The masterful Deng had something else in mind besides economics. Politics. He wanted to build an instant constituency for change, and one nearly a billion strong. The Chinese people, impoverished and cut off from the world, were desperate for opportunity, and Deng knew it. Yet he also knew that he and his reform-minded advisers faced a phalanx of Maoist holdovers in Beijing. So it was only when the peasants began rejoicing at their newfound wealth in the countryside–the place from which Mao had built support on his own Long March–that Deng felt secure enough to make his next step in 1984. After experimenting with industrial reforms in four special economic zones, he moved his revolution to the urban factories, which started offering workers cash incentives to work harder. It was an idea that initially seemed shocking to the Chinese. But with bonuses, workers became more productive, and incomes began to rise. Deng’s supporters in the Propaganda Department promoted stories about China’s first “10,000-yuan families.” Huge signs proclaiming that time is money and efficiency is life popped up on the concrete walls of run-down state-owned enterprises. Stalls selling clothes and imported goods appeared in every hutong. In department stores, sales clerks started to say “thank you”–in contrast to the rude grunts of yore. Two decades of high growth followed.
Deng liked to say China was “groping its way across the river.” But most Western economists now agree that the wizened little revolutionary was on to something. Deng divined a basic truth about economic reform that a host of Ivy League-trained free marketers, from Harvard’s Jeffrey Sachs to U.S. Treasury Secretary Larry Summers, had failed to adequately foresee. The lesson is one that leaders like Bill Clinton have begun to comprehend only since the Asian contagion devastated several of the region’s economies–a result, in part, of countries opening their financial markets too fast. Boiled down, the lesson is this: economic reform doesn’t happen in a vacuum. If the social costs–like opposition groups or public discontent–are not contained or co-opted with careful policies, they can torpedo the best-laid plans. That’s what happened in Russia. In the early 1990s, the former Soviet Union dumped its ideology overnight and plunged into privatization and market pricing. Gangsters and the nomenklatura, old-guard factory managers and bureaucrats who had run the corrupt Soviet economy, quickly joined up to buy cheap state assets. Without a healthy legal system, they stripped the enterprises clean, exporting raw materials for quick profits and laundering money through hidden bank accounts around the world.
China, by contrast, had a sort of revolution in slow motion. The nation underwent a 20-year controlled experiment in tapping the primal fires of capitalism without drawing too close to them. Oddly enough, the socialist market economy, Deng’s peculiar hybrid, allowed China to continue a kind of isolation–especially from the hot money flows that swamped the world’s markets in the 1990s. Largely because it still hadn’t opened its capital markets, for example, China came out of last year’s contagion unscathed. And as the rest of the communist world crumbled, China has remained strangely unaffected. This is not necessarily praiseworthy: unlike the Soviets, the Chinese never abandoned the name of socialism. For that would have meant, in effect, destroying the legitimacy of the Communist Party. Instead the Chinese jettisoned the meaning of socialism but kept its rhetoric as a sort of glue for their regime.
China and Russia: two very different models for reform. In economists’ shorthand, it’s known as gradualism versus shock therapy. So radically different were the two approaches taken by the two communist giants, says World Bank chief economist Joseph Stiglitz, that they make up, with some other reforming nations, “one of the most important sets of economic and social experiments ever conducted.” So far China has come out looking a lot better than Russia–especially since last year’s collapse of the ruble during the global financial crisis. The events of the past year, says Harvard economist Dani Rodrik, have “clearly strengthened the hands of the gradualists.” Some economists, like Yingyi Qian of Stanford, have turned China into a new developmental paradigm. Qian has pointed to the advantages of Deng-like experimentation and limiting the split between rich and poor during reform–unlike Russia, where the losers felt totally disfranchised.
But the game is not yet over. While Russia at least has democratized, China has no legitimate political channels for people to vent their anger when the government finally gets around to allowing unprofitable state factories to collapse. China’s banks are overburdened, and Beijing knows it can’t just keep borrowing without making the vastly indebted state sector more efficient. The painful process of downsizing and shutting factories will have to happen–and less than gradually, if Deng’s successor, Jiang Zemin, agrees to join the World Trade Organization and open up China’s economy, as he’s expected to do. Unemployment could lead to social unrest. “At this point democratization is very important,” says Rodrik. “People need to feel they have a stake in the process,” otherwise they’ll just blame it on the party. His colleague, economist Sachs, is more blunt: “China has no political model for its new economic reality.”
No one questions that Russia and its Western advisers botched Moscow’s reforms. But Sachs and others caution that Beijing always had huge advantages over Moscow. Thanks to China’s vast peasantry, Deng and his heirs, Jiang Zemin and economic czar Zhu Rongji, oversaw a state sector that was only 18 percent of the overall economy. Their reformist counterparts, former Soviet leader Mikhail Gorbachev and his successor, Boris Yeltsin, had to unwind a public sector that amounted to fully 99 percent. That meant Deng could do “two track” reform–freeing up the countryside and letting it subsidize the state sector–while Russia could not. In addition, China always had a huge, rich coastal region to support the interior, says Sachs, while Russia “is all hinterland.” “Truth be told, Gorbachev liked the Chinese model” too, Sachs argues. “Everybody likes gradualism if you can do it.” Maybe. But only the Chinese seem to have done it well.
