The Scissors Gap

In​ July 1978, Hu Qiaomu, a sociologist who was working in Deng Xiaoping’s Political Research Office, issued a dire report on the Chinese peasantry. Hu wasn’t known as a supporter of radical reform, but he nevertheless called for something to be done to mitigate the effects of the socialist industrialisation programme. Over the previous three decades China’s agricultural sector had been systematically underdeveloped in comparison to its industrial sector, resulting in what became known as the ‘scissors gap’. The prices the state paid peasants for their produce were so low that relief from rural poverty was systemically impossible. As younger – and bolder – intellectuals than Hu graduated from their rural re-education locations and took up academic and political positions in major cities, a debate began over the best way to lift the peasantry, then still 80 per cent of the Chinese population, out of poverty. Economic restructuring was clearly in order. Within a few years, the debate had spread beyond intellectual circles in China, and was engaging economists and policymakers in Eastern and Western Europe, as well as the US. The market, they determined, would rescue the Chinese people.

But what is a market for? As China emerged from the collectivised and centralised economy of the Maoist years – an era sometimes called ‘post-Mao’ or ‘Dengist’, and more recently ‘post-socialist’, ‘market socialist’ or (in Deng Xiaoping’s phrase) ‘socialist with Chinese characteristics’ – the question of the market became the central economic, social, cultural and ideological problem. It wasn’t just China’s economy that was perceived to be in crisis in the early 1980s; command economies around the world had more or less run their course and liberal capitalist countries were also in trouble. The West responded with Thatcherism and Reaganism; in Eastern Europe – Yugoslavia, Poland and Hungary in particular – economic reforms were at different stages, with economists proposing a variety of ways in which to break free of centralised control and reap the benefits. On the agenda was what would eventually be called ‘shock therapy’ and its key component, the ‘big bang’. Proponents of this theory, such as Jeffrey Sachs, argued that the best way to transform collective and state-owned systems into privatised capitalist ones was to blast them apart. This would, they thought, bring about immediate economic transformation, with only short-term, if drastic, social consequences. In the context of post-communist economic transformation, the ‘big bang’ – it took its name from Thatcher’s reform of the London stock exchange in 1986 – came to be understood as the sudden withdrawal of state planning from commodity price regulation. As Isabella Weber explains in How China Escaped Shock Therapy, big bang price liberalisation in Russia and Eastern Europe after 1991 ‘caused a disorganisation of existing production links without replacing them with market relations’. This ‘disorganisation’ led to the total collapse of post-Soviet economies, wild price fluctuations, the impoverishment of the vast majority of citizens and the dispossession of state-owned properties through the wholesale privatisation of productive assets. China in the 1980s, tempted though it was by Friedmanite market fundamentalism and the basic contours of shock therapy, chose another route. The story of how it reached this decision is told by Weber with verve and clarity.

In the early 1980s, Chinese economists undertook the rapid reconstitution of their discipline after years of seeing it dismissed as a ‘bourgeois science’. Some – mostly younger – economists looked to Eastern Europe and to capitalist economies; their older colleagues looked back to China’s own history, particularly the rapid stabilisation of the economy effected by the new communist regime in 1949. There were lessons to be learned from the US, too, especially its emergence from the system of state-dominated procurement put in place during the Second World War. It wasn’t just the mechanisms of the economy that had to be transformed: the ideological basis of the Chinese state had to be fundamentally rethought. One could argue that the process was already underway. The reconfiguration of relations of production had for some years been secondary to the economic imperative to improve the productive capacities of the Chinese national economy in infrastructural and aggregate terms. In Weber’s account, it was the convergence of ideological and practical necessities that forced the debate over economic transformation. Though, like most commentators, she doesn’t see an overarching theoretical principle behind the process – Deng’s description of economic reform was ‘crossing the river by feeling for the stones’ – it’s impossible to separate the transformation of the Chinese economy from the mutation of the Chinese state or, more precisely, the changing function of the state and the party as far as social reconfiguration is concerned.

Histories of China tend to treat the state as an enduring entity. Weber, whose study begins in the Spring and Autumn and Warring States eras (772-221 bce), wants to show that the roots of contemporary state intervention lie in China’s distant past. In doing so, she seems to imply that there is a single, immutable Chinese state. Philosophical doctrines of state-market separation, she argues, have never been dominant in China. Quite the contrary: even the earliest political documents, such as the Guanzi (seventh century bce), recommend close state control. But rather than lending legitimacy to the ‘eternal China’ fantasy, Weber is offering a necessary reconfiguration of Western orthodoxies of state-market separability. The notion, central to classical economics, that the state and the economy should occupy separate realms (an idea market fundamentalists push to an extreme) never gained ground in China. Chinese economists of the last 150 years, many of them trained in Euro-American classical and neo-classical economics, have been reluctant to accept this approach. The advent of Marxism in the 1920s only confirmed Chinese thinkers in their conviction that the state and the market were part of the same interdependent historical logic.

By the 1980s, however, serious financial pressures were beginning to threaten this consensus. As Weber points out, Western market authorities – Milton Friedman, Ota Šik, Włodzimierz Brus and others – found a receptive audience in some Chinese economists, particularly Wu Jinglian and Xue Muqiao, and as the need for a suitable market reform mechanism became more urgent, the prospect of complete price deregulation – the big bang – started to haunt policy discussion. Its advocates claimed it would resolve the inflationary pressures that had been growing since Deng decollectivised the countryside and implemented a dual-track price system, ensuring state access to staple items (grain, cooking oil, pork) while allowing excess production to be sold privately at floating prices. Known as the ‘household responsibility system’, this practice stimulated agricultural production beyond anyone’s wildest predictions, leading to huge surpluses in staple goods and the widespread commercialisation of parts of the agrarian sector. It also led to increasing corruption among those (mostly party members) who were in a position to exploit the price differentials. Although Weber doesn’t mention it, the social benefits of the system were spread unevenly across the country, with areas closest to urban centres better able to capitalise, leading to economic distortions that still persist. We could add, as Weber again does not, that the return of agricultural production to the household was a highly gendered affair and proved disastrous for many rural women.

