What went right in China? (Part 2)

The transition to a market economy explained

This the second post in a four part series. The first part is here.

Small Businesses

As TVEs improved employment in the rural areas of China, urban unemployment was a problem. During the Cultural Revolution, tens of millions of urban educated youth had been sent to the villages to "develop their talents to the full" and learn from farmers and peasants. While this was framed as a political solution to their pro-bourgeoisie thinking, it clearly temporarily eliminated the problem of unemployment in China. But when the Cultural Revolution ended, they had to be resettled in cities. In 1978 and 1979 around 6.5 million youth had moved back to the cities. By the early 1980s an estimated 20 million youth had moved back to the cities. 

In socialist theory, they couldn’t be unemployed. Socialist societies were supposed to have eliminated unemployment. The topic was so politically sensitive that the term “waiting for assignment” (daiye) was used instead of “unemployment” (shiye). Above and including the resettled youth, there were hundreds of millions underemployed in China. This was a major public security problem for the Chinese government as crime surged in urban China.

Deng Xiaoping in 1979. Source: Wikipedia

Just like Deng had used the threat of starvation to permit peasants to farm on their own, he used the danger of increasing crime to let people form individual household enterprises or getihu. As long as they relied on their own labour, and did not use others’ labor they would still be considered workers and not capitalists. By 1980, small markets and food stalls popped up in cities and towns.

But what’s the line between a “household enterprise” paying workers and a capitalist? The answer came from Das Kapital where Marx describes an employer who had eight employees and was exploiting their labour. The practical politicians had decided that the limit between a household enterprise is 8 employees and so, the maximum number of employees was seven.

Small businesses came up “like bamboo shoots after a spring rain”. Small restaurants, shoe repair shops and handicrafts were there everywhere. The revival of urban services was immensely popular among both the customers buying their goods and the sellers of these goods. But by 1982 the government faced a problem: some businesses had more than seven employees. Should the government let them go on, or shut them down?

Deng used practical examples to make his case. He asked them that if a farmer has 3 ducks, there is no problem. But if he got a fourth duck did he become a capitalist? And so, step by step with parables like this and with the actual results the Party’s consensus changed to support private enterprises.

 Even then the question of how many employees a household enterprise could have was so controversial that it required the approval of Deng and the CCP’s Vice Chairman Chen Yun. Deng and Chen Yun decided to not discuss this in public because people would be afraid that the law allowing private enterprises was going to be removed. Many enterprises expanded and Deng avoided a public statement on this so that it would not alarm conservative CCP officials or scare away businesses. By 1987, it was so successful that the 13th Party Congress approved household enterprises to have more than seven employees.

Opening up

China was a closed society during Mao’s time. Officials were not permitted to go abroad, and foreign ideas weren’t allowed in China. So, Chinese officials genuinely believed that their country was developed and the rest of the world was backward. But as the political climate changed, officials were allowed to go abroad on trips to study foreign countries and learn from them. They typically travelled in groups of four to six and visited multiple countries at once. In 1978 itself they visited 50 countries. Among these the most important ones were to Japan, Western Europe, Hong Kong and Eastern Europe.

The trip to Western Europe influenced Chinese officials the most. They went to France, Switzerland, Germany, Denmark, and Belgium from May 2 to June 6, 1978 The first thing they were shocked by was the openness of European officials to the Chinese. They had prepared with a Cold War mindset, but got friendliness from them. In China ordinary citizens were not allowed in factories but in Europe even foriegn leaders could see them. They toured factories, farms, markets, research institutes and living areas. Chinese officials were impressed with the level of automation in Europe. Computers were almost unknown in China but were used commonly in Charles de Gaulle airport and Swiss power plants. Agricultural productivity was much higher than they could have imagined. 

They had expected to see exploitation of labour and poor living conditions of workers, but they saw the opposite. Weng Quango spoke (from Ezra Vogel’s Deng Xiaoping and the Transformation of China)

“In a little over one month of inspection, our eyes were opened. . . . Everything we saw and heard startled every one of us. We were enormously stimulated. . . . We thought capitalist countries were backward and decadent. When we left our country and took a look, we realized things were completely different.”

And then they got to work on how China could open up to the West

Gu Mu explained that the Europeans were eager to invest because their factories were operating below capacity and they hoped to sell China their goods and technologies. Gu Mu suggested a number of possible ways that foreigners could assist China in improving production —compensation trade, joint production, and foreign investment—and suggested that China should carefully examine all these possibilities.

The other important trip was to Hong Kong. It was then ruled by the British and had a quickly growing economy. Chinese officials explored the idea of setting up export processing zones in Shenzhen and wanted Hong Kong to take part in the development of China. And that was exactly what happened.

Uptill the Communist takeover in 1949, Hong Kong was the trading center linking China to the rest of the world. When it was clear that the Communists would win, several entrepreneurs started seeking refuge in Hong Kong where they helped build the textile and shipping industries. By the 60s Hong Kong had become an international financial center and by the 70s gained talented youth who had studied abroad but returned home with an understanding of finance and technology.

So, it became the perfect entrypoint for foreigners trying to invest in China. As China was opening up, Hong Kong’s industrial base was losing its cost advantage because wages were rising. On the other hand, wages on the mainland were a hundredth of what was there in Hong Kong. Two coastal provinces Guangdong and Fujian were underdeveloped because they were vulnerable to attack. Fujian especially was just 200 kilometres away from Taiwan, so state policy did not approve of development in Fujian.

The areas of Guangdong and Fujian also had other advantages: they were part of ‘maritime China’ which had links to overseas Chinese in Hong Kong and Taiwan. As soon as Special Economic Zones (SEZs) were established there, money flew in.

The basic premise of a SEZ was simple. They accepted investment, imported, produced and exported goods without any of the restraints on economic activity in China at the time. This had been tried in over 80 countries all over the world.  But Deng Xiaoping’s vision of SEZs was a little further: he wanted them to be a test bed for a market economy. They would have flexibility in experimenting and would produce results for the leadership in Beijing to evaluate. 

Deng Xiaoping’s key role here was to get support among members of the government to establish the SEZs. Then when they started, he got out of the way except for appointing reform minded officials and enacting the same policies in other parts of the country step by step. 

The experiment was an unquestioned success. Guangdong improved its share of exports from 12% of Chinese exports in 1978 to over a third by 2000 which by then were over a trillion dollars. Guangdong’s GDP per capita increased by 9 times from 1980 to 2000 in USD PPP adjusted terms from $322 to $4714. Shenzhen’s population had gone from just 20,000 in 1979 to over 10 million in 2000. Although no formal estimates are available of the number of people who lived in Shenzhen over the years, Ezra Vogel pegs the number at 100 million people. 

Within three decades Guangdong changed from a sleepy province to one with skyscrapers, large industrial sites, world class hotels and traffic jams. 

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