Xi vs. Stalin: What drives the reversal of economic reforms?

In the parlor game of finding historical analogies for present leaders, Chinese leader Xi Jinping is often compared to Mao Zedong. This is not very apt: Xi is an organization man, whose overriding desire for order is quite different from Mao’s love of chaos. After spending some time with Stephen Kotkin’s Stalin biography, StalinParadoxes of Power 1878-1928, I am surprised more people do not compare Xi to Stalin (though of course some have). Both men rose in an authoritarian system formally run by a collective leadership, and shifted it in the direction of more personalized rule for themselves and tighter political controls on everyone else.

238px-Stalin_office

Stalin, of course, also unleashed a historic economic catastrophe upon the Soviet Union, when he abandoned the market-tolerating New Economic Policy and embarked on a crash course of agricultural collectivization and forced industrialization. Xi has not done that! His endorsement of industrial policy and favoring of state enterprises has disappointed many liberal economists. He wants a strong state, has re-emphasized Marxist ideology and clamped down on public policy debate. But it is also worth remembering that he has allowed technocrats to liberalize the exchange-rate regime and tighten up financial regulation, two long-needed reforms.

Nonetheless, the slowing economy has recently led to more public discontent with Xi’s policies. Xiang Songzuo, the former chief economist of Agricultural Bank of China, is one of those arguing that there is a connection between Xi’s aggressively Marxist rhetoric and weaker growth: he thinks a loss of confidence and fear of expropriation among private entrepreneurs is aggravating problems caused by the buildup of debt and misallocation of investment (see this translation of a speech he gave in December). Some foreign commentators are also warning that there is a “big danger that China will re-nationalize much of its economy.”

So it seems worth posing this question: what caused Stalin to abandon pro-market policies, and could similar factors be at play in Xi’s China?

A useful guide to this question is the Taiwanese scholar Yu-Shan Wu, whose 1994 book Comparative Economic Transformations has a whole chapter comparing Stalin’s reversal of the NEP with the extension of “reform and opening” under Deng. China in the 1980s had a lot in common with the Soviet Union in the mid-1920s under the NEP: both combined authoritarian rule with a mixed industrial economy and largely private agriculture. Wu analyzes why the two Communist governments then went in such different directions. He was writing at a time when the Chinese government’s renewed commitment to economic reform after 1989 was still in its early stages, and the idea that China might restore the command economy was not completely unimaginable — so perhaps this is a good time to revisit his work.

One important factor Wu highlights was the international isolation of the Soviet Union and its fear of military conflict. To be able to defend itself, the government needed to rapidly build up an arms industry, and it could not trust that the decentralized actions of individual entrepreneurs would do this:

The state of isolation in which it found itself and the overwhelming military and technological power of the capitalist countries “encircling” the Soviet Union caused great fear of another foreign invasion. … Although some war scares were fabricated by factions in the party the general belief in the party as a whole was that the regime would face war before very long. In order to defend the revolution, rapid industrialization was considered a necessity. More than that, the perceived foreign threat determined the direction of industrialization by causing the regime to give top priority to heavy industry, which provided the basis for an arms industry.

Another fear was of domestic political conflict in the countryside:

The threat perceived by the Soviet regime in the 1920s came not only from international capitalist forces, but also from Russian peasants–the more than 100 million private petty producers in agriculture who constituted 80% of the population. …Even Bukharin, the staunchest defender of the NEP, agreed that the emergence of a powerful, commercially minded peasantry was a deadly danger to the Soviet regime. This particular perception of a peasant threat sets the Bolshevik regime of the NEP apart from its tsarist predecessor and other non-Marxist states pursuing the strategies of authoritarian modernization. For those regimes, a prosperous class of petty proprietors in the countryside was the staunchest supporter of the state. For the Bolsheviks, the same petty proprietors were their deadly enemies.

Stephen Kotkin identifies the same dynamic in Stalin’s decision to collectivize agriculture, and pithily summarizes the political logic:

The Bolsheviks desperately needed the peasants to produce good harvests, but the better the peasants did, the more they turned into class enemies, that is, kulaks. To put the matter another way, a non-collectivized countryside was politically unthreatening only if the peasants were poor, but if the peasants were poor they produced insufficient grain to feed the northern cities or the Red Army and to export.

This makes clear the central role of ideology in driving Stalin’s abandonment of the NEP: it was class-based Marxist ideology that designated prosperous peasants as a political threat rather than an asset. (Ideology also contributed to the Soviet Union’s international isolation, since it did not allow it to compromise with capitalist powers and drove its attempts to foment Communist revolts in other countries).

In the 1950s, China’s leaders had the same ideology and pursued the same disastrous policy of agricultural collectivization. Thankfully, by the 1980s, they had figured out that people would be grateful to a government that did not immiserate them. Kotkin therefore sees ideology as the key reason why the Soviet Union did not continue down the NEP’s path of a mixed market economy:

NEP’s dilemma was not merely that the rate of industrial growth seemed too low, making people wonder how long under the NEP it would take before the USSR became a truly industrial country. … The dilemma was not even just the fact that the regime lacked control over the food supply or the countryside, rendering it hostage to the actions and decisions of the peasantry. All these were profound problems, but the core dilemma of the NEP was ideological: seven years into the NEP, socialism (non-capitalism) was not in sight. NEP amounted to grudgingly tolerated capitalism in a country that had had an avowedly anticapitalist or socialist revolution.

