02 March 2017

Unlikely Partners

Chinese Reformers, Western Economists and The Making of Global China

Julian Gerwitz
2017, Harvard University Press, 416 pages,
ISBN 978-0674971134

Reviewer: Christine Shields, Independent Consultant

This book is both a chronicle and a warning. Covering Chinese economic history after Mao’s death in 1976, Gewirtz catalogues the growing realisation that, in the post-Mao era of Deng Xiaoping, China’s economy needed to change but political reality made this a challenge. So the book begins with the reformists’ mantra of ‘crossing the river by feeling for the stones’ to describe the scope for gradual change in a country living under a Communist regime  but existing within a capitalist world where international and multilateral institutions hold enormous sway. The book focuses on how compromise policies evolved, facilitated by western influence, to resolve the existential tension between these two tenets.

Initially describing the lack of overseas intellectual exchanges under Mao, the book begins with the emerging contacts with a number of Eastern European economists, including Janos Kornai (soft budget constraint and investment hunger) who visited China in 1985. He and other thought leaders from an Eastern Europe just then beginning to emerge from Soviet influence provided practical lessons for China as to how its economy needed to be shaped.

China’s hunger for ideas spread widely. Earlier visits by Chinese reformers to the Soviet Union and Yugoslavia – reciprocated by Tito amongst others – extended into exchanges with US and Western European economic thinkers. Over time, these talks morphed into robust and increasingly practical policies that have shaped today’s compromise between a market socialist model and a fully capitalist system. James Tobin was a guest and his proposals laid the foundations for establishing today’s modern institutions of monetary policy. Milton Friedman also visited, advising on inflation control. This evolution of the influence of foreign economic thought is catalogued in much detail, along with the periodic setbacks. Ultimately, a generation of Chinese economic reformers evolved, some of whom now hold enormous power within present day China, others of whom were discredited – ironically even as their ideas were broadly adopted.

Under Deng Xiaoping, reform implementation, rather than ideology, became the overriding priority. Such pragmatism has characterised Chinese economic policy making since. Nevertheless, there inevitably have been setbacks as conservative influences in China have gained sway. An iterative approach to economic reform evolved. Trials on a manageable scale ofsome aspect of rural reform,  for example, could be extended or curtailed depending on the outcome. Such gradualism and flexibility has been an important strength in subsequent years.

By 1980, China formally rejoined the World Bank to enable more advanced policy formulation. Econometric training was introduced and understanding of how the economy worked improved. However, as political difficulties emerged elsewhere, lessons from, for instance, strikes and unrest in Poland as inflation surged, led to a more cautious approach from Beijing for fear of similar uprisings at home. By 1984, price reform was the priority. This led to the focus shifting to monetary management and the so-called Bashan conference of 1985. But after much seesawing that eventually led to China applying to join GATT and then the WTO, the upshot was the emergence of inflation and then the unrest that culminated in the 1989 Tiananmen debacle. The debate is illustrated by an excellent quotation from Wu Jinglian who said that the problem was not disagreement about the need for a market economy, but rather that, “Each person had a different understanding of how markets operate.” (page 205) Such inconsistency is echoed by Friedman who pointed out that ‘the state is organised from the top down, the market from the bottom up’. Tiananmen was the downfall for key reformers Hu Yaobang and Zhao Ziyang, the latter of whom had earlier stepped up his interactions with the West. Zhao advocated coordinated reform of state enterprises and the public sector as well as prices but was discredited as the conservative faction gained traction in the wake of the unrest.

Later, after an initial retrenchment, Deng intervened to support reform momentum in the face of growing Party anti-western sentiment. Meanwhile, Gorbachev’s reformist policies had been wreaking change in Eastern Europe and stalwarts such as Ceausescu had fallen. Jiang Zemin took over from Deng and he emphasised stability rather than reform for its own sake. China’s reformists then shifted, as Deng empowered Zhu Rongji to extend financial reforms from the banks to the stock exchange (in 1990) and more market-oriented restructuring. By 1993, the direction was set under Jiang and Zhu’s leadership. The economy gradually opened up after China’s WTO accession in 1986, despite the setback of the 1997 Asian financial crisis that served as a wake-up call for China. Domestic reforms gathered pace, the economy picked up speed and the malleable compromise that characterises China’s attitude to economic reform remains the case today.

However, now as China’s assertiveness increases and tensions grow with a Trump-led US, there are signs that the western influences in China’s recent economic history are being downplayed. This is a disappointing diminution of potential opportunity for both sides. Perhaps the lesson for both is that compromise and flexibility is key. Pragmatism matters rather than ideology.