A New World is Possible: The Modernization of China 9811989176, 9789811989179

Table of contents :
Acknowledgements
Praise for A New World is Possible
Contents
1 A New World is Possible: Preface to the English Edition
1.1 China in the Eyes of an Ordinary Chinese
1.2 To Understand China, One Must Understand Chinese History
1.3 What is the China Modernization Model?
1.4 New Economics
1.5 Reconceptualizing Marxism and Socialism
1.6 To Third World Readers
1.7 A New Era in China
2 China’s Early Choice of Modernization Path
2.1 Introduction
2.2 Why Was China Previously Unable to Modernize?
2.2.1 Constraints of a Smallholder Economy
2.2.2 Constraints of the World System
2.2.3 Constraints of State Power
2.3 The Goals and Constraints of Modernization in the People’s Republic
2.3.1 The Three Major Goals for Economic Development of the People’s Republic
2.3.2 China’s Comparative Advantages
2.4 The April Crisis: A Clash Between Old Institutions and New Goals
2.4.1 The April Crisis
2.4.2 Supply-Side: Land Reforms
2.4.3 Supply-Side Reforms: Readjusting Industry and Commerce
2.5 The New Logic Underlying New Institutions
2.5.1 Prioritizing the Development of Heavy Industry
2.5.2 The Planned Economy
2.5.3 State Monopoly of the Purchase and Marketing of Agricultural Products
2.5.4 Agricultural Cooperativization
2.5.5 The “Coupon Economy”: Rationing of Basic Necessities
2.5.6 National Mobilization for Technological Progress
2.5.7 Prudent Fiscal and Monetary Policies
2.6 A Historical Mistake or a Historical Necessity?
3 Seeking a Chinese Path (1956–1976)
3.1 Introduction
3.2 A Decentralized Planned Economy
3.2.1 Mao Zedong Was the First to Propose Avoiding the Pitfalls of the Soviet Model
3.2.2 The First Decentralization and the Great Leap Forward (1958–1961)
3.2.3 The Second Decentralization (1970s)
3.2.4 “On-The-Spot” Rural Industrialization
3.2.5 The Impact of Decentralization on Marketization Reforms
3.3 Economic Democracy and “Restricting Bourgeois Rights”
3.3.1 “Management of the Superstructure by Labor”
3.3.2 The Angang Constitution
3.4 Rural Collectivization
3.4.1 Why Did China Implement Rural Collectivization?
3.4.2 The First Controversy (1951): Should Cooperatives Be Established?
3.4.3 The Second Controversy (Early 1960s): People’s Communes or the Household Responsibility System?
3.4.4 Would It Have Been Better if the Household Responsibility System Had Been Enacted Earlier?
3.4.5 The Achievements of the People’s Commune System
3.4.6 Is Collective Agriculture a Practice of Low Efficacy and Egalitarianism?
3.4.7 The Limitations of People’s Communes
3.5 A Silent Revolution of Basic Education
3.5.1 A Dilemma: Elitist Education or Mass Education
3.5.2 The “Education Revolution”
3.6 The Healthcare Miracle
3.6.1 The Four Principles of Healthcare
3.6.2 Patriotic Public Health Campaigns
3.6.3 Public Health Insurance and Service in Urban Areas
3.6.4 Healthcare Revolution on the Countryside
3.6.5 Women’s Liberation and Demographic Dividends
3.6.6 How Was the People’s Republic Able to Achieve a Miraculous Rise in Human Capital?
3.7 A New China and a New World
3.7.1 Why Did China not Open up to the World Immediately After Its Founding?
3.7.2 The Start of Independent Industrialization
3.7.3 Orienting Towards the Two Intermediate Zones
3.7.4 The Third Front: Expansion to the Western Regions
3.7.5 The Establishment of Sino-US Relations
3.7.6 The Rise of China: Upholding Justice While Pursuing Shared Interests
4 Legacy of the Mao Era and China’s Modernization
4.1 Introduction
4.2 Accomplishments in the Mao Era
4.2.1 Rapid Economic Growth
4.2.2 China’s Industrial Revolution
4.2.3 A New Countryside and Modern Farmers
4.2.4 Access to Healthcare and Education
4.2.5 The Global Significance of China’s Development
4.3 How China Transcended Traps
4.3.1 A Social Revolution: Transcending the Poverty Trap
4.3.2 Effective Organization: Transcending Government Failures
4.3.3 Developing a New Culture: Transcending the Trap of Reactionary Culture
4.3.4 Independence and Autonomy: Transcending the Globalization Trap
4.3.5 Promoting Human Development: Transcending the Demographic Trap
4.4 Some Debates About the Mao Era
4.4.1 Did This Violate the Law of Comparative Advantages?
4.4.2 The Costs of High Savings
4.4.3 Political Movements and Economic Development
4.4.4 Was This an Example of “Leftist Infantilism”?
4.5 How Did China Ensure Basic Living Standards for Its People?
4.6 The Legacy of the Mao Era and the “Dividends of Reform”
4.6.1 The Dividends of Industrial Development
4.6.2 The Dividends of Human Capital
4.6.3 The Dividends of Foreign Diplomacy
4.6.4 The Social and Political Foundations for Marketization
5 Dialectics of the Market Economy
5.1 Introduction
5.2 Thesis, Antithesis and Synthesis in the Market Economy
5.2.1 First Cycle: The Industrial Revolution (Eighteenth Century to Late Nineteenth Century)
5.2.2 Second Cycle: Globalization and the Great Depression (Late Nineteenth Century to the 1970s)
5.2.3 Third Cycle: From Neoliberalism to the Global Crisis (the 1980s Onwards)
5.2.4 Summary: Marketization Is a Process
5.3 The Market Economy in China
5.3.1 The First Stage—Old China: A Bad Market Economy
5.3.2 The Second Stage—The Mao Era: Remedying Market Failures
5.3.3 The Third Stage—Market Expansion During Early Reforms
5.3.4 The Fourth Stage: Cooperation Between “Both Hands”
5.4 The Countryside: Dialectics of Centralization and Decentralization
5.4.1 Reforms Cannot Stop at De-collectivization
5.4.2 Comprehensive Rural Reforms
5.4.3 Rebuilding Rural Collective Organizations
5.5 SOEs and the Market
5.5.1 SOEs Were a Key Force in Launching China’s Modernization
5.5.2 The 1990s: SOE Losses Were not Entirely an “Institutional Problem”
5.5.3 The Three-Year Campaign to Reform SOEs
5.5.4 The Achievements of SOE Reforms
5.5.5 Strengthening Institutional Confidence in SOEs
5.5.6 Clarifying Misconceptions and Misrepresentations of SOEs
5.6 The “Great Transformation” of the Public Sector
5.6.1 Reducing Fiscal Allocations and Encouraging Competition
5.6.2 Rebuilding the Public Services System
5.6.3 From Efficiency First to Ensuring Fairness
5.7 China’s Socialist Market Economy
5.7.1 China’s Economic Miracle Lies in the Integration of Socialist Institutions and the Market Economy
6 Chinese Democracy
6.1 Introduction
6.2 Democracy Solves Problems
6.2.1 Problem-Driven Reforms
6.2.2 New Mindsets and Philosophies
6.3 Top-Level Design and Consultative Democracy
6.3.1 Local Experiments: Crossing the River by Feeling the Stones
6.3.2 From the People, to the People
6.3.3 Participation by Think Tanks in Independent Research
6.4 Interaction Between Democracy and Centralism
6.4.1 Breakthroughs by Anhui Province in Primary Healthcare
6.4.2 Breakthroughs in Reforms of Public Hospitals in Sanming, Fujian
6.5 People-Oriented Reforms
7 Chinese New Model of Modernization
7.1 Introduction
7.2 A Few Misconceptions of the China Model
7.2.1 Is the China Model an “American Knock-Off”?
7.2.2 Does the Success of the China Model Lie in “Progressive Reforms”?
7.2.3 Is “a Strong State and Large SOEs” a Shortcoming of the China Model?
7.2.4 Is the China Model a “Low-Welfare Model”?
7.2.5 Is the China Model “Bureaucratic Capitalism”?
7.2.6 Does Praising the China Model Equate to Resisting and “Backtracking” Reforms?
7.3 The First Pillar: Dialectical Materialism and Historical Materialism
7.3.1 Taking a New Path of Our Own
7.3.2 Constantly Transcending one’s Own Experiences
7.3.3 Turning Philosophy into a Weapon of the People
7.4 The Second Pillar: Placing Markets and Capital in the Service of the People
7.4.1 Integration of Public Ownership and the Market Economy
7.4.2 The Private Sector Under Socialism
7.4.3 A Government that Can Steer the Market Economy
7.5 The Third Pillar: People-Centered Approaches
7.5.1 Social Revolution Before Economic Modernization
7.5.2 Growth Through Common Prosperity
7.5.3 Prioritizing the Development of Education and Health
7.6 The Fourth Pillar: A Global Community of Shared Future
7.6.1 Independence and Autonomy: Attending to Virtue in Solitude When Poor
7.6.2 Upholding the Greater Good in the Pursuit of Shared Interests: Contributing to the Wellbeing of All When Successful
7.7 The Fifth Pillar: Party Leadership and the Mass Line
7.7.1 The Communist Party as Vanguard
7.7.2 An Organized Populace
7.7.3 The Mass Line and Consultative Democracy
7.7.4 Local Competition Under Centralization
8 Understanding Marxism in China
8.1 Introduction
8.2 Humanity is Still Living Under the Laws Revealed by Marx
8.2.1 Tendency of the Rate of Profit to Fall: Capitalism’s Achilles Heel
8.2.2 The Historical Cycle of Capitalism
8.2.3 Has Capitalism Saved Itself?
8.3 The Middle-Income Trap is a Capitalist Trap
8.3.1 The Trap of Capitalist Globalization
8.3.2 Efforts by Periphery Countries to Break Out of the World System
8.3.3 Only Socialism Can Free Countries from Dependency and Crisis
8.4 Reversing the Relationship Between People and Capital
8.5 From the Civil War in France to the Modernization of State Governance
8.6 “Eliminating Bourgeois Rights” and Common Prosperity
8.7 Why China Was Able to Leap Over the “Caudine Forks”
8.7.1 The “Outpacing Theory” and “Remedial Lesson Theory”
8.7.2 The Four Drafts of Marx’s Reply
8.7.3 What Blocks the Caudine Forks?
8.7.4 Why is China Able to Leap Over the Caudine Forks?
9 A Macro-historical View of the Global Crisis
9.1 Introduction
9.2 The Root of Western Decline: Expansion of Capital
9.2.1 The Source of the Crisis: Over-Expansion of the Forces of Capital
9.2.2 The World is Still Unequipped to Exit the Crisis
9.3 The Dilemma of Mainstream Western Economics
9.3.1 Keynesianism: Focusing on Economic Aggregates but not Distribution
9.3.2 Neoliberalism: Exacerbating Rather Than Alleviating Crises
9.4 Review of China’s Economic Growth
9.4.1 The Three Main Drivers of Growth in the Early Stages of Reform and Opening Up
9.4.2 The Four Drivers of Growth in the Early Twenty-First Century
9.5 A Re-examination of Neoliberalism
9.5.1 Misconception I: Blind Faith in Marketization
9.5.2 Misconception II: Blind Faith in Privatization
9.5.3 Misconception III: Blind Faith in “Small Government”
10 China’s New Era (2012–)
10.1 Introduction
10.2 The Historical Logic of the New Era
10.2.1 The Logic of China’s Social Development
10.2.2 The Logic of Marxism and Socialist Movements
10.2.3 The Logic Behind the Modernization
10.3 People-Centered Development
10.3.1 From “Capital-Centered” to “People-Centered”
10.3.2 Revisiting the Purposes of Socialist Production
10.3.3 A New Development Paradigm: Concretization of the Purposes of Socialist Production
10.4 High Quality Development
10.4.1 Strengthening Basic Industries
10.4.2 Innovation-Driven Development
10.4.3 Forging a New Working Class
10.5 Set “Traffic Lights” for Capital
10.5.1 What is Disorderly Expansion of Capital
10.5.2 The Harm of Disorderly Expansion of Capital
10.5.3 Control the Capital in Socialist Scheme
10.6 Enhance Common Persperity
10.6.1 Socialism Can Prevent “Welfare Dependency”
10.6.2 Social Welfare and Economic Growth
10.7 Modernization of National Governance
10.7.1 Stronger Centralization
10.7.2 Rebuilding Local Dynamism
10.7.3 Institutionalizing the Mass Line
10.7.4 New Forms of Rural Collectivization
10.8 E-Socialism
10.8.1 Market Economy + Internet
10.8.2 Consultative Democracy + Internet
10.9 Building a just New World
10.10 Socialism as a New Civilization
10.10.1 New Civilization
10.10.2 Humanity Refocuses on Socialism
10.10.3 The Consistencies Between National Rejuvenation and Socialist Development
10.10.4 Socialism 3.0

Citation preview

Understanding China

Yu Jiang

A New World is Possible The Modernization of China

Understanding China

The series will provide you with in-depth information on China’s social, cultural and economic aspects. It covers a broad variety of topics, from economics and history to law, philosophy, cultural geography and regional politics, and offers a wealth of materials for researchers, doctoral students, and experienced practitioners.

Yu Jiang

A New World is Possible The Modernization of China

Yu Jiang Development Research Center (DRC) of the State Council, Center for International Knowledge on Development (CIKD) Beijing, China

ISSN 2196-3134 ISSN 2196-3142 (electronic) Understanding China ISBN 978-981-19-8917-9 ISBN 978-981-19-8918-6 (eBook) https://doi.org/10.1007/978-981-19-8918-6 Jointly published with CITIC Press Corporation The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: CITIC Press Corporation. 2020 Belt & Road Book Program by Publicity Department of the CPC Central Committee This edition is an authorized translation from the Chinese language edition. Published by arrangement with CITIC Press Corporation (B&R Program). All rights reserved © CITIC Press Corporation 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Acknowledgements

Since this book is about China’s modernization, the greatest thanks go to the pioneers who made sacrifices along the way. It was the countless people who painstakingly built something from nothing, the fortitude of countless workers, farmers, teachers, doctors and soldiers that revitalized the ancient nation of China. This book would not have been possible otherwise. I thank my parents for raising and educating me. I thank Prof. Li Ling, my doctoral advisor, who was the first expert to advocate non-profit healthcare reforms in China. Her immense contributions in this respect have set an example for me. Professor Li also provided much guidance and assistance in the writing of this book. The Chinese edition of this book was based on a class on the economic history of the People’s Republic of China that I taught at Peking University. Many young students born in the 1990s were deeply enthusiastic about learning and exploring the Chinese path. I thank the 500-odd students who took the class, as well as my teaching assistants, Yang Chunyu, Liu Guizhen and Luo Yuan. Kong Dan wrote a preface for the Chinese edition of this book. Ji Hong, Tan Huifang, Wang Shaoguang, Li Ling, Yu Tao, Lu Zhoulai, Xu Hengqiu, Li Lecheng, Lyu Dewen, Chen Yinjian and Xiao Wu promoted it in various settings. Yang Qing, Zhang Lei and Zheng Ruolin of Fujian’s SETV produced a television program for the book. My gratitude also goes to experts, colleagues and friends who offered their guidance and discussed the topics covered: Chen Quanxun, Teng Wensheng, Zhu Jiamu, Li Shenming, Sun Zhigang, Zhao Changwen, Liu Wenxian, Gao Changwu, Fan Peng, Zhong Dongbo, Song Xiaoqing, Yan Yilong, Bai Gang, Xu Haoyuan, Xu Junzhong, Shen Yuanyuan, Wei Nanzhi, Zhang Qingyan, Zhou Jianming, Gao Liang, Wu Li, Yang Xin, Zhang Wei and Peng Shu. Many of the perspectives in this book were inspired by our discussions. Finally, I thank Zhang Kuanxu, Zhao Yani, Huang Chun, Cao Kaiyun and Beijing Chinese-Foreign Translation and Information Service Co., Ltd. for their hard work in the English translation.

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Praise for A New World is Possible

“The author is not writing only in library but also taking part in the policy making and public opinion debate. The book makes a convincing explanation of the history, logic and future of China’s path, clarifies many vague understandings and gives a historical and in-depth interpretation of China’s new era and the future. It reflects the author’s solid theoretical foundation and deep understanding of China.” —Ling Li, Professor of Economics, Peking University “The author convincingly tells the story of why China get success.” —Han Yuhai, Professor of Chinese, Peking University “This magnificent book, written by a young scholar, sums up China’s modern history in 6 concise words: The first 30 years (Creation, Innovation), the next 40 years (Reform, Globalization) and the future 30 years (Transcendence, Rejuvenation). Such craftsmanship let me sincerely praise: A youth is to be regarded with respect.” —Wang Shaoguang, Professor of Political Science and the Director of Universities Service Centre for China Studies, Hongkong University “The book discusses the Chinese history as a whole and try to interpretation the continuity between the Mao era, Post-Mao era and China’s future, criticizing the attitude of cutting apart the China’s modern history. The author integrates historical research and theoretical research and put forward new theoretical framework, proving that Socialism to China is not only an ideology, but also the way to industrialization and modernization.” —Liu Chenguang, Professor of Politic Science, Central Party School “The author is insightful and sharp. He clarifies the historical context of the past 70 years and the logical relationship between the past and future, explaining what kind of road China is on, how it steps out step by step, and how it should continue to go in the next 30 years. There are both theories and domestic cases as well as foreign examples in various fields. Furthermore, the author summarizes and discusses almost vii

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all popular thoughts and debates on China’s development way and makes thoroughly analysis. The proposition of the book is grand, the theory is profound, but the language is fluent, not difficult, easy to read and understand. Even if you skim, you can quickly understand the outline. This book is a very thick one, full of pages, but it is solid, with little nonsense and superfluous words.” —Yu Tao, Head of Department of Party Organization, Yantai City, China “China’s New Way links the history of China’s revolution and reform from the perspective of economic history. In Jiang Yu’s works, the economic system China chose in the first 30 years is not only for theoretical belief and blind imitation, but also for the need of realizing the real independence of the country, economic takeoff and ensuring the basic people’s livelihood at a low level. At the same time, it has laid the foundation of industrialization and national governance for China’s 40 years’ development as a late developing country. At the same time, the Chinese model is neither a simple negation of the first 30 years nor a simple summary of the last 40 years, but a product of 70 years of hard exploration, and a result of reflection and integration of all the experience and lessons of economic development since the founding of new China. Therefore, some basic elements of the Chinese model run through 70 years of national history and will still be continued by the new era.” —Lu Zhoulai, Director and Professor of Economic Research Center of National Defense University, China’s Famous Best-Seller Book Writer “The author insists on the methodology of seeking truth from facts, insists on ‘the theory comes from history’ instead of ‘the theory replace the history’, and avoids replacing historical facts with the prejudice, which makes the book full of new ideas. The author has studied western economics, but he is not bound by the framework of western economics. Instead, he takes the foreign theories for the Chinese. For example, in recent years, the information economics and contract theory of the frontier of western economics are used to explain the planned economy and stateowned enterprises, the cooperative game theory is used to explain the agricultural cooperation, and the periodic theory of ‘positive, negative and combined’ of market economy is constructed with the framework of market economy and protective movement. This shows that it is possible to apply and contribute to the theory based on China’s reality. On the basis of reflecting on the Western Road, the author summarizes and refines the characteristics of Chinese road, which is innovative and has theoretical and historical basis. The five main characteristics of the ‘Chinese road’ proposed in this book are not the simple repair and follow-up of western theories, but the significant differences between the Chinese road and the Western Road, which are persuasive. They are proposed from the perspective of philosophical basis, the relationship between human beings and capital, social equity, states governance and global system. Another feature of this generalization is that it did not separate the

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two periods before and after the reform and opening up, but found the common experience of the two periods, and explained how the Chinese road came and what the advantages of this road are.” —Kong Dan, Former Chairman of China CITIC Corporation, Chairman of CITIC Reform and Development Research Foundation

Contents

1

2

A New World is Possible: Preface to the English Edition . . . . . . . . . . 1.1 China in the Eyes of an Ordinary Chinese . . . . . . . . . . . . . . . . . . . 1.2 To Understand China, One Must Understand Chinese History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 What is the China Modernization Model? . . . . . . . . . . . . . . . . . . . 1.4 New Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Reconceptualizing Marxism and Socialism . . . . . . . . . . . . . . . . . . 1.6 To Third World Readers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 A New Era in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . China’s Early Choice of Modernization Path . . . . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Why Was China Previously Unable to Modernize? . . . . . . . . . . . 2.2.1 Constraints of a Smallholder Economy . . . . . . . . . . . . 2.2.2 Constraints of the World System . . . . . . . . . . . . . . . . . . 2.2.3 Constraints of State Power . . . . . . . . . . . . . . . . . . . . . . . 2.3 The Goals and Constraints of Modernization in the People’s Republic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 The Three Major Goals for Economic Development of the People’s Republic . . . . . . . . . . . . . 2.3.2 China’s Comparative Advantages . . . . . . . . . . . . . . . . . 2.4 The April Crisis: A Clash Between Old Institutions and New Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 The April Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.2 Supply-Side: Land Reforms . . . . . . . . . . . . . . . . . . . . . . 2.4.3 Supply-Side Reforms: Readjusting Industry and Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 The New Logic Underlying New Institutions . . . . . . . . . . . . . . . . 2.5.1 Prioritizing the Development of Heavy Industry . . . . . 2.5.2 The Planned Economy . . . . . . . . . . . . . . . . . . . . . . . . . .

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2.5.3

2.6 3

State Monopoly of the Purchase and Marketing of Agricultural Products . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.4 Agricultural Cooperativization . . . . . . . . . . . . . . . . . . . . 2.5.5 The “Coupon Economy”: Rationing of Basic Necessities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.6 National Mobilization for Technological Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.7 Prudent Fiscal and Monetary Policies . . . . . . . . . . . . . . A Historical Mistake or a Historical Necessity? . . . . . . . . . . . . . .

Seeking a Chinese Path (1956–1976) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 A Decentralized Planned Economy . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Mao Zedong Was the First to Propose Avoiding the Pitfalls of the Soviet Model . . . . . . . . . . . . . . . . . . . 3.2.2 The First Decentralization and the Great Leap Forward (1958–1961) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 The Second Decentralization (1970s) . . . . . . . . . . . . . . 3.2.4 “On-The-Spot” Rural Industrialization . . . . . . . . . . . . . 3.2.5 The Impact of Decentralization on Marketization Reforms . . . . . . . . . . . . . . . . . . . . . . . 3.3 Economic Democracy and “Restricting Bourgeois Rights” . . . . 3.3.1 “Management of the Superstructure by Labor” . . . . . . 3.3.2 The Angang Constitution . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Rural Collectivization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 Why Did China Implement Rural Collectivization? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 The First Controversy (1951): Should Cooperatives Be Established? . . . . . . . . . . . . . . . . . . . . 3.4.3 The Second Controversy (Early 1960s): People’s Communes or the Household Responsibility System? . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.4 Would It Have Been Better if the Household Responsibility System Had Been Enacted Earlier? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.5 The Achievements of the People’s Commune System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.6 Is Collective Agriculture a Practice of Low Efficacy and Egalitarianism? . . . . . . . . . . . . . . . . . . . . . 3.4.7 The Limitations of People’s Communes . . . . . . . . . . . . 3.5 A Silent Revolution of Basic Education . . . . . . . . . . . . . . . . . . . . 3.5.1 A Dilemma: Elitist Education or Mass Education . . . . 3.5.2 The “Education Revolution” . . . . . . . . . . . . . . . . . . . . . 3.6 The Healthcare Miracle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.1 The Four Principles of Healthcare . . . . . . . . . . . . . . . . .

51 54 55 58 60 61 67 67 69 70 72 76 78 81 83 84 85 88 89 93

95

98 100 103 107 109 110 113 116 117

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3.6.2 3.6.3

Patriotic Public Health Campaigns . . . . . . . . . . . . . . . . Public Health Insurance and Service in Urban Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.4 Healthcare Revolution on the Countryside . . . . . . . . . . 3.6.5 Women’s Liberation and Demographic Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.6 How Was the People’s Republic Able to Achieve a Miraculous Rise in Human Capital? . . . . A New China and a New World . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.1 Why Did China not Open up to the World Immediately After Its Founding? . . . . . . . . . . . . . . . . . . 3.7.2 The Start of Independent Industrialization . . . . . . . . . . 3.7.3 Orienting Towards the Two Intermediate Zones . . . . . 3.7.4 The Third Front: Expansion to the Western Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7.5 The Establishment of Sino-US Relations . . . . . . . . . . . 3.7.6 The Rise of China: Upholding Justice While Pursuing Shared Interests . . . . . . . . . . . . . . . . . . . . . . . .

118

Legacy of the Mao Era and China’s Modernization . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Accomplishments in the Mao Era . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 Rapid Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2 China’s Industrial Revolution . . . . . . . . . . . . . . . . . . . . . 4.2.3 A New Countryside and Modern Farmers . . . . . . . . . . 4.2.4 Access to Healthcare and Education . . . . . . . . . . . . . . . 4.2.5 The Global Significance of China’s Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 How China Transcended Traps . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 A Social Revolution: Transcending the Poverty Trap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Effective Organization: Transcending Government Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 Developing a New Culture: Transcending the Trap of Reactionary Culture . . . . . . . . . . . . . . . . . . . 4.3.4 Independence and Autonomy: Transcending the Globalization Trap . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.5 Promoting Human Development: Transcending the Demographic Trap . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Some Debates About the Mao Era . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 Did This Violate the Law of Comparative Advantages? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 The Costs of High Savings . . . . . . . . . . . . . . . . . . . . . . . 4.4.3 Political Movements and Economic Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143 143 144 144 146 148 149

3.7

4

120 120 124 127 128 130 132 133 135 138 140

150 151 152 154 155 156 156 157 158 159 161

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4.4.4 Was This an Example of “Leftist Infantilism”? . . . . . . How Did China Ensure Basic Living Standards for Its People? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Legacy of the Mao Era and the “Dividends of Reform” . . . 4.6.1 The Dividends of Industrial Development . . . . . . . . . . 4.6.2 The Dividends of Human Capital . . . . . . . . . . . . . . . . . 4.6.3 The Dividends of Foreign Diplomacy . . . . . . . . . . . . . . 4.6.4 The Social and Political Foundations for Marketization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

162

Dialectics of the Market Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Thesis, Antithesis and Synthesis in the Market Economy . . . . . . 5.2.1 First Cycle: The Industrial Revolution (Eighteenth Century to Late Nineteenth Century) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Second Cycle: Globalization and the Great Depression (Late Nineteenth Century to the 1970s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 Third Cycle: From Neoliberalism to the Global Crisis (the 1980s Onwards) . . . . . . . . . . . . . . . . . . . . . . 5.2.4 Summary: Marketization Is a Process . . . . . . . . . . . . . . 5.3 The Market Economy in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 The First Stage—Old China: A Bad Market Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 The Second Stage—The Mao Era: Remedying Market Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 The Third Stage—Market Expansion During Early Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.4 The Fourth Stage: Cooperation Between “Both Hands” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 The Countryside: Dialectics of Centralization and Decentralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Reforms Cannot Stop at De-collectivization . . . . . . . . 5.4.2 Comprehensive Rural Reforms . . . . . . . . . . . . . . . . . . . 5.4.3 Rebuilding Rural Collective Organizations . . . . . . . . . 5.5 SOEs and the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.1 SOEs Were a Key Force in Launching China’s Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.2 The 1990s: SOE Losses Were not Entirely an “Institutional Problem” . . . . . . . . . . . . . . . . . . . . . . . 5.5.3 The Three-Year Campaign to Reform SOEs . . . . . . . . 5.5.4 The Achievements of SOE Reforms . . . . . . . . . . . . . . . 5.5.5 Strengthening Institutional Confidence in SOEs . . . . .

177 177 180

4.5 4.6

5

165 171 172 173 173 174

181

183 184 187 188 188 190 192 194 197 198 202 203 207 207 209 213 214 216

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5.5.6 5.6

5.7

6

7

Clarifying Misconceptions and Misrepresentations of SOEs . . . . . . . . . . . . . . . . . . The “Great Transformation” of the Public Sector . . . . . . . . . . . . 5.6.1 Reducing Fiscal Allocations and Encouraging Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.2 Rebuilding the Public Services System . . . . . . . . . . . . 5.6.3 From Efficiency First to Ensuring Fairness . . . . . . . . . China’s Socialist Market Economy . . . . . . . . . . . . . . . . . . . . . . . . . 5.7.1 China’s Economic Miracle Lies in the Integration of Socialist Institutions and the Market Economy . . . . . . . . . . . . . . . . . . . . . . . .

218 220 221 223 225 228

230

Chinese Democracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Democracy Solves Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Problem-Driven Reforms . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 New Mindsets and Philosophies . . . . . . . . . . . . . . . . . . 6.3 Top-Level Design and Consultative Democracy . . . . . . . . . . . . . . 6.3.1 Local Experiments: Crossing the River by Feeling the Stones . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 From the People, to the People . . . . . . . . . . . . . . . . . . . 6.3.3 Participation by Think Tanks in Independent Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Interaction Between Democracy and Centralism . . . . . . . . . . . . . 6.4.1 Breakthroughs by Anhui Province in Primary Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2 Breakthroughs in Reforms of Public Hospitals in Sanming, Fujian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 People-Oriented Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

233 233 233 234 234 235

Chinese New Model of Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 A Few Misconceptions of the China Model . . . . . . . . . . . . . . . . . 7.2.1 Is the China Model an “American Knock-Off”? . . . . . 7.2.2 Does the Success of the China Model Lie in “Progressive Reforms”? . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 Is “a Strong State and Large SOEs” a Shortcoming of the China Model? . . . . . . . . . . . . . . . 7.2.4 Is the China Model a “Low-Welfare Model”? . . . . . . . 7.2.5 Is the China Model “Bureaucratic Capitalism”? . . . . . 7.2.6 Does Praising the China Model Equate to Resisting and “Backtracking” Reforms? . . . . . . . . . 7.3 The First Pillar: Dialectical Materialism and Historical Materialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Taking a New Path of Our Own . . . . . . . . . . . . . . . . . . .

249 249 250 251

236 238 239 240 241 243 244

251 252 253 254 255 256 257

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7.3.2

7.4

7.5

7.6

7.7

8

Constantly Transcending one’s Own Experiences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Turning Philosophy into a Weapon of the People . . . . The Second Pillar: Placing Markets and Capital in the Service of the People . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 Integration of Public Ownership and the Market Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.2 The Private Sector Under Socialism . . . . . . . . . . . . . . . 7.4.3 A Government that Can Steer the Market Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Third Pillar: People-Centered Approaches . . . . . . . . . . . . . . 7.5.1 Social Revolution Before Economic Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.2 Growth Through Common Prosperity . . . . . . . . . . . . . . 7.5.3 Prioritizing the Development of Education and Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Fourth Pillar: A Global Community of Shared Future . . . . . 7.6.1 Independence and Autonomy: Attending to Virtue in Solitude When Poor . . . . . . . . . . . . . . . . . . 7.6.2 Upholding the Greater Good in the Pursuit of Shared Interests: Contributing to the Wellbeing of All When Successful . . . . . . . . . . . The Fifth Pillar: Party Leadership and the Mass Line . . . . . . . . . 7.7.1 The Communist Party as Vanguard . . . . . . . . . . . . . . . . 7.7.2 An Organized Populace . . . . . . . . . . . . . . . . . . . . . . . . . 7.7.3 The Mass Line and Consultative Democracy . . . . . . . . 7.7.4 Local Competition Under Centralization . . . . . . . . . . .

Understanding Marxism in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Humanity is Still Living Under the Laws Revealed by Marx . . . 8.2.1 Tendency of the Rate of Profit to Fall: Capitalism’s Achilles Heel . . . . . . . . . . . . . . . . . . . . . . . 8.2.2 The Historical Cycle of Capitalism . . . . . . . . . . . . . . . . 8.2.3 Has Capitalism Saved Itself? . . . . . . . . . . . . . . . . . . . . . 8.3 The Middle-Income Trap is a Capitalist Trap . . . . . . . . . . . . . . . . 8.3.1 The Trap of Capitalist Globalization . . . . . . . . . . . . . . . 8.3.2 Efforts by Periphery Countries to Break Out of the World System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.3 Only Socialism Can Free Countries from Dependency and Crisis . . . . . . . . . . . . . . . . . . . . . 8.4 Reversing the Relationship Between People and Capital . . . . . . 8.5 From the Civil War in France to the Modernization of State Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 “Eliminating Bourgeois Rights” and Common Prosperity . . . . .

258 259 260 262 264 266 269 270 271 272 273 274

275 277 277 279 280 282 285 285 287 287 289 292 293 294 295 298 299 301 305

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8.7

xvii

Why China Was Able to Leap Over the “Caudine Forks” . . . . . . 8.7.1 The “Outpacing Theory” and “Remedial Lesson Theory” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7.2 The Four Drafts of Marx’s Reply . . . . . . . . . . . . . . . . . 8.7.3 What Blocks the Caudine Forks? . . . . . . . . . . . . . . . . . . 8.7.4 Why is China Able to Leap Over the Caudine Forks? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

310

A Macro-historical View of the Global Crisis . . . . . . . . . . . . . . . . . . . . 9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 The Root of Western Decline: Expansion of Capital . . . . . . . . . . 9.2.1 The Source of the Crisis: Over-Expansion of the Forces of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.2 The World is Still Unequipped to Exit the Crisis . . . . 9.3 The Dilemma of Mainstream Western Economics . . . . . . . . . . . . 9.3.1 Keynesianism: Focusing on Economic Aggregates but not Distribution . . . . . . . . . . . . . . . . . . . 9.3.2 Neoliberalism: Exacerbating Rather Than Alleviating Crises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Review of China’s Economic Growth . . . . . . . . . . . . . . . . . . . . . . 9.4.1 The Three Main Drivers of Growth in the Early Stages of Reform and Opening Up . . . . . . . . . . . . . . . . 9.4.2 The Four Drivers of Growth in the Early Twenty-First Century . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 A Re-examination of Neoliberalism . . . . . . . . . . . . . . . . . . . . . . . . 9.5.1 Misconception I: Blind Faith in Marketization . . . . . . 9.5.2 Misconception II: Blind Faith in Privatization . . . . . . . 9.5.3 Misconception III: Blind Faith in “Small Government” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

319 319 319

10 China’s New Era (2012–) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 The Historical Logic of the New Era . . . . . . . . . . . . . . . . . . . . . . . 10.2.1 The Logic of China’s Social Development . . . . . . . . . . 10.2.2 The Logic of Marxism and Socialist Movements . . . . 10.2.3 The Logic Behind the Modernization . . . . . . . . . . . . . . 10.3 People-Centered Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.1 From “Capital-Centered” to “People-Centered” . . . . . 10.3.2 Revisiting the Purposes of Socialist Production . . . . . 10.3.3 A New Development Paradigm: Concretization of the Purposes of Socialist Production . . . . . . . . . . . . 10.4 High Quality Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.1 Strengthening Basic Industries . . . . . . . . . . . . . . . . . . . . 10.4.2 Innovation-Driven Development . . . . . . . . . . . . . . . . . . 10.4.3 Forging a New Working Class . . . . . . . . . . . . . . . . . . . . 10.5 Set “Traffic Lights” for Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .

345 345 346 347 348 350 350 351 352

9

310 311 312 313

320 323 325 325 326 327 328 329 335 335 337 341

353 355 356 357 357 359

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10.5.1 What is Disorderly Expansion of Capital . . . . . . . . . . . 10.5.2 The Harm of Disorderly Expansion of Capital . . . . . . 10.5.3 Control the Capital in Socialist Scheme . . . . . . . . . . . . 10.6 Enhance Common Persperity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6.1 Socialism Can Prevent “Welfare Dependency” . . . . . . 10.6.2 Social Welfare and Economic Growth . . . . . . . . . . . . . 10.7 Modernization of National Governance . . . . . . . . . . . . . . . . . . . . . 10.7.1 Stronger Centralization . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7.2 Rebuilding Local Dynamism . . . . . . . . . . . . . . . . . . . . . 10.7.3 Institutionalizing the Mass Line . . . . . . . . . . . . . . . . . . . 10.7.4 New Forms of Rural Collectivization . . . . . . . . . . . . . . 10.8 E-Socialism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8.1 Market Economy + Internet . . . . . . . . . . . . . . . . . . . . . . 10.8.2 Consultative Democracy + Internet . . . . . . . . . . . . . . . 10.9 Building a just New World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.10 Socialism as a New Civilization . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.10.1 New Civilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.10.2 Humanity Refocuses on Socialism . . . . . . . . . . . . . . . . 10.10.3 The Consistencies Between National Rejuvenation and Socialist Development . . . . . . . . . . . 10.10.4 Socialism 3.0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

359 360 362 362 363 364 366 366 368 369 370 372 373 374 375 377 378 383 384 385

Chapter 1

A New World is Possible: Preface to the English Edition

This preface was written specifically for English-language readers. Five years have passed since the completion of the original Chinese edition in 2017. These five years have been eventful in terms of global developments: COVID-19, tensions between China and the US, the economic crisis, the conflict in Ukraine… all of which make the themes of this book more relevant. And since the original book was written with Chinese-language readers in mind, I thought it necessary to write a new preface for the benefit of English-language readers. This book is about China’s path to modernization as well as development theory. I describe how an impoverished agrarian nation became a modernized state. What were the major choices that China made along the way? What is unique about China’s path to modernization? What are the universal laws of modernization that China discovered? In what ways does China’s success challenge the theories of mainstream social sciences (including political economy, development economics, political science, international relations, and civilizational studies)? How will China’s success contribute to these fields? What does a Chinese-style path to modernization mean for the 21st-century world? How should today’s world view Marxism and socialism? These are some of our key questions. In this preface, I want to talk about why I wrote this book and what readers can gain from the English edition.

1.1 China in the Eyes of an Ordinary Chinese I was born in 1981 in an ordinary city on the eastern plains of China. Like all of my countrymen, I experienced the tremendous changes that China went through over these decades. My grandfather’s generation were uneducated peasants whose lives were changed in the 1950s by the land reforms that distributed land to every rural resident. My grandparents and parents told me about how collective agriculture allowed China to embark on grand water conservancy projects in the sixties and seventies. © CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_1

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Over 80,000 reservoirs were built during those years, revolutionizing the condition of Chinese agriculture and making hunger a thing of the past. My grandparents and parents took part in these projects too. Basic schooling also became universally available during this period. High school enrolment grew more than tenfold between 1965 and 1978, from 1.31 million to 14.84 million. Enrolment rates grew even faster in the countryside. In 1962, fewer than one in ten high school students were from the villages. By 1976, over 60% of high school students were from rural households. The greatest enabler of class mobility is education. For millennia, only a minority of China’s population was literate. Things were different in modern China, where everyone had the means to improve their lot. This was also what allowed my parents to become first-generation college graduates in their families. I also experienced China’s changes firsthand. In 2004, I began my postgraduate study in health economics. At the time, universal health insurance had just been launched in China. When my grandmother was sick, the new rural cooperative medical scheme subsidized her medical bills. For the first time in China’s long history, healthcare security was available to rural residents. China has also made great strides in its infrastructure. My grandfather’s generation had never traveled farther than our province. When I was a fresh-faced college student in Beijing, it took me nine hours to travel 800 km by train from my hometown to Beijing, and sometimes I had to spend the night under the train seat. Today, China’s bullet trains whiz by at 350 km per hour along tracks that account for two-thirds of the world’s high-speed rail network, a thing of pride for ordinary Chinese travelers. What has changed even more is the mind. When I started college in 2000, the mainstream view of Chinese social sciences was that China’s future lay in the emulation of American institutions. As Francis Fukuyama said, American-style liberal democracy and market economy is the best in the world and the last political system for humankind. However, with my own learning experience, I have come to doubt this popular view. When researching healthcare systems, I was shocked to find that the US, as the strongest superpower, had a healthcare system that was a global laughingstock—expensive and inefficient. The work that presidents since Roosevelt had put into social health insurance had been swept away by special interests. Prior to Obamacare, 40 million Americans were uninsured. Compare that to China, which took less than a decade to build universal healthcare coverage from scratch. Shortly after, in 2020, China became the world’s only country to eradicate absolute poverty. In America, 40 million people live below the poverty line, of whom 18.5 million are in “extreme poverty”, and 5.3 million live in “Third World conditions of absolute poverty”. In 2020, I visited the Garzê Tibetan Prefecture in Sichuan and Tibet Autonomous Region, which were the poorest areas in China before, and found that rural households were living comfortably in two-storey dwellings without worrying about food or clothing. The county hospitals there were comparable to those in the wealthy coastal east. Their ICUs were state-of-the-art. Local governments provided universal screening for infectious diseases and chronic conditions. Free healthcare was available for virtually all poor people.

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These contrasts have put paid to the once-popular notion that history has ended. In 2010, China became the world’s largest industrial nation and second-largest economy, and has maintained rapid development until now. Today, there are few who doubt that China will succeed in its modernization. China’s path to modernization has not only attracted the attention of the Chinese people, but also many international friends. In Moscow, Minsk, Tbilisi, Rome, Canberra, Los Angeles and Honolulu, two feelings strike me when interacting with foreign friends. The first is that many of them have noticed the rapid success that China’s achieved in modernization and desire to understand how that came about. The second is that China’s experience is hard to describe, and even requires breaking many dogmas we have long taken for granted: • China’s economic system is not a “pure” market economy of the sort advocated in neoclassical economics. It does not fit the privatization-and-small-government paradigm. The Communist Party of China, the government, and the state-owned sector play a dominant role. Why can such a system achieve long-term, rapid and sustainable economic development? • Based on Western views, China’s political system is not “democratic”. China does not practice an American-style multi-party system. How was it that an “undemocratic” country was able to achieve rapid growth, social solidarity, and national stability? • The Communist Party of China is not a loose organization like in the West, but is tightly and extensively penetrated into society. China does not have the sort of “civil society” advocated by the West. And yet it is one of the safest and most vibrant societies in the world. • The popular view holds that China succeeded because it learnt the market economy from the US, creating a private sector and opening up to the world. What this explanation does not explain, however, is why the vast majority of countries in the world have adopted private ownership, market economy and openness, yet their development performance has varied widely. However, the global financial crisis since 2008 and the COVID-19 epidemic in 2020 have also shattered blind faith in Western systems. Crises are brewing in Western liberal democracy. As a result, I began to doubt those once-popular views. President Xi Jinping has pointed out that humankind is facing “Profound Changes Unseen in the World in a century”. I believe that one of these changes is that the path to modernization and social science theories dominated by Western Europe and the USA since the Age of Discovery 1500 years ago has lost touch with today’s world. No matter for or against, it is undeniable that China has found a new path to modernization unlike that of the West. The Chinese people need to understand this new path to know how to make their way forward. That was what inspired this book in the first place. In 2021, I was posted to the Center for International Knowledge on Development (CIKD) in China, an institute whose establishment was announced by President Xi at the UN General Assembly in 2015. The center was founded to encourage different countries to compare notes on development theories and practices suited to their respective national conditions. I began to feel, more and more strongly, the need

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to explain China’s development path and the underlying theories to the world. The reason is that people have the tendency to doubt or even fear things that they do not understand. Many hold negative views towards China because they do not understand the country. I always believe that understanding and approval are possible as long as China’s development path and its theories are thoroughly explained to those from foreign lands. So, I hope the English version of this book can contribute to this cause. China is a complex country with a different history, system, culture, and language than the West. So, how might I fit an explanation of China’s modernization path in a single book?

1.2 To Understand China, One Must Understand Chinese History China’s modernization has a highly distinctive history. To understand China, one must begin from the details and logic of history. China has a history of 5000 years. The country’s fortunes began to decline after the First Opium War. It was not till 1949 that modernization began. Meanwhile, China’s modernization took place through a planned economy adopted after the revolution and the establishment of a socialist system. Not only do mainstream Western perspectives fail to understand this point. After reform and opening up, there was once a period when many misconceptions emerged among the Chinese people (we call this “historical nihilism”). For instance, there were views that socialism was incompatible with “constitutional democracy” and the market economy; views that Western colonialism brought prosperity rather than a calamity for China; views that the Chinese revolution had delayed modernization; views that priority development of heavy industry led to backwardness; views that Chinese agriculture was “forcibly collectivized”. There were even those who characterized China’s pre-reform system as “a Stalinist reign of terror” and that the country was “integrated into the mainstream of human civilization” only after the reforms of 1978. In this book, I will show, with justification, that these views are unfounded. Readers who grew up in the developed West will find it difficult to imagine the challenges faced by an impoverished country in launching modernization. In the second chapter, I argued that China’s choice of a socialist system was not merely the result of ideology and geopolitics. It was the optimal choice even when considered solely from the standpoint of the underlying logic of modernization and economic development. For example, China did not have the vast colonies that provided the raw materials for the early modernization of the West, and the only way to start the industrialization process was to accumulate a capital from its limited agricultural surplus. In turn, that required agricultural collectivization and a rationing system, the only way that the country could ensure basic living standards while accumulating the needed capital to industrialize. This is no different from any other nation. Every nation has families who scrimp and save to improve their lot. It was

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only that the Communist Party of China shared weal and woe with the people and extend this virtue to the entire nation. The third chapter, “Finding the Chinese Way”, tells the story of how Chinese communists, led by Mao Zedong, sought to modernize China. To English-language readers, this portion of the book will be the strongest depiction of the unique nature of China’s modernization path. Between 1949 and 1956, China’s development strategy shared similar traits with other newly independent developing states (such as India, Egypt, Brazil and other former colonies). These traits include a planned (at least partly planned) economy, a strong government, emphasis on heavy industry and infrastructure, trade protectionism and “big push” strategies. But after 1956, China’s development path began to diverge from other developing countries as well as Soviet-style socialism. In the third chapter, I identify four aspects unique to China. First, China’s planned economy delegated some authority to local government, avoiding the kind of inefficiencies faced by the Soviets due to excessive centralization. These strategies also ensured balanced regional development. Second, China instituted “economic democracy”, emphasizing that ordinary laborers should have a role in management. This averted Soviet-style bureaucratism as well as the oppression of labor by capital. Third, China made use of the unique advantages of social coordination. It rejected costly Western models of specialized education and healthcare, opting instead to ensure universal access to basic schooling and medical services. The result was a high level of human development. Fourth, China allied itself with Third World and European countries to fend off American and Soviet hegemonism, in the process gaining massive moral capital in the international arena. This era was an age of explorations to find a better social system. Despite setbacks along the way, it laid the groundwork for China’s subsequent boom. The fourth chapter summarizes the Mao era. This period was a historic turning point for the Chinese nation that laid the decisive foundations for China’s present and future modernization. Over those years, the Chinese people went from despondency to self-confidence, from dependence to self-reliance, from humiliation to selfimprovement. As Maurice Meisner, the American academic and author of Mao’s China wrote, the Mao era, far from being the era of economic stagnation that it was popularly held to be, was instead the greatest era of modernization in world history, comparable to the most intense periods of industrialization in main latecomers on the industrial scene such as Germany, Japan and Russia. His view remains relevant because English-language readers should give due credit to the Mao era when seeking to understand China’s experience. Many of China’s unique characteristics today originate from the basic system formed at the time. The foundations laid back then are the source of the country’s present accomplishments. Understanding the Mao era is also relevant because It will help us to understand China’s market-oriented reforms and opening up to the world after Mao’s death in 1976. The early 1980s were also an important turning point for the world. Today we find ourselves at a new historical juncture that requires us to duly recognize how the world was impacted by the neoliberal tide during those years. In 2016, I visited Georgia on a work trip. The country used to be a heavy industry base during the Soviet era. After the USSR fell, however, industry was severely

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weakened. More than 1 million of the country’s 3.7-million-strong population sought work abroad. Most of them were young men, leaving the country populated mostly by the elderly, women and children. As I strolled the streets of Georgia, it was overwhelming for me to see the familiar sight of factories and dormitories (my hometown is also a city filled with old state-owned industrial enterprises), which had been rusted and empty. This was a microcosm of the consequences of the global neoliberalist privatization and liberalization policies of the 1980s. Many countries— Britain, the USSR (Russia), Brazil, among them—were hit hard by these reforms. But China ushered in an age of rapid economic growth through reform and opening up. The fifth chapter answers this question: why were China’s reforms successful? It was not the result of the marketization, privatization and deregulation advocated by neoclassical economics. Rather, it was due to two other reasons. First, China stood by its autonomy during the Mao era and remained politically independent, building its own industrial base despite the heavy costs of relying on domestic accumulation. Second, China held fast to the Party’s leadership and its socialist system even as it brought in private capital, thereby limiting the drawbacks of the market and capital. In other words, China’s socialist market economy is fundamentally unlike the Washington Consensus. Many large corporations in basic and strategic industries as well as financial institutions in China are still state-owned. The Party and the government have retained strong macroeconomic management, redistribution, development planning, and restrictions on capital’s privileges. These measures effectively prevented the capital from having free rein in capturing profits, thus averting the economic meltdowns that followed neoliberal reforms in Asia, Latin America and Eastern Europe (see Chap. 5). The sixth chapter “Chinese Democracy” uses the case of healthcare reforms to illustrate how China makes policy decisions. The West commonly misconstrues China’s political system as despotic or authoritarian, in other words undemocratic. In this chapter, I use the example of China’s healthcare reforms, in which I was a participant, to describe how China’s political system makes decisions as well as how the process reflects the interests of the people. I have attended dialogue sessions held to solicit public opinion and experienced how the Party’s democratic centralism harnessed the mass wisdom in drawing reform plans. I have also witnessed how pharmaceutical special interests tried but failed to influence government policy. After the financial crisis of 2008, many across the world began to rethink the development paths taken by the US and Western Europe, and began to discard “Western centrism”. In lieu, they began to recognize that China had found a new path to modernization. China not only held its ground against the shock of the crisis, but also became the most stable driver of global growth to date. As for me, I began to feel this way in 2008, when China’s economy and institutions became a popular topic of discussion in many international forums. The reason is that China had become the world’s second-largest economy despite not following the Western model. However, it will still take a lot of effort to clarify what the China Model actually is in theoretical terms. It will require a repudiation of existing theories.

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1.3 What is the China Modernization Model? What exactly is the China Model? What are its characteristics? This topic seems particularly difficult to elucidate given existing theories and discourse. In particular, current mainstream Western theories consider the China Model to be a knock-off of the Washington Consensus. Some think that this is why the China Model is “authoritarian politics cum liberal economics” (or “leftist politics and rightist economics”). Some even refer to the China Model as “state capitalism” or “bureaucratic capitalism”. The seventh chapter will show that these views are unjustified. They are simplistic depictions of China’s complexities. Based on a review of history, I propose that the “Chinese path to modernization” has at least five distinctive aspects. The first is philosophy, something that many studies of China overlook. China has long had a tradition of materialism and dialectics. In modern times, Marxist dialectical materialism and historical materialism entered the scene. We can therefore say that China has always been a secular rather than religious nation that does not believe in a supernatural force that decides human destiny. Instead, the Chinese believe that happiness results from effort and understanding of the objective laws of history. The Party’s notion of seeking truth from facts is a modern incarnation of this tradition. The second characteristic is the relationship between the Party, state and capital. This is a problem all modern states must face. Most English-language readers live in capitalist countries, and I believe a correct understanding of capital is indispensable in any discussion on the path to modernization and the future of humanity. As I mention in the book, the capitalist mode of production, wherein profit is the main imperative, has been the main driver of modern global economic growth. This mode of production might have helped to unleash productivity, but it also creates cyclical crises. In contrast, China has created a new model that harnesses capital and markets while restraining their excesses and making them serve the people through the power of a socialist state. This model differs from the Soviet approach of eliminating markets and the Western model of allowing capital to dominate economic and social life. In recent years, China has developed a more definite and detailed policy in this regard: setting “traffic lights” for capital to enable it to serve as a factor of production while keeping its expansion within reasonable limits. Particularly, capital is prevented from interfering with morality, social life, public services and politics. The third characteristic is how China balances the relationship between equity and efficiency, between economic development and human development. This is what is known as putting the people first (Renmin Zhishang). Capitalist modernization is capital-centric, hence Western countries prefer to pursue efficiency before dealing with inequity and prioritize economic growth over human development. A path like this entails two problems: first, it incurs tremendous social cost, as the working class in Europe and the States had to undergo a long-term struggle before they obtained relative equality in terms of social status and security; second, polarization is difficult to eradicate once it takes root in society. China adopts a new approach that includes the following aspects: people-centered development; social change over

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economic change; social progress before economic growth. This ensures that human development stays appropriately ahead of economic growth. Social equity takes first place over economic development. The fourth characteristic is related to how China sees the world. Here, the Chinese tradition of remaining principled when impoverished and benefiting others when strong applies. Even when weak, China did not give up its political independence for temporary benefit even if it had to suffer in the short run. And when strong, China respects the independence of other countries. This concept may be hard for some foreign friends to understand. Foreigners often speculate that when China matches American might, it will exploit other nations as imperialist countries did. This will not be the case as China has, since antiquity, been a self-contained and independent geographical unit that survived through agriculture rather than plunder, a culture that does not encourage expansion. Consequently, conquest is not part of the Chinese tradition. Moreover, China’s socialist system ensures that the country will not seek global hegemony following the Western model of imperialism through capital expansion. The reason is that that would only unbalance the global economy, causing an economic crisis characterized by excess capital at one end and a poverty trap due to insufficient development at the other. It is precisely because China is rational that it has proposed the idea of a global community of shared future. China does not wish to take the place of any dominant power. Its hope is for a world where all countries are equal and can develop together. The fifth characteristic, also the most central feature of the Chinese model, is the leadership of the Party and the unity of the Chinese people. I am aware that there are many foreign misconceptions about the Party. One reason is probably the years of anti-communist propaganda in the capitalist world. Another reason is that the Communist Party of China is a new type of political party distinct from the elected parties of the West. I am a member of the Party. But it was only after I started work as a researcher that I truly realized the capabilities of the Party. I saw for myself that the Party was not the ultra-authoritarian entity of Western imagination. Rather, it was a amiable and lovable organization with deep roots among the Chinese people. Between the Party and the people there is close attachment and mutual trust, and the mission of the Party is to help the people improve and strive for a better life. If friends in the English-speaking world understand this, they will gain a full understanding of what the Party is. In this book, I talk about the Party’s central role in organizing and leading China’s modernization. Party leadership is the most essential feature and the greatest strength of the Chinese path. In The Logic of Collective Action, American political scientist Mancur Olson wrote that large groups are difficult to unite because of their size and their disparate interests, making collective action impossible. Similarly, The Crowd, a highly popular book in China, denigrates the common populace as irrational mobsters. In contrast, the Party has successfully united the Chinese people, turning the “mob” into the “masses” that have common ideals and values and rationally embark on collective action. Moreover, the Party and the people interact through the mass line. The Party leads the people while learning from them. The Party and the people share the same

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long-term goals. That is a new form of relations between a political Party and the people that it leads, transcending the class antagonism and populism in Western countries and distinct from Western political systems controlled by capital and special interests. China has redefined democracy. Chinese democracy is a democracy that truly reflects the original meaning of the word.

1.4 New Economics The Chinese approach to modernization offers the opportunity to develop a new economics. Many Anglosphere readers would probably be students of neoclassical economics like I was. My introductory economics textbook was Gregory Mankiw’s Principles of Economics. My first few years as a doctoral candidate were spent as a follower of neoliberal economic theories and research paradigms. Like many young students today, I was proud of and immersed in intricate mathematics modeling. As a former gold medalist in mathematics and chemistry Olympiads in China, mathematical modeling—whether general equilibriums or dynamic optimization—came easy to me. But I slowly discovered that there was more to economics than just elegant modeling. We have to look at the underlying philosophies and realities too. Harvard students organized a walkout of Mankiw’s class in November 2011. In an open letter, they said: “If Harvard fails to equip its students with a broad and critical understanding of economics, their actions are likely to harm the global financial system. The last five years of economic turmoil have been proof enough of this.” One of my professors, Chen Ping of Peking University, said that economics teachers and students in China should read this letter since Mankiw’s textbooks were even more influential in Chinese economics departments than in the US. The facts of the past century have demonstrated the problems in neoclassical economics. The neoclassical view is that spontaneous market competition will optimize the distribution of resources and bring common prosperity to humankind. But since the 1960s, experiences of the newly independent states testified to the widening global polarization. In the past, economists attributed this to the failure of these “students” to fully emulate their “teachers” in economic systems of private ownership, competitive elections and minimal government regulation. Yet, the facts in a multitude of countries since the 1990s also show that the more thoroughly a country adopted Western hyper-capitalist systems, the worse their failures. Modernization based on private ownership of capital, a liberal economy and multi-party electoral democracy has two problems. The first is that such modernization benefited countries that account for a mere 1 billion of the global population. The prosperity of the minority came at the cost of plundering the majority and depriving them of their development capacity. This path to modernization is no longer feasible for most countries. The second problem is that the Western approach created immense material wealth but failed to find a path of equitable, harmonious, ecofriendly and common development. Neither has it enabled cultural-ethical progress.

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Ethnic conflict, polarization, moral anomie and health crises continue to plague the world. Why did all this happen? China’s experiences show that mainstream Western economic theories are but one side of the coin. On the other side is the backwardness of undeveloped countries. In the eighth chapter, I describe how the post-WWII Keynesian era of government intervention was the most rapid, as well as a fairly equitable, period in Western economic growth. In contrast, the neoliberal reforms that began in the 1980s were fruit from the poison tree. They provided a short-term respite for capital but ultimately hollowed out industries, caused financial bubbles and polarization, and diminished the middle class. These reforms were the basis for the subsequent rise of American populism. Hence, we have to free ourselves from the strictures of neoclassical economics and build a new economic school of thought. When I started college, neoliberal economics reigned supreme in Chinese economic thought. Over the next two decades, Chinese economists began to doubt its merits and are now working hard to build a new economics with greater universal relevance. I know of many other economists in the world pursuing the same revolutionization of economics.

