I enjoyed this video interview with the historian Odd Arne Westad, talking about the book he is writing with Chen Jian on China’s long 1970s. The best part comes toward the end:
Westad: Both in the early 1970s, when Mao Zedong was still around, and maybe even more so in the late 1970s, both under Hua Guofeng and then Deng Xiaoping and his group, there’s this obsession with the idea that there will be war, that China will be attacked from the outside. Most likely by the Soviet Union, but also possibly by the Americans.
The imperative of growth, of rapid growth, came straight out of that. It’s remarkable to see how often leaders in this time period keep repeating that. From their perspective, this isn’t growth to help people get rich and move out of poverty. It’s all about strengthening the state, creating a state that can withstand the storms of that war that is going to come in the future. That was their thinking.
It’s fascinating to see how much of the literature that deals with this time period, especially from a US perspective, gets this exactly upside down. They think that economic reform is simply about releasing setting productive forces free and enabling a market transformation based on what had happened elsewhere. I think from the leadership’s perspective, then and probably also now, it’s the state imperative that is the most important. It’s what the state can extract from its own society in order to prepare for some kind of external conflict.
Karl Gerth: I’m often surprised that the Made In China 2025 plan is talked about as a form of autarky rather than as a form of geostrategic response. Just take the simple statistic that the US military budget is greater than the next 10 countries combined. It’s easy to imagine that China would find itself today, as it did then, in a position where it constantly needs to innovate and unleash productive forces.
Westad: I agree with that. If we look at the situation today, I think that’s very true, it’s exactly where much of this is coming from. It is less specific thinking about rapid economic development per se as it is a preparation for whatever the Communist Party and the Chinese government wants to do. There doesn’t necessarily have to be a contradiction between those two. But it’s very clear what comes first: it is the geopolitical strategy that determines how China approaches its economy, not the other way around.
At this moment, it’s easy to see these historical parallels: with the US openly attempting to strangle China’s technology sector, China clearly feels more externally threatened than it has in a while. As a result, it’s more obvious than usual how its geopolitical position is shaping economic policy. The geopolitical context for Chinese economic policy is also the subject of Covell Meyskens’ excellent recent book on the Third Front–see my review from last year.
In 1984, the Taiwan-born and US-trained anthropologist Huang Shu-min left his family in Iowa to live in a village on the Chinese island of Xiamen, just outside the city of the same name. By that time Chinese villages had already benefited from a few years of reform, and the changes underway were dramatic. Huang was impressed by the visible improvements in living standards, but also somewhat depressed by the constant presence of official propaganda and the regimented controls over daily life. At one point, he recounts trying to express this conflict to a villager:
“I must say that living conditions here are probably much better than what one might see in India or in Africa. To me, this seems to be directly related to the tightly controlled but highly efficient administrative system that one finds in China. The fundamental contradiction then is between economic development and human liberty. In order to achieve quick development, sometimes citizens of less-developed countries, such as China, may have to forgo some of their individual freedom. The problem I weigh is how to draw the delicate balance between collective interests and individual freedom.
In the Chinese context, it’s hard to imagine a more anodyne statement. These days, the effectiveness of China’s authoritarian state and the correctness of its tradeoff between liberties and development have been taken for granted by a generation. What you expect to happen here is for Huang to receive enthusiastic agreement and a lecture on the virtues of China’s system. So it’s pretty interesting that his interlocutor, the village Communist Party secretary Ye Wende, actually pushes back sharply against the whole framing:
Ye looked at me wearily. “I don’t know anything about India or Africa, nor do I know where you have picked up this great idea about the conflict between economic development and liberty. The only thing I know is based on my personal experience, and it seems to run counter to what you said. The more political controls imposed on the peasants, the less they want to work. On the other hand, when the national government shed itself of most controls in the countryside and gave peasants more free choice, they responded with greater enthusiasm and higher production.
This may not be true for all of China. But in Lin Brigade, at least as far as I can tell, it was only in the 1970s, when people realized the absurdity of political campaigns in the countryside and stopped cutting each other’s throats, and when the national policy became more flexible toward peasants, that we were able to achieve genuine development. If you don’t realize this point, you will never be able to understand current agrarian reform, either at the national level or in this village.”
Right on schedule, Chinese officials have declared they have officially met the target of eliminating extreme poverty by 2020. The anti-poverty campaign was one of Xi Jinping’s signature initiatives over the past three years. With its focus on the rural poor and neglected regions, the initiative had a more “socialist” flavor compared to Xi’s two other major political campaigns, for environmental cleanup and financial rectitude, which focused on issues of more concern to urban elites.
Now all three of those campaigns are wrapping up, and the bureaucracy is starting to plan a whole new cycle of initiatives for the beginning of the next five-year plan in 2021. So what’s next? What kind of goal or program could meet some of the same political and ideological goals as the anti-poverty campaign? Various official comments and policy documents suggest that China’s government is preparing for a stronger focus on redistribution and reducing inequality, using more specific and quantitative targets than before.
Xi has laid out the overarching slogan of “achieving socialist modernization” by 2035 to guide the next stage of the government’s planning process. That’s a fairly capacious concept. But as Xi helpfully explained in a November 3 article, one of its main aspects is “promoting common prosperity for all people.”
The phrase “common prosperity” (共同富裕) has very specific connotations in Chinese politics. When Deng Xiaoping famously endorsed inequality in the 1980s by saying “We should let some people and some regions get rich first,” he justified that in purely instrumental terms: it was “for the purpose of achieving common prosperity faster.” The ultimate goal, Deng consistently said, was to achieve common prosperity, not to entrench deep divisions. Inequality would rise initially to allow China to grow more rapidly, then decline later. Since Deng’s original comments, that commitment has been honored more in the breach than the observance. Xi’s rhetorical focus on common prosperity signals that he aims to complete the great task that Deng began, by achieving the final goal that Deng did not.
In his article, Xi highlighted the fact that the “suggestions” for the next five-year plan passed at the Communist Party’s fifth plenum includes the phrase “the common prosperity of all the people will make more significant and substantial progress.” Xi said such a commitment had never been made before in a plenum document, and was a sign that the goal had been elevated in political importance. Although it is expressed somewhat indirectly, the clear meaning of this commitment is to reduce inequality.
