The following article, describing the economic growth of China, extracts information from “The Power of Capitalism” by Rainer Zitelmann. The reader is encouraged to refer to this book for more details and references.
The Great Leap Forward
Mao Zedong wanted to turn China into a shining example of Marxist Socialism, and in 1957 proclaimed the Great Leap Forward to the “worker’s paradise”.
The population was informed of the plan “to overtake all capitalist countries in a fairly short time, and become one of the richest, most advanced and powerful countries in the world”.
This ambitious experiment started with millions of farmers (around one-in-six of the population) being forced to work on massive irrigation projects such as dams and canals without sufficient food or rest. The removal of a large part of the agricultural workforce was one of several reasons for which famines started to spread across China.
During this period private ownership was abolished, and peasants were forced to leave their properties and live in factory-like barracks.
Private plots, which comprised “houses, animals and trees” were confiscated for the purposes of “benefiting production and control”. Homes were to be dismantled if a commune needed bricks, tiles, or timber.
People were also banned from eating at home. Food was served in canteens often hours away from the workplace. This forced people to move to the sites of canteens and live in crammed spaces with no privacy.
Food production was too low and due to the climate of fear created by their own works the Communist Party officials avoided acknowledging the problems. Communes that submitted false data showing phenomenal harvests were taken at face value, while those that submitted realistic numbers were punished.
There were also logistical problems which resulted in large parts of the harvest being destroyed by pests, in particular sparrows. Mao mobilized the entire population to wave sticks and brooms to create a racket that would scare away these birds. This was so effective that pests controlled by sparrows flourished with catastrophic results. The government then sent a “top secret” request to the Soviet Embassy for 200,000 sparrows.
Despite the worsening famine the government was loath to lose face. They were too proud to suspend Russian grain exports, defer debt repayments or accept Western offers of aid. In keeping with the ‘export above all else’ policy they even donated wheat to Albania and other allies when the famine was most severe. According to government propaganda, the Chinese economy was going from strength to strength and breaking records.
Mao was particularly obsessed with steel production. In 1957 steel production was 5.35 million tons and in 1958 the government set a goal of 12 million tons. At the time, Chinese steel was largely produced in small blast furnaces (many of which were unfit for purpose).
The piles of iron ingots produced by rural communes were too small and brittle to be usable in the modern rolling mills. The lack of good raw material led to party cadres going from door to door confiscating household and agricultural equipment such as farm tools, water wagons, cooking utensils, iron door handles and even women’s hairclips. Later Mao was forced to admit that “only 40 per cent is good steel”.
Mao was aware that millions would have to die to bring about his bright future. He told Soviet leaders “We are prepared to sacrifice 300 million Chinese for the victory of the world revolution.”. He said of labour-intensive steel manufacturing: “Working like this, with all these projects, half of China may well have to die. If not half, then maybe one-third or one-tenth – 50 million – die.”
Mao’s experiment caused 32.5 million people officially (unofficially around 45 million) to die between 1958 and 62. Most died of starvation, but around 2.5 million were tortured or beaten to death, killed because they were rich or dragged their feet, or killed because they spoke out or were simply not liked.
The Chinese historian Jisheng says as follows: “The starvation that preceded death was worse than death itself. The grain was gone, the wild herbs had all been eaten, even the bark had been stripped from the trees, and bird droppings, rats and cotton batting were used to fill stomachs. In the kaolin clay fields, starving people chewed on the clay as they dug it. There were frequent cases of cannibalism. At first, desperate villagers would only eat the cadavers of animals, but soon they started digging up dead neighbours to cook and eat. Human flesh was sold on the black market along with other types of meat”.
Mao was eventually forced to abandon his Great Leap Forward. However, this did not stop him from launching his even more radical Cultural Revolution in 1966 where hundreds of thousands were killed in forced labour camps.
Learning from the world
Following Mao’s death in 1976 the government sensed that the Chinese people had had enough of socialist experiments.
Mao’s immediate successor, Hua Guofeng, paved the way for Deng Xiaoping to contribute towards China’s transformation. Deng and his party members took some Confucian wisdom to heart: “By three methods we may learn wisdom: first, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest.”
Having learned some hard lessons the Chinese looked at what was happening in other countries. From 1978 began the busy period of foreign travel to bring back valuable economic insights.
Chinese delegations made trips to more than 50 countries including Japan, Thailand, Malaysia, Singapore, the US, Canada, France, Germany, and Switzerland. Deng asked the delegations to see as much as they could and to ask questions about how economies were managed.
The delegations were greatly impressed by what they saw in Western Europe: modern airports such as Charles de Gaulle in Paris, car factories in Germany and ports with automated loading facilities. They were surprised to see the high standard of living even ordinary workers enjoyed. Deng himself traveled, and after an eye-opening visit to the Nissan plant in Japan, he commented, “now I understand what modernisation means”.
The economic dynamism of neighboring countries, such as Japan and Singapore, were seen as role models. Lee Kuan Yew, the founding father of Singapore, remembers “I had told Deng over dinner in 1978 in Singapore that we, the Singapore Chinese, were the descendants of illiterate landless peasants from Guandong and Fujian in South China … There was nothing that Singapore had done that China could not do, and do better. He stayed silent then. When I read that he had told the Chinese people to do better than Singapore, I knew he had taken up the challenge I quietly tossed to him that night fourteen years earlier.”
The delegations’ findings were widely circulated in China. It led to the realisation that the alleged benefits of socialism for the working class were based on lies and fabrication. Deng noted repeatedly “The more we see (of the world), the more we realize how backward we are”.