1.5 Reconceptualizing Marxism and Socialism What is the path towards innovation in modern economics? I made an attempt in this book to use Marxist political economy to explain the Great Recession and the sluggishness of global economic growth. The eighth chapter points out that humanity is still living under the dynamics of capital that Marx reveals in the third volume of Das Kapital: as capital expands, there is a decline in long-term profit margins. As a result, capital appreciation requires new markets, expansion into the financial sector, reduction of the costs of labor, or otherwise the initiation of wars. However, these create even wider crises. The fundamental difference between Marxism and other schools regarding crises is that the former maintains that capitalist economic cycles are not anomalous deviations from market equilibriums caused by speculation, policy missteps or external shocks. Instead, they are the inevitable result of the capitalist mode of production. Consequently, these crises cannot be resolved through the capitalist mode of production and can only be deflected by means such as foreign investment. Economic crises ensue when the space for such deflection is exhausted. After finishing this book, I thought more deeply about these problems. I believe that Marxist political economy provides a stronger explanation than neoclassical economics because it is founded on observations of extended historical epochs and historical patterns, especially how production processes are influenced by politics and the relations of production (including ownership systems, distribution and the relationships between people). Its panoramic and systematic perspective makes it more scientific than neoclassical economics, which has lost its traditions of historical

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research and critical thinking, preferring to focus exclusively on analyses of microeconomic laws to describe macroeconomic phenomena without accounting for historical and cultural factors. Moreover, the development of neoclassical economics has always been swayed by the interests of capital. Classical economics recognized the labor theory of value before the Marginal Revolution in the 1870s (when the capitalist class was ascending the rungs of political power). This theory was discarded after that because it contradicted the interests of capitalists who had already consolidated their hold over government. In the ninth chapter, I analyze China’s overcapacity, distribution between capital and labor, and the commercialization of public services through the lens of political economy. Analyses of these problems from Western microeconomic perspectives often do not yield satisfactory conclusions. But political economy shows us that haphazard market competition is the root of overcapacity while capital eats away labor incomes and the fair distribution of public services. These may yield greater profits for capital in the short run. But as time passes, workers’ spending power diminishes, overcapacity results, and economic crises emerge. These analyses show that, unlike what many Anglosphere readers (and Chinese) believe, Marxism is not merely a “theory of revolution” but also a guide to modernization. In the 1990s, Fukuyama proclaimed that history had ended. For a period, Marxism and socialism became obsolete heresies. Even in China, there were many who held such views. Marxism found itself in an awkward, even marginalized position. Some believed that discarding Marxism was the direction of China’s reforms. In response to such views, I pointed out in the original Chinese edition that Marxism was not only an ideology that called for revolution. It was also an economic theory that allowed for empirical analysis. It gained new relevance after the Great Recession, both in the West and in China. In truth, setting aside dogmatic labels of Marxism and looking at the Chinese path from a macro-historical perspective makes it easy to see that the path of China succeeded because Marxism succeeded. Of course, this does not imply that well-founded Western economic methodologies should be discarded. Marxism reveals the more fundamental dynamics of the economy, while Western economics makes more detailed studies of specific problems under the framework of the long-term trends revealed by Marxism. This book has made some attempts in this respect. For instance, the second chapter uses the more recent fields of information economics and contract theory to explain the planned economy and SOEs. The fifth chapter uses Karl Polanyi’s “double movement” framework to build a theory on the “thesis-antithesis-synthesis” cycle of the market economy. The global financial crisis of 2008 made it possible to answer this question. From a global perspective, the financial crisis was an inevitable consequence of capitalist globalization. Thereafter, many countries around the world began to recognize the value of Marxism and the real-world significance of socialism. They began to suppress the excessive expansion of capital and optimize its role of. Still, substantive progress is still elusive under the conditions of the Western capitalist approach. From the perspective of China’s and other developing countries’ growth, China was able

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to develop because the adoption of a socialist system freed it from marginalization and dependence on foreign powers under the conditions of capitalist globalization. It was the socialist system that allowed China and others to complete social revolutions that united their peoples, built independent economic systems, the saved the nation from the poverty trap. It was also the socialist system that sustained social stability and national security and gave them the ability for dialogue and competition with major capitalist powers. At present, the world faces economic imbalances, environmental crises and polarization. These can be addressed only through a greater socialist element in national and global policies. Thomas Piketty, author of Capital in the Twenty-First Century, wrote recently: Western countries are still struggling to define their attitude towards the Beijing regime. Let me say it straight away: the right answer lies in ending Western arrogance and promoting a new emancipatory and egalitarian horizon on a global scale, a new form of democratic and participatory, ecological and post-colonial socialism. If they stick to their usual lecturing posture and a dated hyper-capitalist model, Western countries may find it extremely difficult to meet the Chinese challenge. The best way to respond to China is to learn from the country to fix one’s own shortcomings and build a “new socialism.” There is growing recognition that China has breathed new life into Marxism by proving its veracity and demonstrating that Marxists are even more adept at building a new world than they are at dismantling an outdated one. Marxism is neither a mere doctrine nor does it imply violence. It is a new path to modernization and a new form of civilization. I am aware of the complicated views toward Marxism and socialism in today’s world. In the wide English-speaking world, there are many who have studied Marxism in detail and are supportive of socialism. They include Professor Terry Eagleton, who wrote Why Marx Was Right, Professor Richard Wolff, who wrote Contending Economic Theories, and Robert Heilbroner, who wrote Marxism: For and Against. I learned much from them. However, the long Cold War also left Western society with vilified views of Marxism and socialism. The result is widespread confusion, resistance and even fear of socialism. I hope that my book makes some headway in changing such views. The course of China’s modernization is ample proof that socialist China pursues universal values such as peace, development, fairness, justice, liberty, democracy and human rights, just like many other nations. Moreover, China found a new path that expanded space for humankind to realize these values. China’s profound social revolution enabled equality between people and made common prosperity the ultimate goal of socialism. The Party does not have its own special interests, nor does it represent any interest group, power bloc or special class. As such, special interests do not influence China’s democratic process, making it more reflective of the substance of democracy than the Western model of multi-Party elections and expanding humanity’s path to democracy. Through universal access to basic public services, China has progressively narrowed regional, and class divides, allowing the majority of its people to have farmland, education and jobs. The full development of human potential and quality is gradually becoming a reality. At the same

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time, our liberty is tied to national and collective interests. The public good takes precedence over individual freedom. As of October 2021, the COVID-19 mortality rate in China was 0.39 per 100,000. That is 1/159 of the world average and 1/545 that of the US. All of these are China’s contributions to the global cause of human rights. Human rights progress in China is a fundamental manifestation of the peoplecentered development paradigm and expands pathways toward the betterment of human rights. Socialism with Chinese characteristics is congruent with the universal values of human civilization as well as a broadway for the realization of universal human values.

1.6 To Third World Readers I dearly recommend this book to readers from Third World countries. Since the start of its revolution, China has considered itself to be a developing country—part of the Third World. When I was a participant in international academic conferences in 2006, I made friends who hailed from African countries such as Kenya and Nigeria. I experienced their heartfelt goodwill towards China. In 2018, I attended a lecture by Egyptian Marxist scholar Samir Amin during his final trip to China. I recall how he emphasized that some people have the illusion or delusion that China would soon become a developed capitalist sovereign state through reform and opening up and adopting full marketization. He said that was merely the dream of Sun Yat-sen and the Kuomintang, and that Chiang Kai-shek and the Kuomintang had proved that this dream could not be realized. Before that lecture, I already knew that Amin characterized the rise of the Global South onto the stage of history as the “Awakening of the South.” Amin was a great admirer of Mao’s slogan that “countries want independence, nations want liberation and the people want revolution.” He felt that it was this slogan that allowed China to unify the liberation of the people and the nation. Professor Amin was keenly interested in China’s socialist cause. In May 2018, I presented the English abstract of this book to him hoping that he would grace it with a commentary. He agreed but wrote in his email that: “I regret that I shall not be able to benefit from its reading, as long as the book will be in Chinese only.” In my reply, I said that “I will consider translating part of the book to English in the future.” Unfortunately, Professor Amin passed away in August of the same year at the ripe old age of 88. Today, with the completion of the English translation, I think of Professor Amin, who taught me that all who hope for human progress share a common language. Many countries were once caught in the “poverty trap” or “middle-income trap.” Still, that does not mean that undeveloped countries will always be behind the curve. Income levels in China were among the lowest in the world in 1949. Today China is about to become a high-income country. I explain in the eighth chapter that the middle-income trap is essentially a capitalist trap. As the Latin American scholar Theotonio Dos Santos has pointed out, under present historical conditions it is

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impossible to build a society capable of reaching the development stage reached by today’s developed countries, since the same historical process that created the state of underdevelopment also engendered economic development (the development of capitalism). The inherent logic is precisely what Marx had long ago revealed: the expansion of capital causes the crises of capitalism, which are then passed by countries in the center to those on the periphery. Here lies the secret of the middle-income trap. Why is it that periphery countries in the global capitalist system cannot, as neoclassical economics has expected, achieve modernization in the same way as Western countries? I provide an explanation in this book. First, the capitalist systems in these periphery countries were often imposed by external forces. Since these countries have never gone through social revolutions, traditional economic structures, social structures, clan power and the culture of hierarchy continue to hold broad sway. Secondly, if the periphery countries join the global capitalist system, it will be inevitably difficult for them to stand against global capital. Some countries have initially established industrial systems, but under the pressure and shock of external capital, the lifeline of the national economy has been manipulated by international monopoly capital and has lost the ability to develop independently. In addition, many countries have introduced western competitive election democracy, which has not only led to social fragmentation and confrontation but also deprived political parties of initiative and ability to implement long-term economic and social development plans, which is a major drawback for a country that has not yet achieved modernization. China’s experience has proved that the socialist system can get rid of the cyclical crises of capitalism and enable backward countries to embark on the road of independent development. That is akin to how no one in the Middle Ages realized, until the Renaissance, that later generations would see that era as a dark age. People today, perhaps, lack confidence in a brighter future. I hope that English-language readers will read this book because I believe that China has shown a new world is possible. As described in the book, China has proven that a culture where ordinary workers are the leading actors is possible; affordable education not geared towards test results is possible; non-profit healthcare that serves the working masses is possible; a society where job security for the man on the street is possible; a society where people are not commodities and their lives are historically significant is possible; and a self-reliant economy not dependent on foreign capital is possible. China is proving through action that the problems faced by humankind are not intractable. The human race has a bright future as long as it stands on the right side of historical progress. Each of the world’s nations can continue to advance on the basis of their present foundations. Inequities, exploitation and oppression can be eventually eliminated as we march towards a brighter tomorrow. Inside and outside of China, there are also those who ask how China will act towards foreign countries as it develops. Will it “export revolution?” Our answer is that modern China has its roots in ancient China, and that tradition has a profound impact on the country today. The Chinese have always been an inclusive nation

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that has never started wars because of ideological or religious differences, unlike what happened in Western history. Conversely, different ethnic groups, cultures and religions have met and converged several times in China to form the Chinese nation and Chinese culture of today. In comparison, capitalist modernization in the West led to global colonization to serve the expansion of capital, plundering the economic surplus of the Third World through unfair terms of trade. China will not go down this route. To someone immersed in China’s 5000-year-old culture, it is easy to understand the maxim that hegemony never lasts—what goes up must always come down. The People’s Republic was founded under an unjust global order and deeply felt the problems of the center-periphery situation. In addition, Marxist theory also shows that global injustice prevents not only underdeveloped countries from modernizing but also lands developed countries in crises. Thus, contrary to Western imagination, China’s promise to never seek hegemony is not a tactical ploy. It is a principle founded in Chinese history, culture, beliefs, and pragmatic interests. China’s successful development has given confidence to the world. As the logic of China’s development that I described reveals, China will not seek to colonize the world as Europe and America did during their modernization. Rather, China believes that a fairer international order benefits the development of all countries.

1.7 A New Era in China After the completion of the Chinese edition of this book, China’s modernization made new strides. At the same time, the world encountered new changes that are also related to the themes covered in the book. In 2017, the 19th CPC National Congress announced that socialism with Chinese characteristics had entered a New Era. For English-language readers, this can be understood as the third milestone in the history of the People’s Republic (the first two were the founding of the republic and the reforms of 1978). What is the new era? First, the long-suffering Chinese people have made a tremendous advance from standing up to growing prosperous and to becoming strong, ushering in the bright prospect of national rejuvenation. Second, scientific socialism has been revitalized in 21st-century China, making socialism with Chinese characteristics a banner of pride in the world. Third, socialism with Chinese characteristics has expanded the pathways for developing countries to modernize. That provides a new option for countries and peoples who seek rapid modernization while retaining their autonomy. It is also China’s contribution to solving the problems of humankind. All in all, this proclamation by China tells the world that the country will succeed on its own terms. The path that China takes will not pose a threat to the world. Conversely, its success will provide more countries with hope. China will continue to learn from advanced cultures while sticking to its own path and creating a new form of human civilization. In 2021, President Xi Jinping, on behalf of CPC, made an authoritative summary of the characteristics of “Chines-style modernization”. China’s modernization is a

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modernization with a huge population, a modernization of common prosperity for all the people, a modernization in which material prosperity is coordinated with culturalethical progress, a modernization in which man and nature coexist harmoniously, and a modernization of peaceful development. Our modernization has abandoned the old capital-centered route of polarization, materialistic expansion and expansion. China expanded the way for developing countries to modernize, and provided a new alternative for countries and nations in the world which hope to accelerate development and maintain their own independence. China’s modernization is a modernization with a huge population. It has transformed the huge size of population and land into development advantages. It believes that the unity of the country, the unity of the people and the unity of all ethnic groups in China are the basic guarantee for the success of the modernization cause, avoiding the contradictions and conflicts caused by internal differences in many populous countries. China’s modernization is the modernization of common prosperity for all the people. The modernization of the west is dominated by capital, the production is aimed at capital proliferation, and the distribution is centered on capital interests. Chinese-style modernization centers on the people, aims to meet the real needs of the people for a better life, and takes the all-round development of people as the goal and destination of modernization. It has created the largest middle-income group in the world, and will enable more than a billion people to live a life of common prosperity in the future. China’s modernization is the modernization of coordinated development of material prosperity and cultural-ethical progress. The essence of capital-led modernization is that capital rules people and reduces people into production factors. People’s all-round development is covered up by materialism, which will inevitably lead to the corresponding ideology of commodity fetishism, materialism, hedonism, consumerism and individualism. The penetration of capital into the social sphere has led to the fragmentation and atomization of the social structure, class antagonism, ethnic and religious conflicts, etc. China’s modernization, while creating enormous material wealth, adheres to the traditional virtues of the Chinese nation, the advanced socialist culture, and pursues all-round human development and social progress. China’s modernization is the modernization of harmonious coexistence between man and nature. Under the western modernization mode, capital pursues profits endlessly, resulting in unrestrained demand on nature. The CPC insists that green water and green mountains are golden mountains and silver mountains. It complies with the laws of nature, takes the initiative to assume the responsibility of a big country, practices the “double carbon goals”, and protects the rights of developing countries, avoiding the transfer of polluting industries from Western countries to developing countries and restricting the development of developing countries to maintain a development model of high consumption and high emissions. China’s modernization is the modernization of peaceful development. The tide of world modernization has brought different countries closer and closer. Major Western countries expanded and plundered in the process of modernization, turning backward countries into their markets and raw material suppliers. After World War II, they

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placed developing countries in an unequal position through their political, economic, scientific, technological, military and cultural advantages, forming a “center periphery” structure, which seriously hampered the progress of developing countries. The prosperity of a few Western countries comes at the cost of the long-term backwardness of former colonies and affiliated countries. To a certain extent, this unjust pattern of modernization has also led to the shrinkage of the markets of developed countries and the imbalance of the global economy. China’s modernization has always adhered to peaceful development. It will never seek its own development at the expense of other countries. Instead, it will adhere to mutual benefit, win–win results and common development, and win more room for its own development by promoting global fairness and justice. Humanity ran into the COVID-19 pandemic in 2020, the worst catastrophe in global public health in over a century. As of March 2022, over 460 million have been infected and 6.09 million have died. The US has seen over 81 million cases and over 990,000 deaths. Comparatively, China has the lowest rates of infection and deaths in the world. The theories in this book can also explain how China achieved this success: the Party does not have its own special interests. Instead it prioritizes people and life, opting to sacrifice economic growth even if that is the cost of a zero-COVID strategy to protect lives. China’s healthcare system is based primarily on public hospitals. As such, the interests of capital do not distort the health system, allowing the country to provide systematic, sustained, rapid and affordable medical care. The Party also has grassroots organizations in cities, villages, factories, communities and schools. Party members, like volunteers in the West, serve community members and thereby win the trust of the people. This allows anti-COVID measures to be coordinated with minimal costs. The COVID-19 pandemic is a disaster that requires global solidarity. Any compromise will only bring sustained harm to sustainable development. I believe that the experiences and strengths of China’s system in combating the virus will boost global faith that the pandemic will eventually be beaten. Armed conflict broke out between Russia and Ukraine in 2022, a microcosm of the global changes facing humanity. The post-WWII cycle of rapid and stable economic growth has ended. In the third decade of the twenty-first century, the world will face many challenges: the pandemic, economic stagnation, global inequities, a reversal of globalized trade, wars… The Chinese believe that disease must be treated at its root. The ailments of the world today stem from the capital-led model of modernization that took form in the modern era. This capital-centric path is polarizing, materialistic, and teems with war and plunder. Comparatively, China’s new path to modernization puts the people first, balancing material wants and cultural-ethical progress. It is a path of peaceful development where man and nature coexist. Unlike the US, China will not impose its model on other nations. The Chinese believe in the golden rule: act as you would have others act towards you. We also believe in the value of diversity. I express these views frankly because I believe that humanity needs to build a new world together, a world where people regard one another as equals, countries coexist peacefully, man is in harmony with nature, and every person can fully and freely develop. The Chinese path to modernization will help to bring about such a world. Yet, the Chinese approach is still ongoing and the China Model will continue

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to refine itself. Interactions between China’s development theories and practices with the rest of the world will create a better future for all. The English-speaking world still has many misconceptions regarding China. Another of my goals in writing this book is to address these misconceptions. I have also pondered why China is misunderstood by foreigners. There are many possible reasons: difference between Chinese and Western in ways of thinking, in culture and in language, particularly in basic systems and development approach, in which aspect China remains distinct from the West; one-sided, biased media reports influenced by private interests. Still, just as snow will always melt in spring, as a Chinese, I hope that this book gives interested Western readers a picture of the Chinese path to modernization. I believe that the story of China’s journey will enable people to more fully understand the country and eliminate their biases. The story of China’s modernization is a story of hundreds of millions of families changing their destiny through their fortitude and honest labor. It is a story of how 1.4 billion people relentlessly pursue their dreams. It is a story of how a nation with lofty ideals seeks to find a new and brighter path for humankind. I believe that you will feel the same when reading this book. Acknowledgements Since this book is about China’s modernization, the greatest thanks go to the pioneers who made sacrifices along the way. It was the countless people who painstakingly built something from nothing, the fortitude of countless workers, farmers, teachers, doctors and soldiers that revitalized the ancient nation of China. This book would not have been possible otherwise. I thank my parents for raising and educating me. I thank Professor Li Ling, my doctoral advisor, who was the first expert to advocate non-profit healthcare reforms in China. Her immense contributions in this respect have set an example for me. Professor Li also provided much guidance and assistance in the writing of this book. The Chinese edition of this book was based on a class on the economic history of the People’s Republic of China that I taught at Peking University. Many young students born in the 1990s were deeply enthusiastic about learning and exploring the Chinese path. I thank the 500-odd students who took the class, as well as my teaching assistants, Yang Chunyu, Liu Guizhen and Luo Yuan. Kong Dan wrote a preface for the Chinese edition of this book. Ji Hong, Tan Huifang, Wang Shaoguang, Li Ling, Yu Tao, Lu Zhoulai, Xu Hengqiu, Li Lecheng, Lyu Dewen, Chen Yinjian and Xiao Wu promoted it in various settings. Yang Qing, Zhang Lei and Zheng Ruolin of Fujian’s SETV produced a television program for the book. My gratitude also goes to experts, colleagues and friends who offered their guidance and discussed the topics covered: Chen Quanxun, Teng Wensheng, Zhu Jiamu, Li Shenming, Sun Zhigang, Zhao Changwen, Liu Wenxian, Gao Changwu, Fan Peng, Zhong Dongbo, Song Xiaoqing, Yan Yilong, Bai Gang, Xu Haoyuan, Xu Junzhong, Shen Yuanyuan, Wei Nanzhi, Zhang Qingyan, Zhou Jianming, Gao Liang, Wu Li, Yang Xin, Zhang Wei and Peng Shu. Many of the perspectives in this book were inspired by our discussions. Finally, I thank Zhang Kuanxu, Zhao Yani, Huang Chun, Cao Kaiyun and Beijing ChineseForeign Translation & Information Service Co., Ltd. for their hard work in the English translation.

Chapter 2

China’s Early Choice of Modernization Path

2.1 Introduction The first disagreement regarding China’s development path emerged during the early days of the People’s Republic of China: should the country remain in the stage of New Democracy,1 or should it go one step further to socialism? After exploring the issue, the Communist Party of China (CPC) decided to change its original plan of adopting New Democracy for ten to fifteen years before transitioning to socialism. Instead, the new goal was to basically complete China’s socialist transformation by 1956. To this end, the CPC decided upon a planned economy dominated by public ownership, prioritized the development of heavy industry, and implemented rural collectivization. Understanding China’s choices during this period is the start to understanding China’s modernization path. However, debates continue to rage even today. Some believe that the choice to take the socialist path was not based on rational consideration but rather “ideological fervor,” “worship of public ownership,” or indiscriminate adoption of the Soviet model, which led to a detour in economic development that cost the Chinese economy a “lost twenty years.” However, our survey of the historical process shows that the development path taken by the People’s Republic in its early days was both economically rational and ineluctable. It was the only way to overcome the development barriers caused by the smallholder economy, colonial economic structure and weak government capacity inherited from previous regimes, and embark upon the journey towards modernization. National salvation has been the foremost concern of the Chinese nation since its defeat in the First Opium War in 1842, with countless patriots devoting themselves to building an independent, free, thriving and prosperous modern state. Examples of slogans from this period include: “Clean up the scars and bloodstains given to us by the imperialists”; “Let people all over the country have food to eat, clothes to wear, houses to live in, and someone to love”; “Bid farewell to the chaos of history and 1

In economic terms, a hybrid economy between capitalism and socialism—Trans.

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embark on the path to rebirth.”2 Eight decades ago, this was the Chinese Dream. However, their efforts did not bring China onto the highway to modernization but instead widened the gap between China and the rest of the world. As a result, China remained a typical agrarian country that lacked economic and political clout. After the People’s Republic was founded in 1949, China began exploring new paths towards modernization. The Common Program of the Chinese People’s Political Consultative Conference, which served as China’s interim constitution, specified that China “must develop the people’s economy of New Democracy and steadily transform the country from an agricultural into an industrial one.”3 The term “New Democracy economy” was the path of future development envisaged by the Party before and in the early years of the People’s Republic. This model envisioned an economy dominated by the state-owned sector while allowing for the development of the private sector. Article 26 of the Common Program specified that “The basic principle for the economic construction of the People’s Republic of China is to develop production and bring about a prosperous economy through the policies of taking into account both public and private interests, of benefiting both labour and capital, of mutual aid between the city and countryside, and circulation of goods between China and abroad. The state shall coordinate and regulate state-owned economy, co-operative economy, the individual economy of peasants and handicraftsmen, private capitalist economy and state capitalist economy, in their spheres of operations, supply of raw materials, marketing, labour conditions, technical equipment, policies of public and general finance, etc. in this way all components of the social economy can, under the leadership of the state-owned economy, carry out division and co-ordination of labour and play their respective parts in promoting the development of the social economy as a whole.”4 Similarly, Article 30 stipulated that “The People’s Government shall encourage the active operation of all private economic enterprises beneficial to the national welfare and to the people’s livelihood and shall assist in their development.”5 In simple terms, this meant a “mixed economy” founded upon diverse forms of ownership and the market economy. In other words, in the period before and shortly after the People’s Republic was founded, the Party planned to adopt New Democracy for ten to fifteen years before transitioning to socialism. However, with the basic completion of socialist transformation in 1956, the path of New Democracy came to an end ahead of schedule, while a new path of development was gradually paved. In contrast to focusing on the development of labor-intensive light industries, mixed ownership, a market 2

Wang Yong, “Bashi Nian qian de ‘Zhongguo Meng’: Lun 1933 nian Dongfang Zazhi ‘Xinnian de Mengxiang’ zhengwen” [The “Chinese Dream” of eighty years ago: On solicitations of “New Year’s Dreams” essay contributions by The Eastern Miscellany in 1933], Wenyi Zhengming, no. 6 (2015): 95–101. 3 The Common Program and Other Documents of the First Plenary Session of the Chinese People’s Political Consultative Conference, (Foreign Languages Press, 1950), 3. 4 The Common Program and Other Documents of the First Plenary Session of the Chinese People’s Political Consultative Conference, (Foreign Languages Press, 1950), 10. 5 The Common Program and Other Documents of the First Plenary Session of the Chinese People’s Political Consultative Conference, (Foreign Languages Press, 1950), 11–12.

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economy, maintaining land ownership by individual households and opening to the world market, this new path was characterized by a priority on the development of heavy industry, absolute dominance of public ownership, a planned economy, agricultural cooperatives, the pursuit of independence and a certain degree of industry protectionism. Clearly, the path of economic development in the early days of the People’s Republic diverged from the maxims of contemporary mainstream economics (whether neoclassical economics or Keynesian economics). Neither did it follow the path of marketization, private ownership and openness taken by most developing countries. It was also different from China’s post-reform policies. It deviated even from the path of New Democracy that the Party itself had envisaged and proclaimed. What were the principles and logic behind the choice made by the young People’s Republic? Today, how should we view the legacy of that period? These questions still occupy many people, directly influencing their views on major issues relevant to China’s all-round reforms today. An assessment of historical events should be based on historical conditions. As Marx wrote in The Eighteenth Brumaire of Louis Bonaparte: “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already given and transmitted from the past.”6 Let us place ourselves in the shoes of history and explore how development goals and constraints in the early days of the People’s Republic influenced the shift from New Democracy to socialism.

2.2 Why Was China Previously Unable to Modernize? Although the Chinese pursuit of modernization had begun in the late Qing dynasty, China was still a backward agrarian country in 1949. For a large part of its imperial history, China had been one of the world’s strongest nations—its GDP in the early nineteenth century constituted one-third of the global economy. In the Ming (1368–1644) and Qing (1644–1911) dynasties, regions south of the Yangtze River already had a developed agricultural economy, a thriving commodity economy, a sizeable labor force, and huge markets. So why did an industrial revolution never materialize in China? After the First Opium War (1840–1842), Western corporations, technologies, equipment, and even some Western institutions flowed to China. On the surface, China had all the factors needed for modernization. So why did China fail to modernize? There were at least three insurmountable obstacles standing in the way.

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Karl Marx, “The Eighteenth Brumaire of Louis Bonaparte,” in Marx/Engels Collected Works, vol. 2 (Beijing: People’s Publishing House, 2009), 470.

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2.2.1 Constraints of a Smallholder Economy Industrialization is a defining feature of modernity. Three conditions are necessary for the transition from an agrarian society to an industrial society: first, adequate initial investment and industrial technologies because the industrial sector is capital intensive; second, adequate surplus from the agricultural sector to sustain those who undertake scientific research and industrial production instead of farming; third, a relatively large sector of the population with incomes high enough to spend on industrial goods on top of basic subsistence. Ultimately, for industrialization to take place, it is necessary first of all that agriculture provide adequate economic surplus for the industrial sector. The economy in traditional China lacked this condition due to the meager amount of arable land per capita. China has one of the lowest levels of arable land per capita among large countries. During the Warring States era (475–221 BCE), arable land per capita was merely 4.5 mu; by the mid-Qing dynasty, this had declined to 2 mu. During the early stages of reform and opening up (the 1980s), Chinese leader Deng Xiaoping stressed that: “At least two important features of our situation must be taken into account in order to carry out the modernizations in China. First, we are starting from a weak base… Second, we have a large population but not enough arable land.”7 Insufficient arable land was a significant obstacle that prevented the old China from modernizing. First, insufficient arable land limited the production of the agricultural sector, making it unable to provide sufficient surplus for industrialization. During the early stages of industrialization, the capital, raw materials, and labor needed by the industrial sector could come only from agricultural surplus. Meanwhile, consumer markets were primarily situated in rural villages. Industrialization was possible only if the countryside had enough surplus that could be consolidated and diverted to new industries. Historically, per capita possession of grain in China had never exceeded 300 kg. Moreover, after the population rocketed from 100 million to more than 300 million in the middle of the Qing dynasty, per capita grain possession plummeted to merely 175 kg. Even if the grain was more or less evenly distributed, this level of production was only enough for subsistence. As grain was mostly self-consumed by farmers and rarely commoditized, traditional China was an autarkic smallholder economy.8 Low amounts of land and grain versus a large population meant that it was impossible to provide sufficient surplus for industrialization. First, production in the countryside could not generate an adequate surplus to support a large aristocracy that could pursue scientific research and industrial production instead of farming (before the Industrial Revolution in the West, students of the natural sciences, for instance Newton and Galileo, were often from aristocratic families). Second, it was impossible to sustain a high-income group over the long run with abundant excess income 7 Deng Xiaoping, “Uphold the Four Cardinal Principles,” in Selected Works of Deng Xiaoping, vol. 2 (Beijing: People’s Publishing House, 1994), 163–164. 8 Pang Zhuoheng, “How to Find the Essential Causes of the Up-and-Downs in World History—To Celebrate 60th Anniversary of the People’s Republic of China” [in Chinese], World History, no. 4 (2009).

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to spend on industrial products since the accumulation of wealth in those days mainly took the form of large landholdings rather than greater consumption and investment in industry and commerce. Third, the development of modern industry is driven by the replacement of labor by machinery. However, large population and the scarcity of arable land made it less imperative for China to develop modern technologies able to replace human labor. As a result, China remained in an ultra-stable structure characterized by “growth without development.” In contrast, Europe had far more arable land per capita. Moreover, after Western Europeans discovered the Americas, trade in Africa and the Americas was equivalent to gaining large swathes of land overseas, which further eased land scarcity tensions. Foreign lands provided vast amounts of raw materials and labor for the Industrial Revolution and large markets for industrial goods while allowing agriculture to generate plentiful surplus. From that point onwards, Western Europe’s path of development diverged dramatically from China’s. Hence, China’s modernization had to overcome the constraints of the smallholder economy on the effective consolidation of resources. Besides, the constraints of land scarcity gave rise to policies and culture that maintained rudimentary levels of fairness and stability. In contrast to feudal societies in Western Europe, where lords of the manor and farmers were closely interdependent, contemporaneous Chinese farmers and landlords were not closely interdependent. Possession of small plots of land by farmers was the primary form of land ownership. In ancient China, individual farming households (as the Book of Han records, one family with five members and a hundred mu of land9 ) were the primary units of production. Consequently, maintaining the stability of smallholders and preventing land engrossment were prerequisites for sustaining dynastic rule. Famine and bankruptcy in the villages may follow if the industrial and commercial sector or the state draws too many resources from the countryside. In general, the land was more evenly allocated during the early years of a dynasty. After long periods of peace, too much land may be amassed in the hands of landlords and local despots while the official bureaucracy would also expand and form alliances with local despots. At this point, the emergence of a capable emperor who cracks down on wealth concentration would lead to a rejuvenation of his dynasty. In order to maintain stability, feudal dynasties would often take the initiative to weaken state power as well as reduce taxes and corvée. Emperors with grand ambitions, such as Qin Shi Huang, Emperor Wu of Han, and Emperor Yang of Sui, would amass resources to build infrastructure, a practice that was generally frowned upon in ancient China. While this policy orientation supported social stability, it also limited the development of a commodity economy, which made it difficult to concentrate capital. Given the demands of industrialization in the modern era, how might capital be concentrated without threatening rural stability? Neither the Qing government nor the Kuomintang (KMT) regime (1927–1949) was able to resolve this dilemma. The modes of production in a smallholder economy also, in turn, impacted social structures and culture, forming a change- and risk-averse culture content with modest 9 Ban Gu, “Shihuo Zhi” [Treatise on food and commodities], in Han Shu [Book of Han] (Beijing: Zhonghua Book Company, 2012), 1032.

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wealth. The self-sufficiency of local regions that only had sparse contact with one another neither allowed for large-scale market trade nor sufficient space for farmers to participate in social interaction and political activities. According to Marx, these mutually independent villages, scattered like potatoes, where small agriculture and cottage industries were combined, as well as family lives that are self-contained and self-sufficient, formed the immutable economic foundation that the authoritarian system of China depended upon to exist.10 On August 31, 1944, Mao Zedong wrote in a letter to Qin Bangxian, the head of Jiefang Ribao [Liberation Daily], that “the foundation of the new democratic society is the factory (social production, both publicly operated and privately operated) and cooperatives (including work-exchange teams), rather than the scattered individual economy. The scattered individual economy— family agriculture and family handicraft industry—forms the foundation of feudal society, not the foundation of a democratic society (including old democracy, new democracy, and socialism). This is where Marxism differs from populism.”11 These characteristics of China’s smallholder economy benefited long-lasting stability in a closed feudal society. On the flip side, it made it difficult to respond to external shocks. China’s modernization has encountered obstacle after obstacle since the advent of the modern era. One primary reason was that all reforms, big or small, were focused on societal elites and urban regions without any attempt to fundamentally change rural economic and social structures. After the First Opium War, both foreign capital and the Chinese government, objectively speaking, siphoned resources from the countryside to support the intense demands of developing urban industry and commerce. At this point, the “ultra-stable structure” of traditional villages was undermined. The introduction of industry, commerce, and financial capital to the countryside was a shock to rural villages, where individual farmers were unable to compete with large capital. Widespread land engrossment and usury, coupled with the exploitation by industrial and commercial capitalists, led to extensive bankruptcy among small farmers and polarization in rural villages. Peasants were rendered destitute, making it impossible to form an efficient domestic market. Moreover, as large amounts of agricultural surplus were plundered by rentiers such as landlords and usurers, rural surplus could not be consolidated for infrastructure development and industrialization. After the founding of the People’s Republic of China, Mao Zedong often mentioned one incident. When he was eleven (1904), his uncle,12 Mao Jusheng, a farmer, had found himself on the verge of bankruptcy and wanted to sell the mere 7 mu of land he owned to Mao Zedong’s family. Both Mao Zedong and his mother disagreed, believing that they should help his uncle out, but his father felt that there was nothing wrong with buying his land. Mao Zedong lamented that “the private 10

[Germany] Karl Marx and Friedrich Engels, Marx/Engels Collected Works, vol. 2 (Beijing: People’s Publishing House, 1973). 11 “Mao Zedong Lunshu Xinminzhu Zhuyi Shehui Jichu Wenti” [Mao Zedong on problems of the social foundations for New Democracy], August 31, 1944, retrieved from People’s Daily online database, http://www.people.com.cn/GB/historic/0831/2835.html. 12 In China, one’s parent’s cousin is also considered one’s uncle or aunt—Trans.

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ownership systems in old society eroded even brotherly bonds—although my father and my uncle were cousins from the same clan, my father cared only about making money when purchasing my uncle’s 7 mu of land, turning a deaf ear to entreaties otherwise.”13 In essence, this was an example of the impact of external capital on rural villages. The withering of the countryside, in turn, entailed a lack of a market large enough for urban commerce and industry, which would either have to come to a premature demise or depend on foreign countries. Choosing the latter would mean forming a colonial economic structure and the inability to develop an independent industrial system. This shows that the key to overcoming the constraints of the smallholder economy on modernization lay in solving this problem: how to effectively concentrate agricultural surplus and in the meanwhile protect the countryside from being shocked to bankruptcy? This question has persisted since the late Qing dynasty, yet a full solution remains elusive.

2.2.2 Constraints of the World System Aside from its domestic smallholder economy, the world system posed another major constraint on China’s modernization. During the Industrial Revolution in the West, countries such as Britain that were the first to modernize did so in a world dominated by the natural economy, with vast virgin lands still untouched by commodity economies and capitalism. In contrast, most countries, including the People’s Republic, would later find themselves facing a global capitalist system that had already taken shape. Capitalist modes of production polarized the globe. On one side were the so-called core countries—developed countries such as the US and the European powers—which dominated the world system and used their military, scientific, technological and cultural advantages to dominate trade and control periphery countries in politics and economies. Economically, periphery countries were locked in at the low end of the industrial chain, providing cheap natural resources, agricultural produce, primary goods, and labor for developed countries. According to free-market economics, free trade and global division of labor will benefit all countries, allowing underdeveloped countries to continually close the gap with developed countries, eventually resulting in global equality. In reality, since the Industrial Revolution, this form of “free trade” has essentially been a tool for industrial powers to consolidate their monopoly. With the exception of certain economies, gaps between core countries and periphery countries have grown rather than shrunk. Because free trade was founded upon the monopolistic advantages of the strong, its theory is essentially their discourse system, a tool wielded by the strong to maintain their status, suppress the weak, promote international free trade through their 13

Pang Xianzhi, Jin Chongji et al., Mao Zedong Zhuan (1949–1976) [Biography of Mao Zedong (1949–1976)] (Beijing: Zhongyang Wenxian Press, 2003).

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monopolistic industrial strengths and to build a world structure that furthers their monopolistic interests. An investigation of history allows us to lay bare the essence of the free-trade theory. Before bringing major European states into the free trade system, Britain, the first state to industrialize, signed bilateral free trade agreements with other countries, using free trade as bait to more cheaply siphon their production factors. This also gave Britain access to bigger markets for their increasing stocks of goods and thereby a means to monopolize industrial production over the long run. For instance, Britain and Portugal had signed several reciprocal treaties, which in fact opened up markets for British goods in Portugal and hindered the development of Portuguese industries. The result was that Portugal became reliant on the British economy, which stifled its nascent textile industry and made the country no different from a “British colony.” Similarly, British textiles and other finished products poured into France, pushing French manufacturing industries into crisis, and leading to the French Revolution.14 As summarized by Fernand Braudel, a French historian: “The division of labour on a world scale (or on world-economy-scale) cannot be described as a concerted agreement made between equal parties and always open to review. It became established progressively as a chain of subordinations, each conditioning the others. Unequal exchange, the origin of inequality in the world, and, by the same token, the inequality of the world, the invariable generator of trade, are longstanding realities.”15 Apart from plundering developing countries of their resources through trade, developed countries have also influenced the political and social structures of colonized territories. Polarization is often prominent in colonies, where convenient transportation links enable coastal regions and large cities to integrate into the global economy, forming a class of elites with close ties to foreign powers (i.e., compradors). However, most inland regions remained traditional societies, even intentionally sustaining feudal, serfdom or tribal systems to make it easier for social elites to control the underclasses. Polarization of this sort limited the size of domestic markets in colonies, which diminished their capacity for normal governance and undermined their traditional social structures, reinforcing their spiral into the poverty trap. Prior to the founding of the People’s Republic, China was a typical periphery country in the world system. Although China did not completely lose its political sovereignty between 1840 and 1949, its economy had many traits typical of colonized countries. In 1936, foreigners controlled 76% of industrial capital in China—72% of the industrial mining and transportation industries, 95% of the steel and oil industries, 75% of the coal mining and electricity industries, 60% of the textile industry, 88% of the railway industry, 84% of the shipping industry, 80% of the export industry and

14

Mei Junjie, “Historical Facts of Free Trade as Illuminated by Marx’s Judgment” [in Chinese], Studies on Marxism, no. 6 (2009). 15 [French] Fernand Braudel, Le temps du monde, vol. 3 of Civilisation Matérielle, Économie et Capitalisme, XVe-XVIIIe, trans. Gu Liang and Shi Kangqiang (Beijing: The Commercial Press, 2017).

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90% of the import industry.16 Also related were domestic polarization and disunity. By then, a minority of coastal cities were already closely interwoven with the international economic system. For instance, “Shanghai was able to develop and thrive mainly because of taxation, with all trade and transport of goods in the Yangtze basin subject to taxes… In the 12 square miles of the International Settlement and French Concession, Westerners controlled a gradually industrializing and commercializing China like bosses.”17 However, traditional social structures persisted in China’s vast hinterland and countryside, with most smallholders unable to either fend against the impact of market risks or afford the required investment and consumption. This in turn constrained the ability of China’s national capitalists as well as industrial and commercial capital to expand production and improve technologies, eliminating any possibility that China could develop an independent economic system. Under this international system, both the advocates of the Self-Strengthening Movement of the Qing dynasty (during the latter part of the 1800s) and the later KMT regime hoped to achieve industrialization with assistance from abroad. As a result, they allowed large amounts of foreign investment to flow into China, whether under duress or on their own initiative. The outcome was that, although China developed some modern industries, control over capital, technology, and markets primarily lay with foreign capitalists. China failed to develop its own national industries and fell under the dual oppression of bureaucrat capitalists and compradors. The large inflow of cheap Western industrial products also caused extensive bankruptcy in China’s handicrafts industry. According to a survey of North China by British scholar William Hinton: Large-scale importation of cheap, machine-made goods undermined one sector of the economy after the other. This was especially true of the textile trades. Millions of weavers, unable to compete with the power-driven looms of Lancaster, Tokyo, and later Shanghai, lost their main means of livelihood and were thrown into the swelling stream of those bidding for the scarce and already depleted land. The rising tide of landless and destitute people enabled landowners to stiffen the terms of tenancy, raise rents, and jack up interest rates. It enabled grain dealers to force harvest time prices lower and winter and spring prices higher. It enabled merchants to widen the gap between farm produce and industrial products. Not only the laborers and tenants but also the land-owning middle peasants felt the squeeze more and more. To maintain bare subsistence they had to increase working hours, get up earlier, finish later, and work harder on the job. Even then they could not make ends meet. They had to go over more frequently to the moneylender and, once saddled with debt, found it impossible to break free. It was an exceptional family in Long Bow that did not owe the equivalent of several years’ earnings.

16

Chi Pingping, “Qianxi Kangmei Yuanchao Zhanzheng dui Waiguo Zaihua Qiye de Yingxiang” [A brief analysis of the impact of the war to resist US aggression and aid Korea on foreign companies in China], Historical Records of Heilongjiang, no. 9 (2010). 17 [British] Richard Hughes, Hong Kong, Borrowed Place, Borrowed Time (London: Andre Deutsch, 1968).

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2 China’s Early Choice of Modernization Path … Weighed down by high-interest rates, harassed by heavy taxes, caught in the snares of a rigged market, many landowning peasants went bankrupt… “There are districts in which the position of the rural population is that of a man standing permanently up to the neck in water so that even a ripple is sufficient to drown him,” wrote R.H. Tawney in 1932.18

After the outbreak of the Great Depression in 1929, China became a place for the West to deflect its crises.19 Cheap goods from foreign countries bankrupted large swathes of China’s few indigenous industries, even as large inflows of silver created real estate bubbles. By 1935, more than 1000 companies in Shanghai had collapsed, causing 500,000 to be unemployed. This demonstrates that effective domestic demand could not develop under colonial economic conditions. Neither would these conditions allow China to develop a foundational industrial system that could meet its development needs.20 China gained political independence when the People’s Republic was founded, but there was yet no change to its dependent colonial economic structure. China faced a difficult choice: to continue depending on major powers or to build an independent economic system. After surveying domestic and international circumstances, the People’s Republic opted for a strategy of prioritizing the development of heavy industry and military industries, to be primarily driven by domestic resources. The goal was to develop China’s heavy industries as quickly as possible. Economic efficiency could not be the sole goal of economic development. The most pressing imperative for economic development was to meet the needs of national security.

2.2.3 Constraints of State Power Ever since the emergence of capitalism, state power has played an indispensable role in modernization in each and every country. In the early stages of the capitalist revolution, capitalists relied on state violence to overcome feudal constraints, turning land and labor into commodities that could be freely traded and creating the conditions for industrialization. Countries such as Germany and Japan implemented a system of state capitalism, where they concentrated resources on the development of heavy industries and military industries through the power of the state. After the Second World War, capitalist states became more involved in providing public goods, social security and income redistribution. To a certain degree, this alleviated social contradictions and risks such as polarization. 18

[British] William Hinton, Fanshen: A Documentary of Revolution in a Chinese Village (Beijing: Beijing Publishing House, 1980). 19 Yan Quan, “Minguo Jingji Shi Yanjiu de Xin Shijiao: Du Da Xiaotiao Shiqi de Zhongguo: Shichang, Guojia yu Shijie Jingji” [A new perspective on research on the economic history of Republican China: Reading China During the Great Depression: Market, State and the World Economy], Historiography Quarterly, no. 1 (2013). 20 Dai Chunxia, “A Research on Chinese-funded Banking under the Great Depression in the 1930s” [in Chinese], Ph.D. diss., (Tianjin: Nankai University, 2012).

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The initiation of modernization requires a powerful state. Countries that have fallen into the poverty trap generally lack the capacity to govern, as manifested in two areas. First, their governments are too weak to maintain social stability, provide public goods, or implement long-term plans for socio-economic development. The second is that state power is controlled by special interests and becomes their selfserving tool, depriving the majority of development opportunities. These countries cannot possibly achieve modernization. Both problems existed in pre-1949 China. On the one hand, feudal China had weak governments. One characteristic of the socio-political structure in feudal China was that “imperial authority extends only to the county” (huangquan bu xia xian). Local communities were “autonomous,” with power structures dominated by local landlords and gentry. To maintain the stability of this structure and prevent onerous taxes from leading to civil rebellions, the central government had no choice but to cede power over fiscal affairs. As a result, central government finances in feudal China never exceeded 4% of GDP. After the mid-Qing, local power structures expanded and rapidly eroded the authority of the central government. It has been estimated that, in the later years of the nineteenth century, the income of local and central governments amounted to around 7.5% of GDP. Less than half (approximately 3%) went to the central government.21 These weak governments advocated “streamlined administration,” relied on respected community leaders, and promoted local self-government. This tradition of weak state power and reliance on local self-government sustained the stability of the feudal system. Even in modern times, Chiang Kai-shek still extolled this tradition in China’s Destiny, arguing that: [In] China’s [original] social structure… the spirit of self-government was sufficient to ensure individual and family behavior without depending on the legal intervention. The spirit of mutual co-operation was sufficient to ensure planning for the public benefit without the need for government supervision… During the past five thousand years… our social traditions and morale retained their honesty and sincerity, diligence and modesty, virtue and righteousness, thrift and honor. These were the fundamental reasons why our nation was able to survive for so long.”22

Chiang Kai-shek was aware of the role of rural self-government in rural stability, but he failed to see that this stability was a pernicious solution. This form of stability caused rural villages to retain self-sufficiency over the long run, making them unable to consolidate resources for technological progress and causing the stagnancy of feudal societies. In the era of industrialization and urbanization, the government would be powerless to protect farmers. Under the impact of industrial, commercial and financial capital, land engrossment intensified in rural villages, while local despots and landlords allied themselves with newly risen industrial and commercial capitalists, aggravating the exploitation of farmers. Meanwhile, the KMT government also failed to put land issues and the development of rural government on their agenda. These were important factors behind their eventual downfall. 21

Ma Min, “Xiandaihua de ‘Zhongguo Daolu’” [The “Chinese Road” to modernization], Xinhua Wenzhai, no. 3 (2017). 22 Li Ling and Jiang Yu. Well-functioning government, effective market and organic society— China’s path and the modernization of capacity for governance [J]. Economic Herald, 2014 (04).

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On the other hand, political dependency featured prominently in the KMT regime. Chiang Kai-shek’s primary power base was comprised of monopoly capitalist groups and the foreign capital that backed them, which meant that the KMT regime could not possibly represent the interests of farmers, workers, or China’s national capitalists. It could only represent the interests of large capitalists and compradors, which then refused to take any serious measure in land reforms, rent reductions, interest reductions, or other policies that promoted social equity and improved the lives of the social underclass. It then became impossible to stop land rentiers and usuries from grabbing resources. During the reign of KMT, although a wide range of exorbitant taxes and levies created a huge burden for farmers, only a tiny proportion of taxes actually made it to government coffers. A survey in Sichuan speculated that the heads of community units known as bao and jia23 pocketed one-third of apportionments. In early 1945, the Ta Kung Pao reported that the burdens on farmers were five times that of taxes levied by the government. The difference had been pocketed by landlords and local despots.24 The existence of a class of landlords and financial capitalists (the KMT itself was part of this interest group) made it impossible for agricultural surplus, already limited, to be consolidated in real industries. In 1936, the financial budget of the KMT government was merely 8.8% of GDP, a typical example of a weak government. Due to weak government capacity, the KMT relied on US aid and printing money to finance its war efforts, which caused raging inflation and ended up undermining the interests of various social groups, from the middle class to farmers, making the downfall of the regime an inevitability. In this sense, the KMT was defeated by the existence of too many interest groups, the collapse of grassroots society, and a lack of governance capacity. Meanwhile, the CPC implemented land reforms in base areas and liberated areas, distributing resources that had been seized by interest groups to farmers. This allowed the CPC to win the support of the people and develop a formidable capacity to mobilize resources. Thus, the showdown between the KMT and the CPC over China’s fate was, in fact, also a showdown between two paths of economic development and two class forces. It is then apparent that the constraints of the smallholder economy and the power of feudalism made China’s domestic capitalist forces extremely weak. At the same time, the development of capitalism in the outside world also held back the independent development of Chinese national capitalism. Foreign imperialist forces and domestic feudal forces became two forces that held back China’s modernization. To the Chinese people of this arduous era, capitalism was a double-edged sword—something to be simultaneously embraced and wary of. On the one hand, China suffered because of the development of foreign capitalism, i.e., imperialist aggression. On the other hand, China suffered from the lack of development in internal capitalism, i.e., feudal oppression. Anti-imperialism and anti-feudalism were responses to these two 23

In traditional China, grassroots communities were divided into administrative units known as bao and jia. Ten households constitute one bao, while ten bao in turn constituted one jia—Trans. 24 Lloyd Eastman, Seeds of Destruction: Nationalist China in War and Revolution, 1937–1949 (Nanjing: Jiangsu People’s Publishing, 2009), 51.

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problems. Today, China’s commitment to the Four Cardinal Principles and reform and opening up is similarly a response to these problems.25 As China’s anti-imperialist and anti-feudal struggles took place in a land that was semi-colonized and semi-feudal, a powerful and capable government became all too necessary. Neither the Qing government nor the KMT government could represent the interests of the oppressed. A capitalist regime could not create space for the independent development of the Chinese people, nor could it effectively consolidate resources to initiate the modernization process. This then meant that China could only rely on a path different from capitalism to achieve modernization. It was impossible for the political and economic model of the old China to shoulder the mission of initiating modernization. For China to modernize and expand its economy, before anything else three questions had to be answered. First, how should China accumulate capital, given its smallholder economy, such that it could complete primitive capital accumulation for industrialization while sustaining rural stability and development? Second, how should China achieve independent development and cease being a dependent periphery country by utilizing necessary international aid while retaining economic independence? Third, how should China enhance its governance capacities and build a strong modern state that could eliminate interest groups and embark upon modernization? The People’s Republic answered these questions by embarking upon the path of socialist economic construction.

2.3 The Goals and Constraints of Modernization in the People’s Republic After the People’s Republic was founded, the Party immediately faced a choice between different paths of economic development. The Party not only had to consider economic efficiency; it also had to safeguard national security and independence, lay a foundation for heavy industry, and improve living standards. Simultaneously meeting these demands required the formulation of a radically different development strategy and an untapped path of economic growth suited to China’s contemporaneous national conditions.

25

Qin Yicheng, “Ruhe Duidai Zibenzhuyi: Zhongguo jinxiandai shi de jiben wenti—jianlun Zhongguo tese shehuizhuyi daolu de lishi biranxing” [How to regard capitalism: a basic question in modern Chinese history—cum a discussion on the historical necessity of the path of socialism with Chinese characteristics], Red Flag Manuscript, no. 19 (2009).

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2.3.1 The Three Major Goals for Economic Development of the People’s Republic The first goal was to safeguard national security and sovereignty. The People’s Republic faced a grim global landscape during its early years. After the Second World War, the US and the USSR delineated their spheres of influence and formed a nuclear monopoly. China found itself at the forefront of the confrontation between the two camps as the Taiwan question remained unresolved, while the eastern coast faced threats from the US. Later, northern China would be affected by the breakdown in Sino-Soviet relations in the 1960s. As such, China first had to build a militaryindustrial system to safeguard its national security. Only after safeguarding its basic security could China embark upon economic activities and engage with the world on a relatively equal footing. This mandated that economic development in the 1950s and 1960s had the attributes of a “wartime economy.” Major economic policies, such as prioritizing the development of heavy industry, the planned economy, the building of the Third Front (sanxian, the landlocked hinterland of China), and agricultural collectivization, were directly related to countering the threat of war. China only had the means to adjust its economic development strategy in the 1970s after it had achieved some measure of national security with the development of its own atomic weapons, ballistic missiles and satellites, preliminarily established a comprehensive industrial system, and achieved self-sufficiency in oil and other strategic supplies, giving it the capacity to compete with the superpowers. The second goal was to lay the industrial foundation required for modernization. Although industrialization is one of the most important characteristics of modernization, initiating the industrialization process and expanding economic output are two different concepts. In the Qianlong era (1735–1796), China generated one-third of global economic output despite being a typical agrarian society. Both the late Qing and the KMT governments had tried hard to modernize the country but lacked the minimal industrial base required. The economy was still extremely backward when the People’s Republic was founded. Modern economic sectors made up merely 10% of its economy, while per capita GDP in 1950 was less than $50. Based on 1952 RMB prices, fixed assets per capita were less than 40 yuan,26 rendering effective investment virtually impossible. In 1952, despite some industrial development, output from modern industries constituted merely 26.6% of industrial and agricultural production. Heavy industry constituted 35.5% of total industrial output, while light industry was dominated by cottage industries such as textiles and food processing. Electricity generation per capita was merely 7.9 kWh, less than that required to power a fluorescent lamp. Crude oil production per capita was 0.36 kg, enough to power a motorcar for merely a few kilometers. Steel production per capita was 0.29 kg, less than that required for a kitchen knife. Given these circumstances, modernization would require the fundamental transformation of a backward economic structure. Meanwhile, large 26

Fang Ye and Zhang Xiaofang, “Hu Angang: 60 nian jingji fazhan rang zhongguo zouxiang shijie qiangguo” [Hu Angang: 60 years of economic development have brought China towards being a world power], Economic Information Daily, September 3, 2009.

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amounts of investment were needed for China to build an industrial base, especially in heavy industry. This first required a solution to the problem of accumulating capital in an agrarian society. The third goal was to improve living standards and promote human development. Human development is not only a goal of modernization but also a driver of economic growth. Old China was extremely lacking in human capital. In 1949, more than 80% of the Chinese population were illiterate, while enrolment rates for schoolage children were merely 20%. These indicators were equivalent to 1820 levels in Western Europe. At the time, the nation remained despondent, society was highly fragmented, and China was still known as the “Sick Man of Asia.” These made it impossible to form a qualified population of industrial workers and affected the vitality, spirit, and character of the country. In the latter part of the Chinese Civil War, vicious inflation in territories controlled by the KMT plunged locals into hardship and cost the regime popular support. After the founding of the People’s Republic, the Party had to lead the Chinese people in “modernization from scratch,” responding to foreign and domestic security threats, launching modern industrial construction and improving public wellbeing. One can easily imagine how difficult it was to develop the economy. The three goals of national security, industrialization, and improving livelihoods each had “veto power”—all had to be achieved. As Mao Zedong put it during an enlarged meeting of the Politburo on October 5, 1951: “Wars have to be won, prices cannot fluctuate, and production still needs to be developed.”27 To simultaneously fulfill these three goals, economic development in the early days of the People’s Republic could not merely pursue growth rates. Instead, China had to find a path of development that could concurrently meet these three goals. From 1840 to 1949, China’s various attempts at modernization failed as the country did not realize that these three goals were mutually reinforcing and inalienable. The Self-Strengthening Movement in the Qing dynasty sought to achieve national independence by revitalizing the economy through industrial development. The KMT government overly relied on foreign capital to stimulate economic growth, leading to a loss of autonomy over important resources and basic industries, turning China into a typical dependent periphery country in the world system. Although the Chinese economy achieved some growth, this came at the cost of economic and political sovereignty. Moreover, since 1840, China’s modernization had been repeatedly interrupted. Aside from the incursion of foreign powers, another key reason was that China failed to address livelihood issues. Over-exploitation of small farmers by industrial and commercial capitalists had led to bankruptcies in the handicrafts industry and stagnant rural economies. When the People’s Republic was just founded, none of the existing paths to modernization was suitable.

27

Rong Bing, “Zhonghua Renmin Gongheguo Chengli Chuqi de Zengchan Jieyue he Fanlangfei Yundong” [Campaign to boost production and reduce waste in the early years of the People’s Republic of China], General Review of the Communist Party of China, no. 5 (2015).

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First, it was impossible for China to take the path of modernization that capitalist countries like Britain, Germany, and Japan did. Early capitalist countries such as Britain relied on colonization and foreign trade for primitive accumulation and markets. Within their borders, they relied on enclosure movements to drive farmers from their lands and gain cheap labor. Outside their borders, they gained cheap slaves, raw materials, and markets for their products through colonialization. The African-American scholar William Du Bois estimated that from the beginning of the sixteenth century, Europe and America sold as many as 60 million African slaves over three hundred years, reducing Africa’s population from one-fifth of the total human population to merely one-thirteenth.28 Primitive accumulation for industrialization in Western countries relied on the labor of these slaves. Obviously, this was out of the question for China, both objectively and morally. Subsequent capitalist countries such as Germany and Japan relied on war reparations and colonialism for primitive accumulation and markets. That was also not an option for China. Second, neither could China take the path of small economies like the Four Asian Tigers, which relied on major countries for security and markets. Some hold that if China had joined the global trade system as the Four Asian Tigers did and opened its doors to Western industries relocating overseas, using its comparative advantage of a huge labor force to engage in labor-intensive industrial processing and trade, China would have modernized as early as they did. This is an erroneous view. The “take-offs” of the Four Asian Tigers share one common prerequisite: joining a Western political and economic system dominated by the US to gain access to Western markets, technologies, and capital. This is a path to becoming a dependent economy, which may be possible for small economies, but not a major country like China. On the one hand, China would never give up its hard-won independence and liberation. On the other hand, Western countries could afford to support these small economies as “unsinkable aircraft carriers.” But no country would have the ability to provide China with the sort of support given to the Four Asian Tigers. Neither would they dare to support the rise of China as they did for the Four Asian Tigers. In short, China could neither emulate the development models of capitalist countries like Britain, Germany and Japan nor follow the development path taken by small economies like the Four Asian Tigers. This meant that existing development models among industrialized and modernized countries were unsuitable for China. Since China could neither follow its old development paths nor those of others, the People’s Republic, destitute yet brimming with potential, could only seek a new route.

28

Huang Shaoxiang, Meiguo Tongshi Jianbian [A concise general history of the United States] (Beijing: People’s Publishing House, 1979), 23.