Rather awkwardly, however, Xi’s campaign for eliminating extreme poverty coincided with a renewed rise in inequality, as shown by the official Gini index published by the National Bureau of Statistics. Inequality had steadily declined from around 2009 but then started rising again after 2015. For skeptics of Chinese official data, the trend of declining inequality after roughly 2010 is well supported by multiple other sources, so I believe the post-2015 rise or plateau in inequality is also a real phenomenon.
The earlier decline in inequality was mostly driven by a tight labor market that pushed up wages for blue-collar workers. The most likely explanation for the renewed rise in inequality is the reversal of that trend, due to the steady loss of manufacturing jobs in China after the industrial recession of 2014-15. Income inequality is also certain to rise again in 2020, given the huge and highly unequal shock to incomes from the Covid-19 lockdowns, which cost many low-income households weeks and months of lost wages. The anti-poverty campaign does not seem to have had a noticeable effect on overall inequality, probably because it targets relief for such a narrow slice of the total population. That suggests a more vigorous official attempt to reduce inequality will have to take a different approach.
What kind of specific targets might the government set in terms of inequality? The fifth plenum’s communique mentions two goals related to inequality: “achieve equalization of basic public services” (基本公共服务实现均等化) and “significantly narrow the gap in development between urban and rural regions and the gap in residents’ living standards” (城乡区域发展差距和居民生活水平差距显著缩小).
These goals are eminently quantifiable, in terms of the ratio of public spending and incomes in different regions. And in fact at least one government plan has already set such quantitative targets. The Integrated Development Plan for the Yangtze River Delta Region was published in December 2019, so it represents current government thinking before Covid-19 took over everything. In a novel step, the plan targets narrowing inequality between different parts of the region, whose center is defined as Shanghai and other major cities in Zhejiang, Jiangsu and Anhui provinces:
By 2025, the income gap between urban and rural residents in the central area will be controlled within 2.2:1, the gap between per capita GDP in the central area and the whole region will be narrowed to 1.2:1, and the urbanization rate of the resident population will reach 70%.
It’s less clear what precise tools the government could use to achieve such reductions in inequality. The associated goal of “equalization of public services” suggests one channel: public expenditures could be raised in lower-income regions to help narrow the income gap. Other policy documents suggests officials are increasingly open to using the tax system to do some redistribution. This would be a big change: while China’s top marginal tax rate is fairly high, the system as a whole is not progressive. Most wage earners are exempt from income tax, and required social security contributions are regressive (see this IMF paper for details).
The discussion of redistribution that happened around the the Communist Party’s fourth plenum in October 2019 also seems to have been quite important. That meeting was mostly ideological in focus, and produced a lot of verbiage about the nature of “socialism with Chinese characteristics,” much of which seemed to be a rehash of old slogans. But Han Wenxiu, a senior economic official, said publicly afterward that the meeting’s discussion of distribution was a major “innovation.”
Chinese-style socialism had long been defined as involving the coexistence of state and private ownership, and the coexistence of market incentives and government direction–the systems for the ownership of the means of production and the allocation of resources. The fourth plenum’s decision said that a third system, that of the distribution of income, is equally important: this is the innovation to which Han was referring. The plenum declares that Chinese-style socialism in terms of the distribution system means the coexistence of market-led labor remuneration with redistribution through government and charities.
This is a descriptive statement, not a prescription for any particular type of redistribution. But it nonetheless has political and ideological force because it elevates the mechanisms of income redistribution to a fundamental part of the Chinese system, rather than just technical details. That makes it more important to get the system right. In an article in the People’s Daily after the fourth plenum, Vice Premier Liu He, the nation’s top economic policymaker, articulated the case for a more active use of fiscal policy to redistribute income:
We should improve the redistribution mechanism, using taxation, social security and transfer payments as the main methods to appropriately adjust the distribution between urban and rural areas, regions and different groups. Among these methods, it is very important to strengthen taxation, particularly by improving the system of direct taxes and gradually increasing the share of direct takes, so as to enable taxation to play a better role in adjusting the income distribution.
Liu’s latest missive in the People’s Daily, following this year’s fifth plenum, touches on some of the same themes, but frames them a bit differently. He again calls for using the “redistribution mechanism,” including taxes, social security and transfer payments, to “improve the pattern of the distribution of income and wealth.” But this time he places more emphasis on redistribution as a complement to an overall macro policy that is more favorable to employment and household income:
We should adhere to the orientation of employment-oriented economic development, expand employment capacity, improve employment quality, and promote fuller employment. The expansion of the middle-income group is fundamental to the formation of a strong domestic market and to structural upgrading. We should adhere to the direction of common prosperity, improve the income distribution pattern, expand the middle-income group, and strive to make residents’ income grow faster than the economy.
Taken together, these documents suggest that various parts of China’s bureaucracy have been gearing up to do more to reduce inequality for some time, but that the thinking on how to define and achieve the goal is still evolving. It will not be clear for a few more months just how the “more significant and substantial progress” Xi promised on inequality will be expressed in terms of specific goals or quantifiable targets. I do think it’s more likely that the problem of inequality will be officially defined in regional terms, as inequality among occupational classes and income groups is a more sensitive and difficult issue. And it will take even longer to find out whether inequality will prove amenable to the tools China’s government is able to deploy.
The book that Odd Arne Westad is now working on sounds very interesting. It’s a collaboration with his fellow historian of the Cold War, Chen Jian, on China’s “long 1970s.” Their project tackles the late 1960s to the mid 1980s as one unified period, rather than dividing them into the conventional eras of the Cultural Revolution and Reform and Opening. The overarching question is a basic one: how and why did China make that transition from revolutionary politics to economic growth?
In a webinar last week organized by the University of California, San Diego, Westad said they still have three chapters to write, but was able to summarize some of the book’s main arguments. One of them is the importance of “change from below, from outside the state and Party sectors.” The following passages are from my notes of Westad’s remarks, slightly rearranged for readability:
It’s pretty clear to us that much of the economic transformation of China during the long 1970s originated in the south. It’s most visible in Guangdong and parts of Fujian. This is a fascinating story. It’s something that starts after the first, most intense phase of the Cultural Revolution is over.
It’s a kind of market revolution carried out in desperation by people and families who knew a bit about a how a market economy would operate, and were deathly afraid that things would move back to a situation like the Great Leap Forward. There are these small businesses that come up, completely against any regulation, already in 1972 and 1973, based on a barter economy and links to Hong Kong and Southeast Asia. This vanguard was already in place when reform from the center was launched.