Complete price deregulation looked theoretically attractive. But although rural reforms had gone some way to closing the ‘scissors gap’, they appeared to have hit a limit. Meanwhile, rising consumer prices were leading to urban unrest (salaries were still pegged to a system of allocation and had been static for years). More germane to Weber’s story is the economic stagnation in industries that were fully state controlled, including steel, iron ore, fuel oil.

Two tipping points, in 1984 and 1988, could have pushed China in a radically different direction. In 1984, after several under-the-radar conferences during which the issue of price deregulation was hotly debated, the Central Committee decided to release certain goods on the open market. Relying on the idea that peripheral or non-essential items could be treated this way while important items remained within the state programme, prices were abandoned (fang), reformed (gai), adjusted (tiao) and made to participate (can) in exchange. Zhao Ziyang, then on his way to becoming general secretary, popularised the policy’s four-character slogan. He also made clear that ‘the state intervenes in the market, and the market drives the enterprises.’ Rejecting the full price reforms recommended by the World Bank, Zhao opted for gradualism. Weber describes it as a game of Jenga, in which ‘players take turns removing one block at a time from a tower, aiming to prevent its collapse’. But removing blocks changes the ‘statics’ of the tower: ‘This gradual approach cannot avoid the looming danger of collapse.’

Between 1985 and 1989, a battalion of foreign economists arrived in China, trying to convince anyone who would listen of the wisdom of big bang and shock therapy strategies. The US and the UK were by now committed to neoliberal transformation, and in 1985 proselytisers of market fundamentalism, including János Kornai, James Tobin and other Ivy League economists as well as several Nobel Prize winners, were given the opportunity to put their arguments to Chinese officials. The attendees at the Bashan River Cruise conference (all of them men) spent a week going up the Yangtze by boat. Meanwhile, Chen Yizi and Li Yining, members of a Chinese delegation to Hungary, tried to convince Zhao to resist full deregulation. Zhao, however, was dazzled by the men from the West and began to consider the possibility of more drastic action. By 1987, Deng, too, had got behind comprehensive price reform. Dual-track pricing was lifted on a host of commodities just as the coastal development strategy came into force. This called for Special Economic Zones (SEZs) aimed at attracting foreign direct investment and developing manufacturing for export. Operating outside China’s socialist legal system, these zones (the best-known is Shenzhen, on the border with Hong Kong) were designed to link China’s relatively insular socialist economy directly to the global capitalist market. As Weber notes, this not only forced Chinese enterprises to marketise as a matter of domestic survival, but ‘to catch up with global capitalism’. Competition introduced a new logic of financialisation, which, as Giulia Dal Maso documents in Risky Expertise in Chinese Financialisation: Returned Labour and the State Finance Nexus was to take hold fully in the 2000s.*

During 1987 and into 1988, announcements about price liberalisation in China led to widespread hoarding, bank runs and panic buying as the cost of basic goods rapidly increased. Older revolutionaries saw an echo of the economic crisis of the mid-1940s, when the Kuomintang regime lost control over inflation, paving the way for communism. In the Soviet Union, shock therapists were calling for a single bullet to the centralised economy: the quickest way, they thought, to bring down the Communist Party. Deng and other CPC leaders had no intention of losing their grip on power. A period of retrenchment began, with prices coming back under state control. But the political damage was done. As Weber notes, ‘my interviewees strongly disagreed on the course and causes of the crisis of 1988. But they agreed that the disastrous failure of the push for price reform in 1988 was critical for the political crisis that culminated on 4 June 1989’ with the massacre in Tiananmen Square. The 1990s saw the realignment of Chinese economic theory and practice with international neoliberal nostrums. Market fundamentalists have made huge inroads into many parts of China’s economy, but ultimate state control has remained – an uneasy but powerful dynamic and the most significant consequence of the decision not to separate state-market relations along ideological lines.

The older revolutionary generation is now dead. The many young economists who devoted themselves to preventing shock therapy fell from power in 1989 when Zhao was ousted: like Zhao, their support for the Tiananmen Square protesters had political consequences. Some emigrated, others went underground and re-emerged as business leaders. Most are no longer remembered for what they did in the 1980s. Weber argues persuasively that their role in debates over economic reform has not been adequately recognised in China or elsewhere. She also makes a convincing case for the 1980s as a time when such debates were possible. Her efforts to interview the participants and her extensive research, in both public and private archives, make her account the standard against which future books will be measured. What is not part of her story, although others have written a good deal about it, and from many perspectives, is the way China’s uneven progress created new domestic dilemmas. Huge overall economic growth and new global sway has led to vast environmental degradation, resource extraction and exploitative relations of production that mimic, if not yet in scope then in essence, Euro-American imperialism at its height. Also left out of this story are the consequences of labour commodification; the re-subordination of the rural population to non-agricultural concerns; the relegation of women within society, particularly rural women; and the control of populations in peripheral regions such as Xinjiang and Tibet. These are all developments that manifested more fully after 1992 and Deng’s Southern Tour, but their outlines were visible in the debates of the 1980s – alongside those of other possible futures, now largely forgotten.