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2.3.2 China’s Comparative Advantages While recognizing these difficulties, one must also realize that the People’s Republic was able to surpass the regimes that preceded it because China already developed unique strengths in 1949. Specifically, China had three strengths that it did not have in the past. First, mainland China had been unified, forming a single market constituted by a massive population. Human beings are the most dynamic factor of production. The founding of the People’s Republic marked an end to more than a hundred years of feudal segmentation and warlord dogfight, allowing China to form an enormous single market with advantages of scale. Adopting an appropriate development strategy would allow China to build a relatively comprehensive industrial system and form massive domestic demand simply by relying on its own resources and population. This would allow China to be free of reliance on global markets, as well as fear of blockades, making it possible to escape the fate of dependency that often befell periphery countries. This was a unique advantage that China had as a major country. Second, China had completed the most thorough social revolution in history and built a fair and united society. One important reason that the old China was unable to embark upon modernization was the expropriation of rural surplus by rentiers, foreigners (imperialists) and natives (bureaucrats and feudalists) included, causing domestic wealth to flow to other countries or be spent on luxury consumption rather than benefit industrial development or the general population. The CPC led the most thorough social revolution in Chinese history on a scale rarely encountered even in the annals of world history. The revolution eliminated the various interest groups that existed then, built a fair society, and liberated the wealth that had been amassed by a social minority, diverting it to industrial investment and the improvement of livelihoods. Moreover, an equitable society was also beneficial to raising the overall literacy of the people, which bolsters social solidarity and consensus. These were the positive significances of the social revolution on economic growth. Third, the CPC has rigorous and efficient organizational capabilities. The transition from an agrarian society to an industrial society is a process of making social production more organized. The CPC is a political party with a rigorous organizational system and great prestige. The Party’s organization and mobilization capacity were able to remedy problems faced by China as a traditional developing country, such as its poor governance capacity and inadequately developed markets, thus safeguarding national security and stability and concentrating limited resources in sectors most effective for long-term development. These conditions made it potentially possible for the People’s Republic to embark upon modernization efforts. However, to truly utilize these conditions and find a path of modernization appropriate to China still required several rounds of experimentation. The first economic crisis in the early days of the People’s Republic, the “April Crisis,” was a good lesson for the new government. This crisis proved that the economic institutions it had inherited could not shoulder the missions of building a

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modern, socialist China. The quest for solutions to this crisis prompted the Party to seek the right path for China’s modernization.

2.4 The April Crisis: A Clash Between Old Institutions and New Goals Before the founding of the People’s Republic, as well as during its early days, key Party leaders repeatedly stated that it was impossible for China to pursue a socialist revolution right after the victory of the New Democratic Revolution. A transition stage from New Democracy to socialism would be required. However, barely three years after the People’s Republic had been founded, Mao Zedong proposed that China should transition from New Democracy to socialism, a transition completed in merely three years. Ultimately, what were the reasons, or perhaps new circumstances, that caused the Party to cut short its previously devised New Democratic economic roadmap and bring forward socialist transformation? Some believe that the path that China took after reform and opening up was essentially that of New Democracy— the Chinese economy could have “saved itself twenty years” if the country had not pursued socialist transformation as early as it did. History does not support the view that China’s socialist transformation was a “false start.” The fact was that neither the economic systems of previous regimes nor the envisaged New Democratic policies could have set China upon the process of modernization. This conclusion is based on actual events during the formative years of the People’s Republic, the earliest being the “April Crisis” of 1950.

2.4.1 The April Crisis The newly founded People’s Republic faced its first economic crisis in April 1950. On the surface, this crisis was the consequence of efforts to tame the inflation caused by the KMT regime. In early 1949, as the Chinese Civil War was drawing to an end, inflation and speculation were rife in KMT-controlled urban areas. After the founding of the People’s Republic, stabilizing commodity prices and cracking down on speculation naturally became the primary objectives of economic policy. In March 1950, commodity prices began to stabilize after the central government adopted measures that effectively curbed inflation. However, this also led to a widespread plunge in the sales of goods and commodities, causing severe difficulties for production and management in the private sector. The following month, China began to face new nationwide economic challenges, including depressed markets, factory closures, and increased unemployment. This led to widespread public anxiety, especially among the national capitalists. In Shanghai, for instance, cotton yarn, rice, and flour transaction volumes

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had declined by 47, 83, and 44% from January to April.29 A contemporaneous couplet captures the mood of those in private industry and commerce: “uneasy we are under the red flag; trapped we are as we dance the Yangko.” This came to be known as the April Crisis. Aside from posing a challenge to the Party’s ability to govern, the April Crisis was a major test of the relations between the new administration and China’s workers and national capitalists. The crisis drew the attention of the CPC Central Committee, which delegated leadership over economic work and specific response measures to Chen Yun, an alternate secretary of the Secretariat of the Central Committee and head of the office of the CPC Central Leading Group for Financial and Economic Affairs (now the Central Financial and Economic Affairs Commission). In May 1950, when addressing a conference attended by the heads of seven major municipal industry and commerce bureaus, Chen Yun analyzed the causes of the difficulties faced by industry and commerce. First, financial and commodity price stability had exposed as well as suppressed the artificial purchasing power previously prevalent in the economy. According to Chen Yun, the inflation had been growing since the Second Sino-Japanese War, leading to soaring price levels. As a result, people valued tangible goods over currency. Extensive hoarding then led to huge artificial purchasing power, which laid the ground for the growth of industry and commerce. After commodity prices had stabilized, people came to value money over goods, preferring to hoard cash instead. Moreover, the resultant sell-off of existing inventory had led to a stagnant industrial and commercial sales. Second, as imperialist rule, feudalism, and bureaucratic capitalism had been wiped out in China, many industrial businesses that had developed under the past semicolonial, semi-feudal economy had become unsustainable, causing many goods to lose their markets. In addition, many goods meant for the indulgences of privileged classes were incompatible with the needs of the people. According to Chen Yun, “Shanghai Mayor Chen Yi has a monthly discretionary budget equivalent to only 50 jin of millet, a huge difference from that of the KMT Shanghai Mayor Wu Guozhen.” Moreover, most private enterprises had bloated organizational structures and were poorly run. Entities within the same industry would blindly compete with one another, with little coordination in cross-regional supply and demand. Prolonged wars had lowered the purchasing power of the people,30 while taxation and public debt issuance systems were inadequate. Chen Yun’s analysis can be summarized as follows: the lopsided economic structure formed under semi-feudal and semi-colonial conditions was no longer able to meet the needs of the socialist People’s Republic. In fact, the dependent and speculative nature of the economic structure, the insufficient purchasing power of 29

Institute of Economics at Shanghai Academy of Social Sciences, Shanghai Zibenzhuyi Shangye de Shehuizhuyi Gaizao [Socialist transformation of capitalist commerce in Shanghai] (Shanghai: Shanghai People’s Publishing House, 1980). 30 Party Literature Research Institute of the CPC Central Committee, Chen Yun Zhuan [Biography of Chen Yun] (Beijing: Zhongyang Wenxian Press, 2005), 695–696.

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the masses, and the weakness of national industry were common traits in modern colonial economies. Under previous regimes, economic demand in China had certain characteristics typical of colonial economies. First, dependent demand—the export of primary commodities—had been weakened by the elimination of foreign colonialists’ privileges and their embargoes on China. Second, the various forms of luxury consumption geared towards rentiers had been curtailed after the socialist revolution stamped out the privileged classes. Contemporaneous estimates indicated that this had led to a decline in annual consumption equivalent to 23 billion jin of millet. According to Chen Yun, “This decline is a fact, and it cannot be immediately reversed; certain declines should also not be reversed.”31 Third, extensive speculation had caused structural imbalances in Chinese industry and commerce prior to the founding of the People’s Republic—speculation accounted for a large proportion of economic demand. In 1936, the commercial and financial sectors had net assets worth 5.87 billion yuan, more than four times that of the industrial and transportation sectors, which had net assets of only 1.33 billion yuan. This lopsided structure made the real economy heavily dependent on both domestic and foreign financial capital. As stronger measures were taken to curtail speculative transactions in the financial markets, demand created by inflation in financial and commodity speculation was reduced and eventually eliminated.32 In short, the economic demand sustained under previous regimes by relying on foreign countries, speculation, and rentier consumption had been weakened, or even eliminated, after the founding of the People’s Republic. This naturally had a temporary impact on economic growth. However, it can also be interpreted as amputating an arm to save one’s life since real economic growth could be achieved only by developing the socialist economy. On the supply side, China, under past regimes, also had certain characteristics typical of colonial economies. Back then, China did not have self-sufficient industrial systems as it had been forced to incorporate its industrial structure into the international division of labor. China was especially weak in infrastructure and basic industries. In 1936, merely 28% of China’s total industrial output consisted of production factors. In particular, the machine manufacturing industry accounted for merely 2.2%,33 while basic industries such as petroleum production and machinery manufacturing were all but non-existent. After operations resumed, light industry immediately ran into problems in reaching full production capacity due to bottlenecks in

31

Chen Yun, “Combatting Sluggish Sales of Commodities”, in Selected Works of Chen Yun, vol. 2 (Beijing: People’s Publishing House, 1995). 32 Wu Chengming, Zhongguo Ziben Zhuyi yu Guonei Shichang [Chinese capitalism and domestic markets] (Beijing: China Social Sciences Press, 1985), 66. 33 Li Yue, Zhongguo Gongye Bumen Jiegou [Structure of China’s industrial sector] (Beijing: China Renmin University Press, 1983), 25.

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machinery, equipment and raw materials caused by deficiencies in the basic industries. These were underlying factors for both the April Crisis of 1950 and recurrent shortages in factors of production in light industries over the following years. On the supply side, under previous regimes, China lacked an independent industrial system, especially in basic industries, which precipitated an economic crisis in the early days of the People’s Republic. The crisis clearly showed that the new state could not industrialize without overhauling legacy economic foundations and systems. Then again, what measures should China take to survive the crisis? This can be analyzed from the perspectives of both demand and supply.

2.4.2 Supply-Side: Land Reforms In 1950, Mao Zedong analyzed the three conditions for improving public finances and the economy. According to Mao, fundamental improvement in the financial and economic situation required three conditions: the completion of agrarian reforms, proper readjustment of existing industry and commerce, and large-scale retrenchment in government expenditures. Hence, leading government financial and economic organs in the next few months had to focus on adjusting the relationships between public and private corporations and their various departments, to overcome the anarchic state of affairs.34 Apart from the third condition, which is primarily a fiscal issue, the first two accurately provided solutions to the economic dilemma. “Completion of agrarian reforms” addressed demand-side problems, in other words awakening the huge, slumbering rural market by increasing farmers’ purchasing power. “Proper readjustment of existing industry and commerce” addressed problems of supply, in other words eliminating disorderly competition and strengthening fundamental sectors and industries through cooperation between the state-owned and private sectors, and thereby providing the funds and raw materials needed for the development of other industries. Measures taken in response to the April Crisis of 1950 were largely in line with these approaches. On the demand side, the most important measure was to “promote the exchange of materials between urban and rural regions,” in essence replacing vacuous speculative demand and foreign demand with actual demand from the countryside. It was estimated at the time that land reforms had reduced land rents for farmers and boosted agricultural production. As a result, potential demand from China’s farmers had increased by 62 billion jin of millet, equivalent to 155% of the previous level (40 billion jin).35 To this end, the Central Committee adopted measures to encourage trade between cities and the countryside, building a huge unified market.

34

Mao Zedong, Mao Zedong Wenji [Collected works of Mao Zedong], vol. 6 (Beijing: People’s Publishing House, 1999), 52. 35 Chen Yun, Selected Works of Chen Yun, vol. 2 (Beijing: People’s Publishing House, 1995), 88–91.

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This experience had a great impact on economic restructuring in the 1960s and rural reforms in the 1980s. In essence, it provided a huge market for the development of urban industries by boosting social equity and reviving the huge markets of the countryside. Thereafter, the establishment of rural cooperatives and people’s communes shared one important goal, which was to promote the better exchange of materials between cities and the countryside. This historical experience continues to bear highly important lessons for addressing excess industrial capacity and the urban–rural divide today.

2.4.3 Supply-Side Reforms: Readjusting Industry and Commerce On the supply side, the most important step was to have the state, and state-owned enterprises, place orders for processed goods from private corporations since foreign demand had decreased and domestic demand was inadequate. As a matter of fact, these orders for processed goods had already begun in 1949. On January 1, 1950, Chen Yun wrote in a telegram to Mao Zedong that “we have allocated 50 billion yuan to East China on December 8, most of which will be used to purchase goods from Shanghai factories, with the remainder used to disburse loans… the crisis in the Shanghai commercial sector has been resolved”.36 Mao Zedong expressed his approval of these measures. Thereafter, the placement of orders for processed goods expanded rapidly, increasing from 11.5% of nationwide private industrial output in 1949 to 27.3% in 1950. In particular, processed products for the state constituted more than 70% of the output of the cotton textile industry.37 State procurement of processed goods was the origin of the subsequent “public–private partnership” policy and the socialist transformation of commerce and industry. The journey from the procurement of processed goods towards public–private partnership shows that socialist transformation was not—unlike what some believe— nationalization of a well-functioning private sector. On the contrary, the inherent weaknesses of a semi-colonial economy had created a weak private sector. State assistance in areas such as raw materials and markets was the only route for China to survive the crisis and develop normally. This, in itself, implies the inevitability of heading towards socialist transformation. China’s experience in responding to the April Crisis shows that the economic foundations and institutions inherited from the previous regime were unable to serve the goal of modernization. Specifically, on the demand side, China’s industrialization was possible only by obtaining surplus from the countryside and invigorating its immense rural market. On the supply side, the development of other industries 36

Chen Yun, Selected Works of Chen Yun, vol. 2 (Beijing: People’s Publishing House, 1995), 51–52. Institute of Economics at Shanghai Academy of Social Sciences, Shanghai Zibenzhuyi Shangye de Shehuizhuyi Gaizao [Socialist transformation of capitalist commerce in Shanghai] (Shanghai: Shanghai People’s Publishing House, 1980), 116.

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could be boosted only by prioritizing the development of basic industries. These experiences informed the subsequent search for a development path for the People’s Republic. Of course, resolving the April Crisis was only a start. In the years thereafter, like the response to the April Crisis, Party leaders led the people in seeking a new path during the process of overcoming the bottlenecks that prevented the People’s Republic from industrialization and modernization, which determined the basic institutions and strategies for the country’s economic development. In fact, the problems faced by China’s current “new normal” share many similarities with the April Crisis of 1950, making it worthwhile to learn from the successful response to the crisis (see Box 2.1).

Box 2.1 the April Crisis Provides Lessons for Stable Growth History is the best textbook. China experienced a severe recession in the first half of 1950. In response, under the leadership of the Central Committee, Chen Yun presided over the restructuring of the national economy and its rapid recovery. That round of economic restructuring shares many parallels with contemporary circumstances and can serve as a guide. • Similarities in the nature of the challenges. Beginning in April 1950, markets nationwide plunged into a severe recession. Outflows of industrial and commercial capital were greater than inflows. This is similar to today’s situation. • Similarities in underlying factors. First, the stabilization of the situation exposed the false purchasing power created by past financial speculation. Previously, the economy seemed to be thriving even though real purchasing power was muted. Second, industry and commerce were highly foreigndependent in the past. Domestically, China had not yet formed an independent industrial system, leading to difficulties once foreign demand shrank. Third, business models were backward, relying primarily on long working hours, intensive labor, and wage reductions to generate profits. Fourth, haphazard competition within the same industry was prevalent, while demand and supply between different localities were uncoordinated. Even though China is now at a very different stage of development, these phenomena are still extant in some sectors and corporations. Factors underlying economic difficulties include ineffective investment attracted by local governments, lack of independent industrial systems in certain sectors, some companies’ reliance on suppressing labor costs to expand re-production, and blind competition within the same industry. • Solutions to the crisis can serve as a valuable reference. First, the government organized the placement of orders for processed goods and purchased finished goods to help sustain corporate production. Second, the government used rural land reforms and strong rural purchasing power to develop huge rural markets and the circulation of goods between urban and rural

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regions, unifying their markets. Third, the government reduced burdens on companies in aspects such as taxation, public debt, and credit. Fourth, the government restricted investment in industries with excess capacity through professional conferences, production and sales meetings, and announcements of production figures. This provided a roadmap for the production and operations of privately owned industrial and commercial enterprises, gradually abating the anarchic state of production and strengthening coordination. After restructuring, the profits of private-owned industrial and commercial enterprises grew by 90.8% in 1951. Businesses found that peak seasons were even more profitable while business remained good even in off-seasons. These measures are worth reflecting upon today. First, in some strategic and resource industries, falling commodity prices provide an opportunity to expand government reserves and mitigate insufficient corporate demand. Second, the government should work to boost the incomes of farmers and migrant workers through greater income redistribution and strict implementation of regulations on minimum wages and shorter working hours. Rural cooperatives should also play a role in reducing the costs of logistics. Excess capacity in the steel and electrolytic aluminum industries should be diverted to rural infrastructure development and the rebuilding of rural housing, which would create new, huge rural markets. Third, measures should be taken to regulate disorderly competition in industrial sectors. Industry coordination and integration should be strengthened. The government, state-owned enterprises, and industry associations should play a leading role in the development of key technologies and industry self-regulation, as well as enhance integration in key industries.

2.5 The New Logic Underlying New Institutions Beginning from the response to the April Crisis, the basic economic institutions and development strategies of socialist China began to take shape over a few years of exploration. In terms of ownership systems, after the socialist transformation, China established a structure dominated by public ownership but did not implement a system where “diverse forms of ownership develop side by side,” not to mention private ownership. In terms of development strategies, China prioritized the development of heavy industries but not labor-intensive light industries. In terms of economic systems, China adopted a planned economy instead of a free market. In the countryside, rural cooperatives were established soon after land reforms achieved the goal of “land to the tiller.” China did not retain a system of individual land ownership, unlike most developing countries. In terms of distribution, China stressed the primary role of public consumption, with basic living necessities to be distributed by the state

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instead of freely traded. Of course, in terms of specific steps and paths, these systems were not established simultaneously, but rather through a complex process. The formation of these strategies was not based on ideology or unfounded beliefs in the planned economy or public ownership, but rather on the objective needs of industrialization and economic growth. They were based on intrinsic, rigorous principles.

2.5.1 Prioritizing the Development of Heavy Industry Prioritizing the development of heavy industry was the most salient feature of the development path of the People’s Republic in its early days. From the standpoint of comparative advantages, China should have first developed light industry since it had scant capital but a huge labor force. Thus, some have argued that China was wrong to prioritize the development of heavy industry, which distorted the allocation of resources. Others have argued that China’s choice was based on an unfounded belief in Stalin’s argument that socialist industrialization should prioritize heavy industry, leading to the adoption of the Soviet development model. Neither of these arguments comport with historical facts. Given the conditions in the early days of the People’s Republic, the adoption of a strategy that prioritized the development of heavy industry was the foundation for building a modern industrial system and a diversified range of industries. This was necessary not only for national security, but also for the development of light industry and the transformation of agriculture (Fig. 2.1). First, from a political perspective, the development of heavy industry was a prerequisite for national security. In June 1950, the United Nations Command led by the US invaded Korea, threatening China’s security and forcing it into the Korean War, the first war faced by the People’s Republic. The eventual outcome secured peace for the subsequent decades and greatly enhanced China’s international prestige. Yet, China also paid a high price. One important cause of that was the lack of an industrial base at the time. The war made the country acutely aware of the necessity of heavy industry in countering the threat of war, whether conventional or nuclear. National defense industries involved state-of-the-art technologies and could not be simply conjured into being. They were possible only through gradual and substantial accumulation on the foundation of a comprehensive industrial system. To the People’s Republic in the early days, prioritizing the development of heavy industry was not a problem of economic efficiency, but a “make-or-break” issue. Its importance is not something that can be explained through the logic of economic efficiency, as measured through comparative advantages. Second, from the perspective of economic logic, it was also necessary to prioritize the development of heavy industry. This was because heavy industry, light industry, and agriculture were not mutually independent and unrelated. Neither was the choice of which industry to develop first a random one. It was necessary to consider how the technologies of various industries were related when making a

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2 China’s Early Choice of Modernization Path Three major goals: national security,economic development, higher living standards

Prioritizing the development of heavy industry

Means for concentrating resources in heavy industries

Sources of capital

Agricultural cooperation Unified purchase and sale

Means for achieving technological progress

Nationwide cooperation system for scientific research

Planned economy Leading to One Side and seeking Soviet aid

Means for preventing high levels of capital accumulation from impacting living standards Rationing of basic necessities

Three major goals: national security, economic development, higher living standards Prioritizing the development of heavy industry Sources of capital Means for concentrating resources in heavy industries Means for achieving technological progress Agricultural cooperation Planned economy Nationwide cooperation system for scientific research Unified purchase and sale Leading to One Side and seeking Soviet aid Means for preventing high levels of capital accumulation from impacting living standards Rationing of basic necessities

Fig. 2.1 Logic underlying the early economic development system of the People’s Republic

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choice between development strategies. Among the three, heavy industry was the foundation that provided light industry with raw materials and manufacturing equipment, and agriculture with chemical fertilizers and mechanical equipment. In 1949, the industrial sector made up only 12.6% of national income in China, while heavy industries constituted merely 26.4% of total industrial output. In contrast, value added by industry made up around 50% of GDP in developed countries. China’s steel production was merely 158,000 tons, whereas in 1950, American steel production was 87.85 million tons and Soviet steel production was 27.33 million tons. In 1952, electricity generation per capita in China was merely 12.6 kWh—1/44 of Soviet levels and 1/234 of American levels. This industrial foundation could not possibly supply modern factors of production, such as machines and chemical fertilizers, for agriculture and light industry. Neither could it support infrastructure construction in transportation, water conservancy projects, electricity, or energy.38 Because of the weak heavy industry base, agriculture was unable to break free of the limitations of a natural economy. In the early years of the People’s Republic, agriculture was reliant on human labor, draft animals, and farm manure. Without modern chemical fertilizers, pesticides, improved crop varieties and agricultural machinery, agricultural production would not have been able to overcome the constraints of land and traditional technologies. Neither would it be able to break through the “grainfirst” mindset and free up land for cash crops. It would be even more impossible to free up large swathes of the rural workforce. By the 1970s, China had formed a relatively independent industrial system for machinery and equipment. Agricultural mechanization began to spread only after China achieved self-sufficiency in more than 80% of industrial equipment, creating the conditions for ultimately resolving food supply problems. Similarly, because of a weak foundation in heavy industry, China could not possibly develop its fragile light industries. Light industry required raw materials from the agricultural and heavy industry sectors. During the First Five-Year Plan, due to China’s weak chemical industries, the output of industries that used agricultural products as raw materials comprised merely around 50% of total industrial output. Because agricultural production was limited, while grain had become more equitably distributed after land reforms, thus increasing rural demand for grain, there were even less amount of raw materials for light industry. From 1950 onwards, there were recurrent shortages in production factors for the light industry. During the April Crisis, when the supply of cotton yarn could not keep up with demand, the cotton textile sector competed to hoard raw materials. Even tea and mint merchants fought to hoard cotton yarn. After the economy recovered in 1952, light industrial capacity was still underutilized. Merely 78, 57, 21, and 54% of the production capacities of cotton yarn, cooking oil, cigarette and sugar were utilized. The underlying reason was that the agricultural sector could not provide enough raw materials. Given the relationship between agriculture, light industry, and heavy industry, only by first developing heavy industry could China provide greater support for light 38

Mei Xinyu, “Dui Jianguo Chu 30 Nian de Chongxin Guzhi” [Revaluation of the first 30 years of the People’s Republic of China], Global Business and Finance, no. 10 (2009): 54–58.

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industry and agriculture, as well as more raw materials for light industry. Thus, it was a rational, inevitable choice for the People’s Republic to prioritize the development of heavy industry in its early years. Party leaders also stated this principle on various occasions. In December 1953, Mao Zedong stressed that: If we do not establish heavy industries, our existing light industries will be worn out day by day. Without new equipment for supplementation and transformation, it will also be difficult to expand light industries or establish new light industries. Because there are no heavy industries, in the past, we barely used machinery in our agriculture, and seldom used chemical fertilizers. If we still do not develop the machinery industries and chemical industries now, our farmers would be deprived of new farm tools and agricultural machinery for a long time. If more and better chemical fertilizers are not available for a long time, China will encounter difficulties in agricultural cooperativization and increasing agricultural output. All these show that the core of national socialist industrialization must be the development of heavy industries.39

In February 1955, on behalf of the Central Committee, Chen Yun elaborated upon a draft of the First Five-Year Plan during the CPC National Congress, stating extremely clearly that: Without heavy industry, it is impossible to expand the light industry, and therefore it is impossible to systematically improve the lives of the people. Our current situation is as follows: On the one hand, many light industrial products cannot meet the needs of the people. On the other hand, there are still large quantities of light industrial equipment available. Originally scheduled increases in the number of spindles have had to be reduced because of the lack of raw materials. In addition to the lack of raw materials from agricultural products, such as cotton, silk, wool, tobacco, sugar cane, and so on, there is also a lack of raw materials from heavy industry, such as chemicals, ferrous metals, non-ferrous metals, and so on. Therefore, in order to develop light industry and to systematically improve the lives of the people, heavy industry must also be developed.40

In the years since China’s reforms, a view has emerged among the academic community that it was a mistake to put heavy industry first in those years. Scholars holding this view generally compare China’s development path with those of the following three types of countries or regions, simplistically and crudely concluding that China’s strategy of first developing heavy industry was wrong. They have not accounted for the particularities and strengths of China’s development strategy. The first type is the Soviet Union. They believe that since the USSR’s development of heavy industry led to imbalances in its economic structure, it was a mistake for China to first develop heavy industry. This argument must be examined in a historical context. If the Soviet Union lacked a foundation in heavy industry, it could not have 39

Dong Zhikai, “Zhongguo Laoyidai Gemingjia Gongyehua Zhanlue Yanjiu” [A study of the industrialization strategy of the older generation of Chinese revolutionaries], in Xin Zhongguo 60 Nian Yanjiu Wenji [Collection of studies on the first 60 years of the People’s Republic of China], vol. 1 (Beijing: Zhongyang Wenxian Press, 2009), 14. 40 Dong Zhikai, “Zhongguo Laoyidai Gemingjia Gongyehua Zhanlue Yanjiu” [A study of the industrialization strategy of the older generation of Chinese revolutionaries], in Xin Zhongguo 60 Nian Yanjiu Wenji [Collection of studies on the first 60 years of the People’s Republic of China], vol. 1 (Beijing: Zhongyang Wenxian Press, 2009), 14.

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rapidly boosted its national strength, meaning that it would have been unable to resist German aggression during the Second World War. If so, the world would be very different today. The problem faced by the Soviet Union was that, after it developed heavy industries, it remained committed to the planned economy. Neither was it able to timely restructure economic development nor give due consideration to improving the lives of its people. These were problems that China averted after reform and opening up. Thus, China’s strategy of first developing heavy industry should not be discredited on this account. The second category comprises capitalist countries that implemented the “catching-up and surpassing strategy.” This view argues that “every country that implemented this strategy (developing countries that strived to build independent industrial systems) failed to achieve economic growth and development. For instance, capitalist countries such as Argentina, Uruguay, Chile, and Bolivia had per capita incomes similar to Germany’s in the late nineteenth century. A century later, they are mired in economic difficulties while facing huge wealth gaps. The Philippines, once viewed in the 1960s as second only to Japan, now has a chaotic, stagnant economy.”41 The truth is that, although these countries had once promoted the “catching-up and surpassing strategy,” a greater cause of their economic stagnation was their neoliberalist reforms after the 1970s. They voluntarily surrendered their economic sovereignty and allowed their economic lifelines to be manipulated by external powers. In the political sphere they failed to properly distribute the fruits of development, eventually resulting in polarization. Argentina is the prototypical example. As an “emerging industrial country,” one of the first developing countries to industrialize, Argentina adopted neoliberalism wholesale in the 1970s. Its blind faith in privatization and liberalization left its economy controlled by foreign capital. Most of its manufacturing, commercial and service industries came under the control of Western capital. Foreign capital also gained huge influence in strategic sectors such as finance, communications, military industries and energy. The steel, automobile, aircraft manufacturing, military industry and agricultural processing sectors, which were already well-developed, began to shrink. Eventually, an economic crisis that shocked the world broke out in Argentina in 2001. Huge fiscal deficits led to the collapse of public finances, driving 30% of the population into poverty amidst an unemployment rate of over 20%. The failure of countries such as Argentina is not a failure of the “catching-up and surpassing strategy.” Conversely, they failed because they gave up independent development strategies and economic sovereignty, willingly becoming the vassals of foreign powers. Such failures are common among capitalist periphery countries. Many Asian, African, and Latin American countries that did not implement a “catching-up and surpassing strategy” also encountered these problems. Indeed, they collapsed even more quickly.

41

Zhang Zhanbin, “An Analysis of the Strategy of Giving Priority to the Development of Heavy Industry from the Perspective of Political Economy” [in Chinese], CPC History Studies, no. 4 (2007): 13–24.

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The third type comprises the Four Asian Tigers. This view argues that the Four Asian Tigers were able to use their comparative advantages in factor endowment at each stage of economic development to replace the dominance of labor-intensive industries with capital-intensive and technology-intensive industries. In contrast, China’s priority on developing heavy industry ran contrary to its comparative advantages, leading to low efficiency. As discussed previously, the Four Asian Tigers were successful because they had unique geopolitical environments and gave up some autonomy in exchange for assistance from foreign powers, a path that is not an option for China. Facts since the beginning of the twenty-first century have proved that the dependent economies of the Four Asian Tigers are unsustainable as they are easily affected by Western economic fluctuations and industrial saturation. Thus, whether from the perspectives of history, current domestic realities, or international comparisons, China’s choice to prioritize the development of heavy industry was both necessary and rational.

2.5.2 The Planned Economy During the early years of the People’s Republic, the government implemented a planned economy system that restricted the role of the free market in most sectors. In 1992, after China defined the goals of socialist market economy reforms, many believed that this indicated the planned economy was a mistaken choice, going as far as to entirely discredit the planned economy and China’s accomplishments in industrialization during this period whenever the market economy is mentioned. However, different stages of development require different strategic rules and means of development. Discrediting every aspect of the planned economy era not only disrespects history, but also damages actual policy-making. At that time, the implementation of a planned economy reflected market failures in old China; it was also the inevitable result of priority on the development of heavy industry, a historically rational choice. There were several practical reasons why the planned economy was implemented at that time. First, implementing a planned economy made it possible to concentrate resources for the development of basic industries such as heavy industry, as well as infrastructure. The early stage of economic development requires a foundation in heavy industry, as well as large quantities of foundational public infrastructure. Heavy industry involves long investment cycles and large initial investments, with prominent effects of scale. Sectors such as military industries, energy, transportation, raw materials, and machinery are highly akin to public goods. At the time, weak private capital was unable as well as unmotivated to complete these tasks. During the First Five-Year Plan, most of the 156 projects (of which 150 were actually built) involving Soviet aid were heavy industrial projects that had the properties of public goods and played the role of leading industry. Only three were light industrial projects (two pharmaceutical manufacturing projects, one chemical project).

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Second, the implementation of a planned economy can achieve large-scale collective collaboration and reduce the cost of transactions between enterprises. Heavy industries have long industrial chains and require large-scale or even nationwide collaboration. At that time, Chinese capital and technologies were weak, while the country had scant resources available for heavy industrial production. In this case, the planned economy can play a unique role. The Party’s rigorous organizational structure and strong social mobilization capabilities enabled the organization of largescale collective collaboration and collective labor. Resources could also be allocated by government authorities. Together, these made up for inadequacies in capital and technology. The planned economy aligned the goals and interests of corporations across the country. In projects related to overall long-term interests, resources can be deployed nationwide to avoid segmentation and reduce transaction costs. For instance, resources were mobilized across the nation during the development of the “two bombs and one satellite,” submarines, and the Shanghai Y-10 aircraft. It was through the planned economy that the People’s Republic was able to organize many large-scale oil, railway and geological projects, which quickly remedied its deficiencies in basic industries. The advantages of the socialist system continue to have an impact even today. In the 2014 Ease of Doing Business rankings compiled by the World Bank, socialist and former socialist countries generally had better infrastructure than other countries at the same level of economic development. This is a foundation laid by the planned economy. Third, large-scale deployment and adjustment of productive forces can be achieved in a planned economy. Under full market economy conditions, resources would converge towards advantageous regions due to differences in natural conditions, thus widening divides. Natural conditions differ greatly between different regions in China. Major industrial sectors are concentrated in the eastern coastal regions, which not only creates obstacles for coordinated regional development but also affects national security and the development of markets in central and western regions. Since the end of 1950s, especially after the construction of the Third Front in the 1960s, many enterprises, research institutes, and their staff (as well as families) have moved from eastern China and large cities to central and western China. These enterprises have boosted the development of several large, medium and small cities and towns—China’s version of the Westward Movement. This goal could not have been achieved without the planned economy. Fourth, through the planned economy and the public ownership system, China overcame the large-scale unemployment seen in most countries during the economic take-off stage. Free market mechanisms may enhance efficiency in certain private sectors, but when capital is lacking, full employment is impossible as limited capital would not be able to offer enough jobs for the laboring force. In developing countries, surplus labor has long been a problem, while unemployment is a universal phenomenon. In contrast, China achieved full employment under the planned economy and public ownership system (including farmers in people’s communes). This allowed the organization of surplus labor that capital could not possibly accommodate under a private ownership system. In turn, employment is

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a means for social stability and enhancing the quality of human resources. Moreover, through this system of full employment, the entire population would be able to participate in the modernization process, avoiding polarization and large-scale unemployment that have emerged in most countries. Fifth, a rudimentary but universal social security system was established during this period based on the planned economy. SOEs (state-owned enterprises) in the urban and people’s communes in the rural were not merely economic entities, but also providers of social security and public services. They provided most public services, including education, healthcare, elderly care, and housing. This would be difficult for corporations in a market economy. In an underdeveloped economy, this provided public services and social security for the entire population, which lowered the costs and risks of economic activities and made a “high savings, low consumption” development path a possibility. Even in the economic take-off stage, Chinese workers enjoyed the right to stable employment, insulating them from the impact of economic crises and the oppression of capital. This enabled them to develop and sustain a positive attitude towards work and a positive sense of identity while also improving the quality of human capital. After all, workers that lack labor protections and spend their days worrying about basic subsistence and security cannot possibly develop a “spirit of craftsmanship.” We must also note that China’s planned economy did not eliminate the role of the market, which still existed to a certain extent. The central government merely determined plans for major products. These plans also left some room for flexibility. Apart from the allocation of important supplies, the market still played a role in transactions between corporations, people’s communes, and individuals. This was different from the Soviet practice. Some argue that modern economics is about free markets while the planned economy lacks economic justification. This is a biased view. Neoliberalism, which emerged after the 1980s, dismisses the planned economy. This was not the case during the 1950s. After the Great Depression, Western economists debated the merits of the planned economy. Even Ronald Coase, a British economist hailed by the media as one of the representative advocates of “market omnipotence,” did not deny the significance of the planned economy in his seminal theory (the Coase theorem). In fact, his theorem recognizes the rationality of the planned economy. The Coase theorem argues that both the planned economy and the market economy are merely means to an end. As for which is better, that is a problem to be evaluated by comparing transaction costs and management costs. If all economic activities take the form of market transactions, this would lead to extremely high transaction costs and uncertainties. This then leads to the birth of the firm, the internal operations of which are akin to a command economy for the sake of lowering transaction costs. However, the size of a firm must fall within a certain range. If firms are too small, this leads to fragmentation and high transaction costs. If firms are too big, this leads to overly high management costs, a form of economic inefficiency. This theory can fully explain why China needed a planned economy. At the time, given China’s highly limited resources and its goal to develop heavy industry, resources had to be centrally deployed. The Party’s ability to organize also ensured policy compliance

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to the greatest possible extent, allowing resources to be allocated to where they were most needed at the lowest transaction costs. In the parlance back then, this was known as “the whole country as a chessboard” (quanguo yipanqi, meaning unified national policy). The planned economy met this requirement. From a historical perspective, the planned economy played a key role during the two world wars and the economic crisis following the Great Depression. In the Second World War, nearly half of American industries were nationalized by the government, which then implemented a system of rationing and control over matériel. This mitigated problems of excess capacity, polarization and asset bubbles created by market cycles, as well as enhanced the government’s ability to manage the economy and led to a rapid decline in the Gini coefficient.42 This was also precisely the reason why, after the Second World War, the capitalist world did not fall into a huge crisis after the demand created by the war vanished but ushered in a period of rapid growth that lasted between twenty and thirty years. After the Second World War, the US quickly restored the free market, but the wartime planned economy left a deep mark on the country,43 reducing inequities in economic development, providing economic growth with a more vibrant and just launchpad, and preventing interest groups from grabbing wealth. Through the planned economy, the state boosted its ability to manage the economy and developed the capability and conditions for amassing extensive forces in service of major initiatives. This made foundational, strategic innovation possible. The choice of the People’s Republic to implement a planned economy in the 1950s was also primarily based on the socio-historical conditions then. China’s choice comports with historical conditions, while history shows that this choice was justified by the facts.

2.5.3 State Monopoly of the Purchase and Marketing of Agricultural Products The planned economy had answered the question of “who invests?” but still had to answer the question of “where would investment come from?”—in other words, where would the capital for developing heavy industry come from? First, China could not take the path of exploiting foreign countries. Second, international aid could be utilized, but it generally came with many economic and political strings. There was no way that China would accept international aid that came with many strings attached. Furthermore, as a new member of the socialist camp, the People’s Republic in the early days faced a hostile international environment with economic blockades and 42

The Gini coefficient is an indicator that measures equality in income distribution. A Gini coefficient of 0 indicates perfect equality, while a value of 1 indicates maximal inequality, where all income goes to one person. A higher Gini coefficient implies greater income inequality. 43 Shao Yang, “Enlightenment on Countermeasures of American Economic Crisis to China” [in Chinese], Master’s thesis, (Northeast Normal University, 2014).

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political isolation imposed by the West. Thus, the only path available was to, as far as possible, collect surplus products from within the country. Given China’s huge population, great surplus could be amassed even though each individual could only make a minuscule contribution. To achieve domestic accumulation, two problems had to be addressed. First, how to cheaply and efficiently obtain resources from the countryside? Second, when obtaining resources, China also had to ensure rural stability and basic living standards. Otherwise, it would be repeating the mistakes of the Qing and KMT governments. None of the systems of the past had managed to solve these problems. The People’s Republic would meet these challenges through the unified sale and purchase of agricultural products and rural collectivization. On the one hand, traditional Chinese agriculture produced very little surplus. After the founding of the People’s Republic, the problem became worse as land reforms gave farmers their own land and ownership over the grain produced. Grain consumption per capita in rural regions increased from 370 jin in 1949 to 440 jin in 1952. A survey by the North China Bureau stated that “In the past, farmers in mountainous regions consumed merely ten meals made from wheat flour in a year. Now, they have four or five, seven or eight such meals every month. Demand for flour has grown to unprecedented levels. This is one major reason why the state has difficulties in purchasing wheat.”44 On the other hand, with the advent of industrialization, the demand for wheat by industrial sectors also grew. By 1953, China’s urban population had reached 78.26 million, 20.61 million higher than in 1949. Speculation in grain prices and grain hoarding by private merchants also caused tensions in grain markets. In regions where private merchants were active, market prices for grain were 20–30% higher than official prices. When grain stocks had been depleted but new harvests were not ready, private merchants would even make advance purchases of grain to profit from speculation, which led to instability in price levels. In 1953, imbalances in grain supply and demand intensified. During China’s National Day holiday, Mao Zedong requested that the CPC Central Leading Group for Financial and Economic Affairs provide specific plans in response. Chen Yun led the commission in formulating eight possible measures. Ultimately, the commission decided to implement the policy of unified purchase and sale. Basically, the policy of unified purchase and sale required that farmers producing grain should contribute surplus produce to the state in accordance with official requirements regarding crop varieties, prices, and planned quantities. Prices were largely based on urban levels, with the state neither making a profit nor a loss. By keeping prices fixed, the state eliminated tendencies on the part of the farmers to hoard grain in hopes of future price increases. Per government plans, grain was primarily distributed to cities above the county level, while market towns, cash crop production zones, households that lacked grain, as well as victims of natural disasters were also included. In total, grain was distributed to almost 200 million people. 44

Bo Yibo, Ruogan Zhongda Juece yu Shijian de Huigu (shang juan) [Looking back on a number of significant policy decisions and events (vol. 1)] (Beijing: Zhonggong zhongyang dangxiao chubanshe, 1991), 257.

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All private grain merchants were prohibited from dealing in grain outside of official channels. Obviously, this practice was ran contrary to market economics and has been roundly criticized. However, if we place ourselves in the context of those times, we discover that this was the best option back then. Unified purchase and sale of grain amassed huge amounts of capital for industrialization. Estimates show that the state purchased 15.9 billion yuan of primary and secondary agricultural products in 1954. Assuming that market prices were 30% higher than official prices, procurement at market prices would have cost an additional 5.7 billion yuan or so, far higher than the 3.8 billion yuan spent on the development of the industrial sector that year. Without a state monopoly over the grain trade, it may have been very difficult to achieve progress in industrialization. Unified purchase and sale of grain served therefore the need to prioritize the development of heavy industry while ensuring basic living standards in the countryside—a “lesser of two evils.” Some scholars have criticized the policy, arguing that it exploited farmers and undermined free markets. In reality, these questions had been considered during the policymaking process. Ultimately, all decisions are the result of opting for the lesser of two evils. The following firsthand account of the decision-making process is illuminating: Were there problems [in the unified purchase and sale policy]? Yes. It may well have dampened work incentives, driven people to death, resulted in requisition by force or led to local riots. But things would have been worse if we hadn’t adopted this measure. China would have had to import grain like in the past, making development impossible. Ultimately, the imperialists would come, and so would domestic unrest. The conclusion was that the benefits of the policy outweighed its costs.45

There are also others who believe that the policy caused losses to farmers as they had to sell grain below market price, leading to “price scissors” between industrial and agricultural products, which constituted exploitation of farmers by the industrial sector. This view is also not objective. From a historical perspective, in comparison to the situation before the People’s Republic was founded, assuming no significant change in agricultural technologies, farmers had more rather than less surplus grain. According to records, under the relations of production in pre-1949 China, farmers had to surrender around half of the grain they produced to landlords, whereas the amount of grain subject to the unified purchase and sale policy was generally maintained at less than 30% of production levels. Furthermore, part of that grain would be sold back to the villages. After the implementation of the “three levels of ownership with the production team as the basic unit” system in 1961, rural grain consumption levels grew at a sustained rate. Famine became a thing of the past, while China’s population and average lifespan increased significantly. By 1980, life expectancy in China had increased to 68 years, compared to merely 35 years before the People’s Republic was founded. The population had grown from 450 million to more than 45

Bo Yibo, Ruogan Zhongda Juece yu Shijian de Huigu (shang juan) [Looking back on a number of significant policy decisions and events (vol. 1)] (Beijing: Zhonggong zhongyang dangxiao chubanshe, 1991), 263.

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800 million. The country would not have made these achievements without ensuring food security and basic nutrition. Grain that was purchased and sold by the state was used to support industrialization, the fruits of which were ultimately shared with the countryside. Between the 1950s and 1970s, there was sustained growth in agricultural product purchasing price indices but a sustained decline in the sale prices of industrial products. This was an implicit subsidy for the countryside. It was also during this period that agricultural machinery, irrigation facilities, and factory-made household goods made their way to the countryside. Extreme views that argue that the unified purchase and sale policy and the people’s communes exploited farmers to a far greater extent than the landlords did are entirely divorced from reality.

2.5.4 Agricultural Cooperativization In order for agriculture to support industry, apart from the unified purchase and sale policy, a more fundamental method was to increase the production of agricultural products to boost rural surplus. Under the conditions of traditional agriculture, there was barely any room for raising production by increasing individual labor input. Grain production could be increased only by modernizing agriculture, which in turn required improvements in agricultural irrigation and access to machinery, better crop varieties, and chemical fertilizers. However, China’s industrial base was not yet able to provide rural regions with modern factors of production such as machinery and chemical fertilizers. In these circumstances, the only option was to fully draw on the potential of traditional agricultural production, in other words increasing production per unit area through means such as the construction of irrigation facilities, increased use of fertilizer, the improvement of soil quality, and pest prevention. These could not be achieved through the efforts of individual households, and the only avenue was through collective collaboration among farmers. This was the initial purpose for the establishment of rural cooperatives. China established rural cooperatives not because it wanted to copy the Soviet kolkhoz model but because it had to address real problems. After the founding of the People’s Republic, the first cooperative was built in Pingshun County, a region in Shanxi Province with poor natural conditions, abundant hilly terrain, and little arable land. In order to jointly purchase farming tools and convert wasteland into new farmland, local farmers took the initiative to form a rural cooperative. Later, the central government implemented their model across the country, launching the agricultural cooperativization movement. Regarding the rationale for developing agricultural cooperativization, as well as the relationship between agricultural cooperativization and industrialization, the Report of the Eighth CPC National Congress stated: We are carrying out agricultural co-operation without farming machinery… the main method of increasing agricultural production in the second five-year period will still be to rely on the agricultural producers’ co-operatives and the peasants to raise per mou [mu] yields

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by such means as building water conservancy works, applying more manure to the land, ameliorating the soil, improving seeds, introducing the use of new-type farm tools on a wider scale, increasing the area sown to more than one crop a year, improving methods of cultivation, and preventing plant diseases and insect pests.46

In terms of outcomes, agricultural cooperativization effectively promoted the modernization of Chinese agriculture. It also increased agricultural production, providing huge amounts of surplus for industrialization. In addition, agricultural cooperativization also facilitated social initiatives in rural regions through the collective economy, expanding the coverage of public services such as basic healthcare and education.

2.5.5 The “Coupon Economy”: Rationing of Basic Necessities High savings and low consumption are all too necessary during the early stage of industrialization. Without exception, every country paid a hefty price during the early stages of industrialization. During the primitive accumulation stage and Industrial Revolution in Britain, the working class and the peoples of its colonies endured great suffering and made huge sacrifices. In the US, the cruel institution of slavery lasted from the early phase of its industrialization to the nineteenth century, whereas the country carried out a bloody campaign to exterminate Native Americans during its westward expansion. Slums and vicious polarization have also emerged in some large developing countries.47 China managed to establish rudimentary universal basic social security even during the early stage of socialist modernization. Although benefits were not great, the system ensured that most people enjoyed adequate food, clothing, housing, primary healthcare, and basic education. Compared to Western countries, this was a more humane and less costly path. The core tenet of this path was that the costs of industrialization would be distributed in a relatively equitable way, so that even with high saving rates and low consumption levels, basic living standards could be assured for every social group, particularly workers and farmers. At the time, that was known as “properly handling the relationship between the state, collective, and individual.” The basic characteristics of this system include: Basic necessities were rationed. Beginning in 1953, when China implemented the unified purchase and sale policy for agricultural products, grain was distributed at fixed quotas in the cities. Later, this system was gradually extended to non-staple

46

Central Archives, Selected Documents of the CPC Central Committee (October 1949 to May 1966), vol. 24 [in Chinese] (Beijing: People’s Publishing House, 2013), 85. 47 He Xin, “Shehuizhuyi de Xuanze yu Lishi Pingjie: Jinian Yapian Zhanzheng 150 zhounian” [Choice of Socialism and Historical Commentary: commemorating the 150th anniversary of the Opium War], Scientific Socialism, no. 7 (1990): 52–56.

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foods, clothing, and factory-made daily necessities, which were to purchased by coupons. In terms of its consumption structure, China promoted public consumption and restricted private luxury consumption. In the cities, a safety net was established for workers that covered healthcare, education, housing, elderly care, work injuries and compensation (for death or disability). In the countryside, China also relied on the people’s communes to establish social security systems covering basic education, cooperative healthcare, and the “Five Guarantees” (food, clothing, medical care, housing, and burial expenses). Healthcare, education and housing were provided to citizens at low prices or even free of charge. These policies aimed to lower the cost of social security and provide urban and rural residents with greater peace of mind. In turn, that maximized the accumulation of capital needed to develop heavy industry and expanded the availability of basic healthcare and education. Meanwhile, Chinese society also developed a culture of fairness. After land reforms and socialist transformation, gaps between social classes shrank while luxury consumption, which the wealthy used in the old times as badge of their social status, became a target for criticism. As society advocated a culture of equality, pride in labor, and respect for workers and farmers, laborers developed a positive attitude towards their work even though the level of economic development remained low. There is the impression that the planned economy era is a period when living standards improved at a slow pace, egalitarianism was implemented and consumer goods stayed unchanged for decades because of the lack of variety. Some even go so far as to demonized the “coupon economy” of that era. These erroneous views are based on faulty assumptions that ignore historical fact. Before reform and opening up, China was still in the initial stage of industrialization. Low consumer spending was the result of limited resources and China’s stage of development. It was only after laying the foundations for heavy industry that China had the means to develop light industry and improve living standards. In other words, China had to determine its priorities. Without austerity during that era, it would not have been possible to rapidly develop a foundation for heavy industry, and the swift post-reform development of light industry would have been unthinkable. As Mao Zedong wrote in Our Great Victory in the War to Resist US Aggression and Aid Korea and Our Future Tasks in September 1953: Policies of benevolence are of two kinds. One is concerned with the people’s immediate interests. The other is concerned with their long-term interests, such as resisting US aggression and aiding Korea and building heavy industry. The first is a policy of lesser benevolence and the second is a policy of greater benevolence. Both must be taken into consideration and it is wrong not to do so. Where then is the emphasis to be placed? On the policy of greater benevolence. At present, the emphasis in our policy of benevolence should be on the construction of heavy industry. Construction takes money. Therefore, much as the livelihood of the people needs to be improved, this cannot be done to any great extent for the time being.48

48

Central Archives, Gongheguo Wushi Nian Zhengui Dang’an [Valuable archival documents in the fifty years of the People’s Republic] (Beijing: Zhongyang dang’an chubanshe, 1999), 280–281.

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Unified purchase and sale and the “coupon economy” are not fundamental characteristics of the planned economy, but rather an interim measure in service of the industrialization strategy. This was clearly stated when the system was implemented. On September 23, 1954, during the First Session of the First National People’s Congress, Chen Yun delivered an address titled Some Ideas about the System of Planned Purchase and Supply, which clearly set out the period for which planned purchases and supply would be implemented. Chen Yun stated that “The system of planned supply is only a temporary measure. As soon as we increase industrial and agricultural production to the point where the output of consumer goods fully meets market demand, it will be abolished.” But with respect to planned supply, Chen Yun pointed out that “it will be some time before we are able to stop the planned supply of grain, cooking oil and cotton cloth.”49 In other words, the implementation of the coupon system was more a means of ensuring the universal availability of the basic necessities under tight supply conditions rather than a means to curb high levels of consumption. In this respect, Gilbert Rozman wrote in The Modernization of China that “China has succeeded in distributing poverty equally—not wealth… if China succeeds in carrying out modernization without jeopardizing this egalitarian society, it will be a unique accomplishment in human history.”50 Subsequently, as China improved its heavy industry base, the basic living subsistence began to improve both in quantity and in quality. Coupons were abolished starting in the mid-1980s, a natural outcome of economic development. Yet, without the coupon system, it was highly likely that China would have witnessed the sort of economic inequality that emerged in Western countries during the early phase of their industrialization. In this sense, egalitarianism is a more rational and humane distribution policy, as well as a necessary choice, in the initial phase of industrialization. An overview of the development of other developing countries reveals that China is the only major developing country to achieve initial capital accumulation without serious social instability. This was due to the unified purchase and sale policy, agricultural cooperativization, and the “coupon economy.” Through these measures, China was able to achieve the accumulation of capital for heavy industry while avoiding the sort of extreme fluctuations in agricultural production in the Soviet Union and the brutal class conflicts and social turmoil that plagued early industrialization in the West. A problem of methodology arises at this point, namely, how to view the institutions of the planned economy as part of a system rather than in isolation. Admittedly, if the unified purchase and sale policy, agricultural cooperativization, and the “coupon economy” are considered separately, each had its own flaws. Unified purchases and sales suppressed the enthusiasm of farmers. Agricultural cooperativization readily led to egalitarianism and free-riding. The “coupon economy” made it hard to quickly raise living standards. However, when viewed as a whole, considering that China 49

Chen Yun, Selected Works of Chen Yun, vol. 2 (Beijing: People’s Publishing House, 1995), 261. Gilbert Rozman, ed., The Modernization of China (Shanghai: Shanghai People’s Publishing House, 1989), 32.

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needed to first develop heavy industry, safeguard national security, and ensure basic living standards, were there any alternative better than such a policy combination? Given the constraints at the time, China made the most feasible choice.

2.5.6 National Mobilization for Technological Progress Apart from capital and labor, the development of heavy industry also requires scientific technology. After its founding, the People’s Republic developed a scientific research system that was oriented towards real-world demands and involved nationwide synergy. The system made technological progress possible, allowing China to become a world leader in certain cutting-edge technologies at the time. In summary, the scientific research system during that time had the following characteristics. First, innovation was guided by real-world needs. During the planned economy era, the main goal of Chinese research institutions was neither profit nor the publication of scientific papers, but rather meeting real societal needs. Technological innovations representative of this era include China’s development of its own nuclear weapons, ICBMs and satellites, crystalline bovine insulin, hybrid rice varieties, large aircraft, computers, and reattachment of severed limbs. China was a world leader in these fields at the time. Most of these innovations were geared towards strategic national development and meeting the needs of the man on the street for adequate food, warm clothing, health and development. This orientation towards real-world demands allowed resources for innovation to be more strongly concentrated in foundational, strategic and long-run sectors. This made it easier to achieve breakthroughs in key foundational areas as well as generate more far-reaching economic benefits, ultimately allowing China to fulfill major imperatives while not neglecting lesser needs. The classic example of innovation oriented towards real-world needs is the technology developed in the 1970s for extracting artemisinin, for which a Nobel Prize was awarded in 2015. Malaria was one of the most prevalent infectious diseases and is still a menace in Africa even today. But because malaria is a “disease of the poor,” pharmaceutical companies in developed countries do not expend many resources in this area. In contrast, per the principles of internationalism, China sought to support third-world countries in their fight against malaria, which gave rise to the demand for anti-malaria pharmaceuticals and guided the direction of scientific and technological progress. This is an example of scientific research steered by real-world demands. Second, China established a “Big Science” system that involved nationwide collaboration. Nie Rongzhen, who oversaw scientific and technological work in China at the time, had realized early on that Modern science and technology are very different from that in the 18th and 19th centuries. Scientific research at that time was often done independently by individuals, and a single person could have multiple inventions throughout his lifetime. The situation today has changed a lot. Some basic theoretical and technological research, such as the exploration of certain mathematical theories, can still follow the methods of the past. But research and

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production in aspects such as major foundational theories, major projects, and major equipment, which use modern experimental methods, the power of the individual or work unit, or even industry or region, is no longer adequate. The power of the nation is needed.51

China’s implementation of the Big Science system also aimed to, under state leadership and masterplans, rapidly strengthen national scientific and technological expertise, so that certain important or urgently needed sectors would be able to approach or catch up with advanced nations within 20 years.52 Building a scientific research system that mobilized the entire nation allowed China to pursue independent innovation even though industrialization had just begun, and economic development was still at a very low level. Moreover, the system also turned China into a world leader in certain sectors. For example, this system was integral to the development of hybrid rice varieties.53 In the 1960s, Hunan Province launched a public campaign involving both professionals and farmers to find rice varieties with sterile pollen. Not long after, the campaign expanded throughout the nation, with every province establishing a collaborative research group working on hybrid rice varieties. This created a huge nationwide collaboration network that screened more than 1000 rice varieties from the Yangtze region, South China, Southeast Asia, Africa and Europe. If the initiative had been limited to the efforts of a few scientists such as Yuan Longping, instead of involving nationwide collaboration, hybrid rice varieties would never have been developed. The Shanghai Y-10 jetliner independently developed by China involved the participation of more than 300 factories, research institutes, colleges and universities from 21 provinces, municipalities and autonomous regions. Although it cannot be said that the various parties were able to work seamlessly together, the planned economy system and a culture of collective cooperation enabled lower costs and higher efficiency as compared to self-initiated collaborative efforts by individual corporations. In 1975, China successfully predicted an earthquake in Haicheng, Liaoning, a feat that benefited from monitoring and forecast systems involving collaboration between professionals and the general public. Collective research collaboration also resulted in systems that brought together ordinary workers and researchers, the most well-known being the “Angang Constitution.” These systems allowed scientific research to extend from scientists to frontline workers. This powerful spillover effect enhanced the research capabilities and expertise of frontline workers, creating a generation of highly skilled industrial workers. Collective research collaboration is a strength of the socialist system as well as integral to scientific research. This strength should not be forgotten today when we encouraging business start-ups and innovations. 51

Editorial Committee of the Guangming Daily Press, Nie Rongzhen Tongzhi he Keji Gongzuo [Comrade Nie Rongzhen and technological work] (Beijing: Guangming Daily Press, 1984), 10–11. 52 “Outline of the vision for the development of science and technology 1956–1967 (revised draft)” [in Chinese], in Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Zhongyao Wenxian Xuanbian [Selected compilation of important documents since the founding of the People’s Republic of China], vol. 9 (Beijing: Zhongyang Wenxian Press, 1993), 436. 53 Li Yanjun, “The Retrospection of Yuan Longping’s Success” [in Chinese], Master’s thesis, (Guangxi University, 2004).

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Finally, the Big Science system manifested not only in scientific research but also in the diffusion of technology. The patent system, which is used by countries across the globe, might be a good way to encourage innovation, but it also impedes the spread of new knowledge and technologies. Thus, even in Western countries, there have long been debates on whether to abolish the patent system. A balance needs to be found between encouraging innovation and sharing its fruits. After its founding, the People’s Republic, much like the Soviet Union and other socialist countries, dismissed patents as a product of private ownership systems and implemented systems that regarded knowledge as a public good. Research institutes and researchers were entitled to some remuneration and awards for their intellectual achievements, but did not have exclusive rights to the fruits of their research. Instead, the state would promote the use of these research achievements across the country. This allowed science and technology to spread extremely quickly, the most classic example being the “agricultural technology promotion stations” built in rural villages through collective organizations. Since its founding, the People’s Republic has launched many campaigns to promote new agricultural tools and improved crop varieties. Advanced tools and improved varieties were quickly introduced to suitable regions after their development. Farmers did not need to spend cash on purchasing patent rights or expensive seeds, which also allowed agricultural technology to spread rapidly.

2.5.7 Prudent Fiscal and Monetary Policies After the founding of the People’s Republic, the Party regarded inflation and debt as serious political problems and lines that could not be crossed. The Party remained committed to the guiding principle of the “Four Balances,” namely that public finances, debt, foreign exchange, and materials must each be individually and collectively balanced. The Party stuck to prudent financial, fiscal, and monetary policies, ensuring that financial and fiscal funds were commensurate with the size of the real economy, limiting the issuance of currency and the size of external debt. Currency was not issued to stimulate the economy, nor were loans sought from foreign countries. In January 1975, the Report on the Work of the Government, which Deng Xiaoping played a leading role in drafting and Premier Zhou Enlai delivered to the Fourth National People’s Congress, announced that: Gross industrial output for 1974 is estimated to be 190 percent more than 1964, and the output of major products has greatly increased. Steel has increased 120 percent, coal 91 percent, petroleum 650 percent, electric power 200 percent, chemical fertilizer 330 percent, tractors 520 percent, cotton yarn 85 percent and chemical fibers 330 percent… we have maintained a balance between our national revenue and expenditure and contracted no external or internal debts. Prices have remained stable, [and] the people’s livelihood has steadily improved.54

54

Zhou Enlai, “Report on the Work of the Government” (January 13, 1975), electronic version uploaded on February 23, 2006, to http://www.gov.cn/test/2006-02/23/content_208796.htm.