One example we use is the No.3 Memory of Lenin Tractor Repair Factory in Zhuhai, which already in 1973 had started repairing tractors outside the plan. It would take tractors that needed to be repaired from other units, repair them on the side of the plan, and then get payment in kind. That payment in kind was then either bartered further within Guangdong, or smuggled downriver to Hong Kong. By 1973 this unit had a Hong Kong bank account. If this had been discovered at the central level, these people would have been shot.
We are not arguing that the specific models of economic and social transformation that you see in Guangdong were then put in motion at the central level. But it primed units to behave in ways they had already prepared for. That made it possible for them to get one step ahead in Guangdong. They could develop very quickly into very profitable companies.
This is really significant for China’s history over the next generation. Without these moves that had privileged certain areas and certain units prior to 1978, that development would have taken a very different course. With one exception, all the units that we looked at have since become constituent elements of some of the largest companies in China.
It seems as if the book’s focus will be less on high politics and foreign relations than one might have guessed from their previous works: Westad is the author of, among other things, a survey of China’s foreign relations entitled Restless Empire: China and the World since 1750, while Chen is the author of Mao’s China and the Cold War. But the Cold War context of this period clearly informs their analysis. Here are some more interesting comments from Westad:
It’s very unlikely, at least to me, that Chinese reform would have been as successful if it weren’t for the Cold War, if the US did not have an interest in facilitating China’s economic reform and economic growth. What the Americans found when they started coming back to China was just how far behind China was in terms of economy, technology, science. US leaders from Nixon to Reagan believed they had China as a partner in putting pressure on the Soviet Union, but they discovered quickly that China was far too weak to play that role. So that put great pressure on them to help China develop. The fact that the Chinese state after 1976 made use of the security links with the US to get the technology and credit it needed is of crucial importance.
Friedrich Engels introduced the idea of the “reserve army” of labor in his The Condition of the Working Class in England, an impassioned combination of journalism and political polemic produced in 1845. As he watched the ebb and flow of business cycles in early days of British industrialization, he realized that the number of workers employed by profit-seeking capitalists would also have peaks and valleys:
From this it is clear that English manufacture must have, at all times save the brief periods of highest prosperity, an unemployed reserve army of workers, in order to be able to produce the masses of goods required by the market in the liveliest months.
Workers are on “reserve” because they are not required all the time, only some of the time. Ultimately, the reserve army of the unemployed functioned to keep labor costs down and thereby maintain capitalists’ profits. Engels and Marx elaborated on the idea in The Communist Manifesto of 1848, in which their description of workers as an “army” emphasizes how unfree they are:
Masses of labourers, crowded into the factory, are organised like soldiers. As privates of the industrial army they are placed under the command of a perfect hierarchy of officers and sergeants. Not only are they slaves of the bourgeois class, and of the bourgeois State; they are daily and hourly enslaved by the machine, by the overlooker, and, above all, by the individual bourgeois manufacturer himself.
I thought of this idea of the reserve army of labor after reading Dexter Roberts’ new book, The Myth of Chinese Capitalism. Somewhat in the spirit of Engels’ book, it’s a journalistic expose of the conditions under which China’s working class labors, and a polemic about what keeps them in those conditions. (Full disclosure: along with a number of other China-watcher types, I am thanked in the acknowledgments for the book.)
The focus is on rural migrant workers, in particular a family from Guizhou whose experiences Roberts tracks across multiple provinces and several years. The point is not so much that migrants labor in sweatshops, although their employers do not come off too well, but that they are systematically denied opportunities to better themselves. He argues that China’s rural migrants constitute a deliberately maintained underclass whose “marginal status was necessary to buttress fast economic growth and lift living standards for those new middle-class urbanites.”
Roberts puts most of the blame for this not on capitalists but on institutions and systems maintained by the government, in particular the much-maligned household registration, or hukou. His reporting vividly brings to life the daily indignities created by the hukou system, and how it warps and limits the life choices of migrants. Other issues include the government’s repression of independent labor unions and its continued controls over the use of rural farmland. In combination, these systems limit migrant workers’ bargaining power with employers and keep them part of an unfree reserve army of labor.
While very much a work of contemporary reporting, his book also makes a few ventures into history. These are necessary because the hukou and related policies did not originate with China’s turn to market economics in the late 1970s, but date instead to the high socialism of the 1950s. The push for Soviet-style industrialization, he argues, also required the deliberate maintenance of a rural underclass in order “to ensure cheap raw materials for industry and food for elite urbanites.” Those same socialist practices were simply repurposed in later decades to serve a different kind of industrialization drive, one led by private investors and export manufacturing. Looking at the full history of the Chinese government’s treatment of its rural citizens, he concludes:
In an irony little discussed then or even now, the biggest beneficiaries of Mao’s peasant revolution would be the cities and the people who live there—not the countryside. The rural masses post-1949 would become second-class citizens, their primary purpose in the new system to support the cities.
The coercion of rural labor is indeed a theme that runs through much of the history of Maoist China. The reserve army of rural labor was in many cases literally an army: in the 1960s and 1970s, rural residents were organized into militias that could, if needed, rise up and confront any foreign invaders. These could number in the hundreds of thousands of people in a single province. But militia members were not just drilling on the weekends to prepare for possible invasion: they were also deployed as forced labor to “wage shock attacks and rush construction of key projects,” as Covell Meyskens describes in his indispensable book Mao’s Third Front (previously discussed here).
The Third Front drive to build industry and infrastructure across inland China in fact relied mostly on rural workers, who did not have to be paid as much as higher-status urban workers. Meyskens estimates that while 3.9 million urban workers participated in the construction of Third Front projects between 1964 and 1980, another 11.1 million workers came from rural areas. It is rather striking that Mao’s drive to industrialize on the cheap also required a reserve army of rural labor to keep costs down and accommodate surges in activity, just like 19th-century British manufacturers.
Given all this history, I started to wonder why Roberts chose as his title The Myth Of Chinese Capitalism, since capitalism is generally acknowledged to be pretty good at the exploitation of labor. The myth that is more effectively exploded by his book is the myth of Chinese socialism, which no longer appears as much of an equalizing force.
