began to circumvent the official ban on private farming. Since they were quickly able to achieve far greater outputs, party cadres allowed them to carry on. Initially, these experiments were restricted to the very poorest villages, where almost any outcome would have been better than the status quo.

Long before the official ban on private farming was lifted in 1982, peasant-led initiatives to reintroduce private ownership against socialist doctrine sprang up across China. The outcome was extremely successful: people were no longer starving and agricultural productivity increased rapidly. By 1983, the process of de-collectivizing Chinese agriculture was almost complete. Mao’s socialist experiment, which had cost so many millions of lives, was over.

China’s economic transformation was by no means restricted to agriculture. Across the country, many municipal enterprises increasingly operated like private businesses, although they were still formally under public ownership. Liberated from the restrictions of the planned economy, these companies frequently outperformed their less agile state-run competitors.

The 1980s saw the establishment of an increasing number of collectively owned enterprises (COEs) and township and village enterprises (TVEs) – de facto privately-run companies in the guise of collective enterprises. Legally owned by municipal authorities, these blurred the distinction between state and private ownership.

The increasing erosion of this socialist system that exclusively permitted public ownership under the management of a state-run economic planning authority was accelerated by the creation of Special Economic Areas. These were areas where the socialist economic system was suspended and capitalist experiments were permitted. The first Special Economic Area was created in Shenzhen, the district adjacent to capitalist Hong Kong, which was then still a British crown colony. Much like in Germany, where an increasing number of people fled from the East to the West prior to the building of the Berlin Wall, many Chinese tried to leave the People’s Republic for Hong Kong. The district of Shenzhen in Guangdong province was the main conduit for this illegal emigration.

When the party leadership in Guangdong province investigated the situation in more detail, it found refugees from mainland China living in a village they had set up on the opposite side of the Shenzhen River on Hong Kong territory, where they were earning 100 times as much money as their erstwhile compatriots on the socialist side.

Deng’s response was to argue that China needed to increase living standards in order to stem the flow. Shenzhen, then a district with a population of fewer than 30,000, became the site of China’s first free-market experiment, enabled by party cadres who had been to Hong Kong and Singapore and seen at first hand that capitalism works far better than socialism.

From being a place where many put their lives at risk to leave the country, this former fishing village has today become a thriving metropolis with a population of almost 12 million and a higher per-capita income than any other Chinese city except for Hong Kong and Macau. The electronics and communications industries are the mainstays of the local economy. Only a few years into the capitalist experiment, the Shenzhen city council had to build a barbed-wire fence around the Special Economic Zone in order to cope with the influx of migrants from other parts of China.

Soon, other regions followed suit and tried the Special Economic Zone model. Low taxes, land lease prices and bureaucratic requirements made these Special Economic Zones extremely attractive to foreign investors. Their economies were less heavily regulated and more market-oriented than those of many European countries today.

The official proclamation of the market economy at the Fourteenth Congress of the Chinese Communist Party in October 1992 – a step that would have been unthinkable only a few years before – proved a milestone on the road to capitalism. The reforms continued to gain momentum.

There was strong competition between the Industrial and Special Economic Zones that sprang up across China. Foreign investors were welcomed with open arms and started to discover China both as a manufacturing base and as a new export market for consumer goods manufactured elsewhere.

There was also a raft of privatizations that happened spontaneously or at the instigation of local governments. Once again, the market forces of economic competition had proved far more powerful than ideology despite the fact that privatization has never been adopted as an official government policy.

To understand the dynamics of the Chinese reforms, it is crucial to note that the extent to which they were initiated “from above” was only one part of the picture. Many contributing factors happened spontaneously. It was a triumph of market forces over government policy. This is one reason why the Chinese market economy works better than the supposedly “free markets” in Russia and other former communist Eastern Bloc countries, where reforms were frequently imposed from one day to the next, rather than allowed to evolve slowly from the bottom up.

China’s development in recent decades demonstrates that rising economic growth – even when accompanied by rising inequality – benefits the majority of the population. Hundreds of millions of people in China are far better off today as a direct result of Deng’s instruction to “let some people get rich first”.

For all the positive developments China has seen in recent decades, a lot still remains to be done. Although its economic growth was accompanied by an increase in economic freedom, there are still deficits in many areas. In other words, China has both a strong need for further reforms and a great potential for further improvement and growth.

Professor Zhang Weiying stresses: “China’s reforms started with an all-powerful government under the planned economy. The reason China was able to sustain its economic growth during the process of reform was because the government intervened less and the proportion of state-owned enterprises decreased, not the other way around. It was precisely the relaxation of government control that brought about market prices, sole proprietorships, town and village enterprises, private enterprises, foreign enterprises, and other non-state-owned entities.” Taken together, all of this formed the basis for China’s unprecedented economic rise.

Commentators frequently cite the strong influence of the state on the country’s economic transformation as evidence that China’s road to capitalism was a special case. However, given the nature of this transformation from a socialist state-controlled to a capitalist economy, this is less exceptional than it may appear at first sight. In many ways, there was nothing all that special about the road China took, as Zhang points out: “In fact, China’s economic development is fundamentally the same as some economic development in Western countries – such as Great Britain during the Industrial Revolution, the US in the late 19th and early 20th centuries, and some East Asian countries such as Japan and South Korea after World War II. Once market forces are introduced and the right incentives are set up for people to pursue wealth, the miracle of growth will follow sooner or later.”

Whether or not China will go down that road remains to be seen. The process of reform has never been a smooth and consistent one – rather, it has been marred by frequent setbacks, especially in recent years, when instances of governmental intervention in the economy have set back the reform process. China’s positive development will continue only if it stays true to its current course of steering the economy towards the introduction of more free-market elements, which has been the basis for the country’s enormous success in recent decades.

Throughout our conversation, Zhang Weiying repeatedly stressed the key point. “The great successes of the past decades are not the result of a ‘third way’ between capitalism and socialism,” he said. “They are the result of capitalist reforms. And they were successful not because of the state, but in spite of the state.”

This article is a substantially abridged extract from the first chapter of Rainer Zitelmann’s recently published book, “The Power of Capitalism.”

Dr. Dr. Rainer Zitelmann is a historian and sociologist. He is also a world-renowned author, successful businessman and real estate investor.