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China remained committed to contracting no external or internal debts. Monetary and financial policies were restricted to serving the real economy. Apart from small loans from the Soviet Union and the issuance of some government bonds in the 1950s, China has never found itself in severe debt. These practices may add certain burdens in the short run. However, in the long run, this protects national credibility and avoids crises of vicious inflation and external debt that have surfaced in many developing countries. The Latin American external debt crisis in the 1990s not only derailed modernization but also caused strategic resources such as oil and land to fall under the control of foreign capitalists, leading to the loss of economic sovereignty. In comparison to other developing countries, China has remained committed to a balance between the monetary supply and the real economy. In so doing, China has basically maintained price stability, never experienced serious inflation, and ensured the continuous improvement of people’s living standards.

2.6 A Historical Mistake or a Historical Necessity? Our review of history makes one maxim clear: socialist economic system in China is not a product of the subjective choices or design of some leader or other, but rather a sound, rational choice in the face of the need to reinvigorate and industrialize a backward agricultural country. It signifies a unity of the theoretical logic of socialism and the historical logic of Chinese social development. Years often must pass before historical events can be properly evaluated. Only through a deep understanding of history can we avoid being confused by fleeting intellectual trends. If we situate ourselves in the historical context of the first half of the twentieth century, we find that there are deep historical reasons why China chose the path of socialist economic development, and that this choice was grounded in the needs of the broad masses. In the middle of the twentieth century, faced with the wounds inflicted by the two world wars and the economic crisis as well as the disasters that capitalist expansion brought to developing countries, the world began to reflect on liberal capitalism. In the early twentieth century, the Progressive Movement gained traction in the US, whereas Keynesianism economic policies were implemented after the Great Depression. These practices shared certain common traits in that they sought to address the shortfall in economic demand, economic inequality, and environmental damage caused by capitalist free markets through stronger government intervention in the economy, greater social equity, and improved social security. After the Second World War, many developing countries that had just gained independence also accepted structuralist economics and maintained that the governments of underdeveloped countries should mobilize resources for industrial development to catch up with developed economies. This intellectual trend towards stronger government intervention was a correction to the drawbacks of globalization and marketization since the early twentieth century.

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Since the early twentieth century, both the Party and men of foresight from across Chinese society have been aware of the flaws of liberal capitalism. In his youth, Sun Yat-sen, the leader of China’s capitalist revolution, traveled across Europe and America during an age when monopolistic capitalism was expanding throughout the globe. He saw that class contradiction was extremely intense in these countries and that “the rich held wealth that rivaled that of nations, while the poor had barely any land to stand on”. European states paid an immense price to carry out social revolutions, and narrow class divides. Sun Yat-sen believed that social revolution would be easier in China than in developed countries since China had not yet modernized, did not have large capitalists, and had not yet formed a huge wealth gap. Thus, “social revolution must precede economic revolution”, and social justice had to be addressed before economic development. To this end, he proposed measures such as restraining capital, rendering aid to workers and farmers, even division of land rights, and state ownership of large capital. In reality, Sun Yat-sen was a socialist in his old age. In his speeches, he often stated that his slogan “the people’s welfare” (minsheng zhuyi) was no different from socialism: Although China succeeded in the civic nationalism and civil rights revolutions, there is no choice but to leave social revolution to the future. The social revolution is difficult in countries such as Britain and the US given their civilizational progress and advanced commercial industries. Chinese civilization has not yet progressed, and commercial industries are not yet developed, making social revolution an easy task... It goes without saying that China is a poor country with barely any members of the middle class. Neither does China have capitalists of the sort in foreign countries. Thus, the social revolution will not be a painful process.55

Of course, after his death, it was the CPC rather than the KMT that brought his vision to reality. It is precisely in this sense that the Chinese Communists were the most faithful inheritors of Sun Yat-sen’s revolutionary cause. Another notable figure is the modern Confucianist Liang Shuming. In his youth, he was a close friend of Mao Zedong. Today, people often note his disagreements with Mao Zedong in 1953 over the path of industrialization, but fail to note that, as a renowned scholar of Confucianism and Buddhism, Liang Shuming identified strongly with socialism, even organizing rural cooperativization campaigns during the Republican era. In his old age, Liang Shuming once discussed his views on socialism. He believed that capitalist societies were highly successful in devising solutions to the relationship between man and nature, but also engendered competition and conflict and therefore failed to achieve “mutual harmony between men.” Moreover, “since the coming of Western powers, there was no room for China to take the capitalist path. The socialist path was the only choice, and the welfare of the individual must not eclipse the welfare of society. Hence, the emergence and success

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Sun Yat-sen, “Minsheng Zhuyi yu Shehui Geming” [The principle of the people’s livelihood and social revolution] (March 31, 1912), Sun Yat-sen Memorial Hall Collection, Zhongshan City, Guangdong Province.

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of the Communist Party in China are entirely justifiable. There is nothing special nor strange about that.”56 This is not an isolated case. In 1933, the Eastern Miscellany, a Shanghai periodical, solicited answers to two questions from across the nation: (1) What would the future China of your dreams be like? (2) What are your dreams in life? The answers received can reflect the views of contemporaneous Chinese intellectual elites. The author Yu Dafu answered, “[a China] without social classes, disputes, and the oppression of material [wealth].” Zhang Shenfu, a professor at Tsinghua University, replied that an ideal China was one that “could bring to reality the Confucian ideal of ren,57 Russell’s ideal of science, and the ideals of Leninist communism.” Wei Congwu, a professor at Tianjin Women’s Teachers’ College, indicated that “I dream that the China of the future will be an incorporated cooperative limited by shares, where all adults are members and shareholders. Military affairs, politics, and education would all fall under its ambit to form one economic unit that strides towards a world cooperative corporation.” Yang Xingfo, head of Academia Sinica, had a dream that China “would be a truly equal society where the material and the spiritual are of the same importance.” Li Quanshi, head of the Business School at Fudan University, stated that “an ideal future China must be that as described in The Classic of Rites: ‘When the Grand course was pursued, a public and common spirit ruled all under the sky… This was (the period of) what we call the Grand Union.’” Zhou Yuying, who was unemployed at the time, dreamt of “starting a monthly magazine called ‘Socialism’ to exchange ideas with youths from across the country and discuss all sorts of academic topics without reservation.” These replies show that given the social circumstances at that time, even intellectuals who did not belong to the Party harbored hopes for a new China with material and intellectual freedom as well as freedom from exploitation and oppression. These ideals were rooted in Chinese culture and the ancient Confucian ideal of a datong58 society. The British philosopher Bertrand Russell, who traveled across China from 1920 to 1921, published The Problem of China in 1922. In the book, Russell mentioned that China’s development must achieve three things: the establishment of an orderly government; industrial development under Chinese control; the spread of education. These three points may seem simple, but in reality, the accomplishment of each step would be breaking new ground for China. The KMT government had failed to achieve “orderly government,” one reason being that the ruling class had special interests that divorced them from the masses, depriving them of popular support. In contrast, the CPC had deeply mobilized the masses, begun to seek gradual solutions 56 Guy Salvatore Alitto and Liang Shuming, Has Man a Future? [in Chinese] (Beijing: Orient Publishing Center, 2006), 23. 57 The concept of ren is a core tenet of Confucianism without an exact equivalent in English. Various Sinologists have translated it as “benevolence,” “humaneness,” “perfect virtue” and “empathy” (among others). In essence, Confucianism holds that ren is an innate human capacity to feel empathy for others. This capacity, when cultivated, develops into compassion. Confucians view ren as a defining human trait—Trans. 58 The concept of datong is another Confucian concept that has no exact equivalent in English. In the current context, a datong society would be one of universal equality, unity and harmony—Trans.

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through its leadership of the social revolution and established an orderly government. As for industrial development, this required Chinese leadership on the one hand, but on the other hand, China lacked the necessary capital and technological support. If foreign industrialization relied on external “transfusions,” China would be unable to control this process. Eastern Europe is one negative example. Hence, the Chinese people had to tighten their belts and take the path of “high savings and low consumption.” This process would require a strong government that represents the long-term fundamental interests of the people, as well as the sharing of weal and woe between the government and the people. The Party has achieved this. The process of industrialization also requires large numbers of skilled workers and large amounts of advanced knowledge, which makes education and healthcare particularly important. It was precisely through the fair social foundation and strong organizational capabilities developed after China’s social revolution that basic education and healthcare became universal. China’s “learning by doing” model also made it a leader among developing countries in education and healthcare, laying the groundwork for industrialization, and, subsequently, economic reforms and its transformation into the world’s factory. It can be said that the first thirty years of the People’s Republic solved all the three problems that Russell mentioned, leading Russell himself to have nothing but praise for his own views when revising The Problem of China in the 1960s. The history of China’s development shows that China’s ability to embark upon modernization cannot be divorced from the greatest and most thorough revolution in the relations of production in Chinese history. China’s march towards socialism was a “problem-oriented” solution to the issues of the day, required by the historical logic of Chinese social development. It was the social revolution that enable China to build a strong and stable government, ending the chaos produced by the wars between scores of warlords, paving the way for a unified national market, and rescuing the country from collapse and dismemberment. It was the social revolution that enabled China to, with the strong support of its people, avoid dependence on foreign hegemony and complete the historic missions of building an independent economy and protecting its domestic markets. It was the social revolution that enabled China to break through the constraints of the smallholder economy and concentrate resources for the development of heavy industry so as to develop infrastructure and an industrial base superior to that of most developing countries. It also allowed China to concurrently avoid the exploitation of farmers by land engrossment, usurious loans, and monopolistic capital, providing capital for industrialization while ensuring rural stability and rising living standards. It also ended the historical cycles of land engrossment that had plagued Chinese history. It was because the Chinese system was able to concentrate capital, resources, and economic forces spread out widely that the country was able to achieve independent industrialization by resisting global monopoly capital that was economically powerful and technologically advanced. It was the social revolution that enabled China to annihilate prejudices of social class and provide a powerful cohesion for modernization. Strong efforts to inculcate

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the concept of social equity and the belief that the people are the true masters of the country were mass campaigns targeted at elitism and hierarchical systems, which were common in class societies. The belief that history is made by the people and that workers are the most glorious transformed traditional Chinese politics, society and culture, building a sense among workers that they are the masters of their own labor and bringing jobs, dignity, security and hope to ordinary people who have been humiliated and hurt for centuries. This is the powerful force that drives modernization. It was also the social revolution that enabled China to form new relations between the state and the people. Because of the existence of a fair society, the Party and the government had powerful social mobilization capabilities. The People’s Republic relied on its powerful organization and democratic centralism to launch a large-scale collective collaboration that effectively brought together social forces that used to be dispersed disorderly throughout society. This then allowed China to quickly promote economic, political and cultural modernization on a huge scale. These all show that the basic economic system and development path chosen by the People’s Republic is historically justified and met real-world demands at the time. However, the establishment of new systems and institutions is merely the first step in a journey of a thousand miles. The growth of new things will always be full of twists and turns, while there will be yet new risks and challenges in the road ahead. New institutions and systems also need to be continually reinforced and improved. Since 1956, with the completion of socialist transformation, China’s path began to face more complex and arduous challenges.

Chapter 3

Seeking a Chinese Path (1956–1976)

3.1 Introduction Socialism emerged as a means to address the abuses of capitalism. However, it took a long historical process to turn the theories of socialism into reality. Elements contrary to socialism, or entirely opposed to its ideals, may arise even in countries that have established the socialist system. In 1956, China began to explore independent paths of development to avoid the drawbacks of Soviet-style socialism. Many new socialist initiatives emerged in China: two rounds of devolution of economic authority, the Great Leap Forward, the People’s Communes, “small rural industries” (nongcun xiaogongye), barefoot doctors, construction of the Third Front, the education revolution, “restricting bourgeois rights,” and aid to countries in the Third World. By the time reform and opening up was around the corner, China’s development model was entirely different from those of the USSR and the West. The 22 years of exploration between 1956 and 1978 were a brilliant chapter in modern Chinese history. It was an era of endless new initiatives. It was an era of braving turbulent headwinds in a quest towards a better society. It was a rocky era, but also an era of fruitful gains and glorious accomplishments. It was an era that cemented the groundwork for reform and opening up. No other period is as complex or challenging in an account of modern Chinese history as the 22 years between 1956 and 1978, a transitional stage between socialist transformation and reform and opening up. Misconceptions and debates concerning the era remain prevalent even today. There is one main thread throughout this period: the transcendence of traditional models in search of a new path. Despite awareness of the problems that other countries faced during their development, as well as problems in the Party and the state during China’s development, the Party did not back away from its quest to find a path suitable for China’s development through the “elimination of superstition” and © CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_3

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the spirit of self-revolution. This was an era of boundless creativity and new initiatives. Neither the accomplishments nor missteps of these explorations can be denied. However, these steps, whether in the right or wrong direction, are part and parcel of practice. China’s reform and opening up and the country’s path today can be better comprehended only when we get to know and understand these explorations through the paradigms of dialectical materialism and historical materialism. When studying the theories and experience of Soviet socialism, China did not blindly emulate its forerunner, but instead creatively tailored what it learned to fit its unique circumstances. This was manifested in at least two aspects. First, in view of its highly centralized planned economy, China stressed initiative on the part of both central and local authorities, and twice devolved authority over economic matters to local governments, making China’s planned economy more dynamic than the USSR’s. Second, in view of the USSR’s bureaucratism and institutional rigor mortis, China explored means for promoting democratic decision-making in economic work and expanding the rights of ordinary laborers to participate in management. This also included efforts to narrow the disparities between cities and the countryside, disparities between different regions, and disparities between mental and physical labor. China also instituted universal basic healthcare and education. Together, these allowed China to maintain a relatively fair and mobile social structure. These laid the groundwork for reform and opening up, making China’s planned economy very different from the Soviet version. At the same time, far from just surpassing the Soviet model, experiments during this period touched upon universal problems faced by all developing countries in the journey towards modernization. China formed a unique set of practices in handling urban–rural relations, regional relations, the relationship between economic development and human development, as well as the relationship between China and the global system. With respect to urban–rural relations, the People’s Republic implemented a policy of rural collectivization, organizing villages to accumulate resources to serve the needs of industrialization while also promoting the all-round development of agriculture, industry and social programs. With respect to regional relations, China initiated the construction of the Third Front, the first “Westward Movement” in Chinese history. The Third Front laid a decisive foundation for China’s strategy of active defense, and eradicated, at a fundamental level, the risk of large-scale foreign invasion, thus creating a safe international environment for reform and opening up. With respect to human development, China greatly increased the level of human capital by building a rudimentary but universal system of public services and social security that ensured access to basic healthcare and education. With respect to international strategy, in the face of a global landscape divided into two camps, one led by the US and the other by the Soviet Union, China remained staunchly committed to the principles of independence and autonomy, extending aid to countries in the Third World to the best of its ability and standing on the side of global equity and justice. In this way, China impacted the global landscape while pursuing its own development. These were groundbreaking practices for a developing country.

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Although China has come a long way today, we cannot deny the merits of its explorations over these twenty years. Through an objective assessment based on the historical context, we see that, in comparison to past eras and most developing countries, China has managed to successfully carve out a unique path of development. Accomplishment and progress were the mainstream during that period, despite the accompanying missteps. By the eve of reforms in 1978, China already had a relatively complete industrial system, the preliminary groundwork for agricultural modernization, universal basic healthcare and basic education, greatly improved levels of human capital, and a safe and conducive international environment. At a fundamental level, these changed China’s position as a periphery country, allowing the Chinese nation to stand, renewed, amidst the global community of nations, and created the historical conditions for its reform and opening up. Innovations and explorations during this period, along with the accompanying successes and missteps, also provided profound lessons for China’s future development.

3.2 A Decentralized Planned Economy The People’s Republic did not unthinkingly emulate the Soviet model. However, due to similarities in national conditions and the implementation of socialist systems, certain flaws in the Soviet model also emerged in China. During the mid-1950s, the Party proposed a rethink of the Soviet model. In the early twentieth century, the Soviet Union, despite being a backward agrarian country, managed to achieve rapid industrialization, which propelled the country into the ranks of the Great Powers, insulating it from the impact of the Great Depression, and allowing it to become a bulwark in the war against fascism. At the same time, it was a pioneer in establishing labor protection and social security systems, providing universal housing, healthcare, education and other basic public services, making substantial contributions to the safeguarding of global equity and justice. These were initiatives of progressive significance in human history. Even today, these Soviet initiatives are superior to those in most countries. However, the Soviet model did have glaring flaws. Chief among these were its highly centralized economic system and ever-growing bureaucratism. First, in the relations between central and local government, every aspect of the Soviet economy was planned, with most plans made by the central government. While this was good for concentrating and deploying resources, it also led to an ossified system that dampened the initiative of local governments. Moreover, under the technological constraints of that era, an overly extensive management ambit made the system prone to information distortion and low efficiency. Second, in the vertical allocation of power, the Soviets adopted a highly hierarchical system of management, which readily led to bureaucratism and cadre privilege. Bureaucratism and cadre privilege in the Soviet Union caused the Soviet Communist Party to lose touch with the people and its founding ideals, eventually becoming a special interest group and leading to

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the dissolution of the Soviet Union. Before its dissolution, the peoples of the Soviet Union enjoyed a level of economic development and living standards higher than the global average. The dissolution of the Soviet Union was less of “failure in economic performance,” but more of political deterioration. The lessons of the Soviet Union show that even when socialist countries had managed to achieve a system of public ownership and the dictatorship of the proletariat, eliminating the antagonism between labor and capital extant in a system of private ownership and opening a pathway towards a society free of exploitation and oppression, this does not imply that all these problems had resolved once and for all and that the system required no further consolidation. There were at least two major issues that the Soviet Union failed to resolve: (1) how to stimulate the initiative of local and grass-roots levels under conditions of public ownership; (2) how to ensure a socialist state regime ultimately represented the fundamental interests of the working class. These were the problems that the CPC had to overcome as it tried to avoid the pitfalls of the Soviet model. They were also the very problems that China had to resolve for its own reforms.

3.2.1 Mao Zedong Was the First to Propose Avoiding the Pitfalls of the Soviet Model China’s First Five-Year Plan achieved notable success between 1953 and 1956, laying the preliminary groundwork for industrialization. However, because the First FiveYear Plan implemented a highly centralized planned economy, its achievements were also clouded by certain drawbacks, including over-centralization of power, a lack of initiative on the part of local government, the prevalence of bureaucratism, among others. In early 1956, when receiving a report on economic work from various ministries and commissions of the State Council, Mao Zedong proposed that China should encourage the initiative of both central and local authorities. According to Mao, the Soviet Union was once “highly centralized,” which was advantageous in some respects, but dampened local initiative. Mao called attention to this problem, saying that China’s large number of local authorities should not be made to feel that they “had nothing to do.”1 Thereafter, in various addresses (“On the Ten Major Relationships” included) Mao repeatedly returned to this topic: One of the advantages Europe enjoys is the independence of the various countries. Each is devoted to a set of activities, causing the European economy to develop comparatively quickly. Since the time of the Chin, China has taken shape as a major power, preserving its

1

Party Literature Research Institute of the CPC Central Committee, Mao Zedong Nianpu (1949– 1976) [Chronology of Mao Zedong (1949–1976)], vol. 2 (Beijing: Zhongyang Wenxian Press, 2013), 540.

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unity on the whole over a long period of time. One of the defects was bureaucratism, under the stifling control of which local regions could not develop independently.2

At the same time, Mao also took note of the mindsets and acts of privilege seeking that emerged after entering the era of peaceful development. He felt that this was breaking with the tradition of equality between officers and the rank-and-file that formed in the years of the revolutionary war. In 1956, riots broke out in the Eastern European socialist states of Poland and Hungary. Mao believed that the roots of these riots lay in the bureaucratism that had emerged in these countries, along with the encroachment of the people’s interests by certain cadres. At the same time, there were also Party officials in China who were encroaching upon the people’s interests. From September 1956 to March 1957, there were dozens of labor strikes and petitions in China, most of which were the result of bureaucratism in enterprise administration.3 This led Mao to believe that contradictions between the Party and the masses would continue to exist even after the establishment of a socialist system, which led him to propose the “correct handling of contradictions among the people.” Changes in Sino-Soviet relations were another incentive that prompted China to seek to transcend the Soviet model. In the late 1950s, the Soviet Union hoped that China would submit to its global strategy and refrain from developing nuclear weapons. The Soviets also hoped to station troops in China. At the same time, as regards issues of Chinese sovereignty in Taiwan and Tibet, the Soviets objected to China’s shelling of the Kinmen Islands and defensive retaliation against India in the hopes of avoiding conflict with the US. China thus faced new alternatives in its relationship with the Soviets: should it give up its independence and autonomy for the sake of continued Soviet aid, or should it uphold its sovereignty at the cost of losing it? The Party chose the latter path. In September 1960, Deng Xiaoping said during high-level talks between the Chinese and Soviet Communist Parties that the CPC would never accept a “father-son” relationship with its Soviet counterpart. Deng told the Soviet delegates that, despite the losses and difficulties caused by their withdrawal of experts dispatched to China, the Chinese people were willing to “swallow” these losses and were determined to make up for it using “[our] own hands” to build a “country of our own.”4 The deterioration in Sino-Soviet relations also affected the development of the Chinese economy. On the one hand, this prompted China to seek a more autonomous path of development. On the other hand, tense international relations created, out of the blue, greater pressures on China to develop its military industries. After Soviet aid was withdrawn, 156 uncompleted projects were paralyzed. The tense relations 2

Mao Zedong, Du Shehuizhuyi Zhengzhijingjixue Pizhu he Tanhua [A critique of Soviet economics], vol. 2 (The Association of National History of the People’s Republic of China, 1998), 756. 3 Zhao Wei, “1956–1957 Nian Gongren Yidong Wenti Yanjiu” [Research on labor unrest issues 1956–1957], Ph.D. diss., (Central Party School of the CPC, 2012). 4 Qu Xing, “50 Niandaimo zhi 60 Niandai Zhong Su Guanxi Ehua de Zhanlue, Lilun yu Liyi Beijing” [The strategic, theoretical and interests background of the deterioration of Sino-Soviet relations in the late 1950s and 1960s], Foreign Affairs Review, no. 1 (2000): 15–24.

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between agriculture, light industry and heavy industry, which had already begun to be mitigated during the First Five-Year Plan, began to deteriorate. China had to fork out 8.6 billion yuan per year to service Soviet loans.5 These changes in Sino-Soviet relations caused China to reform its highly centralized planned economy model and put greater store on local initiatives. The idea was that greater local initiative would boost economic growth and compensate for the damage caused by the withdrawal of Soviet investment. In rural regions, China hoped to accelerate rural collectivization to increase grain output more quickly, which would provide greater surplus resources for industrialization, narrow the urban–rural divide and develop social welfare programs as well as the rural industrial and commercial sector in the countryside. Beginning in 1958, China successively launched three intrinsically related initiatives: the devolution of authority, the Great Leap Forward, and the people’s communes.

3.2.2 The First Decentralization and the Great Leap Forward (1958–1961) In 1958, China delegated authority to local governments for the first time since it established a planned economy. This initiative primarily aimed to transform industrialization based primarily on investment by the central government into initiative on the part of both central and local authorities, while at the same time encouraging local governments to transcend their blind belief in Soviet practices through the Great Leap Forward and promote local industrial development. China’s proposal of a Great Leap Forward at the time was not primarily because of “hotheadedness” of Party leaders, but rather due to highly important considerations. First, the Party acted in consideration of the domestic economic structure, seeking to stimulate local initiative and to overhaul the highly centralized structure of the planned economy. Second, the Party acted in consideration of political imperatives. The goal here was to transform the class foundations of the Communist Party— grassroots cadres, workers and farmers—into the main drivers of industrialization and modernization. In September 1957, the third plenary session of the Eighth CPC Central Committee decided to partially delegate administrative power over industry, commerce and fiscal affairs to local governments, factories and mines, and corporations. This round of decentralization covered more than 80% of the corporations administered by the central government and greatly increased local financial resources. After the devolution of authority, there was a substantial decrease in the fiscal revenue of the central government in proportionate terms, from 70 to 80% during the First Five-Year Plan (1953–1956) to 44% in 1958 and 24% in 1959. Local regions gained large amounts of resources for industrial development. 5

Wang Taiping, Zhonghua Renmin Gongheguo Waijiao Shi [Diplomatic history of the People’s Republic of China], vol. 2 (Beijing: World Affairs Press, 1998), 257–258.

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In order to promote the development of local industry, the development of industrial technologies during this period was also underpinned by the call to “eliminate superstition” (pochu mixin). This represented a shift from Soviet-style standardization and large-scale heavy industry towards a greater emphasis on small-scale industrial corporations and technologies with low barriers of entry, as well as encouragement of technological innovation on the part of the general public. Various central government departments overseeing industrial affairs rushed out standard designs for small factories and mines, most of which were suitable for counties, prefectures and town(ship)s. “The largest of the seven types of small blast furnaces designed by the Ministry of Metallurgical Industry had a capacity of merely 100 m3 and could produce 40,000 tons of pig iron per year, making them suitable for individual counties.” Meanwhile, “the small oil extraction factories designed by the Ministry of Food Industry required merely an investment of 1000 yuan, not to mention that they could be converted from ordinary dwellings.”6 In May 1958, Deng Xiaoping stated that industrial development “should encompass all corporations of all sizes, with the large ones run by the central government, medium-size ones run by local government, and small ones run by townships and rural cooperatives.” Deng believed that, for instance, if fertilizer factories were “everywhere,” the development of chemical fertilizers would progress at a far greater pace.7 Decentralization gave, for the first time, most local governments the conditions and possibility of independently developing industry. Coupled with the lowering of barriers, there was an unprecedented rise in the initiative of local governments in industry development. At this time, the central government also initiated the Great Leap Forward, which further boosted the enthusiasm of local regions. The Great Leap Forward movement went through three phases: initiation, intensification of local competition, and rectification of overly high targets. The first phase took place before May 1958.8 In December 1957, the CPC Central Committee issued a call for China to catch up with or surpass the UK in terms of the output of steel and other major industrial products within fifteen years. Then, in early 1958, Mao Zedong stressed in three meetings, respectively held in Hangzhou, Nanning and Chengdu, that China should eliminate superstition, emancipate mindsets, think independently, oppose dogmatism, and explore its own path of development. During these meetings, Mao criticized the dogmatism in economic work over the past eight years, arguing that this was due to an incapacity to think independently, caused by the “pressure of foreign experience.” The second phase was when local governments and departments competed to propose ever-higher targets (May to October 1958). With the encouragement of the central government, local governments and departments began to compete. For 6

Li Haitao, “The Study on the Developmental History of Iron and Steel Industry in Modern China (1840–1927)” [in Chinese], Ph.D. diss., (Soochow University, 2010). 7 Deng Xiaoping, Deng Xiaoping Wenji (1949–1974) [Collected works of Deng Xiaoping], vol. 2 (Beijing: People’s Publishing House, 2014), 376. 8 For more historical details on the initiation of the Great Leap Forward, see: Party Literature Research Institute of the CPC Central Committee, Zhongguo Gongchandang Lishi [History of the CPC], vol. 2 (Beijing: Zhonggong dangshi chubanshe, 2011).

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instance, Shanghai proposed that total industrial output would more than double during the Second Five-Year Plan, while the East China Bureau proposed that its four provinces and one municipality would produce more than 120 billion jin of grain in 1958, an increase of more than 50 billion jin over the previous year. Other regions also successively convened meetings to determine their goals for the Great Leap Forward. In 1958, targets for steel output were met, although quality and efficiency levels were low. The third phase began when the Central Committee started to rectify the errors of overly high targets (after October 1958). Today, many believe that the Great Leap Forward was all about high targets, the trend towards gross exaggerations (fukua feng), and mass steel production. While true, this characterization fails to capture the complete historical picture. In the autumn of 1958, Mao and his colleagues had started to rectify the problems that had arisen during the Great Leap Forward. In October 1958, Mao admonished the Xushui People’s Commune in Hebei Province for their false practice, such as reporting sweet potato output to be 8000 jin per mu instead of the actual level of 2000 jin, their taking over of prime hogs from several villages to deceive visitors, as well as “communizing” personal property and private debt, and fully implementing the “free-supply system” (gongjizhi).9 In November 1958, at the Zhengzhou Conference, Mao specified that people’s communes were not to implement the free-supply system. Instead, they should use the law of value to expand the production of commodities. Mao also expressed doubt towards overly high targets, saying that the targets for steel, machinery, coal and electricity were “shockingly high.”10 In the same month, Mao said in an address at the Wuchang Conference that “prematurely denying the positive role of commodities, value, currency and prices is not beneficial to socialist development and hence erroneous.”11 In February 1959, during the Second Zhengzhou Conference, Mao pointed out that egalitarian practices such as egalitarianism distribution, transferring personnel and material resources without regard to the actual collectives to which they belonged, and banks’ recalling of loans to farmers (yiping, erdiao, sanshoukuan) had led to panic among rural residents and had to be immediately rectified: “if this major issue is not resolved in the first half of March, it would lead to huge losses, and I worry that the extensive damage that the Soviet Union experienced when establishing cooperatives would also arise in China.”12 In March 1959, an expanded meeting of the Politburo further lowered industrial targets for the year. However, when rectifying these so-called “leftist” (extreme leftwing) errors, Mao also stated that the primary goal then was still the mobilization of the initiative 9

Pang Xianzhi, Jin Chongji et al., Mao Zedong Zhuan (1949–1976) [Biography of Mao Zedong (1949–1976)] (Beijing: Zhongyang Wenxian Press, 2003), 1149. 10 Mao Zedong, Mao Zedong Wenji [Collected works of Mao Zedong], vol. 7 (Beijing: People’s Publishing House, 1993), 436–439. 11 Pang Xianzhi, Jin Chongji et al., Mao Zedong Zhuan (1949–1976) [Biography of Mao Zedong (1949–1976)] (Beijing: Zhongyang Wenxian Press, 2003), 906. 12 Pang Xianzhi, Jin Chongji et al., Mao Zedong Zhuan (1949–1976) [Biography of Mao Zedong (1949–1976)] (Beijing: Zhongyang Wenxian Press, 2003), 906.

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of local regions and the masses. These “rash advances” (maojin) were regrettably unavoidable as economic development was ultimately a process of “spiral progress” from equilibrium to disequilibrium to a new equilibrium: “Disequilibrium is constant and absolute; equilibrium is temporary and relative.”13 Hence, his addresses during this period would often revolve around two themes. On the one hand, Mao would criticize high targets and the trend towards gross exaggerations. On the other hand, Mao continued to stick to the general direction of mobilizing the initiative of local regions and the masses and “eliminating superstition,” forbidding the dampening of grassroots enthusiasm under the pretext of correcting these problems. Moreover, it remained a fact that the planned economy was still highly centralized, and there were still divergent views on whether to devolve power to local regions and communities to stimulate their initiative, which made it even more difficult to correct errors. Overall, the decentralization in 1958, which took place primarily in the form of the Great Leap Forward, was unsuccessful. Moreover, it led to overly high targets and a tendency to grossly exaggerate production figures during the early days of the Great Leap Forward. Relations between workers and farmers, light industry and heavy industry, became unbalanced and jeopardized the quality and efficiency of economic development. However, an assessment of history must be based on contemporaneous historical events. We should acknowledge that the original goals of the Great Leap Forward, which were to stimulate local initiative, as well as incorporate grassroots communities and the countryside into the industrialization and modernization process, were sound. In fact, the movement did achieve some progress. During industrialization efforts under previous regimes, China’s few industrial sectors were mainly concentrated in the limited number of coastal cities. This exacerbated not only regional divides, but also limited capital and markets for industrialization as most of the countryside, as well as central and western China, were not incorporated in the industrialization process. Whether from a moral standpoint or the pragmatic requirements of economic development, it was impossible for the People’s Republic back then to allow industry to be concentrated merely in a few large cities or in eastern China, so a process of developing local industries was all too necessary. In the economic domain, this helped to narrow regional divides and quickly form an industrial system where tasks were well-distributed between the central and local governments, which would expand capital and markets for China’s industrialization. Politically, this helped to consolidate the unity of the nation and prevent the formation of overly large disparities. In reality, during the Great Leap Forward, there was great progress in the development of local industry, which ensured not only continued investment in many key provincial and municipal projects even after the withdrawal of Soviet funding but also the launch of many new projects. This also meant that investment projects would no longer be concentrated in the hands of the central government. After the 13

Gao Qirong and Li Jiang, “Mao Zedong ‘Gongzuo Fangfa Liushi Tiao (Cao’an)’ Luelun” [A brief discussion of Mao Zedong’s Sixty Articles on Work Methods (Draft)], CPC History Research and Teaching, no. 1 (2008): 50–55.

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Great Leap Forward, local fiscal revenue and industrial output grew markedly as a proportion of the national total. Undoubtedly, it was ill-advised to put an exclusive stress on mass steel production using “native methods” (tufa) in the hope of developing local industry without consideration of real-world conditions. Still, it must be acknowledged that this period also laid the groundwork for subsequent industrialization. Figures show that more than two-thirds of new large and medium-scale projects in major heavy industry sectors between 1949 and 1964 were initiated during the three years of the Great Leap Forward. Today, many of these projects are leaders in their respective industries. China’s total fixed industrial assets grew three-fold from 1956 to 1966, based on original prices.14 The lesson here is that high investment growth during the Great Leap Forward was achieved by sacrificing rural interests, domestic consumption, and the environment. Fixed asset investment by state-owned corporations skyrocketed from 15.1 billion yuan in 1957 to 27.9 billion yuan in 1958. Construction projects in the coal, power and transportation sectors also saw rapid growth. Moreover, heavy industry also elbowed out agricultural and light industry production. Around 10% of crops were left unharvested, while many localities were unable to complete their autumn sowing. This lesson is analogous to the mechanisms underlying the pursuit of economic growth by some localities, which has led to chaotic corporate competition, depleted resources, damaged the natural environment, and caused industrial overcapacity. This shows that, whether in a planned or market economy, exclusive focus on the economic laws of competition and incentive at the expense of the laws of science, technology and nature will compromise economic equilibrium and sustainable development.

3.2.3 The Second Decentralization (1970s) In the early 1970s, the second large-scale devolution of economic authority took place. This time, the devolution of authority was in tandem with the construction of the Third Front and the development of rural commune and brigade enterprises (shedui qiye). Industrialization priorities shifted towards central and western China as well as the countryside, which spurred the development of local industry and laid the foundation for the formation of competitive markets after reform and opening up in 1978. In the early 1960s, the CPC Central Committee summed up the lessons from the hardships of the Great Leap Forward, proposing the policy of “adjustment, consolidation, enrichment, and raising” of economic work. One important aspect of “adjustment” was to recentralize all authority devolved in 1958 to local governments, which

14

Fu Fengge and Gu Zhiqiang, “Shinian Jingji Jianshe de Lishi Fansi” [Historical reflections on ten years of economic development], Extensive Collection of the Party History, no. 10 (1996): 12–14.

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helped to mitigate the regional chaos caused by the Great Leap Forward. It also improved China’s economic situation and order. In 1966, Mao again criticized the highly centralized planned economy, stating that “this present method of managing the economy using bureaucratic methods is not good and has to be changed”; “it is not good for everything to be run by the central government and blocked at every turn.”15 He instructed that the Central Committee sum up what it had learned from past efforts and carry out a “thorough revolution” of economic work. These ideas were brought to life from the late 1960s to the 1970s. In 1969, after things calmed down after the early phase of the Cultural Revolution, the National Planning Conference decided to again increase the amount of authority devolved to local regions. In March 1970, most enterprises and public institutions under the various ministries of the State Council were placed under local administration. These covered more than 2600 enterprises and public institutions directly under the central government, including large leading corporations such as the Daqing Oilfield, Changchun No. 1 Automobile Factory, and Kailuan Coal Mine,16 which were placed under the purview of the respective provincial-level governments. As a result, the industrial output of corporations under the central government declined from 42.2% of total industrial output to 6%. To keep up with this structural change in economic administration, the State Council streamlined its administrative structure to an unprecedented extent, cutting the number of departments under its purview from ninety to twenty-seven, which resulted in an 82% decrease in its staffing establishment.17 This round of devolution, apart from further clarifying the relationship between central and local government, also attained two achievements that would profoundly affect China’s economic structure for the subsequent decades: the construction of the Third Front and the development of rural industry. The construction of the Third Front was the largest investment in the industrialization of central and western China during the planned economy era. Commune and brigade enterprises drove the rapid development of rural industry. These enterprises were the forerunners of the town and village enterprises (TVEs) that emerged after 1978.

15

Gu Longsheng, Mao Zedong Jingji Nianpu [Mao Zedong: an economic chronology] (Beijing: The Central Party School Publishing House, 1993), 637. 16 Most factories, coal mines and oilfields were public enterprises in China’s planned economy— Trans. 17 Cui Fengjun, “Sanwei Fenquan Shijiao xia Dangdai Zhongguo Xingzheng Tizhi Gaige de Luoji yu Chulu: Zhongguoshi fenquan zhuyi yanjiu” [Logic and outlet for the reform of the contemporary Chinese administrative system under a three-dimensional perspective of decentralization: A study of Chinese-style decentralism], PhD diss., (Zhejiang University, 2013).

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3.2.4 “On-The-Spot” Rural Industrialization The development of rural industry was an important outcome of the second round of devolution. It is often believed that industrialization and urbanization are two sides of the same coin. However, in reality, the development of capitalism in Western countries also went through a “rural industrialization” phase. “On-the-spot” development of rural industry was also a means for industrial development. In the early twentieth century, vigorous debate arose in Chinese society regarding paths to industrialization. One point of contention was whether China’s industrialization should start from largescale urban industries or the development of rural industries. Some scholars proposed the development of rural industry, prominently Professor Fei Xiaotong, who believed that traditional handicraft trades in the countryside had been adversely affected by industries from foreign countries, reducing rural incomes to a level that could barely guarantee the barest living standards and resulting in rural poverty. The decline of rural economies disrupted the balance between the urban and rural regions, leading to a dry-up of capital in the countryside and accelerating the engrossment of land in the countryside by urban capital.18 The solution would be to develop rural industry. According to Professor Fei: Should we pursue ample modernization of industry at the cost of lower incomes and living standards for 80 percent of farmers? Or should we impose some restrictions on industrial technology so that farmers can have a bit more income? I choose the latter. If villages cannot attain prosperity, and farmers’ incomes cannot grow, even if urban industries are as modern as those in the West, where would their products be sold? Losing the huge markets of the countryside while at the same time facing intense external competition and pressure from Western industry would lead to factory closures for want of markets.19

In essence, this meant that the goals of “on-the-spot” rural industrialization, apart from enhancing economic efficiency, would, more importantly, be to provide rural employment, raise rural incomes, support agriculture and narrow urban–rural divides. This would transform rural society and culture, provide markets for urban industries and incorporate the countryside into the process of modernization. In the past, China did not have the means to turn these ideas into reality, owing to its weak urban industry base. In the early days of the People’s Republic, the first industrial sectors to be developed were concentrated in the cities. In the late 1950s, during the first devolution of economic authority, rural industrialization became one of the goals of the people’s commune movement.20 In August 1958, an expanded meeting of the Politburo passed the “Resolution on the Establishment of People’s Communes in the 18

Liu Changliang, “Xiangjian Xiaolu yu Gongye Tongqu: Fei Xiaotong xiangcun gongye sixiang pingshu” [Rural roads and industrial thoroughfares: A commentary on Fei Xiaotong’s ideas on rural industry], Journal of Hebei University (Philosophy and Social Sciences), no. 1 (2005): 143–144. 19 Peng Nansheng and Jin Dong, “A Discussion on Fei Xiaotong’s Country Industrialization Thought” [in Chinese], Journal of Historical Science, no. 11 (2010): 80–85. 20 Wu Yiping, “Collectivism, Township-Village Enterprises and Village Industrialization” [in Chinese], Finance and Economics, no. 2 (2005): 168–175.

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Rural Areas.” During this period, the CPC Central Committee also decided that the central government would disburse 1 billion yuan each year to promote rural industrialization. By 1959, the people’s communes had established approximately 700,000 enterprises in Chinese villages, which were said to have created output worth 7 billion yuan.21 However, commune and brigade enterprises were not consolidated at the time. Economic restructuring in 1961 greatly reduced their size. In 1961, their numbers fell to 45,000. Output declined to 1.98 billion yuan and further to 420 million yuan two years later, a historical low.22 In 1960, when reading Political Economy: A Textbook (a Soviet publication), Mao penned some of his thoughts on the large inflow of rural migrants to the cities during the Great Leap Forward: What shall we do to reduce the rural population? If we do not want them crowding into the cities we will have to have a great deal of industry in the countryside so that the peasants can become workers right where they are. This brings us to a major policy issue: do we want to keep rural living conditions from falling below that in the cities, keep the two roughly the same, or keep the rural slightly higher than the urban? Every commune has to have its own economic center, its own upper-level schools to train its own intellectuals. There is no other way to solve the problem of excess rural population really and truly.23

After 1965, rural industrialization again returned to the agenda. In September 1965, the CPC Central Committee and the State Council issued a directive on the development of sideline production in the countryside, instructing that “rural collective sideline industries” should be vigorously developed, with production brigades playing the main role. On May 7, 1966, Mao Zedong issued the well-known “May 7th Directive” (wuqi zhishi), in which he instructed that “the communes do their main agricultural work (including forestry, fishing, animal husbandry, and subsidiary trades), but they must also learn military affairs, politics, and culture. When circumstances allow, they should collectively set up small-scale factories and take part in criticizing the capitalist class.” This provided the political conditions for the development of commune and brigade enterprises.24 It was a breakthrough over the rule that “in general, communes and brigades should not run enterprises” set by central authorities during the economic recovery phase in the early 1960s. By the early 1970s, the countryside also had the conditions for industrial development. Sustained growth in the rural population had led to land scarcity. The excess population needed means of livelihood. Meanwhile, large and medium-sized stateowned corporations in the cities mainly manufactured heavy industrial products and could not meet rural demand for light agricultural machinery. In 1970, the Central 21

Pan Wei, Politics of Marketization in Rural China: The Coalition Between Grassroots Authorities and Rural Industries [in Chinese], (Beijing: The Commercial Press, 2003), 65. 22 Ma Quanshan, Xin Zhongguo Gongye Jingji Shi [Economic history of industry in the People’s Republic of China] (Beijing: Economy & Management Publishing House, 1998), 354–355. 23 Mao Zedong, Du Shehuizhuyi Zhengzhijingjixue Pizhu he Tanhua [A critique of Soviet economics], vol. 1 (Beijing: Zhongyang Wenxian Press, 1992), 197. 24 Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Mao Zedong Wengao [Manuscripts by Mao Zedong since the founding of the state], vol. 12 (Beijing: Zhongyang Wenxian Press, 1998), 54.

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Committee convened a conference, during which it stressed the vigorous development of commune and brigade enterprises as well as the widespread establishment of small-scale industries (coal mines; steel, fertilizer, cement and machinery factories), known collectively as wuxiao gongchang (the “five types of small factories”) to seek a means of livelihood for underemployed agricultural laborers, raise the income of farmers, satisfy long-suppressed market demand,25 and achieve agricultural mechanization. Through two rounds of decentralization, villages already had some of the foundations necessary for industrial development. The two climaxes in the construction of the Third Front, in 1964 and 1969, had also resulted in the relocation of many factories and mining companies to remote rural regions, or otherwise their “devolution” to prefectural- or county-level government management, which increased the use of capital and equipment in rural regions. After 1966, the emergence of May Seventh Cadre Schools (wuqi ganxiao) and the launch of the “down to the countryside” movement resulted in the flow of scientific, cultural and technical talent (in the form of Party cadres and educated youth) to the villages, who brought along with them the know-how and market information needed to establish corporations. Provinces such as Jiangsu, Zhejiang and Guangdong, historically home to traditional handicraft industries, were the first to establish commune and brigade enterprises in sectors such as farming tools, grain and oil processing, construction materials, plaiting, and apparel. In Jiangsu, for instance, the total output of commune and brigade enterprises rose from 696 million yuan in 1970 to 2.24 billion yuan in 1975, an annual average growth rate of over 20%. Their share of provincial industrial output rose from 3.3% in 1970 to 9.3% in 1975. During the Fourth Five-Year Plan, brigade and commune enterprises were affirmed by central authorities, allowing them to grow even more quickly. Between 1965 and 1976, industrial output by all commune and brigade enterprises in China rose from 530 million yuan to 12.39 billion yuan (based on constant prices), while their share of total industrial output rose from 0.4 to 3.8%. By the end of 1976, there were 1.115 million commune and brigade enterprises across China, with over 400 such enterprises in each county. Moreover, the industrial output of commune and brigade enterprises had risen to 24.35 billion yuan; in particular, industrial output by commune enterprises had increased by 216.8% since 1971. Objectively, the development of commune and brigade enterprises laid the preparatory groundwork for the great growth in TVEs in the 1980s.26 Commune and brigade enterprises boosted the might of the rural collective economy and improved the conditions for agricultural production. They also accelerated the mechanization and electrification of agriculture, as well as progress in agricultural irrigation projects and the use of chemical fertilizers. Together, these 25

Deng Hongtu and Li Ya, “Guoduqi Zhongguo Zhidu Bianqian de Jingjishi Jieshi: 1956–1996 ‘tizhi kunju’ yu gaige de neishengxing he guoduxing” [An economic-historical interpretation of institutional change in China during the transitional period: “institutional dilemma” and the endogeneity and transitional nature of reforms from 1956 through 1996], Nankai Economic Studies, no. 2 (2005): 3–11. 26 He Jihua, “The Research on Shedui Enterprise in Guangxi: 1953–1983” [in Chinese], Ph.D. diss., (Guangxi Normal University, 2010).

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made agriculture more risk-resilient. Commune members enjoyed continually rising living standards, creating the conditions for narrowing disparities between the cities and the countryside, workers and farmers, as well as mental and physical labor. A news report in 1975 wrote that “Commune and brigade industries are blooming everywhere, much like mountain flowers in full blossom… they not only create the conditions for expanding the collective economy and accelerating agricultural mechanization, but also have profound significance for progressively narrowing the three major disparities,27 strengthening the alliance of workers and farmers, and consolidating the dictatorship of the proletariat.”28 Apart from commune and brigade enterprises, county-level corporations in the “five small industries” also saw vigorous growth. By the end of 1975, local corporations in these industries produced 6.8% of China’s steel, 37.1% of its coal, 58.3% of its cement, and 69% of its chemical fertilizers. The development of commune and brigade enterprises, as well as corporations in the “five small industries,” led to the rapid popularization of agricultural machinery and chemical fertilizers. In 1975, China’s agricultural machinery had exceeded 100 million horsepower, a nearly ten-fold increase over 1964. In particular, the total horsepower of hand-operated tractors and motor-powered threshers had respectively grown by 45-fold and 23-fold. The total horsepower of electric rice huskers, cotton gins and oil presses had risen by 10.4 times, 1.8 times and 11.8 times over 1964 levels.29 The popularization of chemical fertilizers and agricultural machinery created the conditions for the rise in agricultural output after the household responsibility system (baochan daohu) was instituted in the 1980s.

3.2.5 The Impact of Decentralization on Marketization Reforms On the whole, the second round of decentralization, implemented in the 1970s, was a successful endeavor. Not only did it incorporate local communities, villages, as well as central and western China into the modernization process—it also allowed China to build a unique planned economy that allowed local initiative to co-exist with central government control. This laid the groundwork for the formation of competitive markets in the early stages of China’s reform and opening up. 27

Referring to the inequalities between cities and the countryside, mental and physical labor, and urban workers and rural farmers—Trans. 28 Anonymous, “Weida de Guangming, Canlan de Xiwang: Henan Gong Xian Huiguo Zhen Gongshe weirao nongye ban gongye, banhao gongye cu nongye de diaocha” [Great light and brilliant hopes: A survey on agriculture-centered development of industry and advancement of agriculture through well-developed industry by Huiguo Town Commune in Gong County, Henan Province], Xin Nongye, Z1 (1975). 29 Liu Guoguang et al., Zhongguo Shige Wunian Jihua Yanjiu Baogao [Research report on China’s Tenth Five-Year Plans] (Beijing: People’s Publishing House, 2006), 351.

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First, the devolution of authority was the first time in Chinese history that villages were incorporated into the process of industrialization and modernization. The means whereby major developing countries manage urban–rural relations during modernization and industrialization are not only moral issues of social equity, but also related to sustainable industrial development. Most developing countries prioritize the development of urban industry and commerce while viewing the countryside as merely a source of labor and raw materials, leaving villages and farmers to flounder outside the path towards modernization. The outcome, then, would be a widening urban– rural divide, or even sharp antagonisms and social divisions. If a system of private land ownership is implemented, this would then cause multitudes of farmers to lose their land, in turn leading to the formation of slums that then become insurmountable barriers to modernization. Economic inequality between cities and the countryside also breeds political inequality, as progress in modernization is controlled mainly by urbanites, which gives rise to policy orientations even less beneficial for rural development. India, the Philippines and Brazil are typical examples of this path of development that breeds urban–rural disparities. After the founding of the People’s Republic, members of the Party also disagreed among themselves as to the best approach to industrialization, one aspect of which was whether to support the establishment of industry in the countryside. If the industrial sector is dominated by large, standardized urban industries, most of the countryside would be left drifting outside China’s path towards modern industry, becoming ever more peripheralized. The people’s commune movement in the 1950s and the second devolution of economic authority in the 1970s were opportunities for the rapid advancement of rural industrialization. This not only prevented the peripheralization of the countryside, but also increased rural incomes and allowed industry to support agriculture to a greater extent, while also transforming rural society and culture, bringing the idea of modernization to the countryside. It may well be that rural industries were substandard and roughhewn at the start and were gradually rendered obsolete by the market economy after the 1990s, making the employment of migrant workers in the cities the main way for the rural population to participate in the industrialization process. Yet, the historical role of brigade and commune enterprises and the “five small industries” in rural development should be fully affirmed. Even in today’s circumstances, we should give sufficient attention to the development of rural industries. Compared to the flow of migrant workers into cities in search of jobs, the development of rural industries would let farmers take on sideline work without leaving their villages, ensuring that they can be both farmers and industrial workers at the same time. This would also allow villages to retain some of their young talents and avoid the failures in rural social governance caused by the large outflow of human capital. In turn, this made the countryside more organized and promoted the provision of public services, social development, and the progress of democratic politics. During an inspection of rural villages in July 2013, President Xi Jinping indicated that China would still have four to five million rural residents, even if the urbanization rate surpassed 70%, during which he said that villages must not become home to only desolation, “left-behind” children, or a distant memory. According to President Xi, urbanization had to progress together with agricultural

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modernization and new rural development—only synchronous development could allow both cities and the countryside to shine.30 This line of argument indicates that both urban and rural regions should jointly participate in the modernization process, rather than seeing villages as merely “vassals” of cities that provide urbanites with grain, cheap labor and raw materials. This would rectify the practices of privatizing rural land, encroaching upon farmland and depriving farmers of their rightful interests in the name of urbanization. There are lessons to be learned from revisiting the development of rural industries in the 1950s and 1970s when promoting greater urbanization. Second, after two devolutions of economic authority, many Chinese corporations were run by local government by the time reform and opening up was rolled out in 1978. Large, medium, small and micro enterprises were developing in tandem, while many regions had also come to possess relatively complete and self-contained economic systems. Even during the height of China’s planned economy, the central government controlled the production and distribution of fewer than 600 types of products. In contrast, the Soviet Union controlled as many as 5500. Only 3% of state-run enterprises were directly regulated by the central government. From the perspective of the regional distribution of industries, a strict division of labor existed between the various regions of the Soviet Union (for instance, the Varyag, which later became China’s first aircraft carrier, was first built in a Ukrainian shipyard; construction had to stop after the dissolution of the Soviet Union due to a lack of supporting industrial foundation in the region). In contrast, China stressed that each region should have its own “self-contained system.” Many localities formed complete industrial systems, which was conducive to the rapid formation of inter-regional competition after economic reforms were launched.

3.3 Economic Democracy and “Restricting Bourgeois Rights” Another Chinese breakthrough over the Soviet model was the narrowing of gaps between the elite and the rest of society during the course of development, thereby maintaining the links between the Party and the masses. In the economic domain, this manifested primarily as the promotion of economic democracy in grassroots-level work units, allowing ordinary laborers to participate in corporate management and thereby narrowing urban–rural, inter-regional, and class divides. At the time, these policies were known as “restricting bourgeois rights.”

30

Xi Jinping, “Nongcun Jue Buneng Chengwei Huangwu de Nongcun” [The countryside must never become a barren countryside], July 22, 2013, http://news.xinhuanet.com/politics/2013-07/ 22/c_116642856.htm.

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3.3.1 “Management of the Superstructure by Labor” According to Mao Zedong, the achievement of public ownership and Communist government would not automatically protect the rights and interests of laborers. Rather, it required true participation by laborers in the management of the superstructure. Mao extended the concept of “bourgeois rights,” a concept used by Marx, to express the notion that, in the socialist stage, there were still inequalities arising from differences in the division of labor, occupation, urban/rural residency and social status, even though inequalities caused by different levels of personal wealth had been eliminated. In 1958, in a commentary on Stalin’s book, Economic Problems of Socialism in the USSR, Mao wrote: In 1953 we changed the free supply system into a wage system. This approach was basically correct. We had to take one step backward. But there was a problem: we also took a step backward in the matter of grades. As a result there was a furor over this matter. After a period of rectification grades were scaled down. The grade system is a father-son relation, a cat-and-mouse relation. It has to be attacked day after day.31

But how should bourgeois rights be restricted? The method proposed by Mao was to allow the people to govern corporations, organs of state, and the superstructure. Mao argued that the protection of the people’s rights had much to do with the faction that controlled all state organs, military units, corporations, as well as cultural and education programs. Mao believed that the people must be the ones to manage the superstructure, and that the Party cannot regard the people’s rights as a problem that can be solved by having the state managed by a minority, and letting the people enjoy the labor, education and social insurance rights under the governance of this minority.32 In other words, Mao believed that it was not enough to merely provide the people with rights and social welfare. It was also necessary to allow them to directly participate in the management of state organs and enterprises. Mao’s primary method for restricting bourgeois rights was to continually launch political movements and promote integration between cadres, intellectuals, workers and farmers. Ordinary workers would be given a chance to participate in the management of corporations and the people’s communes. Mao’s explorations in this respect aimed to find a path where public ownership and economic democracy could be integrated. Under the historical conditions then, this idea may be somewhat beyond China’s contemporaneous stage of development. Still, it was not entirely a pipe dream. In 1960, he promoted the Angang Constitution, which stated that “cadres participate in labor, and workers participate in management.” The Work Regulations for the Rural People’s Communes that Mao enacted also clearly 31

Mao Zedong, Du Shehuizhuyi Zhengzhijingjixue Pizhu he Tanhua (jianben) [A critique of Soviet economics (abridged version)] (Beijing: The Association of National History of the People’s Republic of China, 2000), 40–41. 32 Mao Zedong, Du Shehuizhuyi Zhengzhijingjixue Pizhu he Tanhua [A critique of Soviet economics] (Beijing: The Association of National History of the People’s Republic of China, 1998), 275–276.

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put forth that “the organizing principle of the people’s communes is democratic centralism”; “major matters at various levels of the people’s communes… should be decided by a congress of members’ representatives or a congress of the members”.33 As China faced a grim international environment at the time, while residual feudal elements and the “smallholder mentality” had not been entirely eradicated, Mao’s ideas were not very well realized. Neither was Mao satisfied with progress in this respect during his lifetime. On the evening of December 26, 1974, Mao and his old comrade, Premier Zhou Enlai, discussed this problem through the night. Mao said at the time: I spoke about the socialist system with the Prime Minister of Denmark. Our country now implements a commodity system; the wage system is not equal, there is an eight-level wage system, and so on. This can only be restricted under the dictatorship of the proletariat. … Lenin said, “Small production produces capitalism and the bourgeoisie on a regular, daily, and every time, spontaneous and large scale.” This is also the case with part of the working class and part of the party members. Among the proletariat and among the staff of government agencies, there is a bourgeois style of life.34

Mao stressed these issues because he had already realized that the Soviet Communist Party had become a revisionist party, a path that China had to resolutely avoid. From today’s perspective, Mao’s attempts to restrict bourgeois rights cannot be said to have been entirely successful. Neither did he have enough time to discover and establish a mature, comprehensive system. In this regard, the “Resolution on Certain Questions in the History of Our Party Since the Founding of the People’s Republic of China” made a sound conclusion. However, from a historical standpoint, under the efforts of the Party, China did, to a certain extent, avoid the intense wealth gap and class conflicts that emerged in other countries during the early years of their modernization and built a comparatively fair, horizontal and democratic society.

3.3.2 The Angang Constitution The exploration of means to restrict bourgeois rights in the economic domain can be well represented by the enactment of the Angang Constitution. During the early days of the planned economy, in corporate management China followed the Soviet model by implementing a “commander responsibility system” (yizhang zhi), a topdown hierarchical management and command system. In 1956, Mao Zedong said regarding the Soviet “commander responsibility system”:

33

See the Revised Draft of the Work Regulations for the Rural People’s Communes, ratified by the tenth plenary session of the Eighth CPC Central Committee on September 27, 1962. 34 Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Mao Zedong Wengao [Manuscripts by Mao Zedong since the founding of the state], vol. 13 (Beijing: Zhongyang Wenxian Press, 1998), 413–415.