One of themes running through Superpower Showdown, the instant history of the US-China trade conflict by Bob Davis and Lingling Wei, is nostalgia for former Chinese premier Zhu Rongji. Two decades ago, Zhu was a strong advocate for China’s entry into the WTO and pushed hard for China’s government to accept difficult reforms in order to grasp that bigger prize. “When China needed to change to join the World Trade Organization, Zhu was able to win President Jiang Zemin’s support and push through reforms that eliminated thousands of state-owned firms, even though that produced massive layoffs,” Davis and Wei write.
Ever since then, successive US administrations, up to and including the Trump administration, have searched for a similar figure they could work with to drive further liberalization of the Chinese economy. They have never found one. “Washington needed another Zhu Rongji,” they write, but “none was on the horizon.” To this day, especially among foreigners, Zhu is often seen as the hard-charging reformer who remade the Chinese economy through sheer force of will, a hero who achieved significant market liberalization.
At this point, it’s clear Zhu’s advocacy of WTO accession for China was the correct strategic choice: it led to massive gains in China’s global export market share, while fears that Chinese farmers and domestic companies would be swamped by foreign competition proved unfounded. But for all his charisma, it is too simplistic to think of Zhu as a heroic figure with a widely celebrated legacy. It’s worth recalling that out of the seven people who have served as Premier of the People’s Republic of China, Zhu had the second-shortest tenure: a single five-year term (1998-2003), exceeding only Hua Guofeng’s truncated four-year tenure (1976-1980). On many of the issues most closely associated with Zhu, his positions have since been reversed or weakened by successive Chinese administrations. It is not an accident of history that a Zhu-like figure has not risen again.
Zhu paid a serious political price for how the WTO negotiations played out. In an episode recounted in detail in Davis and Wei’s book, Zhu visited Washington in April 1999 at a low point in the negotiations, and made a strong offer to get them restarted. President Bill Clinton nonetheless rejected it, and, in a major breach of protocol, publicized the specific terms Zhu had offered. They went well beyond what other Chinese leaders had expected. The US bombing of the Chinese embassy in Yugoslavia in May further poisoned the atmosphere for making concessions to the Americans:
The combination of Clinton’s rejection of Zhu’s WTO offer followed by the embassy bombing badly weakened the premier. As soon as Zhu returned home from his U.S. trip, committees under Li Peng’s National People’s Congress questioned whether Zhu had gone too far in offering concessions. Wu Jichuan, the head of the Ministry of Information Industry, threatened to resign over Zhu’s offer to open the telecommunications industry to foreign competition. At a meeting of senior Communist Party officials, Zhu offered Mao-style self-criticism, or jiantao, for his U.S. trip. He said he was too anxious to get a deal done, said a senior government official at the time.
The rest of the Chinese leadership made sure that Zhu would not go freelancing again, and set clear limits on what he could offer. The WTO deal that the US and China eventually agreed on did not go as far as Zhu’s April 1999 offer; notably, Wu Jichuan prevailed in his insistence that foreign companies be essentially blocked from the telecommunications market. Today, with the US and China locked in a conflict over mobile-phone apps and semiconductor technology, it is hard to imagine there are many Chinese officials who think Wu Jichuan was wrong about that and Zhu Rongji was right.
The domestic economic reform most closely associated with Zhu’s spells as vice-premier and then premier was the downsizing of the state sector, which began around 1995 and accelerated in 1998-2000. Zhu allowed local governments to close or privatize underperforming state firms, and oversaw mergers and consolidation of the larger companies controlled by the central government–a policy summarized by the slogan “grasp the large, release the small”. As a result, the number of people employed by state-owned enterprises fell from 77 million in 1995 to 42 million in 2003, the end of Zhu’s term.
There is some evidence that Zhu expected or hoped that the downsizing process would continue after he left office. According to William McCahill, who worked at the US Embassy in Beijing during Zhu’s tenure and is now a senior fellow at the National Bureau of Asian Research:
When Zhu Rongji left the post of premier in 2003, he foresaw the number of central government-owned SOEs shrinking in five years from around 180 firms to around 15, all operating in national security areas like telecoms and energy.
What actually happened was that the downsizing of SOEs slowed and then stopped almost immediately after Zhu left office. In March 2003, the government established a new organization, known as Sasac, to supervise SOEs. At the Third Plenum in October 2003, the Communist Party approved a new architecture for economic policy that focused on “preventing the loss of state assets,” a pejorative term for botched privatizations. Within two years Sasac effectively brought a halt to management buyouts and other common methods of SOE privatization, and they have never resumed. The number of centrally owned SOEs directly supervised by Sasac has now fallen to 97. But all of that shrinkage has come from merging those companies into larger conglomerates that would be more effective national champions, and their numbers have been little changed in recent years.
While Zhu Rongji focused on encouraging competition among different SOEs in order to energize the domestic economy, more recent administrations have instead emphasized reducing competition among SOEs and building up larger entities that can more effectively take on Western multinationals.
The layout of China’s state sector today perhaps owes less to Zhu than to Li Peng, his predecessor as premier and frequent sparring partner in internal economic debates. According to Sarah Eaton’s excellent 2015 book The Advance of the State In Contemporary China, as early as 1991 Li presided over an effort to identify 100 SOEs as “large enterprise groups” that would receive special government support to become a team of stronger, more competitive companies. That idea continued to be influential during Zhu’s tenure, and beyond:
In particular, ‘grabbing the large’ – one half of the most controversial policy of ‘grab the large, let go the small’ (zhua da fang xiao 抓大放小) – carried forward the essential aims of the large enterprise strategy championed by Premier Li Peng in earlier years. In general terms, the idea was to focus the state’s resources on supporting a group of ‘elite SOEs’ that would anchor a trimmer, fitter state economy.
The simplest way of summarizing China’s SOE policy since Zhu left office is that it gave up on the “release the small” part of the policy, but has redoubled support for the “grasp the large” part. The combination of social unrest among laid-off SOE workers, and public criticism over corruption in the privatization process, had made continued SOE downsizing politically untenable by the 2000s. But the economic upheavals of the last two decades have generally only reinforced Chinese officials’ belief that SOEs play a necessary role in stabilizing the economy. Xi Jinping’s public commitments to keep making SOEs “stronger, better and bigger” are just the latest iteration of a line of thinking that is at least three decades old.
