Asia Economics Blog
Moderator: Calla Wiemer (email@example.com)
Moderator: Calla Wiemer (firstname.lastname@example.org)
Isabella M. Weber’s “How China Escaped Shock Therapy” is a painstakingly researched but fundamentally flawed account of one key thread of the economic reform debates that took place in China during the 1980’s. For those who are already familiar with those debates it is a useful and often engrossing account of the nitty gritty details of the process by which price policy was determined. For those who are not familiar, the flawed underlying argument of the book poses the risk of creating considerable misunderstanding.
How China morphed from one of the world’s poorest countries in 1978 to today’s economic superpower is one of the central topics in contemporary global economic and political discussions. In particular, the Chinese leadership’s choice in the early 1980s of a bold but at the same time gradual and phased approach to economic reforms has been documented and analyzed repeatedly and is generally seen as one of the central reasons for China’s rapid development. At the same time, the fact that four decades later a number of basic reform challenges are still unaddressed, including abolition of hukou controls on rural to urban migration, ending the privileged access of large state-owned enterprises to key factor and material inputs, establishment of an effective modern taxation system, and providing a level playing field for foreign investors has lately drawn focus to the possible downside of the gradualist approach (see Rosen, 2021 and IMF 2021).
These are complex and often emotional questions, demanding analytical rigor, objectivity, and ability to thread together answers that encompass a broad range of components. Weber’s book lacks all three of these. Many of its key conclusions are simply asserted rather than subjected to analytical scrutiny, starting from its basic thesis that China almost embraced ‘shock therapy’ but ‘escaped’, and in its anachronistic use of this term in the title and throughout the book. The book often reads as a subjective, personal argument by the author, whose sympathies or disapproval for certain figures and whose repeated references to the ‘so-called Erhard miracle’* in post-War Germany eventually become quite grating. And it starts from a vast oversimplification of the challenges and the policy options that China faced in the early reform years.
‘Shock therapy’ (hereafter ‘ST’) has become a protean label that critics of neoliberal economics apply to any rapid economic reform applied by right-wing or centrist governments. Most relevant to China, this term has also been applied by critics to rapid and comprehensive reforms in countries transitioning from Communist Party dictatorships and planned economies to electoral democracy and markets, starting in Poland in 1988 under Leszek Balcerowicz and later in Russia under Boris Yeltsin and his Prime Minister Yegor Gaidar after the dissolution of the Soviet Union.
That Russian experience is central to Weber’s argument. In the first two pages of the introduction Weber describes the well-known disastrous economic and social decline that Russia experienced following the Gaidar reforms, and then writes: “What was at stake in China’s market reform debate is illustrated by the contrast between China’s rise and Russia’s economic collapse. Shock therapy – the quintessentially neoliberal policy prescript, had been applied in Russia, the other former giant of state socialism.” She goes on: “Given China’s low level of development compared with Russia’s… shock therapy would likely have caused human suffering on an even more extraordinary scale.”
This formulation is implausible. Most importantly, China was not in any sense a post-Communist state. Polish or Russian style reforms, aimed at sweeping institutional change, were never even a remote possibility under the Chinese Communist Party (CCP). How preposterous this suggestion is can be seen from Weber’s assertion that Deng Xiaoping himself, as dyed-in-the-wool a Party pillar as one could imagine, was advocating ST when he supported more rapid price liberalization in 1988. Weber justifies this formulation by defining ‘ST’ very narrowly, as rapid price liberalization accompanied by monetary austerity. But this is not what ST meant when it was actually applied in transition economies; currency market liberalization and sweeping ownership reform to take assets out of the hands of the Communist Party were always key planks. These were not on the agenda of any of those whom Weber describes as Chinese advocates of ST.
Second, the USSR economy, dominated by Russia, was the world’s second largest and featured a vast military-oriented heavy industrial sector which was unviable in a market economy, dismantling of which created huge economic shocks. In 1991 the Soviet Union was the 9th largest exporter in the world integrated into the uncompetitive COMECON network. In 1978 82% of China’s population lived in the countryside. China’s per capita GDP of $156 made her one of the poorest countries in the world. China’s state-owned industrial sector was vastly smaller than Russia’s and centered around production of goods for which there was continued demand. China was virtually autarkic by the end of Mao’s rule; in 1978 China, with 23% of the world’s population, accounted for 0.75% of the world’s exports. Thus it is very odd that Weber lumps 1980 China with 1991 Russia as the two ‘former giants of state socialism’. If a genuine ST reform approach had been tried in China in the 1980s China today would undoubtedly be very different from what it is, but there is no basis for asserting that she would have repeated the Russian post-reform experience, given these entirely different starting points.
There are many other possible choices of comparators, besides Russia, for assessing the outcome of China’s transition policies. Martin Ravallion recently compared China’ trajectory with the Republic of Korea and Taiwan, both of which were as poor as China in 1949 when the PRC was established and are now vastly more advanced. Several post-Communist countries in Central and Eastern Europe would also be interesting comparators; the aggressive reformers of Poland and the Czech Republic, less aggressive approaches in Bulgaria, Romania and Albania. Weber notes that those whom she describes as advocates of shock therapy, such as Zhou Xiaochuan, who later served 16 years as Governor of the Chinese central bank, Lou Jiwei, later Finance Minister, Wu Jinglian, Guo Shuqing, and others, have thrived under the reform regime that rejected their more extreme recommendations. An objective observer might see this as indication that the differences among the ‘camps’ that Weber posits were not as great as she suggests.
The real story in this book is of a vibrant debate about policy within the CCP in which all parties were driven by recognition of how much time had been lost under Mao and how far behind China was in comparison to the developed economies of the West and the emerging dragons of East Asia. The excitement and the judiciousness with which foreign experience and Western economic theory were studied are palpable. But one word of advice to any reader: set aside the author’s artificially imposed ‘ST’ vs ‘gradualist’ dichotomy and enjoy the detail she presents about the process by which the CCP leadership crafted their path forward to undo the enormous economic damage of the Mao era and catch up with the rest of the world, setting the stage for so much that followed.
*There are 18 references to the ‘Erhard Miracle’ in the index. There is one reference to Leszek Balcerowicz, the leader of Poland’s ‘ST’.
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