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3 Seeking a Chinese Path (1956–1976) It is not easy to properly run a factory with several thousand people. Without the leadership of the Party, it is easy for the commander to become a dictator. Find two factories and try different systems in them: the commander responsibility system and collective leadership by the Party committee, to see if the latter is necessarily that bad.35

In 1960, when Angang submitted the “Report on Technological Innovation and Technological Revolution on the Industrial Front,” Mao penned a comment affirming and praising Angang for “beginning to believe in the mass movement… [Angang] has created an Angang Constitution; the Angang Constitution has emerged in the Far East, in China”.36 This comment by Mao affirmed Angang’s practices in five respects: adherence to “politics in command” (zhengzhi guashuai); strengthening Party leadership; vigorously undertaking a mass movement; implementing the “two participations, one reform and three-in-one unity”; and vigorously undertaking technological innovation and technological revolution. Here, the “two participations” (liang can) referred to “cadres participating in labor; workers participating in management,” which opposes the disconnect of leaders and managers from frontline production and operations. The “two participations” required managers to mix with workers and become an integral part of frontline operations through “on-site management,” whereas workers were not only producers of goods, but should also democratically participate in the management of the corporation as managers of its production and operations. “One reform” referred to the reform of unsound regulations. “Three-in-one unity” referred to coordination between workers, cadres and technicians. In substance, this overhauled overly refined division of production line tasks and the departmentalism and bureaucratism of the bureaucracy, allowing for teamwork in technological collaboration. There are scholars who argue that this was a breakthrough over the Fordist model of large production lines and demarcation between R&D and production, aiding enterprises in building the capacity to respond to different types of demand.37 In substance, the Angang Constitution was an embodiment of economic democracy in corporate management, expanding the participation rights of ordinary workers and technicians. After the Angang Constitution was widely promoted in 1960, China began another nationwide movement in 1964: “In Industry, Learn from Daqing” (gongye xue Daqing). This included content similar to that in the Angang Constitution. In the process of “learning from Angang and Daqing,” many typical examples of economic democracy emerged. For instance, the Zhengzhou Aluminum Plant and the Jiaozuo Refractory Materials Factory instituted the “three-thirds system” (sansan zhi), stipulating that cadres should spend one-third of their time on labor, one-third 35

Pang Xianzhi, Jin Chongji et al., Mao Zedong Zhuan (1949–1976) [Biography of Mao Zedong (1949–1976)] (Beijing: Zhongyang Wenxian Press, 2003). 36 Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Mao Zedong Wengao [Manuscripts by Mao Zedong since the founding of the state], vol. 9 (Beijing: Zhongyang Wenxian Press, 1996), 89–90. 37 Yue Guolin and Chen Chunhua, “Exploring the Thinking of Chinese Indigenous Management through Angang Steel Constitution and Huawei Constitution” [in Chinese], Chinese Journal of Management, vol. 8, no. 11 (2011): 1575.

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on surveys and research, and one-third on continuing to carry out their regular duties. This practice was also promoted in some state organs after the 1960s. The philosophy of the Angang Constitution was also reflected in the “Sixty Articles on Agriculture” and “Seventy Articles on Industry.” On September 27, 1962, the tenth plenary session of the eighth CPC Central Committee passed the Work Regulations for Rural People’s Communes (i.e., the “Sixty Articles on Agriculture”), which clearly put forth that “the organizing principle of the people’s communes is democratic centralism”; “major matters at various levels of the people’s communes… should be decided by a congress of members’ representatives or a congress of the members”.38 However, as regards this issue, there were still prominent divergences in opinion when the Seventy Articles on Industry were being drafted.39 During this period, a certain degree of economic democracy was achieved within state-owned enterprises. Based on recollections by some of those present, ordinary workers gained some say in major corporate affairs, as well as affairs related to their immediate interests through platforms such as workers’ representatives’ congresses, pre-work meetings, post-work meetings, “democratic life meetings” (minzhu shenghuo hui) and political study sessions. They also gained a channel for understanding the state of the enterprise, expressing their opinions and exercising their oversight rights.40 Some corporations required leaders to participate in frontline production work instead of becoming lofty bureaucrat-managers. This narrowed the gap between managers and workers, who now got along on more equal and amicable terms. The Angang Constitution was an attempt to develop a new institutional system, which has real-world significance even today. Some have argued that Mao Zedong prized mass movements over institution building. This view does not present the full picture. As early as 1956, Mao had said that it was more important and fundamental to address institutional problems than ideological problems: “People cannot get away from institutions. The same people may lack enthusiasm under one system, but become enthusiastic when another system is implemented.”41 Mao’s views on using institutions to provide incentives were broader than those of mainstream economics, which purely focus on material incentives. He believed that equality between people within the production process was also part of the relations of production. With this equality, workers would become aware that their labor served their own interests, which forms a strong incentive. Slogans such as “politics in command” and “the proletariat take leadership of everything” proposed by Mao had clear socio-economic implications: to build an equal society by getting rid of the 38

Central Archives and Party Literature Research Institute of the CPC Central Committee, Zhonggong Zhongyang Wenjian Xuanji [Selected documents of the CPC Central Committee], vol. 41 (Beijing: People’s Publishing House, 2013), 91–120. 39 Wang Yonghua, “‘Gongye Qishi Tiao’ Zhenglun Shimo” [Course of debates on the “Seventy Articles on Industry”], Extensive Collection of Party History, no. 2 (2010): 15–18. 40 Guo Songmin, “‘Angang Xianfa’ yu ‘Jingji Minzu’ Wuguan ma?” [Is the “Angang Constitution” unrelated to “economic democracy”?], China SOE, no. 11 (2011): 30–31. 41 Pang Xianzhi, Jin Chongji et al., Mao Zedong Zhuan (1949–1976) [Biography of Mao Zedong (1949–1976)] (Beijing: Zhongyang Wenxian Press, 2003), 472.

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system of hierarchy in economic life. Today, after the financial crisis, means for amassing new drivers of growth and expanding economic democracy remain topics that cannot be avoided.

3.4 Rural Collectivization Natural disasters have long been part of Chinese history. In A History of Disaster Relief in China, Deng Tuo pointed out that, for nearly four thousand years, China faced natural disasters and famines nearly every year, a fact that has astonished Western European scholars, who have come to call China a “land of famine.” In the same book, he also points out that, prior to 1949, an average of three to seven million perished from hunger each year in China; over the Republican era, more than two hundred million starved to death.42 According to Mao Zedong, in August 1949, Dean Acheson, then the American Secretary of State, said that “The population of China during the eighteenth and nineteenth centuries doubled, thereby creating an unbearable pressure upon the land. The first problem which every Chinese Government has had to face is that of feeding this population. So far none has succeeded.” With respect to this statement, Mao wrote that “Acheson’s knowledge of history is nil” and declared that “revolution plus production can solve the problem of feeding the population.”43 After its founding, the People’s Republic of China began to work on ensuring adequate food for the population. Rural collectivization was the core of these efforts. China had implemented land reforms just like many other countries, both before and after the People’s Republic of China was founded. These efforts gave “land to the tiller,” i.e., established the household ownership system. However, China did not pause here but instead went on to rural collectivization, establishing cooperatives and people’s communes. This was the most prominent characteristic of the rural system in the People’s Republic of China, as well as a topic that continues to invite controversy. In particular, after the success of the household responsibility system, some believe that rural collectivization was severely out of track with China’s contemporaneous stage of development, signified a blind belief in “large and communitarian” (yida ergong), “worship of [public] ownership systems” (suoyouzhi chongbai) and “fantasizing about communism” (kongxiang gongchan zhuyi), and was the root of rural poverty and backwardness. Ultimately, how should we judge agricultural collectivization? This is not merely related to our assessment of the historical past, but also to the way we regard today’s land system and rural reforms. As we have discussed in the previous chapter, rural collectivization was part of China’s industrialization and modernization strategy, as well as a unique Chinese path of rural development. Even though there were 42

Deng Tuo, Zhongguo Jiuhuang Shi [A history of disaster relief in China] (Beijing: The Commercial Press, 2011). 43 Mao Zedong, Collected Works, vol. 4 (Beijing: People’s Publishing House, 1969), 1399–1401.

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missteps in the specific policies for collectivization, especially the severe issues that arose during the people’s commune period between 1959 and 1961, the history of the thirty years prior to market-oriented reforms indicates that rural cooperatives were an appropriate response to China’s low amount of land per capita, allowing China to break through the constraints of the small farmer economy on modernization and promoted industrialization and modern agriculture. By transforming rural economies, politics, societies and culture, rural collectivization improved rural livelihoods and prevented agricultural and rural crises from arising in the course of modernization, while also laying an indispensable foundation for ensuring basic subsistence after reforms in 1978. On the whole, rural collectivization was a right choice aligned with national conditions.

3.4.1 Why Did China Implement Rural Collectivization? Cooperatives were not an original innovation by socialist countries, but rather a phenomenon that emerged nearly at the same time as capitalism. In its earliest days, cooperatives were a form of organization spontaneously initiated by workers to protect their rights as well as fight back against the flaws of private ownership and the free market. In 1844, twenty-eight textile workers established the Rockdale Equitable Pioneer Society in Britain, the first documented cooperative in Western society. The Society purchased goods at wholesale prices and sold them to its members, with profits distributed regularly as dividends among the membership. This prevented workers from being squeezed by businessmen who monopolized channels for the circulation of goods. In contrast to private corporations, cooperatives implemented democratic management systems, where every member had one vote in electing an autonomous committee that would manage trade activities. Members had the right to supervise accounts and receive dividends each season. In comparison with private corporations, this practice, which entitled all members to the cooperative’s property, helped to build fair and equal interpersonal relationships, which, in turn, led to greater enthusiasm on the part of its members, who would become more proactive participants in the organization and operations of the cooperative. In Spain’s Mondragon Corporation, the best-known cooperative in Western countries today, the ratio of the highest to lowest wages is only four to one. Employees also enjoy great job stability and identify strongly with the company, while wealth gaps and unemployment rates in its home region are among the lowest in Spain.44 After the twentieth century, people began to revisit the idea of the cooperative and its cultural traditions. At present, the wielding of shares by cooperative members and their participation in management have been gaining ground in Western countries, becoming a means by which capitalist nations practice economic democracy. 44

Tang Bing and Song Gelong, “‘Mengdelagong Moshi’ yu Xiandai Hezuo Jingji” [The “Mondragon model” and the modern cooperative economy], China Reform, no. 9 (2006): 52–53.

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However, the successful operation of a cooperative requires certain political, social and cultural conditions, including a comparatively fair social foundation; a culture of collectivism, teamwork and democratic participation; and a collective spirit and cooperation awareness on the part of its members. Thus, although cooperatives have advantages over private corporations, they require more in terms of management capacity and socio-cultural conditions. These factors also affect whether China’s agricultural cooperatives and people’s communes can run efficiently. Agricultural cooperatives are quite common in Western countries. Agriculture is a vulnerable industry with long operating cycles and scattered geography. Farms are usually located at some distance from their markets and are highly dependent on natural conditions, making them less tolerant of risk. Cooperatives are organizations set up by farmers to protect their self-interests. In Europe, Japan, South Korea and Israel, where population densities are high, cooperatives such as n¯oky¯o and kibbutzim have been established. They have since become major modes of organization in the agricultural industry. Agricultural subsidies from the state are also mainly disbursed through cooperatives. When farmers are more organized, it also becomes less costly to promote technologies and provide information services. This creates economies of scale, standardizes the management of product circulation, and avoids disorderly market competition. Cooperatives account for 80% of agricultural produce in the US, 71% of grain in France, 97% of agricultural produce in Denmark, as well as 95% of staples, 80% of fruit, 80% of poultry and most production factors in Japan. The trend towards cooperativization reached China as early as the early twentieth century and became a major idea for national salvation. Many Chinese progressives saw that China’s scattered and disunited small farmer economy was the root of its poverty and backwardness. They hoped to organize farmers through cooperatives, avoid polarization, rebuild rural society, and change China’s national character. For instance, Liang Qichao argued that cooperatives were a third option that lay between capitalism and socialism. Cooperatives did not require the abolishment of private property rights, nor would they concentrate power in the hands of a few, like in capitalism, leading to class divisions and antagonism. Rather, cooperatives advocated mutual assistance and cooperation, allowing their members to achieve fair and equal social and political status. Tan Shougong, a legislator of the Beiyang Government, pointed out that credit cooperatives could prevent China’s huge mass of poor farmers from being exploited by rural usurers. Liang Shuming argued that because the “lack of organization” among farmers caused them to be “politically hapless,” China should establish cooperatives to transform the countryside and educate farmers. Sun Yat-sen, in his “Plan for Local Self-Government,” written between 1918 and 1919, clearly called for organizing cooperation between agriculture, consumers and insurers. Between 1919 and 1920, Mao Zedong advocated the organization of “new villages,” “work-study mutual aid corps” (gongdu huzhu tuan), and “self-study societies” (zixiu xueshe). At the time, some progressive intellectuals had already proposed the establishment of agricultural cooperatives in China. However, because China was still a polarized society where farmers lacked the ability and foundation for cooperation, as well as lacking in the necessary political and social conditions, rural cooperatives were

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unable to attain their original goal of safeguarding farmers’ interests. Conversely, these rural cooperatives were hijacked by interest groups. With regard to the issue of usurers, for instance, in 1936, Xue Muqiao wrote in The Problems of Rural China that cooperatives were originally meant to prevent usurers from exploiting farmers. Yet, in reality, cooperatives were controlled by landlords and local despots. Rather than risk conflict with landlords and local despots, banks joined them in exploiting poor farmers. Bank loans were channeled through rich peasants, who deducted land rent and interest before loaning the money to poor farmers at high annual interest rates of 30–40%.45 After land reforms, the People’s Republic of China did not stop at the household ownership system but went on to launch agricultural cooperatives in 1951. In the late 1950s, people’s communes were established. What were the ultimate reasons for agricultural collectivization? Many official documents and government leaders had discussed the reasons for establishing cooperatives and communes. For instance, in January 1964, Deng Xiaoping listed three advantages of people’s communes when receiving foreign dignitaries: First, it is conducive to the development of production. Communes are large in scale, so they can undertake initiatives that small entities cannot, such as water conservancy projects; in the future, through the continuous expansion of public accumulation, agricultural modernization can be realized. Second, it is conducive to consolidating the socialist system, ensuring advancement along the road to communism, and avoiding polarization in the countryside. Third, it can stabilize urban markets.46

In summary, the reasons for agricultural collectivization include the following five aspects: Reducing the transaction costs between the state and farmers. The state could then more cheaply and fairly accumulate resources from the countryside to support industrialization and stabilize urban and rural markets. The state could interface directly with the people’s communes, preventing private merchants from speculating in and controlling grain prices under free-market conditions. This also prevented landlords and usurers from snatching up surplus products. In addition, while providing the resources needed for industrialization, the people’s communes could also provide a social safety net by fairly distributing basic food rations to its members, ensuring that every rural household had enough subsistence. Collective collaboration addressed shortcomings in the resources needed for agricultural production, including soil quality, fertilizers, irrigation and cultivars, thereby boosting total yields. Under traditional agricultural conditions, the effect of increasing labor input was nearing its limits. The main factors limiting agricultural yields were soil quality, fertilizer, irrigation and cultivars. Since industrialization had not yet been achieved, China had to rely on cooperatives to organize collective labor to improve the conditions for agricultural production. 45

Xue Muqiao, Xue Muqiao Wenji [Collected works of Xue Muqiao], vol. 15 (Beijing: China Financial Publishing House, 2011), 166. 46 Wu Shihong, “Deng Xiaoping dui Zhongguo Nongye Xiandaihua de Tansuo yu Sikao” [Deng Xiaoping’s explorations and reflections on China’s agricultural modernization], Literature of Chinese Communist Party, no. 6 (2006): 61–65.

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Expanding professionalized division of labor in village communes to develop industry, commerce and social welfare initiatives. A major drawback of the small farmer economy was that individual households were too small for professionalized division of labor, which affected the expansion of re-production. One of the original aims of the people’s commune movement in 1958 was the development of rural industry, commerce and social welfare initiatives. In the words of Mao Zedong: “It is better to set up people’s communes. Their advantage lies in the fact that they combine industry, agriculture, commerce, education and military affairs. This is convenient for leadership.”47 By this, Mao meant that professionalized division of labor should be instituted within rural villages, allowing people’s communes to become organs with multiple functions. This would allow rural economies to no longer solely rely on agriculture, narrow urban-rural divides, raise rural incomes, and ensure better healthcare, education and social security. In the 1970s, the widespread growth of the five small industries in rural villages, as well as the universal provision of cooperative healthcare and basic education was reliant on the collective economy. People’s communes were a cost-efficient and effective system for governing local communities. The central government of ancient China rarely wielded effective control over the counties, making effective rural governance impossible. State power “floated” above the grassroots, neither able to prevent the cycle of land engrossment nor implement long-term socio-economic development plans. Formal administrative systems, on the other hand, would be too costly for rural residents to bear. People’s communes played the role of low-cost rural governance organizations with taxation, public security, public services, social administration and even certain law enforcement functions. As most cadres in people’s communes were also workers, this would be a cost-efficient administrative system that could use the strengths of a “society of acquaintances” (shuren shehui) to make implementation and oversight easier. Preventing land engrossment, a cyclical problem that had long plagued Chinese history, as well as the re-emergence of polarization in the countryside. This was something that Mao stressed strongly. Organizing farmers and preventing polarization were two beliefs that Mao had always held. When the People’s Republic of China was newly founded, Mao stated two things had to be done during the transition to socialism: industrialization and collectivization. In the same remarks, Mao mentioned that it was difficult to organize scores upon scores of farmers into collectives. According to him, many famously virtuous emperors in ancient China (including the prosperous periods of Zhenguan, Kaiyuan, Kangxi and Qianlong), adhered to a form of governance involving minimal government intervention (wuwei), which could not resolve fundamental problems; after a few years, peasants would revolt again.48 Wuwei governance meant that the weakness of the state regime required villages to 47

Shandong Agricultural Cooperativization Editorial Committee, Shandong Sheng Nongye Hezuohua Shiliao Huiji [Collection of historical materials on agricultural cooperativization in Shandong Province], vol. 2 (Jinan: Shandong People’s Publishing House, 1989), 118–119. 48 Ma Shexiang, “Mao Zedong Weishenme Dali Tichang Nongye Hezuohua: Tao Lujia fangtanlu” [Why did Mao Zedong strongly advocate agricultural cooperativization—an interview with Tao Lujia], CPC History Studies, no. 1 (2012): 78–88.

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rely on self-governance, leaving China unable to suppress the cycles of land engrossment. After 1962, Mao repeatedly stressed that China had to prevent polarization in the countryside, saying that “allowing individual farming would lead to class divides within two years. These would include corrupt Party branch secretaries who would take more than their fair share, have mistresses, extend usurious loans and purchase land. On the other hand, poor farmers would go bankrupt, including sishu hu49 and wubao hu50 —these [groups] are exactly the social foundation that we rely on.”51 Later on, Mao would repeatedly stress this view that the development of production through capitalism would be painful and prolonged—China had to do its best to avoid class divides. It becomes apparent from the above that the spontaneous establishment of cooperatives and people’s communes by Chinese farmers, as well as the promotion of these organizations by the Party, were neither blind application of textbook approaches nor emulation of Soviet models. Rather, these initiatives were rational decisions made in the face of constraints and goals in rural development that built upon new approaches devised by grassroots communities. Despite the missteps in this process, rural cooperatives should not be characterized as the outcomes of blind belief in Marxist theory or emulation of the Soviet Union.

3.4.2 The First Controversy (1951): Should Cooperatives Be Established? Agricultural collectivization in China was not achieved in a single leap, but rather through a decade of exploration. This process began when farmers in Shanxi established a cooperative in 1951 and was finalized when the CPC Central Committee decided in 1962 that “three levels of ownership with the production team as the basic unit” (sanji suoyou, duiwei jichu) would serve as the basic accounting system for people’s communes. From this point on, the people’s commune system remained relatively stable for nearly twenty years. Two major controversies during this process are important to an understanding of the logic behind agricultural collectivization. The first controversy centered upon the first cooperative established by Shanxi farmers of their own accord in 1951. The question was whether cooperatives should be established. In the beginning, agricultural cooperatives sought to address inadequacies in tools for agricultural production. In March 1951, led by Li Shunda and Guo Yu’en, farmers

49

Referring to the families of cadres, workers, teachers and soldiers—Trans. Referring to those entitled to state assistance for expenditures for food, clothing, housing, healthcare and funerals (and education, in the case of orphaned minors)—Trans. 51 Party Literature Research Institute of the CPC Central Committee, Mao Zedong Nianpu (1949– 1976) [Chronology of Mao Zedong (1949–1976)], vol. 5 (Beijing: Zhongyang Wenxian Press, 2013), 130. 50

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in Pingshun County of Shanxi proposed that they should set up an agricultural cooperative on a trial basis, with the primary goal of addressing five problems: (1) individual farmers did not have the funds to buy good draft animals for deep plowing; (2) increased use of fertilizer, while individual farmers could not afford to purchase sheep herds52 ; (3) collective labor by mutual aid groups made it difficult to allocate surplus labor for individual sideline production; (4) it was uneconomical for individuals to purchase large farming tools; (5) as large land refurbishment could not be carried out, mutual aid group leaders hoped to “bring mutual aid groups one step higher.” Natural conditions in North China were relatively poor: the members of this cooperative each had little land, some had farm tools, while only a few had draft animals. The “Qiongbangzi Commune” (Pauper’s Commune) in Zunhua County of Hebei Province was known across China at the time for being so poor that its large draft animals included only “three legs of a donkey” (they had the right to use the donkey for three-fourths of the time) even after the commune was established. This became known as “revolution through three donkey legs” (santiao lütui nao geming). As can be seen, farmers set up cooperatives because of real-world needs. At the same time, new wealth gaps began to emerge in villages that had just carried out land reforms. According to the recollections of Tao Lujia, then the First Secretary of the Party Committee in Shanxi Province, the six villages of Wuxiang County saw 139 households (11.8% of the total) selling 410 mu of land (2.28% of total farmland) between 1949 and 1950. Some wealthy farmers began to extend usurious loans when unable to purchase land, saying, “people tire to death when working for money; people strike it rich when money works for money” (ren zhuanqian leisi ren, qian zhuanqian fa dacai). These loans came with annual interest rates of 60% to as high as 180%.53 If this continued, land engrossment would again rear its ugly head, which would not only lead to a huge wealth divide, but also divert large amounts of funds to land rents and usurious loans, severely impacting the accumulation of capital for industrialization. In these circumstances, first the prefectural-level Party Committee in Changzhi and then the Party Committee for Shanxi lent their support to the spontaneous establishment of a cooperative by the farmers in Pingshun County. Changzhi’s prefectural Party Secretary, Wang Qian, believed that there was indeed a need to set up the cooperative, because some farmers had low levels of education and ability to work, and individual farming could only enrich some while bankrupt others. Yet, it would dampen farmers’ initiative if China learned from the Soviet kolkhozes and placed land directly under state ownership. Cooperatives were an effective way of resolving this conflict. These practices in Shanxi and Changzhi gave rise to divergent views. In the beginning, some comrades objected to the development of cooperatives, the reason being 52

Farmers used animal waste for compost—Trans. Zeng Kang and Zhou Zhiqiang, “Jianguo Chuqi Zhonggong Dangnei Guanyuu Nongye Fazhan Daolu de Zhenglun” [Debates within the CPC on the path of agricultural development in the early days of the founding of the People’s Republic of China], Literature of Chinese Communist Party, no. 1 (2003): 74–79.

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that the Common Program stipulated that New Democracy should be developed before the transition to socialism, while New Democracy would generally not upend private property systems. Based on the Soviet experience, agricultural mechanization is the foundation for establishing agricultural cooperatives: China lacked the conditions to set up cooperatives before mechanization had been achieved, which implied that the Party Committee for Shanxi and prefectural-level Party Committee in Changzhi were engaging in “utopian socialism” (kongxiang shehui zhuyi). After the news reached Changzhi, prefectural Party Secretary Wang Qian disagreed, writing a letter to appeal to the CPC Central Committee and Mao Zedong for their support. After reviewing the situation, Mao Zedong expressed his support for this attempt to build a cooperative, the reason being that agricultural production cooperatives could use land reasonably, build irrigation facilities, improve soil quality, improve crop cultivars, and use new technologies: things individual farmers could hardly do on their own. In particular, cooperatives had shown themselves to be superior in protecting farmers from the impact of natural disasters. At the same time, Mao was highly concerned with the class divides that had emerged in the countryside after land reforms. He believed that this was unavoidable, but should be kept strongly in check. In the end, Mao used arguments based on the eleventh and twelfth chapters of the first volume of Das Kapital to win over other leaders: in the early development of capitalism in Europe, prior to the invention of the steam engine, the continent also went through a period when hand-made goods were produced in workshops where craftsmen joined forces to coordinate and divvy up tasks, which enhanced productivity. Based on the same principle, new forces of agricultural production could be formed through coordination and division of labor, even if agricultural mechanization had not yet been achieved. Other leaders accepted this view. From that point on, rural cooperatives began to enter the fast track.54 From 1951 to 1955, after a few years of exploration and promotion, cooperatives became widespread throughout China. From the perspective of the results, the establishment of cooperatives freed Chinese society from its perpetually low levels of productivity. From 1952 to 1957, grain production and output from the primary sector maintained reasonably high rates of growth (see Table 3.1). Rural development and stability also laid a foundation for China’s overall development.

3.4.3 The Second Controversy (Early 1960s): People’s Communes or the Household Responsibility System? The second controversy took place in the early 1960s, revolving around whether to continue with the people’s commune system.

54

For specific details on the debates, see: Bo Yibo, Ruogan Zhongda Juece yu Shijian de Huigu [Looking back on a number of significant policy decisions and events] (Beijing: Zhonggong dangshi chubanshe, 2008), 184–211.

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Table 3.1 Agricultural production from 1952 to 1957 (millions of tons) Year

Grain

Cotton

Oilseed crops

Jute and Kenaf

1952

163.92

1.30

4.19

0.31

Growth in agricultural output (%)

1953

166.83

1.17

3.85

0.14

1.9

1954

169.52

1.06

4.30

0.14

1.7

1955

183.94

1.52

4.83

0.26

7.9

1956

192.75

1.45

5.08

0.26

4.7

1957

195.05

1.64

4.20

0.30

3.1

Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010: Table 1-32

In April 1958, the Chayashan satellite People’s Commune was established in Suiping County, Henan Province, marking the launch of the people’s commune movement across the nation. The movement took place concurrently with the Great Leap Forward and the first devolution of economic authority amidst a tense global landscape, all of which were also linked in a causal relationship. The launch of the people’s commune movement was based on at least three factors. First, with the deterioration in Sino-Soviet relations and the decentralization of authority over corporations, more surplus was required from the countryside to support the development of local industries. Second, the construction of public facilities (such as water conservancy projects) required coordination on an even larger scope: the scale of cooperatives no longer satisfied the need for mobilizing resources. Third, in order to narrow urban–rural divides and let more farmers participate in the modernization process, industrial, commercial and public services were provided in the countryside through people’s communes. The movement was also a spontaneous grassroots initiative. At the turn of winter and spring in 1957, during the construction of irrigation facilities that spanned several localities, some localities worked together despite being of different cooperatives, townships or counties. To let farmers focus on the construction of these projects, they organized collective welfare initiatives, such as public canteens and nurseries. These spontaneous developments caught Mao Zedong’s eye, leading him to propose the idea of combining several small cooperatives into a large cooperative during the Chengdu Conference in 1958. On April 8, the Politburo passed the “Opinions on the Appropriate Merger of Small Agricultural Cooperatives into Large Cooperatives,” leading to a flurry of mergers across the nation. Under the advocacy of Chen Bingyin, then the deputy head of the agricultural work division in Suiping County, the county established the Chayashan satellite People’s Commune on April 20, 1958, becoming the first rural organization to have the words “people’s commune” in its name. At the time, similar organizations were variously known as kolkhozes (jiti nongzhuang) or

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cooperative farms, among other names. Ultimately, Mao Zedong settled on the name “people’s commune.”55 The early development of people’s communes was mainly driven through political means, which led to many severe issues. The first was the “communist wind” (gongchan feng)—the fierce competition to expand the size of communes, up to the point where a single commune could have hundreds of thousands of members (one commune for an entire county), far more than could be effectively managed. The distribution of resources, then, could only be based on the egalitarian principle, which dampened the enthusiasm of rural residents. The second was the yiping erdiao policy, i.e., extreme egalitarianism and the transfer of resources without compensation. The policy mandatorily dictated that all incomes within a commune should be equal, while all factors of production were regarded as public property and acquired for collective use. In substance, this was contrary to the nature of collective ownership in a cooperative organization, as well as its basic principles of distributing dividends by levels of shareholdings and the amount of work carried out. The third was the trend towards gross exaggerations. Owing to the absurd, bureaucratic commands issued by some cadres, problems such as gross exaggerations of production volumes and the resultant excessive collection of grain by the state (known as guotouliang) affected agricultural production and rural living standards. Beginning in 1959, the Central Committee began to address these errors. Some inflated Great Leap Forward targets were lowered, stabilizing the people’s commune system. On March 22, 1961, the Central Work Conference passed the “Draft Work Regulations for People’s Communes” (the “Sixty Articles for Agriculture”), which stipulated the “three levels of ownership with the production team as the basic unit” (sanji suoyou, duiwei jichu) system, meaning that the accounting unit for people’s communes would be the production team (shengchan dui) instead of the commune itself, as was the case previously. At the same time, communes and production brigades were downsized. In September 1961, the power to distribute resources was devolved from the brigade level to the production teams, with each team being the basic accounting unit. Teams were generally small, having only ten-odd to a few dozen households. This allowed for stronger oversight mechanisms and the capacity for distribution based on the amount of work performed. There have been many academic studies on the mistakes made during the people’s commune movement. What must be pointed out is that, while the yiping erdiao policy, the “communist wind,” and the gross inflation of production volumes emerged between 1958 and 1961, these problems were neither caused by the people’s commune system nor were they the mainstream. Rather, they emerged because the people’s commune system was not yet well-established. When we judge the people’s communes, we should separate the severe errors in the approaches and steps of the movement from the inherent development direction of the rural collective land ownership system. Similarly, we should differentiate between the mistakes made during

55

Su Xing, Xin Zhongguo Jingji Shi [Economic history of the People’s Republic of China] (Beijing: The Central Party School Publishing House, 1999), 429–430.

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these three years and the subsequent stability of the people’s commune system over the next two decades. Different ideas for addressing problems emerged during the three years of difficulties that China faced between 1958 and 1961. One argument called for implementing the household responsibility system, while another called for keeping the people’s commune system, but adjusting its internal accounting methods. Today, there are scholars who believe that if the household responsibility system had been instituted in the 1960s, China’s agricultural reforms could have borne fruit more than twenty years ahead of schedule. Yet, the facts of history show that this view is unsubstantiated.

3.4.4 Would It Have Been Better if the Household Responsibility System Had Been Enacted Earlier? Between 1961 and 1963, with the support of Mao Zedong, Liu Shaoqi and other ranking officials, Anhui, a major agricultural province, carried out a “responsibility land” experiment that lasted a year and a half. The results of Anhui’s experiment showed that the household responsibility system could not increase grain output, given the production conditions at the time. During this period, growth in Anhui’s grain production was lower than the national average, as well as its own growth rates of grain production after it restored the people’s commune system in 1964. Zeng Xisheng, then the Party Secretary of Anhui, was the main person behind this experiment. In December 1960, Zeng raised the idea of “responsibility land” to the provincial Party Committee for the first time. In February 1961, he again proposed the “responsibility land” measure, which he summarized as baochan daodui, dingchan daotian, zeren daoren (production team responsibility system, fixed output targets for farming plots, individual responsibility), a system that allowed individual farmers to keep the surplus produce after meeting production targets. Zeng also submitted reports to Mao Zedong in March and July of 1961. At the time, Mao supported this pilot experiment by Anhui and decided that its success or failure would be measured by whether grain output increased.56 With Mao’s approval, Anhui began to widely implement this system. The percentage of production teams implementing the responsibility land system increased to 74.8% in August 1961 and then to 90.1% in February 1962.57 In the same year, Li Baohua became the First Secretary of the provincial Party Committee, but the experiment was not immediately halted. Even in late 1962, more than 70% of 56 Source: Zhongguo Nongye Hezuo Shi Ziliao [Materials on the history of agricultural cooperation in China] edited and published by the editorial office for Agricultural Cooperativization in Contemporary China. 57 Source: Zhongguo Nongye Hezuo Shi Ziliao [Materials on the history of agricultural cooperation in China] edited and published by the editorial office for Agricultural Cooperativization in Contemporary China.

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production teams in the province continued to implement the system. This meant, in other words, that the experiment lasted roughly a year and a half, from August 1961 to late 1962, covering 90.1% of production teams at its peak and over 70% even at its lowest point. However, figures show that rates of growth in the province’s grain output in 1961, 1962 and 1963 were significantly lower than the national average. In 1961, national grain output fell by 5.1% but declined by 6.8% in Anhui. In 1962 (the summer and autumn production cycles for this year all fell within the period of the experiment), national grain output grew by 13.1%, but only 6.6% in Anhui. In 1963 (the experiment affected the sowing of crops for the summer harvest and more than half of the growth cycle), grain output in Anhui rose by only 4.0%, while national grain output increased by 10.1%. The figures for these three years are adequate proof that the responsibility land system had a weaker impact on boosting agricultural production than the “three levels of ownership with the production team as the basic unit” system implemented in the people’s communes of other regions (see Table 3.2). After the end of the “responsibility land” experiment, growth in grain production increased rapidly in Anhui, reaching rates of 16.4% in 1964 and 19.0% in 1965, far higher than the equivalent national figures of 10.3% and 3.7%. Anhui’s grain production in 1970 was 30.7% higher than in 1965. This was also higher than the 23.4% growth in China’s total grain production over the same period. This experiment by Anhui Province indicates vividly that in the early 1960s, when China still lacked adequate agricultural production conditions, whether in terms of soil quality, fertilizers, irrigation facilities or seed quality, implementing a household responsibility system would not, in reality, raise agricultural production. Neither was China’s level of industrial development high enough that large numbers of farmers could forsake agriculture for jobs in the cities. Meanwhile, by the early 1980s, the Table 3.2 Growth in grain output in China and Anhui Province from 1958 to 1970 Year

National grain output (millions of tons)

Annual growth rate (%)

Grain output in Anhui (millions of tons)

Annual growth rate (%)

1958

197.65

1959

169.68

− 14.2

7.010

− 20.7

1960

143.845

− 15.2

6.746

− 3.8

1961

136.5

− 5.1

6.290

− 6.8

1962

154.41

13.1

6.707

6.6

1963

170

10.1

6.977

4.0

1964

187.5

10.3

8.121

16.4

1965

194.525

3.7

9.666

19.0

1970

239.955

23.4

12.6380

30.7

8.845

Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010: Table 1-32 and Table 13-15 Note The last row indicates growth from 1965 to 1970

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construction of agricultural infrastructure was basically complete, making it possible to develop agricultural diversification in the countryside. Only then did China have the means for implementing the household responsibility system. Thus, we cannot negate the people’s commune system of the 1960s based on the later success of the household responsibility system. Neither can the failure of Anhui’s “responsibility land” experiment be used as a basis for denying that the subsequent decision to implement a household responsibility system was correct.

3.4.5 The Achievements of the People’s Commune System After 1962, when the “three levels of ownership with production teams as the basic unit” system was established, the people’s commune system remained generally stable for twenty years. How should we assess the role of the people’s communes during this period? In the collectivization era, soil quality, land planning, fertilizer use, irrigation facilities and crop cultivars improved, achieving rapid growth in grain production. People often have the impression that hungry stomachs were the norm during the people’s commune period, as though grain output was not growing rapidly. This is a misconception. Food seemed insufficient because two factors offset the rapid growth in grain production: (1) rapid population growth; (2) contributions by the agricultural sector to the industrial sector. In reality, grain production maintained a rapid pace of growth since the People’s Republic of China was founded, with the exception of certain years. Between 1952 and 1979, total grain output grew from 163.92 million tons to 304.76 million tons, an average annual growth rate of 2.41%. Nowadays, when people’s communes are mentioned, someone would instantly refer to the “great famine,” making it seem as though people’s communes led to the famine. The facts have already given a clear answer as to whether the people’s communes improved living standards or led to a famine. During China’s agricultural collectivization period, the population grew from around 450 million in the early years of the People’s Republic of China to more than 800 million, while life expectancy increased from 35 to 68 years. No other period in Chinese history had seen such high growth rates, which were rare even in world history. The grain produced by people’s communes not only sustained the subsistence and growth of the population but also supported China’s industrialization. Famines were the norm in the small farmer economy of the past. But, from the time that the people’s commune system took shape in the early 1960s and through the 1970s, Chinese agriculture maintained constant progress. Particularly, the output of agricultural produce, predominantly grain, maintained a steady rate of growth. In 1979, China produced 684 jin (342 kg) of grain per capita. By the time, famines were a thing of the past in China—subsistence for all had basically been achieved. In 1982, Deng Xiaoping stated that “Since the founding of our People’s Republic of China [in 1949], we have essentially solved the problems of food and clothing and have become self-sufficient in grain. That in

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Table 3.3 Comparison of growth in agricultural production before and after reform and opening up (millions of tons) Year

Grain

Cotton Oilseed crops Sugar

Tea

1952

163.915 1.304

4.193

7.595 0.082

1978

304.765 2.167

5.218

23.819 0.268

2008

528.709 7.492

29.528

134.196 1.258

Average annual growth rate (1952–1978) (%)

2.41

1.97

0.84

4.49

4.66

Average annual growth rate (1978–2008) (%)

1.85

4.22

5.95

5.93

5.29

Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010: Table 1-32

itself is quite remarkable because these problems remained unsolved for so long in old China.”58 (Table 3.3). The growth in grain output benefited from improvements in factors of agricultural production, such as irrigation, mechanization, chemical fertilizers and cultivars, as well as the development and application of science and technology. China saw rapid progress in these respects during the people’s commune period. Water conservancy projects. The years between 1949 and 1978 were a period of large-scale water conservancy projects. Water conservancy projects had long been a part of Chinese history: in some sense, Chinese civilization is founded upon water conservancy. The People’s Republic in the early days proposed that “water conservancy is the lifeline of agriculture.” In a historic breakthrough, the people’s communes organized its members to launch huge landscape-altering water conservancy projects even while providing little to no material remuneration. In 1979, China had 85,400 reservoirs of varying sizes with a total capacity of 420 billion cubic meters, equivalent to over 4000 Three Gorges Damns. During this period, China dug nearly 100 artificial rivers and built more than 5000 irrigated areas of 10,000 mu and larger. Irrigable area increased from 240 million mu in 1949 to 710 million mu in 1979 (in comparison, the irrigable area was 946 million mu in 2013). These projects would not have been possible without the effective organization of the people’s communes. Three major water conservancy projects are representative of this period: the expansion of the Dujiangyan irrigation district, the Pishihang irrigation district, and the North China well irrigation district. To take the second project as an example, Pishihang, located in central-west Anhui, was the largest irrigation district built after the People’s Republic of China was founded. Works commenced in 1958 and ended in 1972. Designed to irrigate 11.98 million mu of land, its construction required 800,000 workers per day at its peak and took 400 million workdays to build. Its construction required less than 40 yuan of state

58

Deng Xiaoping, Collected Works, vol. 2 (Beijing: People’s Publishing House, 2002), 405.

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investment per mu to excavate 600 million cubic meters of soil.59 These irrigation facilities were basically completed by members of the people’s communes without remuneration; even today, they play an important role in irrigation, flood prevention, local ecosystems, and tourist attractions. By the 1970s, China had basically freed itself from one of the fixtures of its history—that droughts and floods invariably led to disaster. Although China saw extensive droughts in 1978, agricultural output grew by 9.8% over the previous year, exceeding the milestone of 300 million tons for the first time. Backbone water conservancy projects built since the establishment of people’s communes played a key role in this achievement and ensured bountiful harvests. Mechanization. Chinese agriculture had nearly no mechanization to speak of when the People’s Republic was first founded. The early 1970s saw the mitigation of the tensions between agriculture, light industry and heavy industry as well as the growth of the five small industries and commune and brigade enterprises, which paved the way for widespread agricultural mechanization. In the decade between 1970 and 1980, agricultural mechanization leaped from 10 horsepower per square kilometer to 80 horsepower, far higher than levels in low-income countries at the time (15 horsepower) and middle-income countries (60 horsepower). In the early 1970s, China achieved self-sufficiency in crude oil for the first time. In 1973, through the “43 Plan” (sisan fang’an), China imported full sets of equipment for manufacturing fertilizer. These investments began to bear fruit in the early 1980s and were a major factor behind growth in agricultural output during that decade. Science and technology and improved cultivars. Through the planned economy and people’s communes, China built a nationwide network for agricultural research and technology promotion, turning knowledge into a true public good. This system allowed for the rapid dissemination of technology. By 1957, China had established 14,000 “agricultural technology promotion stations,” 1400 “seed stations,” and 1900 “cultivar breeding demonstration stations.” Henan Province successfully developed a few high-yield wheat cultivars in the 1960s, while Yuan Longping succeeded in breeding hybrid rice cultivars in 1973. In 1979, Li Zhensheng succeeded in breeding hybrid wheat cultivars. Rural collectivization broke through the constraints of the small farmer economy on industrialization, accumulating the resources needed for rapid industrialization while also preventing industrialization from resulting in land engrossment and rural polarization, thereby maintaining social stability in the countryside. At the institutional level, collective ownership eliminated two factors that had traditionally threatened rural stability and development—usury and land engrossment. Landlords and usurers who grabbed limited rural surplus were eliminated, allowing the limited available funds to go towards the development of industrial production and the betterment of farmers’ living standards. Since the Qin dynasty, the regular cycles of land engrossment in feudal China were the primary factor behind the rise and fall of imperial dynasties and social upheavals. Society paid a heavy price during 59

Website of the Pishihang Irrigation Area Administration Bureau: http://www.pshgq.cn/.

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each upheaval, to the extent of drastic population declines. Similarly, the early years of industrialization in Western countries also witnessed lashes and plunders of the countryside. Some developing countries today, such as Brazil and Argentina, are rich in natural resources, but have seen their farmland fall into the hands of wealthy landowners. The huge numbers of landless farmers in these countries have long been the root of social instability. China’s smallholder economy provided the resources for industrialization, ensuring the stability of rural development. By relying on the collective economy, people’s communes commenced the development of numerous public welfare initiatives and public services. In the people’s commune movement of the late 1950s, as well as during the latter part of the 1960s, universal basic education and healthcare were successively achieved through the people’s communes. Barefoot doctors and teachers in schools run by locals were commune members who drew salaries from the commune provident funds, with specific matters administered by committees or other institutions established by the commune. This satisfied farmers’ demand for public goods and provided farmers of that time with public services that were far higher than the development level of productive forces. Agricultural collectivization also provided China, a country that still had very low levels of industrialization and urbanization, with huge employment reservoirs, ensuring urban–rural stability. The people’s communes also provided insurance in the form of mutual aid. Under the low levels of economic development and fiscal revenue at the time, the communes formed mutual aid mechanisms and provided villages with low-cost disaster relief and aid. People’s communes also disseminated new culture in the countryside, bringing improvement for both villages and their residents. People’s communes organized farmers into self-governing bodies, cultivating their spirit of teamwork, collective consciousness and democratic consciousness, which had progressive significance for adapting to an era of large-scale modernized production. The widespread growth of TVEs cultivated a team of professional talent with experience in running corporations. At the same time, efforts by the people’s communes to unite farmers had epoch-defining significance for the modernization of the Chinese nation.

3.4.6 Is Collective Agriculture a Practice of Low Efficacy and Egalitarianism? For quite some time, the public have had this impression of people’s communes: that they are were merely about daguofan (“big rice pots,” a metaphor for egalitarianism) that “yang lanhan” (fed lazy bums), as summed up in the saying “ganhuo da hulong, fenpei daguofan, shengchan xia zhihui” (empty slogans during work, lack of incentive, issuing absurd orders in production). There were even voices that completely denied the value of people’s communes in order to emphasize the significance of the household responsibility system, especially in certain scenarios. These criticisms

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were undoubtedly applicable to some poorly managed communes. Still, it would be wrong to see these as fundamental characteristics of the people’s communes. First, the “egalitarian” form of distribution practiced by people’s communes was actually a system where farmers were entitled to basic rations as well as distribution based on labor. This system arose because the communes had limited grain that could be distributed. Productivity at the time was sufficient only to ensure the distribution of basic rations. It should not simply be said that policy decisions at the time did not know how to stimulate initiative. In reality, the means by which people’s communes distributed resources cannot be simplistically encapsulated by the metaphor of daguofan. Rather, there were many different means of distribution, including by shareholdings, amount of work, and the number of commune members. Basic food rations were equally distributed on a per capita basis (while taking into account factors of age). Food rations on top of basic allotments, as well as cash income from the commune’s operations, were distributed based on the amount of work performed by an individual. At the national level, over the entire people’s commune period, distribution of supplies in-kind accounted for 70–80% of the distribution of collective income,60 known colloquially as renqi laosan (lit. “people seven, labor three,” i.e., basic food rations made up 70% while the remaining 30% were based on work points) or renba laoer (lit. “people eight, labor two”; 80% and 20% respectively). For example, distribution of rations by a commune in Shandong Province was based on basic allotments, amount of work, and fertilizer contributions—respectively 70%, 20% and 10% in 1964, i.e., renqi laosan.61 On a per-capita basis, this did lead to more equitable distribution of food rations within the same commune. Still, this was not a fundamental characteristic of the people’s commune system, but rather a choice forced by the limited availability of distributable food. We can imagine that, with increased grain output and the attainment of industrialization, collectives could have increased the proportion of allotments based on shareholdings and the amount of work performed, and lowered the share of basic allotments. Under conditions of the small farmer economy, these material guarantees were highly important. Coupled with the fact that every household had a home after land reforms, villages in the People’s Republic were basically free of the vagrancies and bankruptcies that used to be a cyclical fixture in rural regions of the past. As for the portion of rations that were based on the amount of work performed (work points) and shareholdings, whether or not gaps could truly be widened depended hugely on the administrative capacities and level of democratic participation in each commune. There were a large number of communes that were relatively well managed and could implement sound distribution systems, as well as communes 60

Mei Deping, “Personal Income Allocation Institution of Rural People’s Community After Adjustment of 1960s” [in Chinese], Journal of Southwest University (Social Sciences Edition) 31, no. 1 (2005): 99–103. 61 Zheng Weidong, “A new theory on the causes of high rural birth rates during the collectivization period: Centering on Dong Village in Shandong Province (1949–1973)” [in Chinese], Proceedings of the Shanghai Federation of Social Science Associations (2008).

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that had insufficient administrative capabilities. Judging from the accounting ledgers recording the distribution of rations by some production teams that we were able to collect, not every locality implemented the daguofan system. Table 3.4 lists the household incomes of the No. 1 production team in the Xufang Production Brigade, Jiashi Commune, Qihe County, Shandong Province, in 1971. The production team consisted of 22 households, each receiving an average of 420 jin of grain staples, with the largest allocation being 496 jin (the household of Wang Weiqiao), and the lowest allocation being 376 jin (the household of Chen Jingzhen), the latter being very close to the minimum amount required for basic subsistence. Any larger gap in distribution would probably mean that some families have to go hungry. Gaps in the distribution of cash were even greater. As for surplus cash incomes distributed based on household size, the highest was 31 yuan (for Wang Weiqiao’s household), and the lowest was 0.75 yuan (Jiao Qichang’s household; there were two other households that owed money to the collective). This shows that gaps in cash distribution were quite large.62 Our analysis above shows that “egalitarianism” during the people’s commune period was mainly reflected in the distribution of basic food rations. However, there were differences even in allotted basic food rations, not to mention the distribution of cash. These measures were the best that could be adopted given the contemporaneous historical context. If communes had not adopted “egalitarian” measures at the time, they may well have been able to enhance the initiative of some of their members, but would have been unable to attain the goals of supporting industrialization, ensuring rural living standards, and developing rural public facilities and public welfare initiatives. Greater crises may have well arisen in the countryside. As for the view that people’s communes dampened farmers’ willingness to work, the argument goes that because of “unclear property rights” in people’s communes, farmers were not working for themselves, dampening their initiative and resulting in lower effort in their work and slow agricultural development. This statement is overly one-sided. First, grain production volumes have grown steadily over the past thirty years. Second, in the people’s commune period, communes organized not only agricultural work but also mass labor efforts during the off-season. Many public projects were built over the twenty-odd years that communes were in existence, with far greater labor input than in the past. When the benefits of additional labor came close to the limit, it was the collective labor efforts organized by people’s communes that made up for the shortcomings in agricultural production factors. From a micro perspective, collective labor initiatives inevitably included free-riders and loafers. Still, construction of these facilities would have been impossible without people’s communes. This alone can refute the conclusion that people’s communes caused a decline in labor input. Third, there is at present no strong evidence that labor participation rates were low during the people’s commune period. According to the recollection of Professor 62

The table on the distribution of cash income to households of the No. 1 production team of Xufang Production Brigade, Jiashi Commune, Qihe County in 1971 was provided to the author by the Xufang Brigade, Jiashi Commune, Qihe County, Shandong Province.

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Table 3.4 Distribution of cash income to households of the No. 1 production team of Xufang Production Brigade, Jiashi Commune, Qihe County in 1971 Head of household

Household size

Total work points

Total grain due (jin)

Grain per household member (jin)

Total surplus cash to be distributed to the household (yuan)

Cash owed by the household (yuan)

Cash due to each household member (yuan)

Wang Weiyun

10

20,580

4414

441

141.33

14.13

Wang Keshui

1

1840

426

426

15.32

15.32

Wang Xiting

1

2125

446

446

19.08

19.08

Jiao Fangliu

6

14,048

2772

462

143.69

23.95

Wang Xizhu

8

14,583

3396

425

95.92

11.99

Wang Zongsheng

4

6750

1659

415

7.7

1.93

Wang Weiqiao

3

8484

1489

496

93.03

31.01

Jiao Qichang

6

7289

2286

381

4.47

0.75

Jiao Hengyu

4

8838

1809

452

78.04

19.51

Jiao Shouchen

10

11,893

3890

389

27.99

Jiao Qihua

4

7285

1698

425

46.54

11.64

Wang Xifu

8

12,991

3282

410

79.27

9.91

5.59

Wang Xiliu 5

6792

1956

391

Chen Jingzhen

3190

1128

376

3

1.12 27.03

… Average

420

10.4

Highest

496

31.01

Lowest

376

0.75

Highest amount divided by lowest amount

1.32

41.62

Source Provided by the Xufang Production Brigade, Jiashi Commune, Qihe County, Shandong Province

3.4 Rural Collectivization

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Wen Tiejun of Renmin University, since the 1980s, some economists have tried to corroborate the conclusion that “labor input during the people’s commune period was low” through an extensive survey of the accounts of rural production teams. To date, they have not found any data that can support this conclusion. Fourth, there were indeed several extensive declines in the initiative during the people’s commune period, but these mainly occurred during periods of policy change. After the people’s commune system was stabilized in the 1960s, no major fluctuations in agricultural output occurred. Some case studies also used examples from individual localities to argue that people’s communes were inefficient. One example cited is that Xiaogang Village, part of Anhui Province, “has not paid a single jin of grain to the state for more than twenty years, and even needs state relief”. But this does not show that people’s communes were not efficient, given that the people’s commune system was implemented in rural areas across the country—grain that the state gave in aid towards Xiaogang Village was transferred from other communes. Food relief given to Xiaogang Village can only show that there was a problem with the village, but not the people’s commune system as a whole since food aid given to the village was produced by other people’s communes. In short, the people’s communes were comprehensive organizations that had multiple functions in aspects such as agricultural production, social security, public services, grassroots governance, cooperative finance and rural industry. They should not be seen merely as agricultural production organizations. Neither should daguofan, and a lack of individual initiative be seen as fully representative of people’s communes. “Ganhuo da hulong, fenpei daguofan, shengchan xia zhihui” (empty slogans during work, taking their share of collective resources, issuing absurd orders in production) were indeed problems that existed in the people’s commune period, but not every commune had these issues. In that era, there were communes where people leeched off the collective, slacked off during work or. There were also many communes like Dazhai, Hongqiqu and Huaxicun that toiled to lay a sturdy foundation for the development of modern agriculture in China. There may have been less than perfect cases, but they should not be seen as representative of all people’s communes.

3.4.7 The Limitations of People’s Communes We have discussed people’s communes in detail because there are still one-sided discussions on the topic that affect how people view that period in history. Misinterpretations of the people’s commune system manifest mainly in three aspects. The first type of misinterpretation arises because views are based solely on economic perspectives, neglecting the effect of collectivization on politics, society and culture. The second type arises because views are based solely on the role of rural organizations in grain production, while their functions in improving rural living standards, implementing public welfare initiatives and grassroots governance are being ignored. The third type arises because of a belief that grain production requires only one production factor—individual labor, which fails to take into consideration

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public factors such as irrigation facilities, chemical fertilizers, technology and support from the industrial sector. In other words, such views simplistically regard complex, multi-functional people’s communes as mere vehicles of agricultural production and believe that the only factor that affects grain production is individual labor, while income distribution is the incentive that drives people to work. As such, they conclude that daguofan caused farmers to lack initiative during the people’s commune period, resulting in an inability to increase grain output and a lack of adequate food for the population. This is a conclusion that does not account for the conditions of the time and substitutes reality with subjective speculation and imagination. Of course, like any other past institution, people’s communes had historical limitations that were inevitable. It is wrong not to acknowledge the positive significance of people’s communes or their limitations. That would make it impossible to explain why the household responsibility system was widely supported in the early 1980s. The unavoidable historical limitations of the people’s communes manifest mainly as: First, people’s communes were developed alongside China’s industrialization. The benefits of communes in increasing production were transferred to cities, causing most farmers to feel that people’s communes did not actually help to fill their stomachs. If the countryside did not have to hand over its surplus produce or even received subsidies from the state when the people’s communes were established, farmers would have greatly different feelings towards people’s communes. Today, China has reached an age where industry subsidizes agriculture. Implementing a collective economy now would be more effective than any other period in history. Second, modern cooperatives in Europe emerged after the Industrial Revolution, when the proletariat had already gained experience in participating in large-scale, socialized production. On the other hand, before becoming a socialist society, China was a semi-feudal, semi-colonial country. The small-producer mindset could not possibly be eliminated overnight. Even if cooperation was beneficial from a longterm perspective, a large majority of farmers still based their actions on experience and habits, giving more thought to immediate benefits. In the process of cooperation, they also lacked adequate drive, ability and awareness to regulate the actions taken by cooperatives through active participation in its democratic management and public affairs. Perhaps, only farmers that have personally experienced the shocks that the market economy caused to the small farmer economy could truly understand that cooperation was necessary. This was also a process that was unavoidable in the course of historical progress. At that time, there were different opinions in different localities on what the cooperative system implied, not only among ordinary farmers but even party cadres. A 1966 newsletter by Xinhua journalists titled “A Model County Party Secretary— Jiao Yulu” mentioned that, in the face of harsh natural conditions, there were local officials in Lankao County who let farmers go out to beg for food. In contrast, Jiao Yulu advocated the enlistment of both cadres and farmers in tree-planting programs that would mitigate sandstorms, as well as persuaded farmers to undertake joint action through example. The past development of many people’s communes shows that it took cadres like Jiao Yulu to improve production conditions by mobilizing farmers,

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even in the absence of economic resources. Commune operations may break down if cadres lack an awareness of the importance of collaboration. Third, some institutional arrangements in the people’s commune system could not play their full role due to limited management expertise and methods. As a collective organization, people’s communes were harder to manage than family operations. Whether or not effective management could be carried out was key to realizing the advantages of collective organizations. To people’s communes, effective management included whether or not the quantity and quality of its members’ labor could be accurately assessed, whether or not distribution according to work could truly be achieved, and whether villagers could truly participate in democratic management. Whether or not effective management could be achieved also depended on the management abilities of local cadres, the local customs, as well as local cultural traditions. This led to certain disparities in the actual performance of people’s communes in different regions. The performance of people’s communes was directly related to the management abilities of cadres and the teamwork of its members. As these limitations faced by the people’s communes were unavoidable under the historical conditions of that era, they could only be resolved through a further step in historical progress. However, on the whole, agricultural collectivization was a turning point in the millennia-long development of Chinese villages. It overhauled the millennia-old social structure of the small farmer economy, removed the constraints on modernization imposed by the small farmer economy, and started the transition from traditional agriculture to modern agriculture.

3.5 A Silent Revolution of Basic Education In the thirty years before reform and opening up, the universalization of basic education and basic healthcare was a priority in China’s development. The level of human capital skyrocketed, as reflected in population health and educational attainment. Prior to 1949, the average life expectancy in China was only 35 years, while the literacy rate was lower than 20%. In other words, China lacked the minimum human capital reserves for achieving modernization. Yet, by the late 1970s, China had surpassed the average level of developing countries in indicators such as citizen health, basic education and population quality. Life expectancy had reached 68 years, while the literacy rate had exceeded 80%. China’s experiences in developing basic healthcare, basic education and population transition gained global recognition and praise. China’s economic miracle after the reform and opening benefited from its large number of skilled workers and low wage levels. Universal basic education did not only increase national literacy but was also a profound social revolution. Through the provision of universal basic education, literacy was no longer the privilege of a minority. This enhanced social mobility and gave the children of ordinary farmers and workers the chance to change their destiny. Education is an important public good while also having very strong political implications. Since the Second World War, economists have generally believed that

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education is a primary impetus of economic growth, a tool for narrowing class divides and maintaining social equity, the most important means for vulnerable groups to forge a better future for themselves, as well as a deciding factor in whether a country can enjoy lasting peace and stability. One reason that traditional Chinese society could maintain prolonged stability was the imperial examinations system, through which large numbers of talents were selected for government positions. Even so, the literacy rate was merely 30% in the economically prosperous Song dynasty. In mid-19th-century Britain, the ruling class opposed universal education in order to protect their privileged status. Education became universal only under the demands of capitalists for economic development, showing that politics were indeed a factor in education policies. The literacy rate was only 20% when the People’s Republic was founded. Like many other developing countries, China fell into a vicious cycle where low levels of education led to poor economic development and vice versa. Universal education, from primary to tertiary level, was still not available, while the costs of schooling were exorbitant, preventing a vast majority of age-appropriate youth from university enrollment due to their lack of prior education and financial resources. After 1949, China chose to prioritize the development of basic education rather than elitist education. By the late 1970s, China had surpassed most developing countries in basic education enrollment and literacy rates. Urban–rural and gender educational gaps also narrowed significantly. For the first time in millennia, China had turned from a country where only a minority could read and write into a country with universal basic education. This effectively promoted social fairness and created a quality workforce for its later “economic miracle.”