The conventional take on Li Peng has been that his conservative socialist economics were overruled by Deng Xiaoping, and lost out to Zhu Rongji’s liberalizing forces. Looking at how China’s state sector has evolved over the last couple of decades, that story does not seem completely right. Li Peng has clearly had a lasting legacy, and helped fix the state-capitalist direction of China’s economic strategy.
As the US political system ties itself in knots over how to extend the relief measures offered to households during the coronavirus pandemic, it’s worth recalling just what an extraordinary intervention they turned out to be. US household income including government transfers rose 11.5% year-on-year in real terms in the second quarter of 2020, while household income without transfers fell 4.9%–which means transfers delivered an amazing 16.4-percentage-point boost to income growth.
The scale of the US support for household incomes during the pandemic also throws into sharp relief China’s decision not to offer a significant amount of such support. China’s household income fell 3.9% year-on-year in real terms in the first quarter, while household income without transfers fell 5.2%, which means transfers boosted household income by 1.3 percentage points. So while it would not be fair to say that China’s government did not deliver any additional support to household income during the pandemic, the amount was pretty small.
How much exactly did the Chinese government spend on household income support during the pandemic? It’s possible to put together some numbers from the household survey. Per-capita household income in China was Rmb8,561 in the first quarter and Rmb7,105 in the second quarter; of that, Rmb1,548 and Rmb1,390 was income from government transfers of various kinds. Multiply those figures by 1.4 billion people, and total household income was roughly Rmb12 trillion in the first quarter and Rmb10 trillion in the second quarter, with transfers totaling Rmb2.2 trillion and Rmb1.9 trillion.
Transfers for the first and second quarters were Rmb145 billion and Rmb180 billion higher than a year earlier, for a total year-on-year increase of Rmb325 billion, equivalent to 0.3% of 2019 GDP. It’s hard to know how much of that increase would have happened anyway without the pandemic. Since transfers for the first and second quarter in 2019 increased by a total of Rmb256 billion, so let’s call the additional increase above that in 2020–Rmb69 billion–the extra spending caused by the Covid pandemic.
This is probably not exactly right, but the order of magnitude should not be too far off. For instance, the Ministry of Human Resources and Social Security in July disclosed that a total of just RMB25.4 billion in unemployment benefits (失业保险金) and supplementary unemployment assistance (失业补助金) had been paid in the first half of 2020.
The ministry did not disclose the actual number of people receiving unemployment benefits at the end of the second quarter, but it did for the first quarter: only 2.38 million people, or approximately 0.5% of the urban employed population. What is even more striking is that number increased by just 100,000 people from the 2.28 million people at the end of 2019. In other words, during the biggest shock to employment in recent memory, when credible estimates showed tens of millions of people at least temporarily without work, the official unemployment rolls basically did not expand at all.
What would it have cost the Chinese government to offer more generous support to household incomes during the pandemic? Delivering as big of a boost as the US did is probably too much of an ask, so let’s set a lower standard of just cushioning the shock to the trend rate of household income growth. Household income grew 6.5% in real terms in the first half of 2019, so what would it have taken to keep household income growth at something close to that, say, 5%?
Given that CPI inflation in the first quarter was 5.0%, total household income would have had to grow 10.2% in nominal terms to reach 5% real growth; with CPI inflation slowing to 2.7% in the second quarter, only 7.9% nominal growth would have been required then. Those nominal growth rates would have raised total household income to Rmb13.1 trillion in the first quarter and Rmb10.3 trillion in the second quarter, instead of the actual figures of Rmb12 trillion and Rmb10 trillion. The extra transfers that would have been required are thus about Rmb1.4 trillion, mostly coming in the first quarter. Since there would also be some administrative overhead, let’s call the total a round Rmb1.5 trillion. That is just 1.5% of China’s GDP in 2019.
Of course, China’s government would have had no way of knowing in advance exactly how much money it would have had to spend to support household incomes during an unprecedented pandemic. But Rmb1.5 trillion is certainly not a figure so implausible as to be difficult to mobilize in a short period of time. And policy proposals of roughly that magnitude were actually being discussed during the height of the pandemic. For instance, Yao Yang, a prominent economist who is the dean of the National School of Development at Peking University, in April publicly proposed issuing Rmb1.4 trillion of special treasury bonds to finance household income support. He suggested structuring the payments as a one-off grant of Rmb2,000 to every person in the bottom 50% of the income distribution.
In the event, the government did eventually decide to issue Rmb1 trillion of special Covid-19 treasury bonds. But the proceeds of those bonds were dedicated to fiscal transfers to local governments. According to the Ministry of Finance, “the Covid-19 bonds will be mainly used for local public health and other infrastructure construction and epidemic response, while some funds will be reserved for local governments to solve special difficulties at the primary level.” Since money is fungible, those additional transfers to local governments do help support programs that support household incomes. But the bond issue was clearly not structured to deliver a boost to income transfers, and since the bonds did not actually start to be sold until June, they could not have helped the household income numbers for the first half.
Why did China’s government decide against a policy that could have prevented major damage to household finances at a reasonable fiscal cost? Its internal debates are mostly not public, so a definitive answer is difficult. But my best guess is the hold that a peculiar brand of fiscal conservatism seems to have over much of the government.
It’s a kind of state-socialist fiscal conservatism in which spending money to support household incomes and consumption is viewed as wasteful, while spending money to support corporate incomes and investment is viewed as wise long-term planning (see my post Why China isn’t sending money to everyone from May for more on this). Of course, the government did not stint on money to fund a massive mobilization of public-health measures to combat Covid-19; what is curious is that they did not feel the same urgency to directly address the economic consequences of the pandemic. The fact that most of the income losses were felt by rural migrant workers was also likely a factor in the political calculations: officials generally presume such workers can always eke out a subsistence living on their family farms, so they are not considered to need welfare benefits.
One thing the emergency of the pandemic has done is to make these distinctive biases and priorities of the Chinese government quite clear.
Now that the US and China are widely, if perhaps inaccurately, said to be entering into a new “Cold War,” stories of the original Cold War can feel particularly relevant. The timing for Covell Meyskens’ new book Mao’s Third Front: The Militarization of Cold War China is thus pretty good: its central subject matter is how geopolitical tensions and fears of conflict affect countries’ economic strategies.