In short, ideology matters. Xi’s exhortations to study Marx and create a China in which “the Party leads everything” are usually conducted in the ideological sphere and are not connected to specific economic policies. But it is reasonable to worry about what the implications of this kind of ideology are for future economic policy, since if people actually believe in an ideology they will try to implement it. The political atmosphere under Xi does seem to have encouraged more radical left-wing views to emerge, such as advocating for a second wave of “socialist transformation” (the term used for the nationalization of private enterprise in the 1950s). Of course, such extreme anti-market views are a small minority opinion in today’s China, while they were the overwhelming consensus of the ruling party in the Soviet Union of the 1920s.

The negative dynamics of international isolation that the Soviet Union suffered also have some echoes in today’s China. There is no comparison in terms of degree: China is integrated with the global economy to an extent that the Soviet Union never achieved. In the 1920s Bolshevik Russia was incredibly poor, ruined by famine and civil war, had few diplomatic relations and little international trade. China has not experienced that kind of isolation in half a century.

But it is nonetheless true that internationally China stands alone: it has bought the loyalty of some poor client states through its Belt and Road Initiative, but it still has few real friends and no true allies. The trade conflict with the US, which both sides perceive as being driven by a long-term strategic rivalry, has probably increased China’s sense of isolation. While Europe, Japan, and Australia may not want to sign up for Trump’s trade war, they are also fairly unhappy with Xi’s combination of an aggressive foreign policy and domestic political repression.

As it did for the Soviet Union, China’s perception of international isolation has implications for how the economy is run. It’s obvious that security concerns drive some of China’s industrial policies for the technology sector, and the trade conflict with the US has only intensified those concerns. If China is surrounded by hostile powers, then it cannot rely on free access to global markets to purchase essential commodities and must strive for self-sufficiency. Xi indeed called for “self-reliance” (自力更生, a term favored by Mao) on his tour of northeast China in September. So there is a feedback loop between increased international isolation and more economic intervention: as security concerns become more urgent, the justification for overriding market mechanisms becomes stronger.

To me, this dynamic is more worrisome than the idea that China will re-nationalize the economy in a fit of ideological extremism. Nonetheless, it is telling and rather extraordinary that Xi had to make a very public speech to, essentially, deny that he was going to do that.  On November 1, he gathered some “representative” entrepreneurs for a meeting with the top echelons of the Communist Party, and told them that:

The role and function of the non-public economy [i.e., the private sector] in China’s economic and social development has not changed; our policy of unwaveringly encouraging, supporting, and guiding the development of the non-public economy has not changed; our policy of providing a good environment and more opportunities for the development of the non-public economy has not changed. (非公有制经济在我国经济社会发展中的地位和作用没有变,我们毫不动摇鼓励、支持、引导非公有制经济发展的方针政策没有变,我们致力于为非公有制经济发展营造良好环境和提供更多机会的方针政策没有变.)

This meeting, and the numerous official statements and measures aimed at supporting the private sector that have followed it, highlight the key difference between Xi and Stalin. Xi does not view prosperous Chinese entrepreneurs as a threat that must be eliminated, but as a constituency to be placated. His Marxism seems to be sincere, but it has also been denuded of most class content.

Since Jiang Zemin welcomed private businesspeople into the Party, the Party’s goal has been to win over the support of the Chinese private sector, not crush it. And indeed this is the only realistic strategy in what is now a very large mixed economy: I would estimate that China’s economy is roughly 50% private (SOEs are probably 20-25% of GDP, and government proper 25-30%).

The large role of the private sector in China is ultimately a constraint on the government’s ability to indulge in economic policies driven by socialist ideology. Of course, this doesn’t mean that the government can’t tilt the balance between the public and private sectors more toward the public at the margin, as it indeed has been doing. And if the political factors supporting this trend do not change, it will be negative for China’s future prospects. But it would be almost impossible for Xi to truly emulate Stalin’s economic policies, no matter how sympathetic he might be to Stalin’s politics.

 

 

 

 

 

3 Comments

  1. I thought it was interesting that Xiang Songzuo alluded to the exact same speech of Xi’s that you quote from to point out how bad things are–“things are so bad the Great Leader had to go and reassure us all that private property is not in danger!”

    I have been trying to decide to what extent this statement was loyalty signal vs. an honest assessment.

    Reply

  2. Excellent post, Andrew. Similar factors to those that caused Stalin to abandon the NEP are at play in Xi’s China. Similar, that is, in the sense of being a threat to party rule.

    Just as Stalin felt threatened by the rise of the kulaks, so Xi feels threatened by the rise of productive technology that the party does not have the technical expertise to understand. To give a simple example of the latter: Can the party base employment on the use of factory machinery that it does not understand? Machinery that it cannot repair following a break-down?

    Thus, the tension in trade talks over technology transfers. Technology transfers are THE important issue in the trade talks. Lack of understanding of productive technology is a kulak to Xi. Ah, and the west loves its kulaks (both the technology creators and their creations).

    Reply

  3. The two reasons to end the NEP (national security, ideology) were each independently sufficient justifications. The NEP was a surprising and audacious experiment that was unlikely to last long under the conditions the Soviet regime faced.
    China is in a stronger geopolitical position in most respects than Stalin’s USSR in the 30s (although it’s more dependent on natural resource imports). As to ideology, Marxism has mellowed in China and surveillance works to supplant it as a population control mechanism.

    Reply

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