3.5.1 A Dilemma: Elitist Education or Mass Education There are two pathways in the development of an education system. The first would be quantity before quality, where universal basic education available on an equitable basis to the people is achieved before higher education and elite education are developed. The other is to aim for quality before quantity, with energies focused on the development of a talented and elite minority. The People’s Republic faced this dilemma: on the one hand, it wanted to quickly expand the rights of workers to an education. On the other hand, it wanted to quickly develop elite talent for industrialization and national defense. In terms of policy, this presented the question of whether China should first cultivate a talented minority or provide education to the majority of the population, keeping in mind the extremely limited educational resources at the time. In its early years, the People’s Republic desperately needed to increase both the coverage and quality of its educational system. Neither path can be simplistically characterized as right or wrong. China’s education system was also constantly balancing between two sets of objectives: elite education, to be more standardized, institutionalized and specialized on the one hand, while on the other to provide a

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broad-based, revolutionary and labor-oriented education.63 In the beginning, education policies aimed for both greater educational coverage and quality, with coverage being the focus for quite some time. In December 1949, the first National Educational Work Conference put forth that education should be in service of China’s development; thus, schools were required to open their doors to workers and farmers. In 1951, the Government Administration Council decided to incorporate “workerpeasant accelerated schools” (gongnong sucheng xuexiao), “spare-time schools” (yeyu xuexiao) and “literacy schools” (shizi xuexiao) into the school system. Most government agencies, military units, factories and educational institutions began to set up “worker-peasant secondary schools” (gongnong xuexiao) and hold extensive part-time classes as part of a literacy movement.64 During the First Five-Year Plan, the goal of universal education began to give way to elitist education after the formation of the planned economy system and the resulting urgent need for highly skilled talent. Educational policy was adjusted: instead of expanding the coverage of the school system, resources would now be focused on developing and improving higher education. In the same vein, educational quality would take precedence for primary and secondary schools.65 A decision was also taken to establish “key secondary schools” (zhongdian zhongxue). In 1955, worker-peasant accelerated schools ceased to enroll new students. In the development of higher education, courses that trained specialists were given priority, while “key” primary and secondary schools became conduits that channeled the cream of the crop to their doors. Together, they trained a generation of high-caliber talent that China needed for its industrialization. This orientation towards elitist education easily affected the popularization of basic education as well as the fairness of the education system. As early as 1954, Mao Zedong received a letter from Jiang Zhuru, one of his old schoolmates from Hunan First Normal School, saying that “the special education seems in need of improvement. The kindergartens serving the government and military officials in Hunan seem to have special status in the education sector. They have sprawling organizational structures, large management staffs and cost hefty sums to operate. On the one hand, this leaves the masses with a bad impression. On the other, neither does it do any good for those young children who are used to lives of privilege.”66 Mao Zedong forwarded the letter with his comments to Chen Yun and Deng Xiaoping. In February 1957, Mao put forward a new education policy: “Our education policy is to enable the educated to develop in moral education, intellectual education, and physical education, and become educated workers with socialist consciousness,” and 63

Yang Dongping, “The Basic Features of ‘Seventeen-years Education’ in New China” [in Chinese], Tsinghua Journal of Education, no. 1 (2003): 9–16. 64 Yang Dongping, “Dazhongzhuyi dao Jingyingzhuyi” [Popularism to elitism], October 16, 2006, http://theory.people.com.cn/GB/49157/49166/4923124.html. 65 China Education Yearbook Editorial Department, China Education Yearbook (1949–1981) [in Chinese] (Beijing: Encyclopedia of China Publishing House, 1984), 966. 66 Party Literature Research Institute of the CPC Central Committee, Mao Zedong Nianpu (1949– 1976) [Chronology of Mao Zedong (1949–1976)], vol. 2 (Beijing: Zhongyang Wenxian Press, 2013), 311.

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proposed to reduce courses, reduce textbooks, make it easier for farmers’ children to go to school nearby, and encourage communes and locals to run schools.67 During the movement to establish people’s communes, rural private educational institutions increased rapidly both in number and student enrollment, launching a large-scale literacy campaign. In September 1958, the Party Central Committee and the State Council issued the Instructions on Education Work, which proposed that China should basically eradicate illiteracy and provide universal primary and secondary education in three to five years. The main measures included: (1) developing full-time middle schools and vocational middle schools run by locals by devolving authority over the education system; (2) moving all “half-farming and half-study middle schools” (banging bandu zhongxue) and agricultural colleges to the countryside; (3) lowering entry requirements by reforming the examination system to create more educational opportunities for workers and farmers. The mid-1970s film Breaking with Old Ideas offers a dramatic representation of the conflict between two views regarding higher education. The first was that agricultural colleges should remain in the cities, as per the Soviet model, and maintain their academic standards— students who could not keep up should simply drop out. The second was the view that enrollment should be based on labor skills and practical experience—high university entry requirements were unfair to students from worker or peasant backgrounds, given that the People’s Republic had only been established nine years prior. The foundations for rural education, expanded during the Great Leap Forward and the people’s commune period, were not consolidated. After 1961, as China restructured its economy, educational policies were recalibrated to reduce the size of schools and improve the quality of education, cutting back the amount of investment in basic education. In 1962, the primary school enrollment rate dropped from 80% during the Great Leap Forward period to 56.1%. In 1962, all Chinese localities were required to select a number of key primary and secondary schools and concentrate their efforts on turning them into “top-notch” schools. Most of these key schools were established in urban regions,68 widening the education gap between urban and rural areas. Statistics compiled in September 1963 show that there were 135 key schools in 9 provincial-level divisions, including Beijing, Jilin, and Jiangxi. Of these, 84 were in cities, 43 in counties or towns, and only 8 in rural areas. Seven provinces and autonomous regions did not select middle schools from rural areas.

67

Central Institute of Education Sciences, Zhonghua Renmin Gongheguo Jiaoyu Dashiji (1949– 1982) [Chronicle of education in the People’s Republic of China (1949–1982)] (Beijing: Educational Science Publishing House, 1984), 190. 68 Yang Dongping, “Zhongguo Jiaoyu Zhidu he Jiaoyu Zhengce de Bianqian” [Changes in China’s education system and education policies], May 11, 2005, http://www.aisixiang.com/data/6728.html.

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3.5.2 The “Education Revolution” The mid-1960s saw an intensification in the conflict between elitist education and mass education, as well as the tensions caused by a widening urban–rural educational divide. In response, the CPC Central Committee launched a series of policies to expand the coverage of the education system. From the late 1960s to the 1970s, basic education was rapidly expanded. Main practices included: agricultural colleges were “devolved” to the countryside, where high school education was also expanded. Years of schooling were shortened, with primary education requiring only five years, middle school education and high school education requiring only two years respectively, and university education only three. Educational systems were tailored to local needs, such as the establishment of “721 Universities”, “farming-study primary schools,” and “horseback elementary schools” (mabei xiaoxue). “Open-door education” (kaimen banxue) was instituted so that students could learn from workers, farmers and soldiers. The key school system and the difference between various schools were eliminated, boys’ schools, girls’ schools, overseas Chinese schools and vocational schools were canceled, and the admission to neighborhood primary and secondary schools without examinations was adopted. In a repudiation of educational hierarchy, examinations in schools of various levels were abolished or reduced to prevent children of workers or farmers from being excluded from enrollment by reason of “educational quality” or marking standards. Higher education institutions implemented a system of enrolling students based on recommendations instead of examinations and enrolled students who were workers or farmers with practical experience. Beginning in 1963, institutions providing secondary vocational education in agriculture, forestry, medicine and teaching adopted a system that combined recommendations from people’s communes and examination results. Concurrently, they implemented a system of shelai shequ, according to which students would return to their communes after graduation. In 1966, the CPC Central Committee and the State Council decided to postpone the gaokao (college entrance examinations). Beginning in 1972, some higher education institutes resumed the enrollment of new students. By 1976, these institutions had enrolled seven batches of students in total, known as “worker-peasant-soldier students” (gongnongbing xueyuan). The educated youth (zhishi qingnian) would go to the rural areas, and “down to the countryside” became the slogan of an era.69 Between the late 1960s and the 1970s, these measures, to a large extent, reversed the tendencies to overly concentrate educational resources in cities and on the elite. Most prominently, more resources were made available for basic education and rural education. Educational coverage and fairness improved somewhat, especially for children from workers’ and poor rural households, who now had far greater educational opportunities. First and foremost, primary education was universally provided. After the founding of the People’s Republic, enrollment in primary school rose from 69

Yang Dongping, “‘Wenhua Da Geming’ yu Jiaoyu Wutuobang” [The “Great Cultural Revolution” and Educational Utopia], October 20, 2006, http://theory.people.com.cn/GB/68294/72286/72288/ 4939387.html.

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23% under the previous regime to 49.2% in 1952. During the Great Leap Forward, due to the “open-door education” policy and the devolution of authority to establish schools, the primary school enrollment rate leaped from 61.7% in 1957 to 80.3% in 1958. However, this achievement was not consolidated. Economic restructuring in the 1960s led to a slight decline in primary school enrollment to 56.1% in 1962. After the mid-1960s, primary school enrollment increased rapidly, reaching 96% in 1976. Even more noteworthy are the stark changes in the student population profile. Among junior high school students, the percentage of those from rural households increased from 37.1% in 1962 to 75.2% in 1976. Among high school students, the percentage of those from rural households increased from 7.8% in 1962 to 62.3% in 1976 (see Tables 3.5 and 3.6). An even more profound implication of the expansion of basic education during the 1960s and 1970s was its impact on the student mix in higher education institutes after the 1970s. Universal basic education allowed more children of workers and farmers to receive higher education. A survey of the family backgrounds of students in Peking University and Soochow University discovered that nearly all their students came Table 3.5 Primary and secondary education from 1965 to 1976 Year

Primary schools (millions)

Number of students (millions)

Number of ordinary secondary schools

Number of high school students (millions)

Number of middle school students (millions)

1965

1.68

116.21

18,102

1.31

8.03

1966

1.01

103.42

55,010

1.37

11.13

1968

0.94

100.36

67,210

1.41

12.51

1970

0.96

105.28

104,954

3.50

22.92

1976

1.04

150.06

192,152

14.84

43.53

1.3

10.6

11.3

5.4

1976/1965

Source China Education Yearbook (1949–1981), Encyclopedia of China Publishing House, 1984: p. 1006

Table 3.6 Household residency of secondary school students from 1962 to 1976 (%) Year

Middle school

High school

Cities (%)

Counties and towns (%)

Villages (%)

Cities (%)

Counties and towns (%)

Villages (%)

1962

35.2

27.7

37.1

42.6

49.6

1965

42.1

24.2

33.7

43.1

47.9

9.0

1970

19.0

8.0

73.0

22.7

16.0

61.3

1976

15.6

9.2

75.2

22.7

15.0

62.3

7.8

Source China Education Yearbook (1949–1981), Encyclopedia of China Publishing House, 1984: p. 1006

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from urban households in the early days of the People’s Republic. The percentage of Peking University students from rural households rose from 2.4% in 1952 to 6.5% in 1955 and had exceeded 30% by 1972. The percentage of Soochow University students from rural households rose from 3.6% in 1952 to 11.4% in 1955, a figure that jumped to 60% in 1965. Even among children of rural households, the proportion of those from “poor and lower-middle farmer” households rose steadily. Prior to 1956, more than half were the children of wealthy farmers or landlords; from 1957 onwards, those from “poor and lower-middle farmer” families increased rapidly in number, exceeding half of the total.70 Apart from the universalization of basic education and ensuring greater equality in educational opportunity, another aspect of the “education revolution” during this period was the “promotion of integration between education and production/labor.” This was inspired by the need for economic development: the state lacked the financial resources to establish a large number of well-regulated, professionalized schools and needed to rely on educational initiatives by corporations and people’s communes. For instance, Liu Shaoqi stated on May 30, 1958, that “China should have two education systems, two labor systems,” which would “more adequately meet the needs of many people for higher levels of education, allow the problem of too many people in factories to be resolved, and allow more people to be employed.”71 At a deeper level, the integration of education and labor was also proposed with the purpose to promote participation of intellectuals in labor, the “intellectualization” of the laboring masses, as well as to eliminate the divides between physical and mental labor, urban and rural residents, and workers and farmers. Closely related to the education revolution during this period was the “down to the countryside” movement. The movement was a necessary measure for addressing the problems of surplus urban labor in that particular historical era. At the same time, it was a measure instituted to narrow the “three great differences”, cultivate successors to the revolution, and enhance social fairness. The fact that some educated youth experienced hard times and were treated unfairly in the countryside points toward policy imperfections that are worth learning from. However, we must also realize that the movement was the first time in modern Chinese history that urban intellectuals relocated en masse to the countryside. Rural science, technology, education and healthcare standards were greatly enhanced when educated youth brought their knowledge and culture to the countryside, accelerating the spread of technology and culture from the cities. In addition to promoting urban–rural integration, these educated youth developed their abilities. Their contributions were invaluable to the

70

Liang Chen, Li Zhongqing, Zhang Hao et al., “A Silent Revolution: Research on Family Backgrounds of Students of Peking University and Soochow University (1952–2002)” [in Chinese], Social Sciences in China, no. 1 (2012): 98–118, 208. 71 Liu Shaoqi, Selected Works of Liu Shaoqi, (Beijing: People’s Publishing House, 1985), 324–326.

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rapid universalization of basic education and cooperative healthcare in the countryside after the 1970s. Moreover, many of these educated youth excelled in their respective fields after their trials and tribulations.72 Industrialization requires a large, well-structured team of professional talent. Some of China’s policies to expand basic education were less than perfect, especially since higher education was impacted over a certain period. Some policies adopted to rectify educational inequalities were also flawed in execution. Even so, the People’s Republic’s achievements in primary and secondary education from 1949 to the late 1970s was highly laudable. The illiteracy rate declined from 80% in the early days of the People’s Republic to around 30% in 1981. The illiteracy rate among young adults (aged 15–45) was merely 15%; in contrast, the illiteracy rate in India of the same era remained at around 60%. In terms of formal education, China’s primary school enrollment rate increased from around 25% in 1949 to 96% in 1976. Levels of over 90% were maintained over the subsequent years, close to levels in developed countries. Female students made up 45% of primary school students. The gross secondary school enrollment ratio was 46%, slightly higher than the global average and far higher than countries with similar income levels.73 This shows that the basic talent development strategy adopted by the state was to allocate resources towards basic education to enhance the overall scientific and cultural literacy of the population. China’s increased coverage of basic education, without a doubt, meant that it was better prepared than most developing countries to supply a labor force that could meet the demands of a global industrial transfer.

3.6 The Healthcare Miracle The provision of universal primary healthcare and the rapid improvement in the health of the populace was another prominent achievement of the People’s Republic in the first thirty years after its founding. Building upon new economic and social institutions, the People’s Republic built a new and unique healthcare system. China quickly achieved full coverage in terms of social security, mainly by relying on state-owned corporations, public institutions, and people’s communes. In the distribution of resources, China focused its efforts on workers, peasants and soldiers, giving particular attention to the countryside and prioritizing the provision of basic services. As for the types of services, China gave precedence to public health services that were oriented towards the group rather than emulating Western countries in emphasizing medical services oriented towards the individual. In terms of technical approaches, China’s approach focused on prevention and the integration of 72

Zhang Shu, “Buduicheng de Shehui Shiyan: Lun ‘wenge’ zhong de zhiqing shangshan xiaxiang yundong” [Asymmetrical social experiment: On the campaign to send educated youth to the countryside during the Cultural Revolution], PhD diss., (Central Party School, 2001). 73 31% in India, 29% in Indonesia, 34% in Brazil, 47% in Mexico. Data from Guoji Tongji Nianjian (1995) [International statistical yearbook (1995)]. Statistical measures of the gross enrollment ratio may vary by country.

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Chinese and Western medicine. In so, China adopted low-cost approaches suited to its circumstances instead of costly, capital-intensive methods focused on treatment. In the provision of services, China not only relied on professionals, but also primary healthcare workers that have been through simple training, integrating healthcare and mass work. This path transcended the treatment-centered approach in Western countries, where healthcare was regarded as a commodity to be provided by professionals. Instead, healthcare was broad-based and focused on preemptive medicine, which allowed China to maintain the health of its population while expending fewer resources. The unique healthcare systems that China developed, predominantly the “threetier healthcare network” (sanji yiliao baojian wang), barefoot doctors, and rural cooperative healthcare, have been described by international organizations as “a unique model for universal primary health care in low-income countries.”

3.6.1 The Four Principles of Healthcare The health of the people is the foundation of the national spirit and an important form of soft power in national development. During its early days, the People’s Republic faced external blockades while desperately needing to industrialize, meaning that precious little resources could be devoted to healthcare. At the time, most developing countries emulated healthcare systems in Western countries: relying on professional doctors that cost a lot to train, emphasizing the use of cutting-edge technologies, and focusing on healthcare services oriented towards individual patients. But a developing country like China lacked the resources to train large numbers of highly skilled professionals in Western medicine. Most of the few medical professionals in China resided in the cities. Residents could not afford costly medical services, while medical professionals were limited in number. This made it impossible to effectively address problems like the spread of infectious diseases in the countryside, malnutrition and high disease rates. Under these circumstances, China, based on prevailing actualities, found a unique path for improving healthcare, namely the “four major principles” to healthcare: oriented towards workers, peasants and soldiers, prevention as the mainstay, uniting Chinese and Western medicine, integrating healthcare work and mass movements. “Oriented towards workers, peasants and soldiers.” This was manifested as the incorporation of healthcare into the planned economy, establishing a healthcare network that covered urban and rural areas. This included a state-funded healthcare system, labor insurance healthcare system and rural cooperative healthcare system that covered urban and rural residents. These systems allowed the entirety of China’s population to enjoy basic healthcare services at a low cost. “Prevention as the mainstay” and “integrating healthcare work and mass movements.” This was manifested in the form of state investment in healthcare and the fact that healthcare work focused on preventive medicine. Relying on epidemic prevention stations, “health centers” (weisheng yuan), “health offices” (weisheng

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shi), and community healthcare workers, the state launched several health initiatives, including the prevention of infectious diseases, environmental sanitation, health education, preventive healthcare, and new forms of birth delivery, as well as organized community-level patriotic health movements. “Prevention as the mainstay” is in line with the tenets of public healthcare services, able to both improve health and control healthcare costs. China was able to effectively carry out mass public health movements due to its high degree of organization and ability to mobilize resources. “Integrating Chinese and Western medicine” was an attempt to combine traditional Chinese medicine and modern Western healthcare systems. Traditional Chinese medicine has the advantages of being simple, effective, convenient and cost-efficient. Its emphasis on preventive medicine and the idea that the human body is a holistic system has practical significance. Since the nineteenth century, mainstream intellectuals have, day by day, lost their cultural self-confidence as China faced internal disturbances and external threats. Traditional Chinese medicine found itself in an unprecedented plight. The KMT government even used the levers of government to discriminate against and stamp out traditional Chinese medicine. After the People’s Republic was founded, in keeping with its general policy that traditional heritage should be rejuvenated and used to solve contemporary problems, it developed an approach of “uniting Chinese and Western medicine.” This was a means for addressing real-world problems. Traditional Chinese medicine was a labor-intensive skill that relied mainly on the expertise and experience of the physician. Moreover, it was easy to forage for and cultivate medicinal herbs in the villages. In contrast, Western medicine required industrially produced pharmaceuticals and equipment, and the cost for training doctors is high. Especially in the latter part of the 1960s, the rise of barefoot doctors and rural cooperative healthcare increased demand for low-cost and suitable skills, giving Chinese medicine even more room to grow.

3.6.2 Patriotic Public Health Campaigns The “patriotic public health campaign” (aiguo weisheng yundong) originated during the Korean War. In response to the deployment of germ warfare in Northeast China and the Qingdao region by the US military,74 the State Council established the Central Epidemic Prevention Committee in March 1952, rapidly launching public campaigns that primarily aimed to eliminate disease vectors and pests in cities and villages. In late 1952, the Central Epidemic Prevention Committee came under the jurisdiction of

74

Qi Dexue, “Was the Anti-germ Warfare during the War to Resist US Aggression and Aid Korea a False Propaganda on the Part of China?” [in Chinese], Contemporary China History Studies 17, no. 3 (2010): 81–89, 127; Qu Aiguo, “Meiguo Weifan Guoji Gongyue de Zuixing, haishi Zhong Chao Bianzao de Zhengzhi ‘Huangyan’? Kangmei Yuanchao Zhanzheng Fanxijun Zhan de Lishi Kaocha” [US crimes against international conventions, or political “lies” fabricated by China and North Korea? A historical examination of anti-germ warfare in the War to Resist US Aggression and Aid Korea], Wenshi Cankao, no. 12 (2010): 74–81.

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the Party Central Committee and was renamed the Central Patriotic Health Movement Committee. Zhou Enlai was its first director and later succeeded by Xi Zhongxun. Beginning in the 1950s, several patriotic public health campaigns were launched by the CPC Central Committee. On October 13, 1956, Mao stated in an address to the Supreme State Conference that “Doing away with the four pests is a big public health campaign and a campaign to destroy superstition… If the entire nation is mobilized to do this and achieves some success, I believe there will be a change in the mentality of the people and the morale of the Chinese nation will be given a big boost. We must invigorate this nation of ours.”75 In the first ten days of January 1958, Mao personally inspected the progress of the patriotic health movement in Hangzhou’s Xiaoying Lane. In the early years of the People’s Republic, infectious diseases were the biggest threat to public health, making public health services particularly important. Patriotic public health campaigns made up for the inadequate number of professional healthcare workers. Through urban and rural healthcare service networks, people’s communes, public institutions and various corporations, the state established a range of public health agencies to survey and study common diseases. These included “epidemic prevention stations,” as well as agencies dealing with endemic diseases, gynecological and pediatric health, and border health control. To prevent endemic diseases, many localities also launched comprehensive health checkups for rural residents and regularly provided medication for the general public. The patriotic health movement had become hugely successful by 1959, basically eradicating deadly infectious diseases such as smallpox, bubonic plague and cholera. Several others with a severe impact on public health, such as schistosomiasis, filariasis, hookworm disease, and malaria, were also effectively controlled. At the same time, the patriotic health campaign also changed public mindsets, instilling the mentality that good personal hygiene was praiseworthy. By the later part of the 1960s, the spread of rural cooperative healthcare and barefoot doctors had enlarged the coverage of the patriotic health campaign in the countryside. Large-scale public screening and treatment efforts were launched in the early 1970s in some areas where malaria, filariasis, kala-azar, and Keshan disease were rife. Large numbers of healthcare workers and barefoot doctors would visit farms, mines, and factory workshops to provide free checkups, medication and vaccinations. Through several years of efforts, most acute and chronic infectious diseases in China were brought under control. The effectiveness of the patriotic public health campaigns benefited from the ability to organize in urban and rural communities, a successful model of the public health cause in China. At the same time, the implementation of public health interventions also fully mobilized the initiative and participation of local residents. In public health management, by integrating public health initiatives with educational efforts and social governance, China managed to achieve effective outcomes at a lower cost.

75

Mao Zedong Zhuzuo Zhuanti Zhaibian [Thematic excerpts from the writings of Mao Zedong], vol. 2 (Beijing: Zhongyang Wenxian Press, 2003), 1657.

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3.6.3 Public Health Insurance and Service in Urban Areas Apart from public healthcare, another important aspect of the healthcare system was the healthcare insurance and services, which addressed problems in the availability of medical services and medication. Before 1965, China concentrated on building healthcare insurance and service systems in the cities. After 1965, China diverted more healthcare resources to the countryside, forming a rural healthcare system characterized by the three-level healthcare security network, barefoot doctors and cooperative healthcare. In the cities, China formed a three-level system for healthcare services and epidemic prevention, the three levels being municipal hospitals, district hospitals and subdistrict clinics. Hospital budgets mainly came from two sources: operating income and fiscal allocations. Apart from slight profits from prescriptions, all fees were charged at below cost. Drug prices were set by the government. The general principle was to keep drug prices as low as possible, with medical institutions running only slight profits, provided that prices were not low to the point where demand overwhelmed supply. At the same time, cities established publicly funded healthcare and labor healthcare systems for all urban residents. Coverage reached 76.6% in 1970 and 84.6% by 1975.

3.6.4 Healthcare Revolution on the Countryside By the mid-1960s, cities had developed sound healthcare security systems, but the countryside continued to lack doctors and medicines. In this respect, urban–rural divides were widening with each passing day. In 1965, the Ministry of Health found that 69% of skilled healthcare workers were based in the cities while 31% were based in the countryside. Merely 10% were based in administrative divisions below the county level. Among the over 93 million yuan in the healthcare budget, 28 million yuan, or 30%, was used to fund public health services. The countryside received 25 million or so yuan, or 20%, of which merely 16% went to administrative divisions below the county level.76 The government was more concerned with the building of county hospitals, giving inadequate policy guidance and support to rural cooperative healthcare and “half-farmers, half-physicians” (bannong banyi, i.e., barefoot doctors). As for medical education, the government emphasized midlevel education and a gradual transition towards higher education, stressing standardized teaching and clinical training. Scant attention was given to traditional Chinese medicine.77 76

Ministry of Health. “Guanyu ba Weisheng Gongzuo Zhongdian Fangdao Nongcun de Baogao” [Report on focusing health efforts on rural areas], in Selected Documents of the CPC Central Committee, vol. 49 (Beijing: People’s Publishing House, 2013), 228. 77 Interview with Zhang Yinting, former deputy director of the bureau for retired officials at the Ministry of Health. Courtesy of the Center for Health Development Studies at Peking University.

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These problems drew the attention of the CPC Central Committee, especially Mao, who, in keeping with his longstanding views, regarded healthcare as a political issue. Mao thought that the concentration of healthcare in the cities, the over-emphasis on advanced medical science instead of the treatment of common diseases, and the emphasis on relying upon professionals instead of mass campaigns were signs that healthcare professionals, as a team of intellectuals, had become disengaged from the masses. As early as 1958, after schistosomiasis had been eradicated in Yujiang County of Jiangxi Province, Mao wrote in his poem Farewell to the God of Plague: “So many green streams and blue hills, but to what avail?/This tiny creature left even Hua To powerless!” These lines were a subtle criticism of healthcare authorities for overly emphasizing the role of healthcare professionals and neglecting the impact of public campaigns. In its 2008 annual report Primary Health Care: Now More Than Ever, the World Health Organization pointed out that medical and public health systems across the globe had given too much attention to hospitals and treatment, and had become overly commercialized. If China, in the 1960s, had adopted this overly specialized, hospital-centric and treatment-focused model, it would have prevented the expansion of basic healthcare services in the countryside. Around 1965, national leaders issued several criticisms of the large urban–rural healthcare gap, the poor implementation of disease prevention measures, and the low level of resources for the prevention and treatment of common diseases. The most influential one was made by Mao Zedong during a conversation with healthcare officials, which later became known as the June 26 Directive. In it, Mao said: Tell the Ministry of Public Health that it only works for fifteen percent of the total population of the country and that this fifteen percent is mainly composed of gentlemen, while the broad masses of the peasants do not get any medical treatment. First, they don’t have any doctors; second, they don’t have any medicine. The Ministry of Public Health is not a Ministry of Public Health for the people, so why not change its name to the Ministry of Urban Health, the Ministry of Gentlemen’s Health, or even to the Ministry of Urban Gentlemen’s Health? … The methods of medical examination and treatment used by hospitals nowadays are not at all appropriate for the countryside, and the way doctors are trained is only for the benefit of the cities. And yet in China over 500 million of our population are peasants. They work divorced from the masses, using a great deal of manpower and materials in the study of rare, profound and difficult diseases at the so-called pinnacle of science, yet they either ignore or make little effort to study how to prevent and improve the treatment of commonly seen, frequently occurring and widespread diseases. … In medical and health work put the emphasis on the countryside!78

At the same time, Mao also spoke about medical education and healthcare approaches, the main points being: (1) the bulk of resources should be expended on the countryside rather than the cities; (2) the development of healthcare expertise should prioritize common diseases over those that were rare or difficult to treat; (3) medical education should be in line with this trend, focusing on the training of 78

Party Literature Research Institute of the CPC Central Committee, Mao Zedong Nianpu (1949– 1976) [Chronology of Mao Zedong (1949–1976)], vol. 5 (Beijing: Zhongyang Wenxian Press, 2013), 505–506.

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low-cost healthcare workers that rural villages could afford to upkeep. In addition, Mao also criticized the existence of privilege in healthcare. In 1964, in a report by the Ministry of Health on improving healthcare services for Party and government officials, Mao replied critically that “Beijing Hospital has many doctors but few patients. This hospital for gentlemen should be opened up.”79 During this period, officials like Zhou Enlai and Liu Shaoqi also criticized the over-concentration of healthcare resources in the cities. After 1965, a “rural health revolution” that lasted over a decade swept across China, greatly narrowing the urban–rural healthcare gap. Rural healthcare developed greatly: Rural cooperative healthcare, barefoot doctors, and the three-level rural referral system became the “three crown jewels” (sanda fabao) of rural healthcare. Rural cooperative healthcare was a system that relied on the collective economy to provide farmers with medical services. Under the KMT government, some intellectuals included cooperative healthcare as part of the campaign to establish rural cooperatives and promote rural development. However, it ultimately failed as China lacked the social foundation for building cooperatives. After the founding of the People’s Republic, cooperative healthcare emerged around 1958 during the people’s commune movement and became part of the people’s commune system. On September 4, 1958, the People’s Daily published the pilot brief (draft) of the Satellite People’s Commune in Suiping County, Henan Province, the Article 18 of which dealt with cooperative healthcare. The Article stipulated that each household in the commune, based on size, would pay a certain “cooperative healthcare fee” each year, which entitled them to free medical attention. In addition, the “center hospital” of the commune would refer severely ill patients that it could not treat to an appropriate hospital, as well as bear all travel and medical expenses. During the Great Leap Forward and the people’s commune movement, cooperative healthcare was rapidly promoted as a novel initiative. In 1962, 46% of the countryside had a cooperative healthcare system. However, during the “adjustment, consolidation, enrichment, and raising” of production policy to restructure the economy after the people’s commune movement, several localities regarded cooperative healthcare as “leftist,” much like public canteens, and made corresponding adjustments. In August 1962, the Ministry of Health criticized the “tendency of once having people’s communes pay for all medical treatment.”80 By 1964, less than 30% of production brigades and teams in the countryside still retained cooperative healthcare. This declined to 20% by 1968, along with a huge reduction in the number of healthcare workers and institutions in rural regions. In 1968, under the leadership of the village doctor Qin Xiangguan, farmers in Changyang, a county in Hubei Province, again spontaneously set up a cooperative medical system. In late 1968, Mao forwarded the experience of the county’s 79

Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Mao Zedong Wengao [Manuscripts by Mao Zedong since the founding of the state], vol. 11 (Beijing: Zhongyang Wenxian Press, 1996), 124–125. 80 Xia Xingzhen, “A Historical Investigation of the Rural Cooperative Medical Care System” [in Chinese], Contemporary China History Studies, no. 5 (2003): 110–118, 128.

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Leyuan People’s Commune along with a comment that “cooperative healthcare is good.”81 On December 5, the People’s Daily published an article on the experience of Leyuan People’s Commune in cooperative healthcare, summarizing four relevant positive aspects: (1) providing (previously unaffordable) healthcare for poor and lower-middle peasants (pinxia zhongnong); (2) turning the “prevention first” policy into action; (3) further developing the proletarian comradeship of poor and lowermiddle peasants; (4) preventing the proliferation of bourgeois ideology and accelerating the instilment of revolutionary ideals in the mindsets and work of healthcare workers. In support of the cooperative healthcare was the system of barefoot doctors, a term used by rural residents to refer to healthcare workers who were also farmers that tilled the land. In 1968, Mao forwarded a report titled “The Orientation of the Revolution in Medical Education as Seen in the Growth of ‘Barefoot Doctors,’” the first document to formally address these “half-farmer, half-physician” healthcare workers as “barefoot doctors.” Using the example of the Jiangzhen Commune in Shanghai’s Chuansha County, the report argued that “poor and lower-middle peasants need such a novel healthcare team.” Barefoot doctors spent half their time on farm work and did not receive much in subsidies from the production brigades, meaning that their upkeep was affordable for poor and lower-middle peasants. Barefoot doctors earned income similar to ordinary workers of the same level in the countryside. Centralized programs in commune health centers (weisheng yuan) were one way of training barefoot doctors, while another was through on-the-job training. It turned out that some barefoot doctors were even more capable than doctors in the commune health center who had graduated from medical school but had no clinical experience.82 Driven by these factors, rural cooperative healthcare and the barefoot-doctors system had basically taken shape by the late 1960s. Generally, commune members paid an annual “cooperative healthcare fee,” while production teams provided subsidies from “public welfare funds” (gongyi jin). In some localities, disbursements were made directly by the commune from its overall budget. Candidates for barefoot doctors were mainly selected locally, with the main criteria being education level and their political record. Conducted mainly through short-term courses, clinical observation, and practice, their training focused on common local diseases and traditional herbal remedies. The training of barefoot doctors gave scores of rural residents access to basic healthcare. Rural healthcare changed rapidly over the 1960s and 1970s. From 1965 to 1975, the number of beds in town(ship) health centers increased from 145,000 to 650,000, 81

Mao Zedong, “Dui Renmin Ribao Fabiao ‘Shenshou Pinxia Zhongnong Huanying de Hezuo Yiliao Zhidu” deng Wenzhang de Piyu” [Comments on the publication of articles such as “The cooperative medical system deeply welcomed by the poor and lower-middle peasants”], in Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Mao Zedong Wengao [Manuscripts by Mao Zedong since the founding of the state], vol. 12 (Beijing: Zhongyang Wenxian Press, 1998), 604. 82 “Cong ‘Chijiao Yisheng’ de Chengzhang Kan Yixue Jiaoyu Geming de Fangxiang” [Viewing the direction of medical education revolutions from the growth of “barefoot doctors”], Hongqi, September 10, 1968.

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while the proportion of hospital beds in the countryside increased from 40 to 60% of the national total. More than 65% of China’s healthcare budget went to the countryside. The coverage of cooperative healthcare increased from 20% in 1968 to over 90% in 1976, forming a three-level (county, township, village) health service network that incorporated preventive medicine, treatment, and the maintenance of general health. The number of barefoot doctors reached 1.8 million, the number of healthcare workers reached 3.4 million, and the countryside had more than 750,000 birth attendants, far more than the number of specialized healthcare workers that the Ministry of Health had at the time. These became the core of rural healthcare teams. From coastal fishing villages in southeastern China to the Tibetan plateau, every village in China had its own barefoot doctors. This healthcare revolution basically made it possible for all minor diseases to be treated in the village and all major diseases to be treated within the township, winning praise from the World Health Organization and the World Bank as a “Chinese model” that achieved “the greatest health benefits for the smallest inputs.”83 In its 1980–1981 annual report, UNICEF mentioned that China’s barefoot-doctor approach to the provision of primary healthcare in undeveloped villages provided developing countries with a template for improving their healthcare quality.84 In 2008, the World Health Organization again cited China’s experience when calling for the world to refocus on primary healthcare: “China had already increased its life expectancy substantially in the period before 1980 to levels far above that of other low-income countries in the 1970s… The contribution of rural primary care and urban health insurance to this has been well documented.”85

3.6.5 Women’s Liberation and Demographic Dividends Apart from the universalization of basic healthcare services, there is also another aspect to the improvement in the general health of the Chinese population that is often elided: progress in women’s liberation and gender equality. After its founding, the People’s Republic completed in thirty years a demographic transition that took Europe more than a century. Demographic transition refers to the shift from high to low birth rates and mortality rates, a mark of social progress. In 1949, China was still a typical traditional society, with a mortality rate of 20‰ and a birth rate of 35‰. By 1957, however, the mortality rate had declined to 10‰. Though it rebounded somewhat between 1960 and 1962, the figure remained far lower than when the People’s Republic was first founded. By the late 1970s, the mortality 83

Wang Shaoguang, “Zhongguo Gonggong Weisheng de Weiji yu Zhuanji” [Crisis and turnaround in China’s public health], part 1, in Guoqing Baogao (vol. 6, 2003, part 2), 2012: 12. 84 Li Yanhong, “Chijiao Yisheng: 20 shiji Zhongguo de wennuan jiyi” [Barefoot doctors: Warm memories of twentieth century China], Literature on Party Building, no. 11 (2008): 49–51. 85 World Health Organization, The World Health Report 2008: Primary Health Care—Now More Than Ever. Page 5 of the Chinese version. Available at http://www.who.int/whr/2008/zh/

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Year Birth rate

Mortality rate Birth rate

Mortality rate Year

Fig. 3.1 Transformation of China’s population structure. Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010: Table 1-3

rate had declined to 5‰, mainly thanks to improved nutrition and expanded basic healthcare. The decline in birth rates began mainly after 1963 and had already declined to around 0.18% before reform and opening up in 1979. The years between 1968 and 1979 saw the most rapid decline in birth rates, with total fertility rates (average number of children per woman) declining from 6.45 to 2.27, close to the replacement rate (where total population size remains unchanged). The urban fertility rate had fallen below two by 1974, while the rural fertility rate also began a large decline in the mid-1970s. This showed that China had basically completed the transition from high to low birth and mortality rates by the late 1970s (Fig. 3.1). One reason that the birth rate declined rapidly was improved education and healthcare. Some people mistakenly believe that the People’s Republic encouraged childbirth in its early days, leading to a population boom. This is only part of the story. By 1953, the Chinese population had grown to 540 million, leading Mao Zedong and Zhou Enlai to propose a family planning system, where mild, non-coercive methods would be adopted to progressively reduce population growth rates. Article 29 of the National Programme for Agricultural Development 1956–1967 stipulated that birth control would be advocated in all densely populated areas except those with a large ethnic minority population, in order to reduce household burdens, allow children to receive a better education, and gain ample employment opportunities.86 86

“1956–1967 Nian Quanguo Nongye Fazhan Gangyao” [National Agricultural Development Program 1956–1967], Gazette of the State Council of the People’s Republic of China, no. 13 (1960): 251–268.

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The decline in birth rates was a natural historical process. Policy may have played a role, but economic development, better education and improved health had an even greater impact. Between 1949 and 1981, the mortality rate of infants declined by 75%, making it unnecessary for families to increase the number of surviving children by having more children. The improved quality of education made people more aware of the importance of health, devote more resources in this respect, and mow knowledgeable in how to improve their health. Longer years of schooling also increased the age of first marriage, which had already reached 22 years for women by the mid-1970s. Other developing countries only reached this level sometime around 1990. Women gained a say in whether or not to have children. The second reason for the rapid decline in birth rates was women’s liberation and gender equality. Gender equality is affected by social, economic and cultural factors, among others. The existence of unequallity in political and economic aspects in any society may translate into gender inequality. The 18th-century French utopian socialist Charles Fourier argued that “the degree of female emancipation is the natural measure of general emancipation.” Marxism saw women’s liberation as part of the proletarian revolution, arguing that private ownership and class exploitation were the social roots of gender inequality and the oppression of women, and that the proletariat could not be fully free if it did not fight for the full freedom of women. The liberation of Chinese women was part of the Chinese social revolution against imperialism and feudalism. After its founding, the People’s Republic built one of the most thorough gender equality and women’s liberation movements in the world, which were important reasons underlying the development of its human capital and the economy. On the one hand, China, based on Marxist conceptions of the role of women, advocated that “women can hold up half the sky” (funü neng ding banbian tian). Gender equality became a basic national policy, and China enshrined in law that women should enjoy the same political and economic rights as men. Social institutions and a social atmosphere that strove for equality created a social environment for gender equality. Women were included in state-owned and collective work units, achieving universal participation in labor. In 1949, publicly-owned units (quanmin suoyouzhi danwei) had 600,000 female employees, a number that had increased to 20.36 million by 1977.87 Employment of women in every industry and trade was also realized in people’s communes, allowing women to gain some economic status in the family. The emphasis that the state put on literacy campaigns also transformed the roles of many rural women. The establishment of the urban–rural three-level healthcare service network, the promotion of barefoot doctors, as well as the building of women and children’s health networks, kindergartens and nurseries, not only protected women’s health, but also lessened the burdens of childrearing and caring for elderly family members. This gave women more time to study and work. Birth rates fell as women gained greater status. The education that they received also made them more active participants in deciding whether or not to have children, leading 87

Wu Zhongmin, “Cong Pingjun dao Gongzheng: Zhongguo shehui zhengce de yanjin” [From averages to justice: The evolution of social policy in China], Sociological Studies, no. 1 (2004): 75–89.

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to lower birth rates. Higher levels of female education also helped to enhance the educational attainment of their children, as well as gave women more time to participate in social activities. This not only increased household incomes, but also brought healthier lifestyles to family members. Women’s liberation and greater human capital formed a virtuous cycle.

3.6.6 How Was the People’s Republic Able to Achieve a Miraculous Rise in Human Capital? In its first thirty years, the People’s Republic made great strides in education and healthcare initiatives. Average life expectancy increased from 35 years prior to 1949 to 68 years in 1980. The infant mortality rate declined from approximately 250 per thousand in 1950 to lower than 50 per thousand in 1981. It is generally believed that improved healthcare and education attainment must be preconditioned upon economic development. But how was the People’s Republic able to rapidly improve the health of its people even though the economy was not well developed, especially in the industrial domain? First of all, the People’s Republic of China established a governance philosophy and public mindset that prioritized equality. Ross Terill wrote in Mao: A Biography that: Mao’s government made a new China more socially just than old China in three ways. Rewards came mainly according to work—no longer according to birth, or land or capital possessed. So the distribution of China’s national product has become one of the most egalitarian in the world, and very few fall through the net and perish through want of a dollar. And the basic tools for advancement—health care and a simple education above all—are no longer commodities purchasable only by a minority.88

The People’s Republic stood by its belief in social justice and that the people are the masters of the country. Though material resources were scarce, it did its best to equally distribute healthcare and education resources to the entire populace and even organized the active participation of the general public in public health movements, literacy campaigns and basic education, initiatives that were related to their immediate interests. In these initiatives, the general public made countless contributions of a creative nature. In some other developing countries, which had not been through a social revolution like China’s, grassroots communities lacked the ability to organize. Their peoples were unable to effectively unite nor afford costly standardized services, making it difficult to popularize basic healthcare and education. Second, the People’s Republic adopted a cost-efficient model of social welfare suited to China’s national conditions. In terms of workplace health, education, and other aspects related to human capital, China extensively adopted labor-intensive approaches, such as barefoot doctors and teachers in schools run by locals, rather 88

Ross Terill, Mao: A Biography (Beijing: China Renmin University Press, 2006), 500.

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than the capital-intensive approaches taken by Western societies, such as patented pharmaceuticals, the use of advanced technologies in medical diagnoses, high-end medical schools, and business school education. The adoption of labor-intensive approaches was aligned with the resources available in China at the time, achieving an optimal cost–benefit ratio. Based on China’s experiences, the Nobel economics laureate Amartya Sen has pointed out that healthcare and education are highly laborintensive social services, with lower relative prices and costs in poor countries. Compared to their richer counterparts, poor countries need less money to provide services that rich countries have to spend much more money to provide. Last of all is the integration between mass campaigns and democratic decisionmaking, which inspired the initiative and creativity of the public. Mass campaigns were a method that could promote collective collaboration, making them a form of social capital. The patriotic health movement and literacy campaigns were, in fact, large-scale social collaborations. The model of interpersonal mutual aid that was extensively used in the process were, in reality, more cost-efficient than service models that relied solely on professionals. This model was also better for tailoring services to local needs and promoting social unity, thus meeting human development needs. This was fundamentally different from the Western development model, which stimulated individual needs through material consumption. It reflects the strengths of China’s socialist system.

3.7 A New China and a New World It is often said that the People’s Republic “closed its doors to the world” (biguan suoguo) in its first thirty years. China was to some extent isolated during this period, but this was first and foremost due to the actions of other world powers rather than its own choice. China did hope to develop relations with other nations on an equal footing, but superpowers were unwilling to treat China fairly nor respect its sovereignty and security, leaving China with no choice but to shut itself off. Faced with isolation, China did not take the path of inaction but rather turned its eye towards the vast horizons of the Third World and “the two intermediate zones” (liangge zhongjian didai). On the one hand, China independently developed its own industries. On the other, China supported national liberation movements in Third World countries, upheld global equity and justice, and eventually ushered in an era of peaceful and equal international relations for itself. During its first thirty years, the foreign relations of the People’s Republic went through three distinct phases. Changes in international strategy had a huge impact on China’s economic strategies, even going as far as having a decisive impact on certain issues. At the same time, the state of economic development also had an impact on international strategy. “Leaning to one side” in the 1950s: In the face of rivalry between the Americans and the Soviets, China steadfastly placed itself in the socialist camp. With aid from the Soviets, China carried out the largest-ever import of technologies for

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its economy, leading to the successes of the First Five-Year Plan and laying the preliminary groundwork for the development of heavy industry. “Opposing either Soviet or American hegemony” (fan liangba) in the 1960s: SinoSoviet relations deteriorated, and China opposed both Soviet and American hegemonism. This period was the most difficult in Chinese foreign relations as China’s economic and composite national strength were inadequate to force the US to give way on issues related to its core interests, such as the Taiwan issue. China insisted on its autonomy and independence, preferring to rely on itself rather than bow down to a global order imposed by hegemonism. This made development more challenging, as domestic economic growth had to rely on domestic accumulation. In the mid-1960s, in response to the threat of nuclear war between the Americans and the Soviets, China launched a huge effort to build a Third Front in its central and western regions. In order to expand international space, China stood by the principle of global justice, cooperated with the “two intermediate zones,” i.e. developing countries in Asia, Africa and Latin America as well as European capitalist countries. China supported national democratic revolutions in the Third World, and independently built its own industrial system and national defense system. It can be said that the 1960s were a decade in which China overcame its domestic difficulties, international pressure from the Americans and the Soviets, and stuck to a path of autonomy and selfreliance. China’s quiet perseverance in this decade accrued the strength and created the conditions for its later opening up. By the early 1970s, China already had a basic strategic deterrence capability in the form of the “two bombs and one satellite” (liangdan yixing; referring to the atomic bomb, ICBM and artificial satellite). China’s steadfast opposition to imperialism, colonialism and hegemonism raised its international stature, while tightening its belt to develop heavy industry increased its bargaining chips, finally allowing China to more independently develop its relations with major Western nations. With the thawing of relations with the US, China achieved a huge breakthrough in its diplomatic relations with the West and took this opportunity to extensively import new technologies and equipment. Step by step, China was striding towards full openness and developing a sound network of international relationships for its later reforms. China was isolated to some extent in the early years of the People’s Republic, but that was a price the country had to pay to maintain its independence and autonomy under the sanctions and embargos by the West. In doing so, China rapidly increased its level of industrialization, while its commitment to safeguarding global justice created the conditions for its participation in economic globalization as an independent player. The three decades between 1949 and 1978 were not thirty years of isolation, but rather an era when China continually broke through external embargos and remained independent and self-reliant. In this period, China learnt from others without slavishly following their lead, sought foreign aid but refused to compromise its principles or become reliant, and remained creative even as it introduced advanced technologies and practices from abroad.

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3.7.1 Why Did China not Open up to the World Immediately After Its Founding? It is true that the People’s Republic did not immediately open up to the world after its founding, especially towards Western countries. But this was not mainly caused by factors on the Chinese side. Rather, it was the result of Western embargos led by the US in the context of the Cold War. In the early years of the People’s Republic, the world had already been preliminarily divided into American and Soviet spheres of influence. However, because this global landscape had just been formed and was not yet stable, both sides were still testing and competing with each other. In many parts of Europe and East Asia, both the US and Soviets were angling to boost their interests and spheres of influence. The People’s Republic may well have proposed early on in its Common Program to “restore and develop commercial relations with foreign governments and peoples on a basis of equality and mutual benefit,”89 but several reasons doomed efforts to develop diplomatic relations with Western countries as equals. First, the Party was steadfast in its commitment to China’s independence and autonomy, refusing to allow the US to continue enjoying special rights such as residence, mining, rental and retainment of land, free navigation and education. This was highly divergent from the expectation of the US, which wanted to retain its privileges in China and to turn China into a bulwark against the Soviet Union. Second, driven by its goal of containing the Soviet Union, American global strategy had already begun to threaten China’s national security. In particular, the American invasion of Korea in 1950 posed a military threat. After failing to achieve its goals in the Korean War, the US began to build a circle of military installations around China. Third, McCarthyism also led to the marginalization or even persecution of persons who sympathized with the Party and those who advocated better relations with China. On December 28, 1950, the American government announced controls on all assets in the US owned by China. In September 1952, the US manipulated the Paris-based Coordinating Committee for Multilateral Export Controls into imposing bans on over 500 types of exports to China. This shows that China was not willfully shutting itself off to the outside world, but had become the victim of forced embargos due to its insistence on protecting its sovereignty and independence. China would never have sought to develop unequal relations with foreign countries if it meant sacrificing its sovereignty. When the People’s Republic was newly founded, China lacked the most basic foundations in heavy industry and military industries. Given these circumstances, China did not yet have the ability to compete with superpowers like the US and the Soviet Union. Neither was a “third path” possible, meaning that China had to choose one camp. At the same time, as a developing country, a peripheral country in 89

Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Mao Zedong Wengao [Manuscripts by Mao Zedong since the founding of the state], vol. 1 (Beijing: Zhongyang Wenxian Press, 1992), 13.

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the capitalist system, and a country that had just freed itself from semi-colonialism, China had to base any alliance with a foreign country on shared ideals and beliefs. On the day after the People’s Republic was founded, the Soviet government was the first to make a formal diplomatic representation to the Chinese government, indicating its willingness to establish diplomatic relations. On the Taiwan question, the Soviets also supported the position of the People’s Republic. In 1949, Mao made his first visit to the Soviet Union and reclaimed Soviet privileges in China twenty years before they were due to expire. Amidst a global landscape dominated by hostility from Western countries, Mao rapidly consolidated the new government administration. More importantly, China gained valuable economic and technological aid.90 Soviet aid to China was the largest international collaboration and introduction of technology since the advent of modern time. The Soviets provided aid to China in multiple respects, including industrial projects, technology, capital and professional expertise, allowing China to complete the preliminary accumulation needed for industrialization. The 156 industrial projects built with Soviet aid were representative of these efforts, as well as the core of China’s development during the First Five-Year Plan. Through these aid projects, the Soviets also exported technologies and personnel to China, promoting the rapid proliferation of technology, with a total of 1093 Soviet experts successively coming to China to aid in the building of its economy.91 The scale of construction during the First Five-Year Plan greatly exceeded the scale of industrial investment during the Self-Strengthening Movement and the “Nanjing Decade” from 1927 to 1937 under the regime of KMT. By the end of 1957, China had exceeded the main targets of the First Five-Year Plan ahead of schedule, with self-sufficiency in machinery and steel respectively exceeding 60 and 86%. China also had close to a full range of steel alloys. Could the People’s Republic have taken the path of export processing in the 1960s, as the Four Asian Tigers did? Some have argued that the rapid rise of the Four Asian Tigers was because they seized opportunities presented by the transfer of industries from developed countries, while China missed this opportunity and fell behind. This view is erroneous. The economies of the Four Asian Tigers were indeed among the minority that rapidly took off after the Second World War and many factors underlying their successes are worth learning from. However, the external environment that China faced was different. First, the Four Asian Tigers were an American “bulwark” against the spread of communism. This allowed them to directly gain access to American capital, technology and markets, as well as security guarantees from the west. It was impossible for China to rely on a foreign country in this fashion. Secondly, when the People’s Republic was first founded, China lacked the ability to manufacture its own infrastructure as well as comprehensive industrial production facilities, while basic education had yet to be universalized. China did not have the means to accept 90

Website of the Chinese Ministry of Foreign Affairs, http://quiz.fmcoprc.gov.hk/chn/ckzl2009/ t538638.htm. 91 Chinese Academy of Social Sciences and Central Archives, 1953 Nian—1957 Nian Zhonghua Renmin Gongheguo Jingji Dang’an Ziliao Xuanbian: Guding zichan touzi he jianzhuye juan [Selected economic archives of the People’s Republic of China, 1953–1957: Fixed asset investment and the construction industry] (Beijing: Zhongguo wujia chubanshe, 1998), 386–388.

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any large-scale transfer of industry from abroad. During the planned economy era, China concentrated on the development of heavy industry, an effort that, in reality, sought to lay the groundwork for economic development. China’s efforts in this respect allowed its manufacturing industries to quickly blossom after the institution of reforms thirty years later, something that would have been impossible without the industrial foundations laid during this period. Going one step further, a country as large as China should not have based its development primarily on industrial transfer from abroad, even if it had the conditions to do so. If China had relied on industrial transfer and formed an over-reliance on international markets, leading to a lack of core technologies and a complete industrial system, it would never have truly become a major country. China had to independently develop a comprehensive industrial system. In particular, China relied on itself after the withdrawal of Soviet aid in the late 1950s and had basically built a complete industrial system by the late 1970s. By contrast, India had maintained trade relations with both the US and the Soviet Union since its independence but has yet to build a complete industrial system. Thus, we cannot make a simplistic comparison between China’s path of development and that of the Four Asian Tigers.

3.7.2 The Start of Independent Industrialization In the late 1950s, the national interests and ideologies of China and the Soviet Union began to diverge, leading to a rapid deterioration of relations. After Nikita Khrushchev became the supreme Soviet leader, he began to adjust Soviet diplomatic strategy, giving foremost priority to improving US-Soviet relations in the hope that the West would recognize vested Soviet interests in Europe gained after the Second World War. The Soviets hoped that China would subordinate itself to its global strategy and refrain from developing nuclear weapons. On issues related to Taiwan and the Sino-Indian border, the Soviets were also not fully supportive of China’s position that its national interests be protected. Soviet requests to establish a long-wave radio station and a joint naval fleet in China were also rejected in sharp terms by the Chinese government. The Soviet Union also hoped that other countries would submit to its global strategy and join a Soviet-led “division of labor” system in military and commercial affairs. These Soviet proposals, whether in terms of international relations or national interests, were unacceptable to China. Consequently, the Sino-Soviet relations gradually deteriorated. First the Sino-Soviet alliance was terminated. In the late 1960s, relations between China and the Soviet Union once became so strained that both countries stationed huge numbers of combat-ready troops on their borders. The deterioration in Sino-Soviet relations worsened the economic difficulties that China faced between 1960 and 1962. Even so, we should recognize that China was not entirely reacting to external developments during this period, but rather acting out of strategic considerations towards its path of development. For countries in the socialist camp then, wholesale emulation of the Soviet model would lead to

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economic and political reliance on the Soviet Union, which would compromise their ideological, political and economic autonomy. Yet, China managed to free itself of the reliance on foreign countries for industrial development, which had been the case since the advent of modern times, thoroughly embarking on an independent path of development. By 1964, China had developed the atom bomb, which gave it a strategic deterrence against other nuclear powers and the ability to reach a strategic stalemate, preliminarily assuring its national security. With further industrialization, China had by the early 1970s become able to manufacture agricultural machinery. Agricultural mechanization began to spread rapidly. The large-scale construction of chemical fertilizer factories also began during this period. Together, these marked the start of a transition from traditional agriculture to modern agriculture. The support that China extended to national liberation movements and social revolutions in other developing countries also greatly enhanced its international prestige and cultural appeal. These achievements were the result of China’s commitment to foreign policy on its own terms.

3.7.3 Orienting Towards the Two Intermediate Zones Even while opposing American and Soviet hegemony, Chinese foreign policy was not one of inaction. Rather, like how it had “encircled cities from the countryside” during the civil war with the KMT, the Party, in the face of pressure from the US and the Soviets, proposed the judgment of “great chaos, great disintegration and great reshuffle” (dadongdang, dafenhua, dagaizu) with respect to the international situation, turning its attention to the vast “intermediate zone” outside of the US and the Soviet Union. Between 1963 and 1964, Mao proposed the idea of “two intermediate zones”: People all over Asia, Africa and Latin America are opposed to US imperialism. A large number of people in Europe, North America and Oceania are against US imperialism. Some of the imperialists are against US imperialism too. De Gaulle’s opposition to the US is evidence. We now put forward the view that there are two intermediate zones: Asia, Africa and Latin America are the first, and Europe, North America and Oceania, the second.92 Mao’s conception of the “two intermediate zones” reflected an overall approach of establishing a united international front opposing hegemonism and colonialism. Under this overall approach, the focus of Chinese diplomacy in the 1960s shifted towards the “two intermediate zones”, among which aid towards the “first intermediate zone” (Asian, African and Latin American countries), included political support for national liberation movements in these continents. Mao met hundreds of people from all walks of life from these countries and made multiple speeches and statements in support of their fight for national independence, opposition towards imperialism, colonialism and tyranny, and the quest for sovereignty. At the time, 92

Mao Zedong, Collected Works, vol. 8 (Beijing: People’s Publishing House, 1999), 345.

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many of those who fought for national independence and liberation looked to China as a source of hope and confidence. During a visit to China in 1999, anti-apartheid revolutionary Nelson Mandela said: “During my imprisonment on Robben Island, inmates would secretly use all sorts of means to celebrate China’s national day on October 1, as we felt that China’s national day was a hope for our oppressed people… standing by our side and supporting us when we felt isolated and helpless.”93 China provided African countries with not only political support, but also direct economic aid. Between 1956 and 1979, around 40 African countries received economic aid from China, with sub-Saharan countries receiving a total of USD 2.445 billion. China also dispatched medical teams to more than 50 Third World countries totaling more than 10,000 healthcare personnel. The economic aid that China extended to other countries was not only based on a shared sense of historical misfortune, but also common international interests. To serve as the model for all developing countries which fought against colonialism and imperialism as well as for all countries which were suffering from injustice was not only China’s moral obligation; it was also compatible with its economic interest. China’s friendship with Africa today owes much to the diplomatic goodwill left behind from those years. Even as it faced its own troubles, China scrimped and saved to support the just struggles of Third World countries, allowing it to gain a political stature that exceeded its economic status. These also caused other major countries such as the US to develop a deeper respect for China’s international stature. This amply demonstrates that, in international relations, self-interest is often aligned with moral principles. Efforts to uphold global justice and moral responsibility also ultimately resulted in pragmatic economic benefits for China. A nation can gain the respect of its opponents and truly stand tall amidst the nations of the world only through self-dignity, self-respect, self-strengthening and independence. In recent years, there has been the belief that Chinese aid to foreign countries was the result of “ideological fanaticism” (yishixingtai kuangre), and did itself more harm than good. All things considered, this view does not hold water. Some have argued that if Chinese aid to any particular country was not immediately reciprocated, it would “not be aligned with national interests”. This misses the forest for the trees. Even corporate investments cannot be expected to immediately generate returns, let alone a major country like China. To the country of the time, the long-term benefits of the foreign aid that it extended helped to break through the embargos of the US and the Soviet Union, so that it could expand its room for foreign diplomacy while maintaining its independence. In terms of strategy as a major country, a moral appeal is a part of soft power—even today, China has great influence among Asian, African and Latin American countries, especially the older generation of leaders that led independence movements. In the economic domain, even at the time, China also gained access to technology and markets through the extension of aid. The lesson imparted by Chinese aid to the Third World is that developing countries can use globalization to develop themselves, but may also fall into its trap, leading to a greater gap with developed countries. Developing countries should do their best to 93

Lai Chen. The friendship between Mandela and China [J]. Chinese Times. 2014(3): 12–13.

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seek the first outcome and avoid the second. From the perspective of world history, this period also saw a peak in the global backlash against hegemonism and colonialism. China’s practices promoted greater democracy and fairness in international relations, which in turn allowed it to gain a better development environment.