The Third Front was a nationwide campaign, running from roughly 1964 to 1973, to prepare China to fend off military invasion and aerial attack. It was essentially a crash program to build industrial and transportation infrastructure in remote parts of the nation’s interior. Mao feared that China was too reliant on industrial capacity scattered along the coast, where it could be easily targeted by bombers and nuclear missiles. The facilities necessary for China’s military to survive a protracted war therefore had to be built in locations that were “mountainous, dispersed and hidden.” Coastal areas were also the most likely to be first occupied in any invasion of China. Leaders recognized that China’s poorly-equipped military would be outmatched in a direct confrontation with either the US or the USSR. China’s military doctrine thus called for making the interior serve as a “rear defense area” in the event of an invasion: their forces would fall back and regroup in the interior, much as the Communist guerrillas had during the Japanese invasion of the 1930s.
The Third Front was kept entirely secret until the 1980s, and has received limited attention from scholars even in more recent years. Barry Naughton wrote a classic article about it in 1988, but it has never really become part of the standard historical narratives of the Mao era. One of the very best books on Maoist China, Andrew Walder’s China Under Mao, does not even mention the Third Front. This is an oversight, as Meyskens makes clear that the Third Front was the main industrial policy of China for at least a decade. The great virtue of his book is to bring this hidden history to light in comprehensive fashion: it covers everything from the deliberations of Mao’s high councils to the shortages of baby formula on Third Front construction sites.
The Third Front definitely changed the shape of China: before and after the Third Front campaign, the targeted provinces accounted for 30% or less of nationwide investment spending; during the campaign, that share rose to around 50% (see chart). The remnants of the numerous Third Front projects scattered around the country can still be seen today; there are some striking photo collections on Meyskens’ website of old Third Front facilities in Sichuan, Hubei and Shaanxi. It’s not all a legacy of decay, though: some industrial sites that were launched during the Third Front are still going strong today, such as the Panzhihua Steel factory in Sichuan.
In official Chinese accounts, the Third Front is now considered the first in the long lineage of the regional development campaigns the Communist Party has mounted to bring prosperity to China’s poor interior provinces. One recent example is a retrospective of the first 70 years of the People’s Republic published by the National Bureau of Statistics in 2019. Because of the Third Front, it says, “a number of railway, oil, machinery, electricity and other projects were built in the central and western regions, effectively improving the weak development foundation in the central and western regions.” That kind of focused investment in infrastructure and industrial projects was also characteristic of the Great Western Development campaign that Jiang Zemin launched in 1999.
But to recast the Third Front as just a regional aid program wrapped up in some Maoist slogans is to miss its real driver: fear. The Third Front was not an economic development program with some security benefits. It was a crash program to put the Chinese economy on a war footing and prepare for what was believed to be imminent attack. At the time the Third Front was launched, Mao’s disastrous Great Leap Forward was still fresh memory, and most of the government was focused on trying to get the civilian economy back to normal. Other leaders had little appetite for signing up for another one of Mao’s crash industrialization programs. What changed their mind was the stepped-up US intervention in Vietnam after the Gulf of Tonkin incident in 1964. Suddenly, a US-led invasion of China from the south seemed like a realistic possibility; and Mao’s falling-out with Stalin had made a Soviet-led invasion from the north also seem a real risk.
Building Third Front projects was hard: it required mobilizing hundreds of thousands of workers and scarce resources to build things that were technically difficult, in inaccessible locations, at impossible speeds. There were easier, better and more efficient ways to develop the economy, and every analysis of the Third Front has concluded that it led to many failures and enormous waste (even an official government review in 1984 found that only 48% of projects were successful). The only possible justification for such a waste of resources was that it was necessary for the survival of the nation.
The Third Front helps make clear just how central security fears were to the organization of the Maoist economy–as they were also to the Soviet economy. In his review essay “Foundations of the Soviet Command Economy 1917-1941,” the historian Mark Harrison remarks that “Economists have tended to describe the Soviet economy as a developmental state that provided civilian public goods and pursued civilian economic growth, although inefficiently.” This perspective is fundamentally misleading, he argues, because Stalin was not really pursuing consumer welfare or economic development. The Soviet command economy was in essence a war economy: state ownership of industry, collectivization of agriculture, political purges and the all-pervasive security state were all necessary because the economy “had to be organized for defense against internal and external enemies acting together.”
That phrase also describes China in the 1960s quite well. A big reason why China under Mao systematically failed to develop the economy was because Mao was, mostly, not really trying to develop the economy. He was instead obsessed with political campaigns against real and imagined enemies inside and outside the country. And although Mao was paranoid, he did have enemies. Meyskens reminds us that the Cold War was only really cold from the perspective of the US, which carefully avoided direct conflict with the Soviet Union; from China’s perspective, it was pretty hot:
Similar to Moscow, Beijing also did not think of the Cold War in John Lewis Gaddis’s famous phrase as a period of “great power peace.” They considered the postwar world to be in a period of ongoing conflict in which China had directly fought against America in the Korean War, the capitalist camp constantly besieged socialist states, and the United States and European countries regularly interfered militarily in decolonization and the affairs of postcolonial states.
It is therefore impossible to separate China’s later successful economic development from changes in the international environment. If China’s leaders had continued to feel threatened militarily by both the US and Soviet Union, they may not have been able to focus on civilian economic development rather than military preparations. Meyskens suggests that the turning point for China’s economic development came with Richard Nixon’s visit in 1972, and the subsequent commitment by both sides to avoid military conflict. Soon after, the Third Front campaign was downgraded in importance, and planners began to direct more resources to light industry and consumption rather than defense and heavy industry.
Of course, it took many more years, and Mao’s death, for the leadership to settle on a coherent and successful program for developing the civilian economy. But, as Deng Xiaoping saw clearly, they would not have been able to de-militarize the economy without confidence that China’s borders were secure. Deng’s project of enlisting the US as a de facto partner of China against the Soviet Union was thus the necessary international condition for domestic economic reform and the opening to foreign trade. Meyskens’ essay on “the profound national consequences of international military tensions” makes for fascinating reading, but it is hard not to find its lessons troubling at a time when the US and China appear stuck in an escalating geopolitical rivalry.