Difficulties with privatisation
However, this newfound enthusiasm did not instantly result in a conversion to capitalism. It was a slow process of transition, starting with tentative efforts to grant public enterprises greater autonomy. This process, which relied on initiatives from both the grassroots as well as top-down from policy, took years or decades to mature.
Peasants began to circumvent the official ban on private farming. Since they were able to achieve far greater output the party cadres allowed it to carry on, and starvation was alleviated long before the ban was finally lifted. By 1983 all Chinese agriculture was de-collectivised.
The 1980s saw the establishment of an increasing number of collectively owned enterprises and township and village enterprises. Being legally owned by municipal authorities, the distinction between state and private ownership was blurred, resulting in these companies having the guise of public companies but being de-facto privately run. Between 1978 and 1996 the total number of employees in these companies rose from 28 million to 135 million, while their share of the economy grew from 6% to 26%.
Subsequent waves of privatisation saw municipal owned companies become less important compared to genuine private businesses.
Individuals who started or worked for private businesses suffered hardship and discrimination. Parents wouldn’t allow their daughters to marry someone who worked for these businesses as their economic prospects were uncertain.
Eventually, more people came to realize that running a business conferred financial advantages as well as greater levels of freedom. Self-employed barbers were earning more than state hospital surgeons, street vendors more than nuclear scientists.
The number of self-employed household businesses and single proprietorships increased from 140,000 in 1978 to 2.6 million in 1981. However, the proponents of socialism passed a resolution which saw over 30,000 arrested. In many cases their only crime was making profits or employing more than the legal limit of seven people.
Special Economic Areas
The erosion of socialism was accelerated by the creation of Special Economic Areas (SEA) where socialism was suspended, and capitalist experiments were permitted.
Shenzhen was an area through which, year after year, many thousands would try to illegally escape to Hong Kong. When the authorities investigated in more detail, they found refugees had set up businesses across the Shenzhen River in Hong Kong territory, where they were earning a hundred times more than people in the mainland.
Deng’s response was that China would need to increase living standards to stem the flow. Shenzhen then became the site of the first SEA experiment.
The experiment was so successful that, only a few years later, the authorities had to build a barbed-wire fence to cope with the influx of migrants from other parts of China. Soon other regions also began following the SEA model.
Low taxes, land lease prices and bureaucratic requirements made SEAs extremely attractive to foreign investors. The economies were less heavily regulated and more market-oriented than those of many European countries today.
The co-existence of public and private enterprises
Over time economic reforms became half-hearted. Public enterprises continued to co-exist with private businesses and SEAs. This co-existence caused a chaotic pricing situation, leading to inflation, discontent, and unrest.
Proponents of socialism believed that the reforms had gone too far. In response, Deng (who held no public office at the time), decided to intervene and visit Shenzhen. He expressed his amazement at the extent of the region’s transformation. He was impressed by the magnificent boulevards, resplendent high-rise buildings, busy shopping streets and seemingly infinite number of factories. The people were dressed in fashionable clothes and were the proud owners of expensive watches and other luxury items. Their incomes were three times higher than in the rest of China.
Deng’s tour and subsequent criticism of those who opposed reforms were featured prominently in Chinese media. Deng and his fellow proponents of free-market reforms continued to pay lip service to socialism, but they redefined the term to mean an “open system that should ‘draw on the achievements of all cultures and learn from other countries, including the developed capitalist countries”.
Increasingly, the reformers won the day. Capital investments in private businesses multiplied by twenty. In 1992, 120,000 civil servants quit their jobs, and 10 million took unpaid leave to set up private enterprises. Millions of university professors, engineers and graduates followed suit.
Furthermore, the list of government-set prices for raw materials, transportation services and capital goods was shortened from 737 to 89, with a further reduction to only 13 in 2001.
Reforming the public sector
The reformers hoped to make public enterprises more efficient by introducing performance-related payment schemes and replacing high ranking cadres with professionals. However, these changes failed to address the key issue, which is that public enterprises cannot go bankrupt.
In a market economy a constant selection process takes place which ensures only the survival of well managed companies that satisfy consumer demand. Badly managed companies go bankrupt and disappear, freeing up resources for other ventures. This natural selection does not occur in public enterprises, as losses are financed by the taxpayer. Thus, public enterprises were frequently in bad economic health.
Furthermore, in the market economy there are strong natural incentives to build and maintain a good reputation for the long term. With public enterprises these incentives do not exist and so executives were more interested in raising their income for the short term. Since there was no means for consumers to hold dishonest executives accountable, corruption was a persistent problem.
Still privatisation continued and by 1996, the share of public enterprises had dropped by about 50%, and around 30 to 40 million people had lost their jobs.
China’s development demonstrated that, rising economic growth, even with rising inequality, still benefited the majority of the population. Deng instructed “let some people get rich first”.
Contrary to popular belief, the statistics showed that the relative income gaps were narrowest in the regions with highest per capita GDP, where the markets were most open and companies made the highest profits. Regions with low growth and more restrictive conditions had wider relative income gaps.
In 2016 China overtook the US and Germany to become the world’s largest exporter. The quality of life for ordinary citizens had improved beyond recognition.
Many economists and politicians believe that the impressive growth is due to a special “Chinese way” which comprises a high degree of government influence.
This was not the case. The Chinese progress was not dissimilar to the progress of other developed nations, such as the UK, US, Germany, South Korea and Japan, which were all facilitated by reducing government involvement and increasing freedoms.
Chinese growth happened partly through the SEAs, and partly by decentralizing power to local governments, which in turn circumvented restrictive laws insuch a manner as to create the space needed for both private business and privatisation.
China grew not because of a special way of government, but rather in-spite of it.