3.7.4 The Third Front: Expansion to the Western Regions Another strategically significant economic strategy of the 1960s consisted of preparations for war and natural disasters and the construction of the Third Front. The latter was significant both militarily and economically. In the military domain, the construction of the Third Front reflected that the Chinese military and people were opposed to but did not fear invasion, forming a strategic deterrence towards the US and the Soviet Union. Economically, the construction of the Third Front was the largest-ever development of western China, significantly improving the economy and society in these regions. Any discussion of the construction of the Third Front must start from the adjustments made by the Third Five-Year Plan, which sought to correct the past tendency towards over-investment in heavy industry. Its main tenet was “priority on food, clothing and daily necessities; priority on agriculture over light industry and light industry over heavy industry” (xianzhua chichuanyong, shixian nongqingzhong)— devoting more energy to the development of light industry and agriculture to concentrate resources on meeting the basic needs of the people. However, this vision had not yet become a reality when new developments emerged in the international landscape in 1964, mandating that the decided-upon strategy of balancing the development of agriculture, light industry and heavy industry make place for the needs of national defense. The foremost change in the global landscape was the intensification of the American military threat to China. In the early 1960s, the US increased its presence in Asia, conducting two nuclear warfare drills that were aimed at China in 1961. In 1962, the US expanded its invasion of Vietnam, while Chiang Kai-shek at the same time accelerated his plans for an offensive against the Chinese mainland. In 1964, the US indeed formulated a plan for a surprise attack on China, and also formulated a specific implementation plan. At the same time, the Soviet Union continued to provoke territorial disputes against China, especially the nuclear deterrence against China. Under these circumstances, as Chinese industry was overly concentrated (60% of major civilian machinery industries, 50% of chemical industries, and 52% of national defense industries were located in merely 14 cities, each with a population greater than one million). Major cities had a large population, while most were located in coastal regions. Major railway hubs, bridges and maritime ports were located in large or medium-sized cities or their vicinity. In addition, reservoirs had little emergency discharge capacity. The Party Central Committee planned the development of the economy based on the need to ensure that interior regions could sustain production

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and livelihoods in the event of war, which led to the approach of accelerating the construction of the Third Front. In September 1964, the CPC Central Committee recommended that the Third Five-Year Plan be adjusted. Firstly, at the regional level, the investment would focus on regions that were part of the Third Front. Secondly, in agriculture, the Central Committee modified its previously decided plans to increase agricultural investment. The policies of the two previous Five-Year Plans would continue to apply to the countryside: efforts to increase grain production would continue to primarily rely on the organization of surplus labor to build agricultural irrigation facilities and increased labor input. Lastly, the guiding principle of “priority on food, clothing and daily necessities; priority on agriculture over light industry and light industry over heavy industry” would be replaced by that of “readiness for war and natural disaster in service of the people” (beizhan beihuang weirenmin) Our above analysis shows that the construction of the Third Front was the result of a belief that “war was impending” and the goal of “racing for time against the enemy.” Because of this reason, the construction of the Third Front was not merely for economic benefit. Rather, it sought to, as quickly as possible, build a strong strategic rear in China’s western hinterland. Between 1964 and 1978, China launched a large-scale effort to build national defense, scientific and technological, industrial and transportation infrastructure in the 13 provinces and autonomous regions in its central and western regions, guided by the principle of wartime readiness. This became known as the construction of the Third Front, an initiative that covered more than half of China’s territory and spanned 14 years over three Five-Year Plans. In total, 205.2 billion yuan was invested in this initiative, which at its peak involved more than four million workers in 1100 construction projects. This huge project, into which China threw all its resources, was unparalleled in scale, duration and the number of people involved. It was both the most important strategic initiative in the history of the People’s Republic as well as a huge adjustment of the national economy, regional economies, strategic national security plans, and layout of productive forces since the founding of the state.94 During the Third Five-Year Plan, a total of 90 billion yuan was invested, of which 34.4 billion went to the Third Front, 38.4 billion yuan went to the First and Second Fronts, and 17.2 billion were investments of a national nature (part of which also went to the Third Front). Although the number of provincial-level divisions in the Third Front amounted to merely one-third of the national total, investment in the region was close to total investment in the First and Second Fronts. The Third Front accounted for 74% of total national investment in national defense industries, 58% of investment in the metallurgy industry, 45% of investment in the railway industry, 40% of investment in the power industry, 35% of investment in the coal industry, 30% of investment in the crude oil industry, and 48% of investment in the chemical industry. 94

Chen Donglin, “1964 Nian Sanxian Jianshe Juece Zhong de Fenqi ji qi dui Xibu Kaifa de Qishi” [Disagreements in policy decisions in 1964 on the construction of the Third Front and their lessons for the development of the western regions], Dangshi yanjiu ziliao, no. 6 (2001): 1–11.

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From the perspective of national security, the construction of the Third Front allowed China to build a relatively comprehensive national defense industry system that gave it the capacity to defend itself by deterring military threats from the superpowers. This effectively improved China’s national defense by deterring the attempts of the two superpowers to wage war against China, preventing the outbreak of war and safeguarding national security. By 1975, the Third Front accounted for half of China’s weapons production capacity, forming a nuclear industry that encompassed nuclear power and the development of nuclear weapons. More than 100 aeronautical industry bases had been built in the region, accounting for one-third of the production capacity of China’s aeronautical industry. By the same year, the original value and net value of fixed assets in the military industries of the Third Front, as well as its production capacities, technologies and equipment quality with respect to major products, had already come close to regions in the First and Second Fronts. The construction of the Third Front formed a strategic rear in China’s vast hinterland where military forces could use topographical advantages to launch offensives, hide and sustain themselves independently for long periods. In other words, China would be able to preserve the ability to fight even after the first wave of an enemy offensive. It can be said, after the late 1960s, the Third Front was indispensable in preventing hostile countries from daring to move recklessly against China. From an even longer historical perspective, the construction of the Third Front gave China, for the first time, the ability to fend off enemies before they crossed the border, creating a peaceful environment for the reform and opening-up. The construction of the Third Front and the building of a complete military-industrial system gave China the ability to hedge against the nuclear deterrents of the US and the Soviet Union. Under these circumstances, land invasion by another major country became a remote possibility, even if not entirely eliminated. Only thus was it possible for southeastern coastal regions to make plans for economic development and attract foreign capital in a peaceful environment free from the threat of war. It was also because the China of the 1970s had the military capacity to fend off enemies before they crossed the border that the country had the means and confidence to open up to the world and foreign capital. After the 1980s, some criticized, based on the standpoint of mere economic benefits, that the construction of the Third Front “overly estimated the risk of war.” We do not agree with this view. These criticisms are based on hindsight and naturally have more information at their fingertips than when decisions were actually made at the time. The laws of war mandate that war may happen even if one is unprepared, while war may not occur or be contained when one is prepared. In hindsight, Mao made a wise decision in focusing China’s energies on the development of its southwestern and northwestern hinterlands—a decision that was based on how the Soviets had suffered heavy losses when the Germans attacked in the Second World War because they had not built an industrial base east of the Urals. From the perspective of national security, this was a highly necessary decision. If China had not actively prepared for war, it would not have had been able to enjoy peace. This is a manifestation of the dialectical concept of “using war to prevent war.” In the 1990s, especially after

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the First Gulf War, the importance of building the Third Front became easier to appreciate. Apart from its military benefits, the construction of the Third Front also generated significant economic and social benefits. In 1984, the State Council Third Front Office held a survey of 1945 large, medium-sized corporations and research institutions in the region. The conclusion was that 48% were successful, well-structured and generated sound benefits, while 45% were “basically successful.”95 In terms of social benefits, the construction of the Third Front narrowed the gap between eastern and western China. The effort was the first great development of China’s western lands and built a comparatively comprehensive industrial system and relatively mature transportation network in central and western China. This was a preliminary step to improving China’s imbalanced industrial structure, greatly narrowing the gap between eastern and western regions. The Third Front had 19.2% of China’s railroads in 1964, a share that had grown to 34.7% by 1980. Even today, these railways still function as the transportation arteries of western China. During the construction of the Third Front, over 200,000 km of new roads were built in the region, accounting for 55% of the growth in road mileage in China over the same period. These roads continue to play a role in the development of the western region, and even today’s Silk Road Economic Belt. A total of 124 machinery industry projects were built in the Third Front, revolving around which emerged a host of new industrial cities, including Panzhihua in Sichuan Province, Liupanshui in Guizhou Province, Shiyan in Hubei Province, and Jinchang in Gansu Province. In this sense, the construction of the Third Front was the first “westward expansion” by the People’s Republic, as well as the first such effort in modern Chinese history.

3.7.5 The Establishment of Sino-US Relations After a decade of effort in the 1960s, China had managed to develop its “Two Bombs and One Satellite” along with the necessary military-industrial system. For the first time, China had the ability to strategically deter any military action by the US or the Soviet Union. By this time, China had also preliminarily built a complete heavy industry system, achieving self-sufficiency in major industrial products like crude oil. After launching the large-scale construction of the Third Front in central and western China, the industrial center of gravity had shifted away from the eastern coast. China’s global influence also reached an unprecedented height, especially among Third World countries. The national liberation movements in Asian, African and Latin American countries that China supported also encouraged social movements in Western countries. On this basis, China became able to engage in diplomacy with Western countries on equal terms.

95

Xiang Jiagui, “Luelun Da Sanxian de Tiaozheng” [A brief discussion on adjustments to the great Third Front], Research on Development, no. 1 (1987): 22–25.

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The normalization of Sino-US relations was also a turning point from the forced embargo of China to its opening up to the West. This shift was the result of choosing the right development strategy as well as years of hard work. The normalization of Sino-US relations also led to a breakthrough in China’s foreign relations. From 1970 to 1979, China established formal diplomatic relations with a total of 75 countries, including major developed countries such as Canada, the Netherlands, the UK, Japan, the Federal Republic of Germany, Australia, New Zealand, Spain, the US, and Portugal (China had established diplomatic relations with France in 1964). By this point, before the reform and opening up, China had established diplomatic relations with all major developed Western nations. During the early years, all of these nations expressed wish for economic cooperation with China. After this breakthrough in foreign diplomacy, China seized the opportunity to import technologies extensively. This was the second large-scale importation of technology undertaken by the People’s Republic, the first being the 156 Soviet aid projects during the First Five-Year Plan. The most representative was the “43 Plan” (“fourthree plan”) of 1973, so named because it planned to import USD 4.3 billion worth of full-set equipment within three to five years, including 13 sets of large chemical fertilizer manufacturing equipment, 4 sets of large-scale chemical fiber manufacturing equipment, 3 sets of petrochemical equipment, 43 sets of comprehensive coal mining units, 10 alkyl benzene plants, and 3 large power plants. In particular, the chemical fertilizer, petrochemical, and chemical fiber equipment sets gave a boost to the chemical fertilizer and apparel industries, allowing China to more quickly raise living standards. The import of technologies from the West also improved the regional balance of China’s economic development, shifting the focus of economic growth from the Third Front in the western region towards the coastal southeast and traditional industrial centers. This laid the policy, technological and material foundation for economic reforms and opened the door for China to rejoin the global system.96 At the same time, China began to strategically make use of world markets. In 1973, China amassed a large sum of foreign exchange during the world sugar crisis, and, at the same time, mobilized its foreign currency held in foreign banks to purchase a large amount of gold to bolster its national reserves. China’s gold reserves grew from 7 million ounces in 1970 to 12.8 million ounces in 1974. When the US dollar began to decline steeply in the subsequent years, these measures ensured the security of China’s foreign reserves, as well as provided reliable financial support for the country’s reforms.

96

Dai Chaowu, “Meiguo ‘Maoyi Ziyouhua’ Zhengce yu Zhongguo ‘Gaige Kaifang’ (1969– 1975)” [US ‘trade liberalization’ policy and China’s ‘reform and opening up’ (1969—1975)], Contemporary China History Studies, no. 2 (2010): 83–104.

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3.7.6 The Rise of China: Upholding Justice While Pursuing Shared Interests Proponents of neoliberal globalization argue that, as long as developing countries open their doors, the capital and technologies of developed countries should unconditionally flow towards developing countries so that they can upgrade their industries. However, in practice, few economies had succeeded by relying on such methods. Most countries that have fully opened up to the West have not only not caught up with Western countries, but have instead lost their economic sovereignty and resources, falling ever more behind the latter. Due to inequalities in political and military strength between strong and weak countries, truly fair international trade does not actually exist. Strong countries will never be willing to engage in international trade with weak countries on equal terms. Rather, they hope that weak countries will always be a source of raw materials, cheap labor, and primary products. Since its founding, the People’s Republic has never, unlike other developing countries, become part of the global system unconditionally. Rather, China participates independently in global governance and strives to eke out its own room for development. Domestically, the strategy of seeking independence and autonomy led China to build an independent industrial system and avoid being economically and technologically dependent on foreign countries. To a major country, it is crucial to keep control of key technologies and strategic sectors. It is because of its independent industrial and technological system that China was able, after its reform and opening up, to negotiate with others on a relatively equal basis in foreign cooperation and the import of new technologies. For instance, in the early 1980s, the American company McDonnell Douglas worked closely with China. That collaboration would not have been possible if China did not then have the ability to independently manufacture large aircraft. An independent industrial and economic system also gave China, even in the early 1970s, the ability to strategically deter other nuclear powers, making it possible to transform its national defense strategy from passive to active defense. China’s ability to stop a hostile force from crossing its border was indispensable in building a peaceful environment for its development, especially along its coastal southeast, which then allowed it to pursue further reform and opening up. Externally, China has remained committed to its independence and upholding the greater good in the pursuit of shared interests. China has supported national liberation movements and democracy movements in Third World countries and opposed the hegemonism, colonialism and imperialism of the US and the Soviet Union. In the short run, it may seem that China paid a hefty price. But over the long run, China gained immense international moral appeal, along with support and assistance from Third World countries. Eventually, China also gained recognition and respect from world powers including the US and the Soviet Union. China’s international strategy is one of unity of moral principles and pragmatic benefit, as well as unity of its

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national interest and international justice. From this point on, China ended its plight of marginalization and forced dependency, which had lasted more than a century, and embarked upon the journey towards independently integrating into the course of globalization.

Chapter 4

Legacy of the Mao Era and China’s Modernization

4.1 Introduction How should we appraise the Mao era (1949–1976)? Unfortunately, those who subscribe to the views of new classical economics or neoliberalism—two of the mainstream economic philosophies—tend to dogmatically dismiss the path and achievements of economic development during those years. History shows that economic development in the first thirty years of the People’s Republic was a success. Despite setbacks along the way, China’s performance compares favorably with other developing countries at the time, as well as developed countries during their industrialization eras. China also managed to steer clear of many pitfalls faced by most developing countries in the early stages of development. Much of the Chinese experience still has clear, pragmatic significance today. This is the mainstream of history. China’s economic system in the Mao era was very different from its post-reform economy. Neither did it bear any resemblance to the doctrines of neoclassical economics, which have been highly influential in recent decades. Since China’s reforms began with agricultural de-collectivization, the market economy, the opendoor policy and the development of the private sector, all of which appear to be “corrections” of past missteps, it is only natural to think that the post-reform meteoric rise of China’s economy proves that past economic strategies and policies were misguided. However, another view emerged around the turn of the millennium as reforms led to new problems and contradictions. Those who hold this view recognize the rationality of certain pre-reform practices and seek from within the key to solving present problems. These divergent views, which sometimes conflict with or even stand opposed to each other, weaken social cohesion and consensus on reforms with a direct impact upon people’s perspectives on reality and the way forward. Only by looking at history correctly can the present be properly understood. In an address delivered at the Central Party School on January 5, 2013, Xi Jinping set forth the principle that “We must correctly evaluate the historical period that came before © CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_4

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reform and opening up. We should neither negate the pre-reform-and-opening-up phase in comparison with the post-reform-and-opening-up phase, nor the converse. We should adhere to the principles of seeking truth from facts and distinguishing the trunk from the branches. We should uphold truth, rectify our errors, draw on practical experience, and learn lessons.”1 This created a political environment for sound appraisal of the historical era before the reform and opening up.

4.2 Accomplishments in the Mao Era An assessment of economic development in any era should give attention to the size as well as the growth rates, but it must also look beyond these factors by considering the following aspects: the quality and benefits of economic development, whether it has met the foremost needs of the country and the people during that period, the coordination between economic and social development, and what that era has left behind for future generations. By these standards, the People’s Republic had outperformed most developing countries of the time. The country had achieved national independence and secured its sovereignty, initiated modernization and improved living standards, achieved relatively rapid economic growth, preliminarily established a complete industrial system and infrastructure, provided universal access to basic medical care and basic education, and successfully revolutionized its societal structure and culture. On the whole, it was a pivotal era in China’s revitalization, an era of rapid development, an era in which the country seized opportunities to kick off its modernization. Although China was still a low-income country when it initiated reforms in 1978, it had become far stronger and more influential than in 1949. The gap between China and the rest of the world had narrowed drastically. The Mao era had provided China with valuable experience, theoretical frameworks, and material foundations for its post-reform development.

4.2.1 Rapid Economic Growth The Chinese economy grew rapidly between 1952 and 1978. According to the China Statistical Yearbook, GDP grew by 6.6% annually in constant prices. In comparison, the average annual growth rate was a paltry 1.5% between 1929 and 1936, the most

1

Xi Jinping, “Guanyu Jianchi he Fazhan Zhongguo Tese Shehuizhuyi de jige wenti” [Some issues on upholding and developing socialism with Chinese characteristics], in Party Literature Research Institute of the CPC Central Committee, Shiba Da yilai Zhongyao Wenxian Xuanbian [Selection of important documents since the Eighteenth CPC National Congress], vol. 1 (Beijing: Zhongyang Wenxian Press, 2014), 109.

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rapid period of economic expansion before the People’s Republic was founded.2 Estimates of annual GDP growth rates between 1952 and 1978 using data compiled by the economic historian Angus Madison show that GDP grew by 5.8% in Asia, 4.3% in Africa, 5.3% in Latin America, 4.4% in Western Europe, and 4.6% in the world as a whole. Clearly, economic growth rates under the People’s Republic during those years not only far outstripped growth in old China, but also outperformed the global average. In the 1950s, China ranked behind industrialized countries in the output of major products. By 1978, however, it was producing more steel than Britain, France and Italy, becoming the fourth-largest producer of steel after the US, the Soviet Union and Japan. Once an oil-poor country, China had turned into the world’s eighth-largest oil producer, generating sufficient output for its own needs. By the time, China had also become the third-largest producer of coal, the largest producer of cotton yarn, the seventh-largest producer of electricity, the second-largest producer of grain, and the third-largest producer of cotton. Electricity consumption, rail cargo volumes, and bank lending are three indicators highly correlated with economic growth. From 1952 to 1978, annual growth rates averaged 8.5% for railway freight, 12.6% for industrial electricity consumption, and 8.2% for new loans. Growth rates for railway freight and industrial electricity consumption were higher than in the post-reform period, indicating that, measured in real terms, the People’s Republic had achieved rapid economic growth. As China’s planned economy during this period excluded many economic activities from the market, using GDP as an indicator underestimates the country’s accomplishments in building its economy. For instance, large swathes of rural infrastructure were built using unpaid rural labor, with little investment from the state. GDP would also have been much higher if the value of housing, health care, education and various goods distributed in kind had been incorporated into GDP statistics like in market economies. Large amounts of resources and labor were deployed without compensation so that heavy industry could be developed first. For the same reason, basic industrial goods were also generally priced below the market. Since these factors lead to an underestimation of GDP, economic growth rates in the Mao era would have been even higher if measured by real economic activity. It should be noted that China’s economic output during this period was the result of self-reliance amid a hostile international environment and ongoing wars in surrounding regions. When the first generation of central Party leadership, with Mao Zedong at its core, handed the reins to the second generation, China had no external or domestic debt, nor inflation and unemployment, something rarely seen in a developing country. At the same time, they left to future generations secure and stable foreign relations, sizeable foreign exchange reserves and improved infrastructure. By 1977, China had gold reserves of 12.8 million ounces and foreign reserves equivalent to USD 2.345 billion, enabling the large-scale import of foreign technology after economic reforms. 2

Hu Angang, Zhongguo Zhengzhi Jingji Shi Lun (1949–1976) [On the political and economic history of China] (Beijing: Tsinghua University Press, 2008), 528.

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These comparisons show that post-1949 growth in GDP, industrial production and agricultural output were impressive, whether relative to pre-1949 China or with other countries during the same period.

4.2.2 China’s Industrial Revolution In the Mao era, China not only achieved rapid economic growth, but also improved its industrial structure. This was most prominently reflected in the formation of an independent and complete industrial system, national defense system and infrastructure, which transformed China from a typical agrarian nation into an industrial nation. Between 1952 and 1980, industrial output increased from 21% of GDP to 48%. The industrial structure came to be dominated by heavy industry and military industries instead of small-scale light industries like textiles or food processing. Over these 28 years, fixed industrial assets increased more than 26-fold, based on constant prices, to over 410 billion yuan.3 By 1978, output in major industrial products had increased vastly over 1952 levels. Particularly, the production of chemical fibers, chemical fertilizers and crude oil—products crucial to basic living needs—had been developed from scratch, increasing over 200-fold. The output of major industrial products such as steel, cement, sulfuric acid and chemical fertilizers grew by over 10% each year (see Table 4.1). China’s infrastructure also improved over those thirty years. The infrastructural capital stock, which was 20.2 billion yuan in 1953, had grown to 111.3 billion yuan by 1978, a 5.5-fold increase. By then, China had formed a transportation network comprising railways, roads and inland waterways. Indicators measuring transportation capacities, such as the lengths of road and rail networks, passenger and cargo volumes, and freight turnover, increased by two to thirteen times from 1952 to 1978 (see Table 4.2). The growth multiples in road length, railway length, and freight turnover were even higher than in the thirty years after reform and opening up. During its three decades, the People’s Republic built 420 billion cubic meters of reservoir capacity, over 3 million kilometers of artificial waterways, 2.2 million pumping wells, and 165,000 km of dykes of various types. Heavy industry and infrastructure have a positive impact on the growth of the national economy. China could not have become a manufacturing giant after the reforms of 1978 if it had not previously developed a foundation in heavy industry. The development of industry also created a huge working class; by 1978, China had nearly 100 million non-agricultural workers. These skilled and disciplined industrial workers became the main force behind social progress and stability, as well as the foundation for the post-1978 economic miracle. The American scholar Maurice 3

“Resolution on Certain Questions in the History of Our Party since the Founding of the People’s Republic of China” [in Chinese], in Sanzhong Quanhui yilai Zhongyao Wenxian Xuanbian [Selection of important documents since the third plenary session of the CPC Central Committee] (Beijing: Zhongyang Wenxian Press, 2011), 130.

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Table 4.1 Growth in the output of major industrial products from 1952 to 1978 Annual growth from 1952 to 1978

1952 1965

1978

Output in 1978 (1952 Average annual = 1) growth rate from 1952 to 1978 (%)

Chemical fibers (thousands of tons)

0.2

50.1

284.6

1423

32.3

Yarn (thousands of tons)

656

1300

2382

3.63

5.1

Raw coal (millions of 66 tons)

232

618

9.36

9.0

Crude oil (thousands of tons)

11,310 104,050 236.48

440

23.4

Electricity generation 7300 67,600 256,600 35.15 (millions of kWh)

14.7

Steel (thousands of tons)

1060 8810

22,080

20.83

12.4

Cement (thousands of 2860 16,340 65,240 tons)

22.81

12.8

Chemical fertilizers (thousands of tons)

222.90

23.1

39

1726

8693

Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, first edition, China Statistics Press (2009): Table 1-37 Table 4.2 Developments in transportation Levels in 1978 (1952 = 1)

1952

1965

1978

2008

Operational railway 22.9 mileage (thousands of km)

38.0

51.7

79.7

2.26

Road length (thousands of km)

126.7

514.5

890.2

3730.2

7.03

Passenger volume (thousands of persons)

245,180 963,340

Freight volume (thousands of tons)

315,160 1,210,830 2,489,460 25,874,130

Freight turnover (millions of tons/km)

76,200

346,400

2,539,930 28,678,920 10.36

982,900

7.90

11,030,100 12.90

Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press (2010): Tables 1-43, 1-44, 1-45 and 1-46

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Meisner has commented that the Mao Zedong era, far from being the era of economic stagnation that it was popularly held to be, was instead the greatest era of modernization in world history, comparable to the most intense periods of industrialization in main latecomers on the industrial scene such as Germany, Japan and Russia.4

4.2.3 A New Countryside and Modern Farmers Modernization of agriculture and rural villages began in the Mao era. When the state was first founded, nearly all of China’s countryside relied on manual labor and nature’s graces for sustenance. Agricultural machinery, chemical fertilizers and electricity were nearly non-existent. By the time the de-collectivization was implemented in the late 1970s, there had been significant improvements in the chemical fertilizers, water conservancy facilities, mechanization and improved crop varieties needed for modern agriculture. On the one hand, industrial development provided chemical fertilizers and machinery for the countryside. The use of chemical fertilizers increased crop yields. Machinery, though with a smaller effect in this respect, greatly reduced the need for labor and enabled the rural workforce to develop industry and commerce or take on jobs in the cities. Later on, the rural population would become a source of low-cost labor after the reform and opening up of 1978. On the other hand, cooperatives and people’s communes organized collective efforts to build rural water conservancy facilities, as well as promote the development of improved cultivars and the use of technology through nationwide collaboration. By the 1970s, the use of agricultural tractors, drainage and irrigation machinery, and chemical fertilizers had increased vastly. Annual electricity consumption was 7.5 times that of annual electricity output when the People’s Republic was first founded. There had been historic changes in farming conditions. Modernization and industrialization not only led to higher rural incomes, but also transformed traditional rural mindsets and culture. The establishment of collective ownership put an end to the cycle between social order and disorder, caused by land engrossment, that had plagued China for millennia. A long-disunited society consisting of smallholder farmers became organized for the first time, allowing for the development of industry and commerce, provision of public services, administration of public affairs, and the building of democracy. These achievements had already changed the social climate and culture in the villages. China’s farmers, who had once been weak, ignorant, lumpen and selfish when trapped in the political and economic shackles of past regimes, were now physically robust, educated and able to be organized in democratic structures and hold their fates in their own hands.

4

Zeng Zhaoyu, “Shichang Jingji de Qiyuan, Benzhi yu Zhongguo Fazhan Daolu: Jian yu Wei Sen Jiaoshou Shangque” [The origin and nature of the market economy, and China’s development path: A discussion with Professor Wei Sen], Tribune of Social Sciences, no. 3 (2013): 189–205.

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4.2.4 Access to Healthcare and Education Human capital is the most dynamic factor in productivity. Low levels of human capital, as measured mainly by the indicators of health, education and gender equality, caused many countries to fall into the poverty trap, mired in a vicious cycle between poverty, ignorance and disease. The People’s Republic regarded healthcare, education and women’s liberation as important political issues in need of solutions. Grassroots communities and rural villages were given priority in the allocation of quality resources, preventing the emergence of an elitist education system and capitalintensive healthcare model. Through the strengths of collective collaboration, China developed an economical but efficient approach to the universalization of basic education and basic healthcare that was based primarily on cooperative healthcare, barefoot doctors, and cooperative education (minban jiaoyu). Average life expectancy increased from 35 years prior to 1949 to 68 years by the late 1970s. Gross primary school enrollment leaped from 25 to over 90%, 30% points higher than average levels in developing countries and nearing levels in developed countries.5 China was also a world leader in women’s liberation. The total fertility rate had fallen to around 2.2 by the 1970s, transcending the high birth and mortality rates in low-income countries trapped in a vicious cycle where poverty led to high birth rates, which in turn led to greater poverty. There were great improvements in levels of education and health. The “sick men of Asia” grew into an educated, disciplined industrial workforce and a new agricultural workforce. This accumulated for China’s later development decades of demographic dividends, which proved to be an effective force supporting sustained economic growth. Improvements in health and education benefit economic development as well as free, all-round human development, leading to a radically different social climate in China. Society became united and optimistic, which motivated the people’s fighting spirit during an era of privation. Through state-owned corporations, public institutions and the people’s communes, China built urban and rural social security systems that encompassed healthcare, old-age benefits, housing, work injury insurance, as well as a safety net for funeral expenses and death compensations, ensuring that the people need not fret about basic living needs. This reduced the costs of economic operation and made intensive, large-scale development of heavy industry possible. The development of social programs also transformed China’s rickety traditional social structure, where disunity and risk were strife and the wealth gap was huge. Ordinary folk gained jobs, dignity, a sense of security, and hope, creating a strong force for the launch of modernization. The universalization of basic healthcare and education in China disproved the prejudiced view that poor countries could not provide universal education or free healthcare. It was also superior to the “modernization first, social security second” route taken by Western countries that had exacted a great toll on their societies. The 5

Pan Wei, China Model: A New Developmental Model from the Sixty Years of the People’s Republic of China [in Chinese] (Beijing: Central Compilation and Translation Press, 2009), 217.

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Chinese people proved through action that universal access to education and healthcare was not the sole province of rich countries. It was possible for an underdeveloped country to provide universal healthcare and education through a not-for-profit healthcare system and an education system where examinations and scores were not the goals. The Indian Nobel economics laureate Amartya Sen has commented that “At the time of political change in 1949, living conditions in China and India were barely distinguishable. Both countries were among the poorest in the world, with high rates of mortality, malnutrition and illiteracy.”6 But by 1978, “the relative positions of China and India had been decisively established,” and “China’s accomplishments in education, healthcare, land reform and social change prior to reforms contributed greatly to its post-reform development, not only allowing China to maintain high life expectancy and other relevant achievements, but also providing strong support for economic expansion based on market reforms.”7

4.2.5 The Global Significance of China’s Development The Mao era marked a turning point in Chinese history since the Opium War, during which the Chinese nation went from despair to self-confidence, from dependency to independence, from humiliation to self-improvement. It was during this era that the Chinese nation began its great journey towards rejuvenation. The revolution that founded the People’s Republic, as well as its subsequent development, not only changed the country, but also the world landscape shaped by the globalization of capitalism. Its global significance lies in its contributions to reversing an inequitable international order. After the Second World War, under the pressures to compete with the socialist camp and socialist system, the capitalist world adapted and improved itself, easing social tensions by improving its welfare systems, reducing income gaps, and reining in the privileges of capital. Meanwhile, socialist movements and national liberation movements arose in many developing countries. At this point, China’s resolve in independent development and its support for the Third World became an important force for advancing global equity and justice. Support for the Third World gave China a strong diplomatic legacy and moral exemplar, promoting the US and Soviets to seek better relations with China, which then opened a gateway for economic cooperation with the West. From this perspective, China’s development into an industrial powerhouse with a population of 800 million was a watershed that altered the global environment created by the globalization of capitalism. At the same time, China to some extent reversed the 6

Gong Songbai, “The comparison of economic transformation and development pattern between China and India” [in Chinese], Ph.D. diss., (Chengdu: Southwestern University of Finance and Economics, 2009). 7 Gong Songbai, “The comparison of economic transformation and development pattern between China and India” [in Chinese], Ph.D. diss., (Chengdu: Southwestern University of Finance and Economics, 2009).

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expansion of colonization and the North–South divide caused by the global capitalist system after the Industrial Revolution. In short, the Mao era was an era of rapid economic growth and an “economic takeoff.” It was an era during which China built an independent, full-fledged industrial system and infrastructure, and achieved its own industrial revolution. It was an era in which traditional agriculture was replaced by modern collective agriculture and traditional villages became modern villages. It was an era in which China, for the first time in history, achieved universal healthcare and education, vastly improving the level of human capital and paving a pathway for free, all-round human development. Through thirty years of development, a country that was once weak, divided and helpless became a strong nation with a consolidated defense system and national dignity; a country which was once disunited became organized and highly cohesive; a country which was polarized as a result of a rigid class system became a just and fair nation truly governed by the people. These decades were an era in which the Party and the people shared weal and woe in their joint struggle, an era of aspiration and unyielding faith, an era of great and moving change. Deng Xiaoping is an authoritative commentator on the three decades prior to economic reforms. In an address in 1979 titled “Uphold the Four Cardinal Principles”, Deng said, “Despite our errors, in the past three decades we have made progress on a scale which old China could not achieve in hundreds or even thousands of years. Our economy has attained a fairly high rate of growth.”8 In 1980, in remarks on the drafts of the Resolution on Certain Questions in the History of our Party since the Founding of the People’s Republic of China, he wrote: It is since the birth of the People’s Republic that China’s status in the world has been so greatly enhanced… Our country would still be in its old plight were it not for our Communist Party, our new-democratic revolution, our socialist revolution and the establishment of our socialist system. What we have achieved cannot be separated from the leadership of the Chinese Communist Party and Comrade Mao Zedong. It is precisely this point that many of our young people don’t sufficiently appreciate.9

4.3 How China Transcended Traps In the three decades since 1949, the People’s Republic not only made progress in many areas, but also created an approach to modernization that fitted China’s national conditions. This approach addressed two historical topics that bear wide-ranging significance for many developing countries: First, given that the global system of capitalism had already been established, how should an underdeveloped country rise, launch its modernization process as well as join the world system? Second, during the modernization process, how might it avoid the costly detours taken by developed countries and escape the “cyclical pattern of history”? 8 9

Deng Xiaoping, Collected Works (Beijing: People’s Publishing House, 2002), 167. Deng Xiaoping, Collected Works (Beijing: People’s Publishing House, 2002), 299.

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Modernization is the dream of every country; however, since the Industrial Revolution, only a few have managed to join the ranks of high-income countries. Today, the Western states that began to modernize in the 18th or nineteenth centuries are still the main developed countries. Since the advent of the twentieth century, merely thirteen of the approximately two hundred developing countries and territories in the world have managed to join their ranks. These thirteen countries and territories were either small economies like the Four Asian Tigers, which benefited from unique geopolitical factors, or countries and territories with extraordinary resource advantages, such as those in the oil-rich Middle East. To date, no developing country with a population of over 100 million has managed to become a developed nation. The divide between developed and developing countries expanded rather than narrowed after the Second World War. New classical economics assumes that capital and other factors of production would flow from rich to poor countries, eventually achieving a “convergence” in the development of nations due to diminishing marginal returns. Accordingly, the gap between wealthy and poor nations should be constantly narrowing. Why then are there so many countries that have not embarked on the road towards prosperity? Jeffrey Sachs, the Harvard economist who was the architect of Russia’s “shock therapy,” began to systematically examine the problem of global poverty after painfully witnessing its failure in Russia. He listed eight major categories of problems that led to intransigent poverty: the poverty trap, physical geography, the fiscal trap, government failures, cultural barriers, geopolitics (trade barriers), lack of innovation, and the demographic trap.10 From these we can see that China managed to avoid the traps often encountered by developing countries because it had managed to take a unique new path.

4.3.1 A Social Revolution: Transcending the Poverty Trap The so-called poverty trap refers to the inability of poor countries to extricate themselves from this dilemma. This is because poverty-stricken people have no choice but to spend most of their income on sustenance, with little leftover for savings and investment. Moreover, poor countries often have low levels of human capital and infrastructure. Excessive consumption, and ultimately depletion, of natural resources is the only way for them to develop their economies. These factors lead to a vicious cycle of poverty—the poorer a country is, the less able it is to escape poverty, and the poorer it becomes as a result. Prior to 1949, China was mired in a typical poverty trap. Given the constraints of its smallholder economy, there was precious little agricultural surplus. Coupled with land rents and exploitation by usuries and special interest groups such as compradors, effective and centralized investment was impossible in China, especially 10

For a discussion on these eight traps, see: Jeffrey Sachs, The End of Poverty: How we can make it happen in our lifetime, trans. Zou Guang (Shanghai: Shanghai People’s Publishing House, 2007).

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with regards to foundational and strategic sectors such as infrastructure and heavy industry. Through its profound social revolution, the People’s Republic dismantled and reformed the interest groups of the past, forming a pathway out of the poverty trap. The “toppling of the three mountains” (imperialism, feudalism, bureaucrat capitalism) used to be interpreted from a political angle. From an economic perspective, however, the “toppling of the three mountains” was required for China to escape the poverty trap. Only through social revolution could China stamp out the seizure of resources by vested interests, thereby allowing it to direct its limited agricultural surplus to sectors such as heavy industry and infrastructure. Meanwhile, leftover subsistence goods would serve to guarantee basic living standards for all through its policies of unified agricultural procurement, the public distribution system, and a rudimentary but extensive social security system. At the same time, continuous rectification movements would prevent the formation of new interest groups within the Party as it held the reins of government. Party officials, social elites and the people shared weal and woe, allowing the costs of industrialization to be more evenly distributed among all sectors of society. These institutional arrangements enabled China to overcome the dilemma faced by many developing countries, where effective investment was often impossible, and launch true economic growth. Often correlated to the poverty trap is the fiscal trap. There are at least three reasons why many developing countries lacked the most rudimentary fiscal capacities to build infrastructure. First, the people are too poor to pay taxes. Second, the government is too incompetent, corrupt or inefficient to collect adequate tax revenue. Third, the government is already saddled with huge debts that eat up its limited tax revenue. In contrast, the People’s Republic built a low-cost, efficient and relatively fair taxation system through the planned economy system. Unlike market-economy countries, which “purchased” infrastructure services using tax revenue, China relied on an economic system based on public ownership to include infrastructure development as part of its planned economy. In addition, through the unified agricultural procurement and distribution policy and the “scissors difference” in the prices of agricultural and industrial products, China generated surplus cash for industrial development. As opposed to other developing countries, this was a tax system that was less costly and more equitable. China also established a sweeping government with highly efficient organizational capabilities that remedied capital shortages through collective collaboration in an era where economic resources were inadequate. Furthermore, the People’s Republic was committed to maintaining zero public debt, whether domestic or external. Although the government did issue bonds in the early years to fuel economic recovery, these were quickly repaid. By 1968, China had become a country with no public debt, unlike some other developing countries, whose economies had been bogged down by debt. These achievements allowed China to avoid the fiscal and debt traps that plagued most developing countries.

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4.3.2 Effective Organization: Transcending Government Failures There are two main reasons why government failure is a problem faced by most developing countries: (1) the fragmentation of government structures, which led to an inability to provide the basic public goods or services needed to maintain social order, security and infrastructure; (2) control of the government by special interest groups, turning the government into their spokesman. Both failures were endemic in pre-1949 Chinese governments, whereas the People’s Republic established a strong and representative government. This government administration was strong enough to save China from the prospect which troubled many developing countries, such as a weak and disorganized state which was unable to put together plans for socioeconomic development, rein in special interest groups and maintain social stability, or prevent the alienation of the state into special interest groups. The strong and representative Party and state became the engine for China’s modernization. Effective organization allowed China’s smallholder economy to pool its limited surplus goods in key sectors, as well as cost-effectively combine various production factors by mobilizing the people through an efficient organization system even as the markets were incomplete and limited in scope. This allowed China to concentrate its resources on industrial development and formulate long-term development plans, as well as ensure their continuous, planned and systematic implementation. Inadequate capital and technology are the foremost problems faced by developing countries during the modernization process. At the same time, these countries suffered from high unemployment with a lot of surplus labor. Fundamentally, this was caused by a capital-centric approach to development. The People’s Republic overcame traditional social structures and built a highly organized, equitable society, organizing collective labor at a large scale to address its inadequacies in capital and technology. In the agricultural domain, rural villages were effectively organized. In the industrial domain, large amounts of infrastructure were also built through collective collaboration between workers in a situation where wages were extremely low. In the countryside, China organized collective projects to build irrigation and water conservancy facilities during off-seasons. These improved the conditions for agricultural production, addressed capital and technological insufficiencies, distributed risks, and prevented rural divisions and bankruptcies. The government of the People’s Republic was not only effective, but also highly representative. Through a protracted period of the revolutionary war and social reform, the Party built a more equal society, which featured mutual trust and collaboration between the Party and the people rather than antagonism and opposition. Despite the low level of economic development, this made it possible to aspire toward a shared long-term goal and sacrifice short-term interests to devote more resources to areas that would generate long-term returns. Unified agricultural procurement and the ration system were means for accumulating the resources needed to achieve industrial development. At the same time, these methods of distribution applied equally to ordinary citizens, Party members, and leading officials. This allowed the Party and

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the people to share weal and woe, and for China to properly balance long- and shortterm interests as well as collective and individual interests. The Party maintained strong credibility, while society remained stable, giving the Party and the government the means to make long-term plans for national development. The stability of domestic society allowed China to maintain its autonomy in the international arena and safeguard its sovereignty. Thus, a representative and strong state regime was the force behind China’s modernization.

4.3.3 Developing a New Culture: Transcending the Trap of Reactionary Culture Cultural issue is also a reason why many developing countries fell into the poverty trap. For instance, culture and religion in some countries prevent socioeconomic participation by women or certain ethnic groups or classes. Due to religious and cultural factors, social mobility remains very low in some countries even today, where there are prominent class divides, with those from lower classes at a disadvantage in education and civic participation. Without fundamental economic security, these societies often find themselves in extreme poverty. The People’s Republic changed society and culture to a profound extent, eradicating millennia-old class systems and mentalities, as well as the old culture where those who labored with their strength were subjected to those who labored with their minds. China undertook a mass campaign for equality and established a new culture that celebrated the people and their labor, giving ordinary laborers unprecedented social status and sweeping away social classes, class systems, and class notions. The depth, breadth and thoroughness of social revolution in China during this period were of a scale rarely encountered. The notions of equality established by China’s social revolution are consistent with the direction of human civilizational progress; these were in essence accomplishments of modernization. Social revolution broke the rigid class systems of the old social structure and propagated a culture of equality, providing a strong force for economic growth. Akin to Max Weber’s view that Protestant movements drove the development of capitalism, China’s social revolution swept away entrenched class systems. The notion that “history is created by the people; laborers are the most glorious,” the foray into economic democracy where workers participated in management and cadres participated in labor, the practice of making officers and enlisted soldiers share weal and woe, and the vision of eliminating bourgeois rights and narrowing the three major disparities all transformed traditional Chinese politics, society and culture at a fundamental level. China also rapidly popularized basic education and achieved full employment, while laborers also developed the mindset that they were their own masters and working for themselves. These had a huge impact on incentivizing workers even as economic resources remained insufficient.

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4.3.4 Independence and Autonomy: Transcending the Globalization Trap Globalization is a double-edged sword. To a developing country, participation in globalization would lead to two futures. Either it would use global resources to serve its own development or become a client state of a large country, in which case it would fall ever more behind, be trapped at the lower end of the industrial chain, as well as lose its capacity for autonomous development or even its economic and political independence. At the global level, it is easier for most developing countries to find themselves in the second circumstance. Pre-1949 China was no exception, being a typical dependent economy. In the face of the global landscape, the People’s Republic in the early days independently developed its own industrial system rather than simply and passively joining the international division-of-labor system dominated by the major powers of the day. In the political realm, China did not align itself with hegemon powers, but instead supported national liberation movements in Third World countries and fought together with other developing countries for an international environment favorable to developing countries. These efforts were rewarded: China become the only developing country with a full-fledged industrial system. China also mastered a considerable range of cutting-edge technologies, giving it the ability to independently upgrade its industries and engage in economic and technological cooperation with developed countries on fairly equal terms. China managed to keep itself from becoming a political or economic vassal of large power, marking an end to its plight for the past century, when it had been forced to adopt an open-door policy and face peripheralization in the global system, as well as coerced into dependency as a source of raw materials and dumping ground for goods. China remained committed to international morality and won the support and trust of developing countries. Eventually, China also gained the ability to engage with the superpowers on equal terms and forged a fairer international political environment that enabled economic cooperation. In the 1970s, China was able to negotiate the establishment of diplomatic relations with the US on relatively equal terms and extensively acquire technological equipment imported from the West. This was inseparable from China’s own international influence and its possession of a complete industrial system.

4.3.5 Promoting Human Development: Transcending the Demographic Trap Like many impoverished countries today, China was once mired in a demographic trap. Most low-income countries have a fertility rate higher than five. High birth rates are the result of poverty as well as the cause of poor child nutrition, health, and education levels. Rapid population growth also creates huge pressures on land and

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environmental resources. This leads to a vicious cycle between higher birth rates and greater poverty. How to avoid the demographic trap? The People’s Republic in the early days opted for a different path, placing equal emphasis on economic and human development. China prioritized the development of social programs, achieving universal access to basic healthcare, basic education and social security even at a low level of economic development. This was another prominent characteristic of China’s path to modernization, which had two effects. On the one hand, this rapidly boosted human capital and therefore productivity. On the other hand, this reduced the costs of economic operation and made it possible to concentrate resources for industrial development. In 1945, Huang Yanpei, a founding pioneer of the China Democratic League, said to Mao Zedong in Yan’an: I’ve lived for more than 60 years. Whatever I saw with my own eyes, it fits the saying, ‘the rise of something may be fast, but its downfall is equally swift.’ Has any person, family, community, place, or even a nation, ever managed to break free out of this cycle?... Throughout history, there are various examples: a ruler ignores state affairs and eunuchs use the opportunity to seize power; a good system of governance fails to function after the person who initiated it dies; people who lust for glory but end up in humiliation. None has managed to break out of this cycle. My humble knowledge shows that the Chinese Communists have always been exploring new ways to break out of this cycle.11

This passage lays out an ideal that generations of Chinese have pursued—to find a new path that would lead the Chinese nation towards rejuvenation rather than endure the detours that other countries had taken in their journey towards modernization. China had discovered an approach to development unique to itself during the first three decades of the People’s Republic, even that approach was not yet mature or stable.

4.4 Some Debates About the Mao Era No human endeavor has ever been smooth sailing; the first thirty years of the People’s Republic have also seen its share of errors and setbacks. Some believe that this period of development was devoid of merit. Previously, we have examined the accomplishments of economic development in the first three decades, the facts of which show that the People’s Republic had found a unique approach to development, whether in comparison to past regimes or most developing countries, which successfully launched its journey towards modernization and made this era one of growth more rapid than in any other period in the history of China. This is the mainstream of these three decades. How should the debates about this period be understood? Most importantly, issues should be examined in their corresponding historical contexts: “Evaluations of historical figures take into account the historical conditions of their times and society, and 11

Huang Fangyi, Huang Yanpei yu Mao Zedong Zhouqilü Duihua [Dialogue between Huang Yanpei and Mao Zedong on the historical cycle] (Beijing: People’s Publishing House, 2012).

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must not depart from a comprehensive understanding of historical conditions and historical processes and a scientific grasp of historical laws, nor ignore the relationship between historical inevitability and historical contingency.”; “We cannot use today’s conditions, development level, and level of understanding to measure and demand predecessors, nor can we demand that our predecessors achieve things that only future generations can achieve.”12

4.4.1 Did This Violate the Law of Comparative Advantages? The primary criticism of China’s approach to economic development is based on neoclassical economic theory. The argument goes that the new state violated the law of comparative advantages in opting to prioritize the development of heavy industry over light and export-oriented industries. Since that ran contrary to the market, China had to rely on the planned economy, state ownership and the people’s communes. The result was a distorted macroeconomic policy environment where the allocation of resources was centrally planned; at the microeconomic level, businesses lacked autonomy. This created an imbalanced industrial structure causing the gap between China and developed countries to grow rather than shrink. Although there is some value to this microeconomic analysis, the conclusions are wrong. First, such analyses are based entirely on economic logic, according to which maximization of economic efficiency is the sole criterion in choosing development strategies. These arguments neglect the unique aspects of China’s development and the fact that survival and security were the most urgent imperatives during the early years of the People’s Republic. The choice to prioritize heavy industry was not based on a subjective preference for heavy industry, but rather because the development of heavy industry was a matter of survival for China. For China, heavy industry is the bedrock for achieving national security, national independence and technological autonomy, as well as the long-term development of light industry and agriculture. Second, such analytical models are overly simplistic. They consider only the differences between heavy and light industries, but not the connection between the two. Technology-wise, even if China had not developed heavy industry and given free rein to markets and private capital to develop light industry, the pace of development would still have been constrained by the agricultural sector, a source of primary resources. Without heavy industry, light industry would quickly find itself facing bottlenecks in raw materials. Third, the implementation of public ownership and collective agriculture in China was not solely for the sake of developing heavy industry first. For instance, in the previous chapter we have examined the purposes behind the establishment of people’s communes, which included serving the strategy of prioritizing heavy industry, as well as protecting the interests of farmers, improving risk resilience in rural areas, 12

Speech by Xi Jinping at a seminar commemorating the 120th anniversary of the birth of Mao Zedong. From the website of Xinhua News Agency.

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expansion of the rural workforce, development of diversified forms of commercial operations, and the maintenance of rural stability. Making public ownership the mainstay of the economy did include the need to prioritize heavy industry, but also included goals such as concentration of resources to compete with the global capitalist system, provision of broad-based public goods, modulation of income distribution, and reflection of the primary status of the people. If we were to argue that public ownership and collective ownership merely served the goal of developing heavy industry, we would reach the conclusion that these systems are not needed today since heavy industry is no longer a priority. This is not true. Finally, from an empirical perspective, these ideas would have China taking the path of the Four Asian Tigers and achieving industrial upgrading through participation in the international division of labor. In practice, however, the Four Asian Tigers are exceptional examples of success through this route. In the 1950s, China’s industrial foundation and human capital were too weak to receive the transferred industries from the West. If China had participated in the international division of labor before building a full-fledged industrial system, it would have been trapped in the lower end of the industrial chain and lost the capacity for independent innovation and industrial upgrading. In fact, as long as we fully understand the constraints that the People’s Republic faced in its early years, we would find that the strategy of prioritizing heavy industry was consistent with the country’s comparative advantages. China had a few unique advantages over other developing countries. First of all, China had a huge population, a vast territory, and huge domestic market potential, although effective investment and consumption were not possible under old systems. Second, China had carried out a thorough social revolution that created a fairer social foundation. Third, the Party has strong organizing abilities. These major advantages were absent in many developing countries. It was also these advantages that allowed China to form its distinctive approach to development.

4.4.2 The Costs of High Savings During its early years, the People’s Republic implemented a “high-savings, lowconsumption” model of distribution so that it could prioritize the development of heavy industry. Living standards improved at a tepid pace, especially since consumer industries grew slowly. This was indeed a problem caused by China’s key development imperatives during the planned economy era, as well as the main reason for the widespread criticism of this era. However, this problem must be assessed in conjunction with the historical context. All development strategies have to consider objective constraints. Consumer industries developed at a tepid pace during this period primarily because of the constraints of the stage of development. The development of consumer industries relies on the development of heavy industry. Could living standards have been improved if China had not prioritized heavy industry? Not so. Improving living standards requires

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certain prerequisites, which include a foundation in heavy industry. As our previous analysis demonstrated, China would not have had the means to develop modern agricultural and textile industries without heavy industry, machinery, chemical fertilizers, and crude oil. We have previously discussed textiles and food. As for the problem of “barefoot doctors,” many people disparage the rationality of this system based on reasons such as the inadequate expertise of barefoot doctors and their lack of medicines (barefoot doctors were equipped with only a few basic drugs like penicillin). However, they fail to realize that barefoot doctors, despite their limited expertise, represented an improvement over the lack of countryside doctors in old China and many developing countries of the same level, where there were stark urban–rural divides. Although barefoot doctors had few medicines, especially Western pharmaceuticals, this was not the result of institutional design, but rather because China lacked the capacity for large-scale production of Western drugs and could only ensure the production of a few basic medicines. It was only in the 1970s that many small chemical factories were established, a period when China was achieving self-sufficiency in oil, undertaking the second devolution of authority, and developing the “five small industries. This foreshadowed the improved situation in the 1980s and 1990s, when most counties had pharmaceutical factories. There is also the issue of farmers being “exploited” by the people’s commune system, leading to the “scissors difference” between urban and rural regions. This was indeed a problem that China faced at the time. Today, we have the means to implement policies where industry subsidizes agriculture and cities drive rural development. This represents an improvement over using the “scissors difference” to transfer surplus from the countryside, as well as compensation for the historical contributions of farmers. However, we must also recognize that the “scissors difference” during the people’s commune period was far smaller than the “scissors difference” under conditions of private ownership in pre-1949 society. Farmers’ welfare did improve continuously. After the founding of the People’s Republic, the state implemented institutional changes that reduced farmers’ tax burdens. At the same time, it increased the taxes-in-kind paid by farmers to the state through the “scissors difference” in unified agricultural procurement. First, this tax burden was lower than before the People’s Republic was founded. Second, these taxes were not expropriated by interest groups like in the past, but rather converted by the government into benefits for farmers through the development of heavy industry, maintenance of national security, and especially support from industry for agriculture. In every country, development inevitably comes with a price—no policies are perfect. China’s high-savings, low-consumption development model did exact a cost, but we must be aware of two fundamental points. First, compared to the early period of industrialization in other countries, China took a path that exacted a relatively low cost. During its development process, China avoided enclosure movements, widespread vagrancy and unemployment, sweatshops, and acute polarization that were a staple feature of early industrialization in most Western states (Engels details these in The Condition of the Working Class in England) through its rationing system, rural collective ownership system, and labor insurance system. It also goes without

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saying that China avoided transferring the costs of development to colonies via means such as the slave trade, as the Western powers did during their early industrialization. China relied solely on domestic savings to achieve industrialization, while at the same time satisfying the basic needs of its people. During this period, the population grew from around 500 million to 800 million, the fastest ever growth rate in history. Life expectancy also increased significantly. These facts show that China had picked a less costly path. Second, these sacrifices were not in vain, but were repaid after China instituted reforms in 1978 through alignment of the fundamental interests of the state and the people. These large savings were not expropriated by special interest groups and spent on luxuries for a tiny minority. Neither were they transferred overseas. Rather, they were converted into state-owned capital and eventually shared with the people through an acceleration of the industrialization process. It is in this sense that the connection between the periods before and after 1978 cannot be severed. The many preconditions needed for development today were acquired at the cost of high savings, low consumption and intense hardships endured by the people prior to reform and opening up.

4.4.3 Political Movements and Economic Development The emphasis on mass campaigns over the development of institutions was yet another damage on economic development during this period. The advancement of economic development through the mass campaigns of the Great Leap Forward led to severe impacts on and losses for economic development. The backyard steel campaign during the early part of the Great Leap Forward and the tendency to exaggerate and prematurely herald the arrival of communism during the people’s commune period all led to huge losses. Even so, we cannot say that these three decades concentrated solely on mass campaigns at the cost of economic development. Even though there were no explicit directives to “focus on building the economy,” Party guidance and work showed that economic development was one of its most important priorities over that period. We must also realize that some events that appear to be mass campaigns in fact aimed to resolve bottlenecks and contradictions in economic development. For instance, one major objective of campaigns such as the Great Leap Forward and the people’s communes was to achieve all-round rural development by resolving problems such as urban–rural imbalances and central-local imbalances in socioeconomic development. This objective cannot be said to have been wrong. Rural cooperatives, people’s communes, literacy campaigns and the patriotic health movement were means for promoting economic development. Each had a direct impact on economic development, as well as achieved clear success. To a certain extent, China transcended the intense wealth divide and severe class contradictions that emerged in other countries during the early part of their modernizations. China also avoided a Soviet-style strict hierarchy and class stratification,

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forming a relatively equitable society. These practices united the people and stimulated the initiative of laborers during a period when the level of economic development was low, while also laying a conducive foundation for reform and opening up in 1978. There is also a notion that China pursued egalitarianism at an inappropriate stage, focusing solely on psychological motivation rather than material incentives. There is some truth in this critique, but we must also consider the historical context at the time. First, egalitarianism was not the result of an unwillingness to provide material incentives. Rather, given the constraints of material conditions under the “high-savings, low-consumption” approach, sustenance for the majority could not have been ensured without egalitarian policies. Second, in a situation where material incentives were lacking, reliance on the subjective agency was both a substitute measure and had a deeper significance, which was to transcend the crude economic paradigms of welfarism and “money worship” in capitalist countries—things that are viewed as decadent and harmful even in today’s Western society.

4.4.4 Was This an Example of “Leftist Infantilism”? Some have characterized this era as one of “leftist infantilism” and “ideology in command”—violating the laws of economics and going beyond what was appropriate for that historical period for the sake of the purity of socialist ideology. This was indeed a serious problem that arose in that era, most prominently in the form of the people’s commune movement. From 1958 to 1959, some localities put forth overly optimistic slogans such as “racing towards communism” for the sake of stimulating local initiative. Yet, we should also realize that some reflections on this issue have gone to another extreme, contraposing socialist ideology with economic rationality. They argue that adherence to socialism and economic rationality are mutually exclusive. On the surface,these views sound plausible, since China did seem to discard doctrines such as the planned economy and absolute public ownership after reform and opening up in 1978. However, this view is fundamentally wrong. This interpretation would lead to the dangerous conclusion that China’s present adherence to the socialist path is grounded in ideology rather than facts, a conclusion which has given rise to many erroneous views today. Such explanations have been applied to many issues. For instance, some believe that the market economy and private sector were soundly developing when the People’s Republic was founded. If that had gone on, China would have long since achieved moderate prosperity. They argue that villages were originally well-suited to family-run operations, but some leaders went ahead with socialist reformation and collective rural land ownership for the sake of ideological purity, resulting in low economic efficiency and a slow pace of development. Why do we say that these views are wrong? It was the great logic of history that brought China onto the socialist path. First of all, views that counterpose ideology and economic rationality are inconsistent with the facts. As we have discussed in the previous two chapters, economic policies in

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the pre-reform era were neither wholesale application of theory nor that of the Soviet model. It was not blind faith in public ownership and the planned economy that led China to implement these policies. Rather, it was because the facts of pre-1949 China demonstrated that the country’s problems could not be solved by simply relying on private ownership and a market economy. A state with a smallholder economy cannot achieve prosperity by implementing an open-door policy. The only way for China to break through the constraints of a smallholder economy and concentrate resources fairly effectively at a lower level was through the socialist approach of a planned economy, public ownership, and collective agriculture. Only socialist public enterprises could allow China to withstand blockades and competition from the global monopolistic capital that had already taken form. Thus, China’s decision to opt for a socialist economic system was a pragmatic choice which obeyed the law of economic development. Some of the specific steps, methods and pathways may have been contrary to economic laws, for instance, the mass steel production campaign during the Great Leap Forward, but these were problems relating to the actual steps of implementation. It does not mean that the choice of the system during this period was wrong. In terms of actual decision-making, the various choices made by China—to implement public ownership, a planned economy, prioritize heavy industry, and carry out socialist reformation and rural collectivization—were not impromptu decisions by any single leader. Rather, they were decisions that were made after repeated studies and refined from theory to practice and back again in a situation where there were many different ideas and practices. The most typical example is the Party’s decision to confirm the “three levels of ownership with the production team as the basic unit” system during the early part of the people’s commune period after the Party carried out extensive surveys and experimentation, including the household responsibility system pilot in Anhui Province (see Chap. 3). Some seek to create a sort of language trap—that adherence to socialism and public ownership is tantamount to “pursuing ideology,” “rigid thinking” and “leftism,” whereas privatization, marketization and liberalization represent “seeking truth from facts,” “pragmatism” and “being knowledgeable in economics.” These views neglect that the blind faith in the Western path is also a choice of ideology, in fact a stronger form of ideology today. A genuinely truth-based approach would entail a more comprehensive examination of the histories of capitalism and socialism, as well as an examination of the histories of developing countries that took the capitalist path. This would prove that it was inevitable for China to take the socialist path. Many people have a blind belief in capitalism precisely because they do not understand this. Another example shows that policies during this period were not based on ideology—Mao Zedong’s staunch opposition to “extreme leftist approaches” to the commodity economy. Some believe that China eliminated markets and private business because of a desire for socialist purity. This conclusion is fallacious. At the time, markets and private businesses were ubiquitous, while the Party itself actively made use of commodity production. The sixth plenary session of the eighth CPC Central Committee, held in 1958, formally stated that: “during the course of a necessary

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period of time commodity production by the people’s communes and the exchange of commodities between the state and communes and among the communes themselves must be greatly developed.”13 Mao agreed with Stalin’s view that commodity production must not be seen as something that exists independently without reliance on surrounding economic conditions. He believed that commodity production must not be viewed in isolation, but rather that “commodity production depends on its association with an economic system. If it is associated with the capitalist system, it is capitalist commodity production; if it is associated with the socialist system, it is socialist commodity production.”14 Based on Guo Moruo’s study on the origins of the name of China’s Shang dynasty (shang means “merchant” or “business”), Mao believed that commodities had been around since antiquity and were not phenomena unique to capitalism. He argued that a socialist economy was a planned economy that developed proportionally, whereas socialist commodity production, which is associated with this form of economy, must also be included in planning channels. First, commodity production must proceed in a planned manner. On the topic of the production characteristics of the people’s communes, Mao believed that commodity production by the people’s communes should proceed in a planned manner by making rational production arrangements based on the needs of the commune, the local region and the state. Furthermore, commodity production must be incorporated into planning channels and orderly carried out within the scope of plans, such that “commodity production will serve socialism quite tamely” and that all economic systems should be developed and encouraged as long as they were helpful to socialism and beneficial to socialist development.15 In short, Chinese Communists during this period were committed to the “twopoint theory” with regards to “capitalist factors” such as markets, commodities and wages. In practice, the Party remained opposed to two proclivities, the first being elimination of commodity trade, the private sector, and laws of value ahead of the proper time. In 1958, Mao severely criticized and ordered a stop to the elimination of commodity trade, wage systems and currency in some localities, as well as their implementation of uncompensated distribution-in-kind systems. On the question of dealing with the capitalist class, Mao argued that “exploitation of the working class for profit constitutes one side of the character of the national bourgeoisie, while its support of the Constitution and its willingness to accept socialist transformation constitute the other… this antagonistic contradiction between the two classes, if properly handled, can be transformed into a non-antagonistic one and be resolved

13

Lin Zhiyou and Qu Xingyi, “Mao Zedong’s Thought on 1960 and the Evaluation” [in Chinese], Journal of Henan Social Sciences Edition) 42, no. 5 (2015): 51–55. 14 Lin Zhiyou and Qu Xingyi, “Mao Zedong’s Thought on 1960 and the Evaluation” [in Chinese], Journal of Henan Social Sciences Edition) 42, no. 5 (2015): 51–55. 15 Lin Zhiyou and Qu Xingyi, “Mao Zedong’s Thought on 1960 and the Evaluation” [in Chinese], Journal of Henan Social Sciences Edition) 42, no. 5 (2015): 51–55.