The history of China’s reform era is inevitably a history of individuals: China started making different decisions after 1978 because different people were making the decisions. Much of the standard historical narrative focuses on the top leaders, figures like Deng Xiaoping and Chen Yun, who came to power after Mao’s death and led the country in a different direction. As the Chinese economist Wang Xiaolu writes in his recent book, The Road of Reform 1978-2018 (王小鲁, 改革之路：我们的四十年), those old Communists were realists rather than utopian theorists, who “had not learned theories of the market economy in a classroom, but because of their rich life experience were able to see clearly where China’s future lay.”
Wang’s book helps flesh out that standard narrative by focusing on a different group of people, the lower-level researchers who helped the government draft, implement and decide on its policies during the 1980s. Wang himself was one of these researchers, and his recollections are the liveliest and most interesting part of his book. He conveys the ferment of that early period, when old hierarchies were overturned and inexperienced youngsters were thrust into positions of responsibility. Here he recalls how he made his own transition into the official intellectual world (my translation):
In the second half of 1978, the newly established Chinese Academy of Social Sciences established a “writing group” on the recommendation of vice president Yu Guangyuan. The mission of the writing group was to criticize the extreme left theories promoted by the Gang of Four over the past decade. The writing group edited and published an unscheduled internal publication called “Unfinished Drafts.”
The journal was named by Lin Wei, the head of the writing group, and signaled toleration, so that some controversial articles could be published. Lin Wei had served as the director of the theory department of the People’s Daily in the 1950s. In 1959, he was labeled a “right-wing opportunist,” but was rehabilitated after the Cultural Revolution. He was open-minded, pragmatic and tolerant; his hiring policy was not to ask about academic qualifications, resume and background, but boldly appoint young people.
During the Cultural Revolution, I spent more than six years in production teams in the countryside in Shanxi, and then spent four years as a worker in mines and factories. Before the Cultural Revolution, I had only completed junior high school and had never set foot inside a university. It was only because an article I had written on reform had been selected by the writing group that I went directly from the factory to work as an editor at “Unfinished Drafts.”
Another person who took a similar route to end up at “Unfinished Drafts” was Wang Xiaoqiang. He had worked on rural production teams in Shaanxi and Henan, and later studied tractors and worked in factories. For the two of us, all of our knowledge of social science came from our own study while we were in the countryside and factories. At that time, there were many young people like this who, driven by the broad trend of reform, directly entered the research field from the grassroots.
At the time, such “internal” publications were important channels for distributing ideas and research findings among people working in the government. Wang says that, over 1979-80, “Unfinished Drafts” published several research surveys on the situation of rural households in Anhui, where the first experiments in the household responsibility system were taking place, that helped convince government officials to endorse the reform. A group of like-minded researchers also formed the “Rural Development Research Group,” which carried out extensive on-the-ground surveys in the early 1980s. They eventually received more formal status:
In 1984, the Premier of the State Council [Zhao Ziyang] approved a plan to assemble several younger researchers from different agencies into a research institute under the leadership of the State Commission for Restructuring of the Economic System. The backbone of the research team came from the Rural Development Research Group, who had spent several years doing surveys and research on rural reform. There were also many who had been among the first students to take the university entrance examinations in 1977 and 1978, and then received degrees. Many of those researchers had spent the Cultural Revolution laboring in the countryside or in factories, and had a deep understanding of the grassroots situation. You could say that being “down to earth” (接地气) was one of the special characteristics of this research team.
What these groups of researchers had in common was a deep commitment to the market-oriented reforms that rolled back state controls and gave people the means to better themselves. But they had this commitment not because they had “learned theories of the market economy in a classroom,” but because they had extensive first-hand experience in the failures of socialist economic organization.
Working for years on production teams in farms, mines and factories gave them a deep understanding of how and why those structures were dysfunctional, and convinced them that China needed to find an alternative. These intellectuals drew what authority they had not from academic credentials–which they did not have, and which it had been largely impossible for anyone in China to obtain during the years of the Cultural Revolution–but from their demonstrated ability and personal experience. (I am reminded of Branko Milanovic’s remark that people who have led boring lives are unlikely to be very good social scientists).
I agree with Wang that this cadre of what you might call “grassroots market liberals” does deserve some of the credit for the success of the China’s first couple of decades of reform. Their unique background and perspective helped China avoid what Richard Bendix called the “polarization of the modernizers and the nativists” in developing countries. In his 1987 essay, “The Intellectual’s Dilemma in the Modern World,” Bendix pointed out that intellectuals in developing countries who want their country to advance often derive their ideas and models from developed countries (and indeed were often educated abroad). This means their proposals for reforms are often opposed domestically for implicitly disparaging their own country’s traditions and identity: “what appears desirable from the standpoint of progress often appears dangerous to national independence.”
The grassroots market liberals could avoid this trap because they were not using their foreign academic credentials to lord it over their local colleagues, or advocating that China adopt a set of foreign ideas. They were arguing for practical changes to obviously dysfunctional institutions, and did so mainly by presenting on-the-ground evidence that market reforms, such as allowing township and village enterprises, improved the lives of ordinary people. The grassroots market liberals were eager to learn from examples outside China, and were often eager collaborators with international institutions like the World Bank, but they could credibly present market-based institutions as being a Chinese solution to a Chinese problem.
These days, the protagonists in the domestic debate over China’s economic reforms are somewhat different. The grassroots market liberals are still around, but the new generation of scholars and researchers have more academic credentialing and more exposure to intellectual trends outside China. Those are not bad things exactly, but it is hard for the new generation of economics PhDs–who did in fact “learn theories of the market economy in a classroom”–to match the moral authority and life experience of the grassroots market liberals. Today, many of China’s best-known proponents of further market reforms have ties either to the financial industry, or extensive foreign connections. That means they can be, fairly or not, more easily criticized as self-interested or unpatriotic.
I wonder if this sociological change may be one of the reasons why the progress of market reforms in China has slowed (or reversed, according to some) in the last decade or so.
China’s role as a massive global consumer of energy is so well-known that the fact that it is also a major energy producer is often overlooked. Like other geographically large countries–Russia, the US, Canada–China’s territory is expansive and diverse enough to include a lot of different mineral deposits. It has the world’s fourth-largest reserves of coal and also the 13th-largest oil reserves. In the 1970s and 1980s, China was even a net exporter of oil–the result of dramatic success in exploring for and producing oil under the extreme conditions of Maoist socialism.
