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China’s ‘capitalism’ came in tiny steps, expert tells Sri Lanka forum

Taken from Economy Next

China’s transition to a market economy was not the result of a one blue print but a series of tiny changes the allowed individuals at grass roots levels to make their decisions, an author and an expert who had studied the People’s Republic closely said. “China’s transition from socialistic economy to a market economy is not a designed outcome of any government-led reform,” Nang Wang, who co-authored the book ‘How China Became Capitalist’ with Nobel prize winner Ronald Coase said in on online forum by Colombo-based Night Watchman Society.

“From the perspectives of Chinese leaders, the purpose of reform was not to turn China into a market economy or turn China into a capitalist society. China even today claims to be a socialist country.” China started to change its economy in 1979, after years of central planning and collectivization had weakened the economy in an effort driven by Deng Xiaoping, a purged ‘right winger’ who came back to power after death of Chairman Mao and the ‘Gang of Four’ was sidelined. In the first purge, Deng was reputed to have been tortured and thrown of an upper story window, leaving him a lifelong paraplegic.

Knowledge Gap

When China started reforms, it lacked technology and basic knowledge about market system. As a result, China in 1979 sent delegations to across the world including Hong Kong, Japan, Singapore, Europe, Canada, and the United States, he said. Chinese Communist Party did not have a blue print on the policy to revive its economy. Instead it made some ‘tiny’ changes to allow the people at the grass root level to take decisions. Before the reforms, the Chinese economy was dominated by state ownership and central planning. One of the first reforms involved collective farming, which had failed to feed the population. China allowed private farming, though land remained under state ownership. Farmers were allowed to cultivate what they wanted, though the land was with the state. “Gradually, everyone tried to do private farming and it spread out,” Wang said. “Beijing adopted private farming as the national policy and food security is no longer a problem now.” The Communist Party authorities carried out the market reforms in two stages. The first stage, in the late 1970s and early 1980s, involved the de-collectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start businesses. However, a large percentage of industries remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the  privatization and contracting out of much state-owned industry. In 1985, China appointed Goh Keng Swee, the architect of Singapore’s economic transformation and Prime Minister Lee Kwan Yew’s right hand man, who had retired as Deputy Prime Minister over health issues as Special Advisor to the State Council (cabinet) on Coastal Development, economic analysts say. The 1985 lifting of price controls was a major reform, and the lifting of protectionist policies and regulations soon followed, although state monopolies in sectors such as banking and petroleum remained, Wang said.

Bottom-up approach

Wang said Chinese leaders realized by the end 1970,radical policies bought by the past socialist regimes had failed China with dire economic consequences and the country failed to feed its growing population. “During reforms, many of those practices that worked in China started in local areas by peasants, by local governments,” he said. “Beijing quickly adopted them into policies to modernize the Chinese economy. China at the beginning of the reforms did not want to throw out of socialism. China wanted to modernize to strengthen socialism.” Later, Chinese government privatized many bankrupt state-owned enterprises and allowed privatization while keeping a control over the way people think. Though it is a state-controlled economy, the state has been withdrawing itself the share form the economy though not completely. The private sector which is illegal in 1970s are now allowed and more than 90 percent of the jobs in urban area are now generated by the private sector. “Chinese economy is becoming more and more market driven.” China also reformed its central bank from the late eighties as inflation shot up, the exchange rate collapsed and foreign reserves fell, analysts say. In 1993 the exchange rate was fixed at 8.2 to the US dollar under Zhu Rongji, Vice Premier and central bank governor, a protege of Deng. He was formerly mayor of Shanghai, a centre of growth and economic transformation. Deng was once reputed to have said the Zhu was the only man ‘who knows economics‘. Zhu refused to devalue the Yuan during the Asian financial crisis in response to calls by Western Keynesian Mercantilists.

The mostly credible exchange rate peg led to a steadt collapse of interest rates and plentiful domestic capital as high inflation disappeared. Foreign reserves also zoomed.

Tight Control

Western analysts, for years, believed the Chinese people, having endured decades of hardship under Mao Zedong, the founder father of People’s Republic of China (PRC) in 1976, would tolerate one-party rule in exchange for rising incomes and more social freedom until a newly prosperous nation would demand political freedoms, too. But the opposite has happened. Income levels have jumped, yet China’s authoritarian leaders have consolidated power. President Xi Jinping could be a ruler for life after term limits were lifted for him. Deng brought term limits for officials at many levels. China’s people still place demands on the party, but the old assumption that prosperity inevitably stirs democratization is being challenged. China’s reform was pushed under tight fisted ruling by a single party government and with a lot of state enterprises Wang said China still controls the way people think and the media. “The way ideas are created is very much controlled by the government. University professors don’t have total control over what text book they teach in their subjects, Wang said. But Wang sees both advantages and disadvantages of the one party ruling with tight controlled decision making. The controlled thinking has destroyed people’s innovative thinking, he says. “It is hard to compete with Americans over innovation,” Wang said. “People don’t have that kind of freedom to be innovative. ”

Fast Track Infrastructure

However China could accelerate decisions and build economic infrastructure very fast. “When I went to Chicago in 1993, they were debating if there should be a third airport. And that airport is still on the paper,” Wang said. “In the meantime, China has built several hundreds of new airports. That is the efficiency of Chinese political system.” “You cannot take for granted that democracy (popular vote) is the best way to run a political system,” he said adding that though Chinese people do not have a direct way to express their dissatisfaction, they still have the “ways to indirectly participate” in the political system. The popular vote often also leads to nationalism as Hitler in Germany and several other nations that got independence as empires broke up in Eastern Europe (Austro-Hungarian Empire/Ottoman), Africa and Asia (Western powers) that got universal suffrage after empires broke up showed.

Lessons for Sri Lanka

Ruling Sri Lanka PodujanaPeramuna (SLPP)’s chief architect and current finance minister Basil Rajapaksa has openly said he wants the party to be like the Chinese Communist Party (CCP). Since Gotabaya Rajapaksa was elected as the president in 2019, Sri Lanka has been leaning more towards China, which has been helping the current government ranging from loans to swaps and infrastructure to vaccines. Wang said China’s struggle in modernizing the economy could be something Sri Lanka also could look into. “From the limited knowledge I have SL is well positioned to take advantage of economic advice of China with close relationship with India to realize their economic potential,” he said.