Most of China’s oil production did, and still does, come from one major source: the Daqing oilfield in the northeastern province of Heilongjiang. Its discovery was a formative event for the young People’s Republic, and Mao Zedong quickly seized upon Daqing as a model of the kind of socialist industry he wanted: ascetic, egalitarian, and dispersed (Daqing’s workers lived in packed-earth houses scattered across the oil field, and mostly had to grow their own food). The tale is very well told in Building For Oil: Daqing and the Formation of the Chinese Socialist State, a 2018 book by Hou Li (侯丽), a professor of urban planning at Tongji University.
China was a poor and badly governed country when it discovered oil at Daqing, and natural resources have often been very mixed blessings for poor and badly governed countries. There are numerous examples of how sudden resource wealth has led to massive corruption, poor government policy decisions, and a failure to successfully develop other parts of the economy–the so-called “resource curse.” Rich, well-governed countries, on the other hand, have generally not been knocked off their stride by sudden oil wealth. (A useful survey of the issue is Confronting the Curse: the Economics and Geopolitics of Natural Resource Governance by Cullen Hendrix and Marcus Noland.) Different countries’ institutions are affected in different ways by the shock from a resource boom, and the China that discovered Daqing was very different indeed, caught up in Mao’s radical political and economic experiments.
Timing matters. When large-scale oil production from Daqing began in 1963, China was recovering from the disaster of the Great Leap Forward, Mao’s mad dash for industrialization that caused a nationwide famine. The disaster had discredited Mao’s aggressive approach, and economic policy was back in the hands of more rational policymakers like the cautious economic specialist Chen Yun and the conventional Soviet-style planner Li Fuchun, as well as respected political leaders like Zhou Enlai, Liu Shaoqi and Deng Xiaoping. They were beginning to draft a new five-year plan aimed at redressing some of the distortions in the economy. The initial draft of the Third Five-Year Plan reversed the Leap’s focus on heavy industry above all in favor of agriculture and light industry–things people could “eat, wear or use” (吃, 穿, 用).
The success of Daqing, however, provided evidence that a Maoist approach to heavy industry development could indeed work. In November 1963, oil minister Yu Qiuli, who had personally supervised the work on Daqing, delivered a report to the National People’s Congress in which he declared that the oil sector was the only one that had met, and exceeded, the targets set during the Great Leap Forward. This was the first time that much of the rest of the leadership had heard of Daqing, which had been a secret project, and Mao in particular was impressed. Indeed, the oil produced by Daqing would prove to be the single greatest industrial accomplishment of the Mao era, its growth eventually far exceeding the temporary surge in steel output during the Leap.
The oil produced by Daqing helped save China from major energy shortages during the 1960s. It also restored Mao’s confidence in his idiosyncratic approach to economic development, based on mass mobilization rather than orthodox planning, political enthusiasm rather than material incentives, and heavy industry and defense over agriculture and consumer goods. And everyone in the leadership, not just Mao, was impressed. Gu Mu, the experienced economic official who in the 1980s would play a key role in China’s opening-up to foreign investment, was then a member of the National Economic Commission and visited Daqing in 1960, 1962 and 1963. He later wrote in his memoirs:
The success of the Daqing oilfield provided a huge boost to China’s oil supplies after its good relations with the Soviet Union came to an end. It put an end to a longstanding geological myth about China’s oil reserves, and opened up a new door for China’s oil industry both in theory and practice. But more significantly, it demonstrated that the Chinese nation could survive and develop on its own rather than living on alms from others.
The discovery of oil, then, probably helped push China back toward industrialization campaigns at a juncture when otherwise it would have moved toward a more balanced and consumer-oriented strategy. Through 1964, Mao often expressed his discontent with the proposed direction of the Third Five-Year Plan. He repeatedly mentioned Daqing to other officials and praised oil minister Yu Qiuli, eventually promoting him over other economic planners.
But the example of Daqing alone was not enough to change the consensus among the leadership. Mao’s attempts to redirect economic policy did not meet with real success until after August 1964, when the Gulf of Tonkin incident precipitated greater US military involvement in Vietnam. Mao and other leaders feared that war was imminent, and the economy therefore needed to be immediately reoriented toward preparing for a potential invasion. That meant lots more projects like Daqing: military-style mobilization of labor to rapidly develop heavy industry in isolated areas that could be easily defended. The fact that Daqing had undeniably worked made this new campaign–a long-secret effort known as the Third Front–seem like a plausible strategy.
As with other examples of the supposed “resource curse,” the discovery of oil in Maoist China clearly had a big impact, but it is difficult to ascribe all the changes that followed to the effect of resources. Still, even today there is evidence of resource-curse-like phenomena within China on a regional basis, where areas heavily endowed with natural resources tend to have more state-dominated and less successful economies (see Manchuria rediscovers the resource curse). So one might hypothesize that the way the resource curse functions under socialism is by reinforcing socialist biases toward isolation and heavy industry.
Yet the rest of the story is more ambiguous. By 1972, the constant fear of invasion that had kept China focused on defense-industry projects had eased, thanks to Richard Nixon’s historic visit to Beijing and the normalization of relations with Japan. At this juncture, Hou argues in her book, the oil industry did not push China back toward traditional socialism, but actually facilitated an engagement with the outside world and the introduction of new technology:
Accompanying the changing political and international climate were intense debates about ideology and strategy in the socialist state. Although Daqing Oil Field was constantly promoted as a model of self-reliance, the rising petroleum leaders understood the importance of advanced technology for sustainable growth and the limitations of an indigenous and labor-intensive model. They thus boldly introduced dramatic changes when drafting state plans.
China’s rising oil exports provided the hard currency with which it could purchase foreign technology, and Yu Qiuli proposed importing large amounts of foreign equipment to build downstream industries like chemicals, fertilizer and synthetic fibers. This push eventually developed into what was called the Great Leap Outward, a 1976 plan to boost economic development with large amounts of imported foreign technology. This plan was over-ambitious and proved short-lived, but the impulse to re-engage with the outside world that it represented persisted, and was refocused into the broader opening-up agenda pursued by Deng Xiaoping, Gu Mu and others after 1978.
One of the great virtues of Building For Oil is the way that it pairs a nuanced account of these high-level twists and turns of Chinese policy with a lively narrative of one woman’s life at Daqing. We get a powerful sense of how this political and economic drama felt to those living through it. It’s one of the best Chinese history books I’ve read in a while.