Commodity Economy from 1958 to Normal University (Philosophy and Commodity Economy from 1958 to Normal University (Philosophy and Commodity Economy from 1958 to Normal University (Philosophy and

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by peaceful methods.”16 Socialist commodity production is primarily to satisfy the needs of society, while public ownership provides a foundation for constraining and weakening the negative impacts of a commodity economy. Thus, although the People’s Republic did overly emphasize ideology and violate the laws of economics in certain periods and areas during its first three decades, on the whole, adherence to socialism and adherence to the laws of economics are not entirely contradictory.

4.5 How Did China Ensure Basic Living Standards for Its People? During the early stages of reform and opening up, China reaped great success from its adoption of a market economy and open-door policy. As a result, some argue that if China had instituted these policies when the People’s Republic was first founded, the country would long have become a developed nation. These views are inconsistent with historical materialism. China’s accomplishments since the institution of reforms may be inseparable from the adoption of correct strategies since its reform and opening up, but they are also inseparable from the foundations laid down prior to reform and opening up. Prior capital accumulation laid a sound foundation for meeting basic living needs after reforms. In terms of people’s subjective experiences, diversity in secondary agricultural products and clothing did occur only in the 1980s. On the one hand, this was because of the implementation of the household responsibility system and the market economy, which greatly boosted the initiative of farmers and businesses. On the other hand, we must also realize that their zeal would not have had any effect on its own; the material foundations laid down prior to reform and opening up also played an indispensable role. First, there was the problem of food. The household responsibility system (the de-collectivization of agriculture), first experimented in Xiaogang Village of Anhui Province, began to be rapidly promoted across the country in 1979, with coverage increasing from 1% that year to 98% in 1983. Meanwhile, total grain production increased from 304.77 million tons in 1978 to 407.31 million tons in 1984, equivalent to an increase from 317 to 390 kg per capita. De-collectivization of agriculture was not the only factor driving growth in grain production. Other factors that played an indispensable role in boosting agricultural output included improvements in agricultural production conditions, changes in grain procurement policy, and changes in the weather. The first tranche of factors was the popularization of chemical fertilizers, machinery and improved cultivars. There are three main forms of chemical fertilizers (nitrogenous, phosphate, potassic). The production of nitrogenous fertilizers requires the production of synthetic ammonia under high temperatures. Rock phosphate and concentrated sulfuric acid are the primary raw materials for phosphate fertilizers. Potassium fertilizers can be produced using naturally occurring potash, 16

Mao Zedong, Collected Works, vol. 7 (Beijing: People’s Publishing House, 1999), 206.

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but the process still requires purification and blending. Clearly, the development of a chemical fertilizer industry would have been impossible without foundations in heavy industries such as machinery, energy, electricity and materials. During the early years of the People’s Republic, there were only two chemical fertilizer plants, one in Dalian and the other in Nanjing. These plants produced merely 6000 tons of fertilizer per year. Annual production volumes reached 1.726 million tons in 1965 after China included chemical fertilizers as one of the industries to be prioritized for development. In the early 1970s, two factors drove the rapid development of the chemical fertilizer industry. The first was local industrialization resulting from the second institutional devolution, wherein small chemical fertilizer factories were one of the “five small industries” at the county level. By 1979, China’s output of chemical fertilizers had ballooned to 10.863 million tons, approximately six times of output in 1965.17 The second was the import of 13 sets of nitrogen fixation and ammonia equipment in 1972 through the “43 Plan”, colloquially known as the “thirteen sets of large chemical fertilizers chemical fertilizers”. All of these plants were commissioned by 1979, which happens to overlap with the launch of the household responsibility system (see Table 4.3). The use of chemical fertilizers skyrocketed to 173.98 million tons in 1984. Second, the popularization of improved cultivars such as hybrid rice. During this period, China built a system to promote agricultural technology that covered the entire country through the collective economy. Hybrid rice cultivars were developed in the mid-1970s. From 1976 to 1984, the area of land planted with hybrid rice increased from 400,000 hectares to 26.7 million hectares. Hybrid rice required more chemical fertilizers than ordinary rice, while the use of agricultural irrigation and chemical fertilizers further boosted the advantages of these hybrid cultivars. Third, the use of agricultural machinery. Small machinery factories were included in what was known as the “five small industries” in 1970, leading to the explosive development of agricultural machinery in China between 1970 and 1977. The total capacity of agricultural machinery in China increased from 21,653 horsepower in 1970 to 102,617 horsepower in 1977, a nearly fivefold increase in seven years. After 1978, the rate of growth in agricultural mechanization reduced because of the slowing demand for agricultural machinery in some localities due to a decrease in investment and the distribution of farmland to individual households. In spite of that China’s total capacity of agricultural machinery still exceeded 190,000 horsepower by 1984. Changes in the climate constituted the second tranche of factors. Even today, the world’s most developed agricultural nations have yet to conquer the impact of climate on agricultural production. Although China had extensively built irrigation facilities during the people’s commune period, these could only weaken rather than eliminate the impact of climate on agricultural production. Table 4.4 lists the weather indices for China from 1970 to 1987, with larger (absolute) values indicating poorer 17

Wu Li, “Lun Zhongguo Gongchandang Lingdao xia de Zhongguo Nongye Xiandaihua” [On the modernization of Chinese agriculture under the leadership of the Communist Party of China], in Zhongguo Gongchandang 90 Nian Yanjiu Wenji [Collected studies on the 90 years of the CPC] (2011).

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Table 4.3 The “thirteen sets of large chemical fertilizer projects” Project

Cumulative investment (RMB million)

Contract signed in

Commissioned in

Cangzhou chemical fertilizer plant

23,900

1973

December 1977

Liaohe chemical fertilizer plant

348

1973

December 1977

Daqing chemical fertilizer plant

243

1973

June 1977

Hubei chemical fertilizer plant

245

1973

August 1979

Dongting Lake chemical fertilizer plant

250

1973

July 1979

Luzhou natural gas and chemicals factory

240

1973

March 1977

Chishui River natural gas and chemicals factory

273

1973

December 1978

Yunnan natural gas and chemicals factory

277

1973

December 1977

Qixia mountain chemical fertilizer plant

298

1974

October 1978

Anqing chemical fertilizer 301 plant

1974

December 1978

Guangzhou chemical fertilizer plant

314

1974

October 1972

Qilu second chemical fertilizer plant

247

1973

July 1976

Sichuan chemical fertilizer 261 plant

1973

Source Chen Jinhua, Guoshi Yishu [Memories and accounts of the state business], Chinese Communist Party History Publishing House, 2005: pp. 17–19

weather, and vice versa. From these figures, we can see that the weather was generally poor from 1976 to 1980 and improved between 1981 and 1984. In particular, 1978 and 1984 were respectively the worst and best years in that decade or so. Using a comparison of grain output during these two years to illustrate the effect of the household responsibility system will exaggerate its impact and attribute the effect of favorable weather to the system. The third set of factors was the change in grain procurement and rural investment policies. When the People’s Republic was first founded, large amounts of agricultural produce were procured at low prices under the unified agricultural procurement policy to meet the needs of industrial development. The amount of food distributed to each individual was sufficient only to meet basic needs. In addition, China had to build the Third Front and build food reserves in case of war or famine in the 1960s,

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Table 4.4 Changes in agricultural production conditions in China from 1970 to 1987 Year

Coverage of the household responsibility system (%)

Use of chemical fertilizers (kg/mu)

Sale price (1950 = 100)

Cultivation of hybrid rice (millions of hectares)

Total wattage of agricultural machinery

Weather index

Multiple cropping index

21,653

− 73.72

141.9

74,786

− 12.62

150

1970

0

1975

0

12

209

1976

0

13

210

0.4

86,296

1.55

150.6

1977

0

14

209

6.2

102,617

28.89

150.5

1978

0

19

217

12.6

117,499

53.61

151

1979

1

24

266

15.4

133,795

12.02

149.2

1980

14

27

284

14.2

147,457

47.4

147.4

1981

45

28

301

15.4

156,801

26.91

146.6

1982

80

31

308

16.8

166,142

7.74

146.7

1983

98

34

321

20.3

180,219

10.17

146.4

1984

99

35

334

26.7

194,972

2.69

146.9

Source Bramall, Re-evaluation of collective agriculture in China, http://www.guancha.cn/Rural/ 2012_08_06_89276.shtml

which also affected the amount of food available per capita. By the late 1970s, the international environment had improved, construction of the Third Front had been basically completed, while a foundation in heavy industry had been developed, alleviating the pressures to prepare for possible war or famine. The state used these favorable conditions to lower savings rates and expand consumption, measures which received popular support. Between the late 1970s and early 1980s, the state consecutively increased grain procurement prices while simultaneously reducing procurement volumes. Grain procurement prices increased considerably after 1978. These were increased by 20% in 1979, with an additional increase of 50% for the portion exceeding procurement baselines; on average, procurement prices for eighteen agricultural products increased by 24.8%.18 On the other hand, procurement volumes were reduced significantly. Markets for agricultural commodities were liberalized, resulting in a sharp decline in the share of grain under the unified procurement policy from 75% in 1978 to 26% in 1984. In 1980, fiscal subsidies for grain and cooking oil price differences, price supplementation for grain and cooking oil procured in excess of the baseline, and subsidies for the losses of agricultural corporations totaled 10.801 billion yuan, an increase of 47.39% over 1979. These measures also helped to motivate farmers to increase agricultural output. In other words, from the late 1970s to the early 1980s, China launched the household responsibility system in the countryside. The same period also saw rapid expansion in the use of agricultural machinery, hybrid rice cultivars and chemical fertilizers, 18

Party History Research Institute of the CPC Central Committee, Zhongguo Gongchandang Dashiji [Chronicles of the CPC]. http://cpc.people.com.cn/GB/64162/64164/4416113.html.

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as well as the completion of many irrigation projects that began in the mid-1960s. New high-yielding cultivars had become highly common. Meanwhile, the state had adjusted grain procurement policies, raising prices while reducing planned procurement volumes. Climate conditions also improved. The period of bad climate between 1978 and 1981 was followed by a favorable one during the period from 1982 to 1984. All of these factors had a positive impact on agricultural output. In that case, how much did the household responsibility system contribute to growth in agricultural output? This requires an analysis based on contemporaneous historical data. Existing studies are split into two camps. Some studies support the proposition that the household responsibility system was the main reason for the growth in agricultural production, while others do not. A review of existing quantitative studies suggests that 27–71% of the growth in agricultural output can be attributed to the household responsibility system. On the other hand, there are some studies that do not support these conclusions. Han examined the situation in Jimo County, Shandong Province, and found that grain production had increased rapidly over the collectivization period, but levels of agricultural mechanization declined after the implementation of the household responsibility system. Some farmers dismantled tractors for scrap, while irrigation also became a problem.19 Bramall looked at county-level data from Sichuan Province and found that output in counties that did not implement the household responsibility system was not lower than in those that did. Conversely, output declined in some counties after they implemented the system.20 Putterman found that agricultural output in a county in Hebei Province had increased in the 1970s, but this ceased after the implementation of the household responsibility system.21 A study by Huang Zongzhi on the Yangtze Delta Region found that “de-collectivization” did not lead to an increase in output.22 Based on available information, our conclusions are as follows. On the one hand, the household responsibility system did motivate farmers’ enthusiasm to work and helped to free up surplus labor for the development of non-primary industries in villages and TVEs. The role of the household responsibility system cannot be denied. On the other hand, the impact of the household responsibility system should not be exaggerated or absolutized. The household responsibility system was not the only reason for the growth in agricultural output. Post-reform-and-opening-up growth also depended on the foundations in farmland irrigation facilities, machinery and improved cultivars accumulated prior to reforms. The household responsibility system cannot be severed from these prior foundations but should instead be placed under the lens of historical materialism. We should not blindly believe in the “magic” of the household responsibility system, nor should we indulge in historical nihilism. 19 Han, Dongping, The Unknown Cultural Revolution: Life and Change in a Chinese Village, (New York: Monthly Review Press, 2008). 20 Chris Bramall, “Origins of the Agricultural ‘Miracle’: Some Evidence from Sichuan”, The China Quarterly 143 (1995): 731–55. 21 Louis Putterman, “Entering the Post-Collective Era in North China: Dahe Township”, Modern China 15, no. 3 (1989): 275–320. 22 Philip Huang, The Peasant Family and Rural Development in the Yangzi Delta, 1350–1988 (Stanford: Stanford University Press, 1990).

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After all, Chinese farmers had always worked individually until the Republican era. Their “private property rights” can be said to have been very clear. Why then were they always struggling to survive? Another example would be clothing. In modern society, the production of clothing relies mainly on the handicrafts industry and the textile industry. Raw materials for the textile industry fall into two categories: cotton or other plant fibers that can substitute for cotton; chemical fibers produced from crude oil. After the Self-Strengthening Movement in the late nineteenth century, the textile industry gradually became one of the main light industries in China. Natural fibers, such as cotton, were the main raw material, but large-scale cultivation of cotton was impossible in China due to land constraints and food production needs. The total production of cotton textiles in 1949 was merely 1.89 billion meters, or 3.5 m per capita.23 After the economy recovered in 1952, the textile industry quickly ran into bottlenecks in production materials, with merely 78% of potential production capacity being utilized. Under these circumstances, the industry had to rely on plant fibers (apart from cotton) and chemical fibers to expand sources of raw materials. In the early 1960s, China focused on finding plant fibers that could replace cotton. However, these efforts achieved only limited success. As a result, the development of chemical fibers was crucial for the development of the textile industry. This would first require China to have a petroleum industry, since crude oil is the feedstock for chemical fibers. At the same time, China needed the heavy industry sector to provide heavy chemical engineering equipment. China has long been regarded as an oil-poor country. When the People’s Republic was first founded, the country could not even ensure that it had enough oil for military training and transportation, much less provide crude oil for the chemical fibers industry. It was only after the Daqing Oil Field was discovered in 1959 that China gradually became self-sufficient in oil. Crude oil production reached 45.67 million tons in 1972, enough to meet domestic demand and leave a surplus for export. Meanwhile, China produced only 2.15 million tons of cotton in 1971, setting aside cotton wadding used by farmers, urban residents and the military, only 1.55 tons are used in the textile industry. In the latter half of the year, Qian Zhiguang, the Minister for Light Industry, indicated that China could use its own oil and gas resources to build chemical fiber production bases and import the necessary technologies and equipment from abroad. In the first half of 1972, China spent USD 400 million to import four chemical fiber production plants, two chemical fertilizer plants, as well as some key equipment and materials. After they were commissioned, these plants could produce 240,000 tons of chemical fibers and 4 million tons of chemical fertilizers each year. China could also ensure the domestic supply of the necessary petroleum gas and crude oil. By the late 1970s, China was able to produce 381,000 tons of chemical fibers per year.24 China’s record in meeting the basic needs 23

Chen Yifang, “Chaoguo le Renmen Yuanxian Zui Leguan de Yuqi” [Exceeding people’s most optimistic expectations], China Textile News, October 1, 2009. 24 Liu Zhenhua, “Waijiao Zhanlue Zhuanbian xia de ‘Sisan Fang’an’” [The “43 Plan” under the shift in diplomatic strategy], China Archives, no. 5 (2009): 82–83.

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of its people shows that the rapid development of the textile industry after reform and opening up would not have been possible without the foundation in heavy industry laid down previously. The reform and opening up of 1978 were vital to meeting the basic needs of the Chinese people, as were the foundations in heavy industry laid previously. It is unscientific for some researchers to completely deny achievements in economic development prior to reforms based solely on inadequacies in basic sustenance.

4.6 The Legacy of the Mao Era and the “Dividends of Reform” The periods before and after reform and opening up were very different in terms of guiding ideology, policy approaches and actual practice. However, both were periods that cannot be denied in China’s exploration of the socialist pathway given their inseverable continuity. One important reason for their great divergence in specific policies is that each period faced a different international environment, development objectives, and development conditions. Things that are possible today may not have been possible back then. Development strategies that used to be appropriate may not be so today. As such, one period cannot be used to disparage the other. Specifically, there are the following circumstances. First, the international environment was different during these periods, which translates to different priorities in opening up to the outside world. When the People’s Republic was first founded, China decided not to fully open up due to objective conditions at home and abroad. On the one hand, in a global landscape divided between two camps, China was blockaded by Western countries for its commitment to protecting its national interests. On the other hand, China had a weak industrial foundation, which meant that indiscriminate opening up would lead to being “bullied” in a fashion akin to before 1949. Later on, national defense and economic strength grew stronger, allowing China to regain its seat at the United Nations and achieve major breakthroughs in foreign affairs, such as the establishment of diplomatic relations with the US. This continuous building of national strength and expansion of international space allowed conditions for opening up to continuously mature. Similarly, even after the reform and opening up of 1978, China did not open up unconditionally; instead, it continued to orderly, systematically and autonomously expand its doors based on its own needs. Second, priorities in economic development were different during these periods, which equated to different imperatives in building the economy. There had indeed been considerable improvements in living standards before 1978. However, China had to focus its limited resources on the development of heavy industry, which was an important reason behind opting for a planned economy. It was only because China had already built a foundation in heavy industry that the country had the means to adjust development strategies, introduce the market economy, and develop

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consumer industries after the initiation of reforms. If China had not timely achieved this transition, it would have ended up like the Soviet Union, where living standards remained stagnant for a protracted period, leading to all sorts of social problems. It was the frugal savings in the previous period that made subsequent improvements in living standards possible. This was a consecutive process—one period should not be used to negate the other. Third, China’s development started from a lower base. Its policies often had to opt for the lesser of two evils. Lessons can be drawn from this regard, but we should not be overly perfectionist in our critiques. Prior to reforms, although there were problems such as overly high saving rates, apparent egalitarianism and constraints on individual freedoms, China did manage to achieve industrialization within a short period of time and ensure national independence and basic living standards. China managed to successfully avert problems that readily occurred in developing countries, such as wealth gaps, large numbers of landless farmers, stagnant health and education levels, social turmoil, and control of economic lifelines by foreign countries. China stuck to its policy of zero public debt, which prevented debt crises and hyperinflation like that in Latin American countries even though that came at the cost of temporarily greater burdens. Later on, China implemented progressive reforms, which prevented problems arising from shock therapy like those in countries such as Russia. With regards to such circumstances, we must realize that China had managed to prevent more serious problems despite the inadequacies in reality. We should not be “Monday morning quarterbacks” criticizing actual practices based on imagined ideal models. The continuity between these two periods was also shown in the rich legacy that the three decades prior to reform and opening up left behind for post-reform economic development—the true source of “reform dividends.”

4.6.1 The Dividends of Industrial Development During the early stages of reform and opening up, China’s economic development was primarily driven by the sanlai yibu (processing of imported materials, designs and parts; and compensatory trade) in international trade—which would not have been possible without having established a full-fledged industrial system. A full-fledged industrial system has the qualities of a public good: it ensures that a country (or even an entire region) has the means to process imported materials into finished goods. The military industries and heavy industries established during the planned economy era also turned towards the production of market goods after China adopted a market economy. SOEs enabled the spillover effect of technology: the capital, technologies, equipment and the human talent for China’s earliest private enterprises came from SOEs, relieving the need for primitive accumulation. This was another legacy of the Mao era. Other important assets were local industries, the “five types of small rural industries” (wuxiao gongye) and commune and brigade enterprises formed over the previous two rounds of decentralization. These enterprises became the mainstay

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of local SMEs and TVEs after reform and opening up. Brigade and commune enterprises were the forerunners of TVEs. China had a total of 1.5 million brigade and commune enterprises in 1978, employing a total of 28 million workers and generating nearly 30% of the income of communes and production brigades. After the people’s communes were disbanded in 1984, brigade and commune enterprises came to be known as TVEs. These enterprises grew at an average rate of 37.9% each year from 1984 to 1994. In 1996, their total industrial output accounted for nearly one-third of the national total while also employing one-fourth of the national workforce,25 making them the main driver of China’s economic development and rural income growth in the early stages of reform and opening up.

4.6.2 The Dividends of Human Capital The first thirty years of the People’s Republic fostered a healthy, educated and disciplined workforce for the post-reform era. Scholars such as Li Ling have carried out quantitative research on the relationship between the levels of human capital and rates of economic growth in various regions since reform and opening up to assess the contributions of the former to the latter. Their research reached the following main conclusions. Health levels had a significant impact on economic development, with every 10% decline in mortality rates leading to growth in per capita GDP of over 5% over the next five years. GDP per capita rose by around 3.8% for every 10% decline in the fertility rate (based on women between the ages of 15 and 65) over original levels. Regions with higher fertility rates had lower rates of economic growth. Apart from that, every 10% increase of proportion of population that received secondary education would also result in a 4% increase of GDP per capita. Clearly, human capital made a significant contribution to China’s economic growth—the relatively high accumulation of human capital during the first thirty years of the People’s Republic was a foundation and engine of China’s economic miracle after reform and opening up.26

4.6.3 The Dividends of Foreign Diplomacy In the thirty years prior to reform and opening up, China’s globe-spanning efforts in foreign diplomacy created a favorable international environment for reform and opening up, allowing China to avoid dependency on other countries and retain its independence when opening its doors to the world. By the early stages of reforms, 25

Wu Yiping, “Collectivism, Township-Village Enterprises and Village Industrialization” [in Chinese], Finance and Economics, no. 2 (2005): 168–175. 26 Li Ling and Li Mingqiang, “Human Capital, Economic Miracle and the Chinese Model” [in Chinese], Contemporary China History Studies, no. 1 (2010): 63–71, 127.

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China had eliminated all major security threats, whether to the south or the north, on land or at sea. In particular, the peace after reform and opening up was founded upon China’s efforts to safeguard itself against war and famine over the prior thirty years. This is a reflection of the dialectical mindset of deterring war through war and “throwing one punch to avoid a hundred punches.” Hence, the “revolution and war” zeitgeist prior to reform and opening up cannot be viewed diametrically with the post-reform zeitgeist of “peace and development.” It was because of the efforts of the first thirty years that Deng Xiaoping was able to declare in 1985 that there was no possibility of global war in the short run and that China can engage in peaceful construction.

4.6.4 The Social and Political Foundations for Marketization Prior to reform and opening up, China had consistently implemented a development strategy that prioritized social equity, with the goal of narrowing China’s “three major disparities.” An equitable society provided an equitable starting point and strong domestic demand for reforms. In the early 1980s, China’s Gini coefficient was merely 0.18,27 making its income gap one of the smallest in the world. A market economy with an equitable starting point is a comparatively ideal market economy, where workers, farmers and private business owners can benefit from market-oriented reforms. Social equity also benefits the expansion of domestic demand. Once China had ended its past “high savings, low consumption” model of distribution, its strong domestic demand emerged and began to drive the rapid expansion of consumer markets in the 1980s. Domestic demand became inadequate only in the late 1990s due to the near saturation of consumer spending, expansion in income gaps, and inadequacies in the social security system. China’s social security system lowered labor costs. Prior to reforms, China already had a low-cost universal social security and public services system. During the early stages of reform and opening up, urban labor security systems were still able to operate efficiently at low costs. Coverage extended to workers’ families as well, which allowed private enterprises to “free-ride” on the system and not have to foot labor security costs when employing workers. As public services had yet to be marketized, the costs of healthcare, education and housing remained relatively low, allowing enterprises to hire workers at low wages and giving China its so-called cheap-labor advantage. Rural collective ownership also supported rural development and urbanization. Rural collective land and housing land provided rural residents with basic economic security, becoming a reservoir and providing basic financial security for large-scale labor migration. Collective ownership of rural land greatly lowered the costs of urbanization, industrialization and transportation infrastructure development by providing a cheap supply of land. 27

Ding Bing, “What are the Major Causes of the Alarming Value of Gini Coefficient for Our Country” [in Chinese], Contemporary Economic Research, no. 12 (2007): 25–29, 73.

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Lastly, after thirty years of development, the CPC and the government had established high prestige. Even during the Cultural Revolution, China maintained stability and a certain level of development. The Party and the government had governance capabilities strong enough to handle the risks and challenges encountered during reforms. It was this prestige and the people’s strong trust in the Party that China was able to mobilize nationwide efforts to promote reforms. These were the political resources and social foundations for China’s reforms. Let us pose an interesting question to end this chapter—what did Mao Zedong himself think about the first twenty-odd years of the history of the People’s Republic? His assessment was not that optimistic. In August 1970, the 77-year-old Mao met his old friend, the American journalist Edgar Snow. When Snow asked Mao what he thought of China and the CPC at the time, he replied: “Not that great”; “I agree if you say that there has been some improvement. I don’t agree if you say China is doing great. There are two things that are engaged in a struggle: one is progressive and the other is backward.”28 Previously, Snow had also posed a question to Mao: you have fundamentally changed China, but what will future generations do? Mao replied: “The future will be decided by the people of the future. In the long run, younger generations will always be more knowledgeable than us.”29 Mao Zedong placed his hopes in youth and the future. The history of the People’s Republic is a process of constant progress towards truth amidst a struggle between right and wrong. After its founding generation, represented by Mao Zedong, departed the historical stage, the People’s Republic began a great new journey on the foundations that they laid.

28

Mao Zedong, “Huijian Sinuo de Tanhua Jiyao” [Summary of the meeting with Snow], in Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Mao Zedong Wengao [Manuscripts by Mao Zedong since the founding of the state], vol. 13 (Beijing: Zhongyang Wenxian Press, 1998), 176. 29 Chen Jin, narration from the documentary Mao Zedong—A Charismatic Leader. http://news. 21cn.com/luntan/liantang/2007/12/20/4058778.shtml.

Chapter 5

Dialectics of the Market Economy

5.1 Introduction China’s economic miracle since its reforms in 1978 is universally acknowledged. Still, controversies abound as to its reforms. Some feel that the reform and openingup policy was none other than “market-oriented reforms,” attributing its success to marketization, privatization and liberalization, as well as the withdrawal of the state and state-owned enterprises from the economic domain. Such views do not hold water. Most countries have market economies, but results have differed greatly. Some of these countries have prospered, while others have fallen into poverty and turmoil. China’s success lies in the prefix “socialist” before “market economy.” Titled “Dialectics of the market economy,” this chapter, through a survey of world and Chinese history, demonstrates that “expansion of market scope, intensification of market failures, correction of market failures” is a process that advances in a repetitive, spiral fashion. China’s market-oriented reforms since 1978 would not have been able to succeed without the foundations laid for the market economy beforehand. Neither would reforms have succeeded if China had not harnessed the strengths of its socialist system to constrain the market’s negative impacts and remedy market failures when introducing the market economy. Both aspects must be recognized before China’s reform and opening up experiences can be comprehensively summarized and the present challenges facing its economy be appropriately addressed. After the third plenary session of the Eleventh CPC Central Committee, Party leaders led by Deng Xiaoping summarized the positive and negative experiences since the founding of the People’s Republic, directed the focus of the CPC towards economic development, and launched China’s great journey towards economic reforms with liberalized mindset and truth-seeking spirit. In the forty years since, China’s accomplishments have caught the eye of the world as living standards skyrocketed and the country’s international stature increased significantly. Adherence to the reform and opening-up policy first requires a summary of successful experiences gained along the way. The key question was how to view the market economy as well as the relationship between government and the market. © CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_5

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Prior to reform and opening up, it was believed that market economies were taboo in socialist countries. After reform and opening up, China established a socialist market economy that promoted the development of production forces and the enhancement of economic efficiency. However, the extremist idea of “market omnipotence” also emerged during this process. This view originated from neoliberal economics, which argued that the “invisible hand” of the market would unceasingly create wealth and achieve the optimal allocation of resources once property rights are privatized, the role of the market is fully harnessed, and government intervention is minimized. According to this view, China’s reform and opening up succeeded because the role of government and public ownership receded while the role of the market and private capital expanded. Some foreign scholars have even attributed the success of China’s economic development to the adoption of the “capitalist path.” Some people have further argued that the next step of China’s reforms would be to continue expanding the scope of the market, narrow the functions of government, as well as abolish SOEs, collective land and social welfare based on post-reform experiences—in other words, “liberalization, privatization and small government.” Since the advent of the twenty-first century, another viewpoint has become ever more influential. In the late twentieth century, the unbridled spread of the Washington Consensus led to growing divides between poor nations and rich nations, poor people and wealthy people. Coupled with the outbreak of the 2008 financial crisis, the West has begun to rethink neoliberalism and its excessive faith in markets and capital. China’s contradictions in terms of the income gap, education, healthcare, social equity, and the ecological environment became increasingly prominent, leading to criticisms of the theory of market omnipotence and proposals that the government and society should be allowed to play a greater role in correcting market failures. However, there are some viewpoints that have gone to the extreme, disacknowledging all of China’s reform and opening up and market economy, and even purporting that there has been a “resurgence of capitalism” in China. Both the “market omnipotence theory” and “market evils theory” are overly extreme. From the perspective of historical materialism, the market economy is a historical process. Like all historical processes, it is neither an inherent part of human society, nor an “eternal order.” Like everything else, the market has both a positive and negative side. Only by recognizing its positive role as well as its inescapable shortcomings can we build on its strengths and avoid its weaknesses. Instead of “marketism”, the proper approach towards the market should be to keep its presence within appropriate boundaries. The strongest and most prosperous countries in today’s world adopt market economies, but so do many of those trapped in poverty, hunger and unrest. This shows that there are successful as well as failed market economies, high-level market economies as well as low-level market economies. Market economies can function only in a certain environment and under certain conditions. Neither China’s success nor its problems are simplistically attributed to it. Since the market is a product of the development of human society, it can be understood, controlled, used and transformed by humankind. For the market to serve the people, its benefits should be harnessed, and its flaws suppressed.

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Examining China’s reform and opening up through the lens of the past three centuries of world history reveals a clear pattern: since the Industrial Revolution, “expansion of market scope, intensification of market failures, correction of market failures” is a process that advances in a repetitive, spiral fashion. Even as they work their magic, markets also sow the seeds of market failures, thereby engendering social and political movements that seek to keep them in check. Markets will regain their vitality if market failures can be effectively remedied. This cycle should be continued until all the productive forces that can be accommodated by existing social institutions are unleashed. China’s modernization began in a capitalist world system. Beginning in 1840, when imperialism forced China into the global market, China became a victim of the global expansion of capitalism, bearing the costs of market failures on behalf of developed countries. This was the first stage of the market economy in China. During the first thirty years of the People’s Republic, China’s economy was predominantly planned by the state while the role of the market was limited. This, however, is an indispensable phase in the development of market economies in backward countries. After carrying out a social revolution, China established an economic system based on public ownership and launched an industrialization process that accumulated huge public wealth and achieved independent autonomy. These remedied and compensated for the consequences of past market failures as well as laid the foundations for the socialist market economy established after reform and opening up. It was this foundation laid during these thirty years that transformed the “bad market economy” in pre-1949 China into the “good market economy” after 1978. The initial period of reform and opening up was the third stage of the market economy in China. The established basic socialist system was integrated with the market economy, with market mechanisms primarily playing a role in ordinary competitive sectors. The forces of the market and capital had not yet seeped into every aspect of social life and market failures were not pronounced. This was a period when the relationships between fairness and efficiency, government and markets were relatively balanced. With the growing clout of the market, the inherent flaws of the market economy began to appear. China’s market economy entered the fourth phase. To remedy market failures through the strengths of the socialist system, China proposed that both the “hands” of the government and the market should be properly utilized. The market should be the decisive factor in resource allocation while also enhancing the government’s role (see Fig. 5.1). The development of the market economy in China is a spiral advance consistent with dialectics. Marketization cannot be simplistically characterized as good or bad. To identify the direction of China’s reforms today requires us to fully understand this process and not regard a short phase in the historical curve as a perpetual historical pattern.

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5 Dialectics of the Market Economy The first stage

The second stage

1949-1978 1840-1949 Forced to open, China became a victim of market failures

The Opium War

Establish the socialist system to correct the consequences of market failures

The founding of the People’s Republic of China

The third stage

The initial days of reform and opening up Expand the scope of the market and establish the market economy

Reform and opening up

The fourth stage

Deepen reform in an all-around way; both the “hands” of the government and the market should be properly utilized; give full play to the role of market and correct market failures

The new era of comprehensive deepening of reforms

Fig. 5.1 The four stages of the market economy in China

5.2 Thesis, Antithesis and Synthesis in the Market Economy The Tao Te Ching says that “the movement of the Tao [proceeds] by contraries,” meaning that all things have an inherent tendency to develop in the opposite direction—a naïve form of dialectism. In Hegelian dialectics, the development of all objects goes through three phases: thesis, antithesis and synthesis. The process from thesis to antithesis means that an object breeds factors that will drive it towards the

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opposite direction upon reaching a certain point. However, the antithesis does not seek to oppose or negate the object itself, but rather to correct its flaws and ultimately achieve a synthesis of thesis and antithesis. But neither is the synthesis a simple regression to the thesis. Rather, it is a unification of the positive factors of the stages of the thesis and antithesis on a higher foundation to realize the “negation of the negation.” On the surface it appears to be a regression to the thesis, but, in reality, it is a new object at a higher level. In everyday life, “unity–criticism–new unity” is an iconic example of “thesis-antithesis-synthesis.” Similarly, the market economy is also an unending process of “thesis-antithesissynthesis.” The market itself can promote the development of productive forces— this is the “thesis.” As the market operates, it will continually result in problems such as capital concentration, polarization, class conflicts, macroeconomic instability, ecological damage, moral crises and global economic imbalances. These will prevent the further functioning of market mechanisms—the antithesis. The societal damage wrought by the market will lead to government and social campaigns to remedy market failures. Correction of market failures does not equate to the abolishment of the market. On the contrary, it serves to remedy market defects and limit the negative impacts of the market economy. This then builds a new form of the market and creates the conditions for the development of the market economy to a higher level—the synthesis. As can be seen, the market economy is a process that spirals upwards amidst constant self-negation. Since the Industrial Revolution, the market economy has been through at least three typical “negation of the negation” cycles (see Fig. 5.2).

5.2.1 First Cycle: The Industrial Revolution (Eighteenth Century to Late Nineteenth Century) To trade is a human instinct. From primitive times to the late-modern era, however, trade was merely a secondary purpose of production. Autarkic natural economies were the norm in most of the world and markets had yet to assume a dominant role. “Production for exchange” had yet to become the primary purpose of production, while major factors of production such as land, labor and capital had yet to become commodities. Conversely, social safety nets based on spontaneous, non-economic relations such as families and religion were widespread. Britain had the English Poor Laws prior to the Industrial Revolution. Similarly, traditional Chinese society adopted various measures to restrict land circulation and guard against land engrossment. Autarkic product economies were preponderant in rural China. Production for the sake of trade was dominant only in capitalist societies. The capitalist classes used the power of state regimes to break the constraints of feudalistic forces on land and labor, thereby turning land and labor into production factors that could truly circulate freely. The capitalist class also repealed social aid legislation such as the English Poor Laws, forcing workers to sell their labor power, which then

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5 Dialectics of the Market Economy Enhanced role of government Capitalist globalization

Industrial Revolution of Europe

Neoliberal reform

Keynesian welfare state Subprime crisis The Great Depression and the

European economic crisis

two world wars

Enhanced role of market

1800

1850

1871

Year

1929

1973

2008

Fig. 5.2 Evolution of the government-market relationship in capitalist countries

provided huge amounts of cheap labor and land for the Industrial Revolution. This shows that the market economy was not a “spontaneous order” that had been around since time immemorial. Rather, it was achieved through blood and fire, blades and swords. The “free market” was in fact created by state violence. The establishment of the market economy was a huge step forward in history, leading to a rapid rise in productive forces. At the same time, like any historical category, the flaws of the market economy began to emerge from the very moment of its genesis. Unconstrainted free market mechanisms caused social polarization, increasing concentration of wealth, impoverishment of the proletariat, insufficient domestic demand and macroeconomic imbalances. In Hard Times, Charles Dickens depicted the intense antagonism between labor and capital in Coketown, condemning the physical and spiritual devastation wrought upon the working class by the bourgeoisie. Friedrich Engels’ The Condition of the Working Class in England brought to light the rapid increase in workers’ mortality rates in big cities, where increasing numbers of people were afflicted by fevers and tuberculosis, a growing share of who were female and child laborers. The revolt of the poor against the rich escalated.

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The emergence of the flaws of the market economy led to the rise of workers’ movements, which became a force against free market economies. Engels once predicted that increasing inequality in the distribution of wealth would inexorably lead to a revolution between the proletariat and the bourgeoisie. Driven by workers’ movements, from the 1850s onwards countries such as Britain allowed workers to form unions, enacted minimum wage laws, implemented social insurance systems, and outlawed the use of child labor. In 1883, Germany established the first social insurance programs in human history. These measures alleviated the socioeconomic crises of capitalism and created the conditions for the continued development of market economies.

5.2.2 Second Cycle: Globalization and the Great Depression (Late Nineteenth Century to the 1970s) History progresses in a spiral fashion. In the latter half of the nineteenth century, capitalism ushered in a new era of prosperity as capitalist modes of production spread throughout the world. By the early twentieth century, most countries had adopted laissez-faire economic policies that again resulted in the accumulation of tensions caused by market failures, greater wealth gaps, and the coexistence of excess supply and insufficient demand. Financial speculation became rife and eventually led to a global economic crisis that began in 1929 with the collapse of the financial markets. Both world wars were the result of the intensified international competition in response to such crises. The Great Depression made the capitalist world aware of the shortcomings of free markets. In response, capitalist countries strengthened government powers to correct market failures. The main initiatives in Roosevelt’s New Deal, introduced in the 1930s, included socialist-style measures such as public works projects, increased government spending, the introduction of unemployment insurance and pension programs, high progressive taxes, and establishment of the state-owned sector. In fact, the Tennessee Valley Authority, the largest American state-owned corporation, was born during this period. After the Second World War, the capitalist world made internal adjustments to strengthen government functions, curb the power of capital, and limit market failures. Capitalist countries universally imposed a certain degree of restrictions on capital as well as strict regulations on corporate investments and the use of important production factors such as land, thereby stripping capital and corporations of unbridled power. The channels by which capital intervened in politics became more clandestine. Capitalist countries adopted measures such as social security and minimum wage laws to protect workers and ensure the stability of their incomes. In addition, they implemented universal social welfare systems. For instance, under the pressures of women’s liberation movements, African-American movements and labor movements, the US established social security programs in the 1930s and launched the

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Great Society initiative in the 1960s. These included hundreds of policies relating to civil rights, taxation, education, healthcare, employment, retirement, and the elimination of racial discrimination. By 1969, US government spending on welfare had reached 14.1% of GDP. Many European countries have had a universal cradle-to-grave social welfare system since the 1950s. The UK was the first capitalist country to establish a universal free healthcare system, which has endured to the present day. After the implementation of these programs, market economies in Western capitalist countries became greatly different from “free markets” where governments were simply “night watchmen;” the functions of government became embedded in every aspect of social life. Their governments became “big governments” in the literal sense. Not only did their functions expand to an unprecedented degree; they were also far larger in scale than those of developing countries. There were a few reasons behind this round of restructuring in capitalist states. Internally, the Great Depression exposed the defects of the free market and made it easier to reach social consensus on strengthening government functions. The Second World War weakened the strength of monopoly capital and bolstered government powers, making it possible for governments pressured by public opinion to adopt certain societal improvement measures. Externally, socialist movements emerged victorious in countries like the Soviet Union and China as independent political forces. The rise of national liberation movements throughout colonies and Third World countries inspired working class resistance within Western countries. Stronger government powers in capitalist states turned the period between the 1950s and 1970s into a prime age for the economic growth of developed and developing countries, as characterized by rapid economic expansion, narrowing of domestic income gaps and milder social tensions. Many scholars have described this era as a “golden age” in the development of capitalism.

5.2.3 Third Cycle: From Neoliberalism to the Global Crisis (the 1980s Onwards) After more than thirty years of peaceful development, the flaws of market economies remanifested during the 1980s. There was once again a surplus of capital, leading to the stagflation crisis. During this period, monopolist capital in the West became more concentrated and powerful. Monopoly capital promoted neoliberalist reforms favorable to capital, the main trends of which were: deregulation of capital and encouragement of global capital mobility; financial deregulation that allowed greater capital speculation in the name of “financial innovation;” privatization of SOEs; privatization and commercialization of social security; and tax cuts. In essence, these lightened the burdens on the owners of capital and diluted government efforts to redistribute income. It is evident that these measures were essentially a regression of

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capitalism that had been restructured to include certain socialist elements towards a form of laissez-faire capitalism. Ronald Reagan, Margaret Thatcher and Mikhail Gorbachev were the faces of neoliberalist reforms. In the short run, these reforms reduced corporate burdens and gave capital the ability to generate greater profits. However, these quickly led to excessive market speculation, weaker social safety nets, wider income gaps and eventually the global financial crisis of 2008. Developing countries were the greater victims of neoliberalist reforms. Some countries and regions blindly believed in Western experiences and adopted their neoliberalist approaches even more thoroughly, which led to disastrous consequences. The most typical examples were Latin America, the USSR and Eastern Europe. A common feature of neoliberalism in these places was their reliance on the power of state regimes to pave the path forward. In the waning years of the Soviet Union, the West used economic aid and political support to bait Gorbachev, the Soviet leader, into implementing liberalist reforms—rapid privatization—which led to oligarchy, huge wealth gaps and erosion of national solidarity. Poland, typical among Eastern European countries, implemented neoliberalist reforms between 1989 and 1993, resulting in a 20% decline in GDP and a leap in unemployment numbers from near zero to 3 million, or 17% of the population. In Latin America, Argentina was a typical example. Western powers used the Argentinian debt crisis to force economic reforms—privatization and financial liberalization—upon the country. Large-scale privatization and inflows of foreign capital hollowed out Argentina’s industrial and labor policies, left the state devoid of regulatory capabilities and subsequently led to devastating consequences. Though one of the first developing states to become a “newly industrialized country,” Argentina saw its economy fall basically under the control of foreign capital. Not only were its competitive sectors—manufacturing, commerce, services—largely controlled by Western capital; foreign capital also had a huge influence on strategic industrial sectors such as finance, telecommunications, military industries, and energy. Meanwhile, its steel, automotive, aircraft manufacturing, military, and agricultural products processing industries, which had already reached a certain scale and level, gradually shrank. The number of Latin Americans living under the poverty line increased by 24 million in the 1990s, while severe economic and financial crises hit some countries in the continent one after another. These were accompanied by endless corruption scandals caused by privatization. There was a direct connection between the devastation wrought upon Latin American countries brought by neoliberalism and excessive American influence in the social sciences, particularly economics. For instance, beginning in the 1960s, with support from the US government and a number of foundations, many Chilean students studied at the University of Chicago, home to American liberalist economics. After Augusto Pinochet rose to power after a military coup, these “Chicago Boys” were appointed to high positions in the regime (e.g. Minister of Economy; Minister of Finance) overseeing economic policy. They advocated replacing the “visible hand” with the “invisible hand” through radical privatization and abolishment of protectionist policies that fenced off the domestic market. The Chicago Boys received

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strong support from international organizations and international capital, particularly of the US, had much to gain from these initiatives. Milton Friedman, Arnold Harberger and Friedrich Hayek had each visited Chile and delivered many speeches in support of their policies.1 Neoliberalism flew high, but finally reached a turning point with the outbreak of the global financial crisis in 2008. Since the Great Recession, neoliberalism has been the subject of systematic reflection by the Western world as well as most developing countries. First, a comprehensive “left turn” emerged in Latin America. Around the turn of the century, centrist and leftist political parties took power in over a dozen Latin American countries. Their domestic agenda centered upon social justice, whereas in foreign policy they prioritized national interests. Growth began to return to Latin American economies. Second, after becoming the Russian president in 2000, Vladimir Putin proposed a new “Russian Idea”, which included patriotism, a sense of national strength, concept of state, and social solidarity. These were a correction of the national nihilism, state nihilism, neoliberalism, and individualism that prevailed in Russia in the 1990s and reflected Putin’s explorations and summary of Russia’s development path and model.2 Lastly, in Europe, the UK’s Labour Party defeated the Conservative Party, which had been in power for eighteen years, in the 1997 elections. Labour then amended Conservative policies that favored the interests of wealthy capitalists, increased investment in social welfare programs such as healthcare, and restored state ownership of the privatized railroad system. After taking office in 2009, Obama, in response to public opinion, adopted a series of measures to restrict the privileges of capital and raise living standards. However, these measures had a lackluster effect due to the inherent conflicts in American politics, where vested interests held a great deal of sway. Healthcare reforms in particular, which Obama regarded as his administration’s top agenda, faced insurmountable obstacles due to strong opposition from vested commercial interests, chiefly pharmaceutical companies and commercial insurance providers. François Hollande, who was elected president of France in 2013, wrote in his autobiography that he was a leftist and socialist; he admonished the Sarkozy administration for widening the wealth gap in France, and advocated policies for “restoring growth through fairness.”3 Since 2016, general elections in many Western countries have seen the emergence of candidates who advocate social justice, criticize capitalism, or even directly advocate socialist approaches. Of course, given the prevailing political landscape and vested interests in Western countries, only time will tell if these ideas can become reality.

1

Zhu Andong, “‘Zhijiage Dizi’ yu Xinziyouzhuyi zai Lading Meizhou de Fanlan” [The “Chicago Boys” and the proliferation of neoliberalism in Latin America], China Economic and Trade Herald, no. 20 (2006): 47–50. 2 Mu Fei, “2000 Nian Shi jian Guoji Dashi” [Ten major international events in 2000], Contemporary International Relations, no. 1 (2001): 55–57. 3 [France] François Hollande, Changer de destin, trans. Liu Chengfu and Pang Mei (Beijing: Yilin Press, 2013), 6.

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5.2.4 Summary: Marketization Is a Process The above section brings us to four basic conclusions. First, market economies have not existed since time immemorial. Instead, they were created by the bourgeoisie through the power of state regimes. Hence, the market economy is not a “spontaneous, eternal order,” but rather the product of a particular historical era. Second, the establishment of a market economy requires certain political and societal foundations, which include a stable political order, equitable class foundations, a wide range of public goods, and safeguards against risks. The more stable these foundations, the easier it is for the market economy to play a positive role and promote economic growth. In a society with sharp wealth and class divides, market mechanisms will only be manipulated by powerful interest groups and become a tool for preying on the vulnerable. Only a fair society can achieve healthy competition. Effective demand can be expanded only through social equity, whereas spending power is often lacking in societies with large wealth gaps. A market economy also requires a certain level of social security to achieve mutual aid and reduce the harms caused by natural and market risks. In addition, things like infrastructure, national security, social stability and macropolicy stability have to be provided by the government. Third, even as it promotes economic growth, the market economy also continually erodes and damages the social foundations on which it relies to function. For instance, market mechanisms cannot spontaneously resolve problems of social equity; in contrast they continually expand social disparities. At a certain point, excess supply and insufficient demand will cause economic crises. Markets will not provide public goods on their own. Global market mechanisms lack systems for providing global public goods, causing ever growing divides between developing and developed countries. Excessive faith in the ability of financial markets to moderate the economy has led to excessive speculation and global economic crises. Market mechanisms turned all goods into commodities and all social relations into transactional relationships, damaging social structures such as communities and families. In short, sole reliance on market mechanisms would lead to imbalanced socioeconomic development, social stratification, inadequate public goods, eco-environmental damage and global economic imbalance, which then hinders the continued healthy development of the market economy itself. Fourth, when market failures emerge, government initiatives to remedy market failures—including government regulation, the establishment of state-owned companies, provision of public goods, income redistribution and macroeconomic policies—will alleviate the damage done to society by the market, curb interest groups and reduce polarization. These will restore a fairer starting point, stable societies and strong guarantees that lay a new foundation for the development of the market economy and a new round of prosperity. The market economy at this point will be one at a new stage. This process will also continue. In this sense, market economies progress in a “negation-of-the-negation” spiral. The positive role of the market economy can be better exercised only if its negative

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impacts are effectively suppressed. Historically, market efficiency is sometimes the primary aspect of its contradictions; at other times, market failures are the primary aspect. A broader historical perspective reveals that the market plays a bigger role in certain periods, while government plays a bigger role in others. These are all consistent with the inherent laws of market economies. We should not focus only on one aspect of the historical curve and (unilaterally) imagine a single section, fragment or segment to be an independent, exhaustive straight line. Missing the forest for the trees would only lead us into a quagmire. Temporary, localized trends should not be regarded as perpetual historical patterns.

5.3 The Market Economy in China Unlike Western countries, the market economy in China had its roots in an “antithesis.” China was forced into the global market. From the First Opium War to the founding of the People’s Republic, marketization and globalization brought about national suffering and failure rather than prosperity and development. This was because China was a semi-colonized country back then that lacked the preconditions for developing efficient markets, placing it on an unfair footing in the global market. During this stage, China did not benefit from the development of the market economy, instead becoming a target for Western countries to transfer their crises.

5.3.1 The First Stage—Old China: A Bad Market Economy Some views hold that the economy in pre-1949 China was a market economy. It was because the CPC insisted on abolishing markets and adopted socialist transformation that led to a detour that lasted decades. China only returned to the “right path” of developing a market economy after the reform and opening up of 1978. These views are not objective. The market economy in pre-1949 China was a low-tier, misshapen, failed market economy that, instead of generating prosperity and development, became a channel for the capitalist world to transfer its crises to China. China’s market economy was not a product of spontaneous, local evolution. Rather, China was forced into the global market system after the globalization of capitalism. In reality, it was a semi-colonial economy. The economic roots of the Opium War of 1840 lay in the UK’s need to transfer its crisis to developing countries to offset its industrial overcapacity and excess capital in the face of insufficient domestic demand. During their industrializations, major Western countries such as the UK, US, France and Germany carved out colonies, dumped industrial goods and developed the global slave trade in order to resolve their domestic shortages in natural resources, labor and markets. This mode of development supported the modernization of a few countries. However, it widened the north–south divide, leading to the

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plunder of many countries’ resources, the destruction of their economic foundations and social structures, and the resultant loss of their endogenous development capacity. From the very beginning, this “imported” market economy placed China and the Western powers on a highly unequal footing. To a greater extent, China bore the consequences of market failures and became a place for developed countries to shift their economic crises. Because China did not have full national sovereignty and was a dependent semicolonial economy, it did not have the opportunity to participate in international trade on equal terms. Its resources, tariffs, key industries and even political sovereignty were controlled by foreign powers, turning the country into a source of raw materials for developed countries and a dumping ground for their industrial goods. At the time, China’s international status, economic strength, and living standards were even lower than during the Kangxi and Qianlong eras, a period of great prosperity in traditional China, when the Chinese economy accounted for one-third of global GDP. China’s share of global GDP had declined to less than 5% by the time the People’s Republic was founded. As China lacked a fair social foundation, marketization exacerbated domestic class divides and caused intense social tensions that repeatedly interrupted the modernization process. After the prosperity in the early and middle parts of the Qing dynasty, the land engrossment and bloated bureaucracy, characteristic of the waning years of imperial Chinese dynasties, had become apparent. Introducing a market economy under such circumstances made it impossible for each social stratum to have a fair opportunity to participate. The commodity economy became a tool for the powerful to exploit the vulnerable. It was the bureaucrats and compradors who threw their lot in with foreign powers that benefited from the commoditization process. Meanwhile, hundreds of millions of farmers and small craftsmen were driven by the market into bankruptcy. As a result, the limited fruits of economic development were not only kept from the Chinese people; the shock to existing societal structures also created enormous social problems for the country. During this stage, China’s capitalist class was extremely weak as the country’s market economy was extraneous. This made the country unable to discard its traditional societal structure, not to mention establish a strong state that can represent the interests of its people. The Qing and Republican governments represented the interests of the landowners or the comprador and bureaucrat capitalists. Neither regime could possibly fulfill its duty to safeguard social justice and achieve long-term economic development. In short, from the Opium War of 1840 to the eve of the founding of the People’s Republic in 1949, China was forced into the global market system and its market economy developed to a certain degree. But on the whole, the market economy during this period was not a healthy one. It undermined China’s sovereignty, lowered the welfare of the Chinese people, expanded the gap between China and the West, and created domestic class divisions and antagonism. China became a quintessential “peripheral country” in the global landscape. The market economy during this period was a “bad market economy.”

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5.3.2 The Second Stage—The Mao Era: Remedying Market Failures After 1949, the People’s Republic carried out socialist reforms that established the systems of public ownership and the planned economy. These policies served the needs to ensure China’s national security, development and modernization, and were also consistent with the “thesis-antithesis-synthesis” pattern of the market economy. Since pre-1949 China had been plagued by market failures, it was only natural that the People’s Republic could not keep with its low-tier, dependent market economy. The first three decades of the People’s Republic were tantamount to a comprehensive rectification of the market failures of the past. These efforts aimed to remedy the negative consequences of past market failures. At the same time, they laid the groundwork for the comprehensive adoption of market mechanisms after reform and opening up. In these thirty years, China established an independent and complete industrial system and national economic system, freeing itself from a position of dependency in a globalized world. This made it possible for China to engage in economic and technological collaboration with developed countries on relatively (not yet fully) equal footing instead of being stuck in the lower end of the industrial chain as an exporter of labor and raw materials. The foundational, strategic and public sectors prioritized for development during these thirty years laid extensive foundations for the energy resources, infrastructure, transportation and technological sectors. The accumulation of these vast public goods made it possible for China to fully utilize their spillover effects to achieve rapid growth after reform and opening up. These thirty years saw profound social changes and development that altered a societal structure of yawning wealth gaps and class divides, allowing China to build a healthy market economy founded upon equality that would benefit every social group. China’s Gini coefficient was merely 0.18 in 1978,4 making it the most equitable country in the world. After the implementation of the household responsibility system, rural residents entered the market and profited from the market returns from agricultural products. This period saw the fastest growth in farmers’ incomes as well as a narrowing of urban–rural divides. SOEs carried out decentralization-andrelinquishment (fangquan rangli) reforms, relaxing the previous practices of “high savings, low consumption” and “production first, life later,” and raising workers’ salaries. The private economy began to gain room for growth, while intellectuals, Party and government officials, as well as ordinary consumers also benefited from higher levels of income and consumption. Thus, reforms during this period were inclusive reforms. It was because the People’s Republic had established a more equitable society in its first thirty years that there was space for these inclusive reforms. 4

Ding Bing, “What are the Major Causes of the Alarming Value of Gini Coefficient for Our Country” [in Chinese], Contemporary Economic Research, no. 12 (2007): 25–29, 73.

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Universal social security and public services systems were established over those thirty years. Health and education levels improved greatly, providing the “world’s factory” with a large industrial workforce. These factors also supported the massive expansion of low- and mid-tier labor-intensive industries as well as lowered the costs of economic development. During the early years of market-oriented reforms, social security programs from the planned economy era that relied on SOEs and people’s communes remained relatively intact even as market mechanisms were introduced. Basic education and basic healthcare systems continued to operate for the public benefit and had yet to be marketized and commercialized. Hence, the costs of social security and human resources remained relatively low during this stage. These were the prerequisites for the smooth roll-out of market economy reforms. The accumulation by the rural collective economy over those thirty years supported rural development and urbanization. The commune and brigade enterprises that were established through collective organizations in the 1970s were the forerunners of the TVEs. Agricultural water conservancy facilities built during the collective economy era continued to operate after reform and opening up. Coupled with the household responsibility system, these factors led to the rapid development of agriculture and TVEs in the 1980s. The equitable distribution of farmland and housing land also provided social security for rural residents, allowing them to “leave the land” to work in the commercial, industrial and services sectors with peace of mind. This was a precondition for the healthy development of the market economy. Collective land also provided cheap sources of land for urbanization and the construction of transportation infrastructure. Those thirty years saw the establishment of a new, strong government administration that maintained close ties with the people, which not only safeguarded national security and social equity, but also provided public services such as infrastructure. Internationally, China advocated moral responsibility, becoming an important force for narrowing the North–South divide and allowing China to begin to free itself from its weak position in the international system, giving it the means to participate in the global economy on more equal terms. Independence and security of national sovereignty; social equity, stability and security; a strong government; these are preconditions and foundations for the healthy development of a market economy. The remediation of market failures during the first thirty years of the People’s Republic had created a fundamentally different environment and landscape for the market economy by the time it was reintroduced during reforms in the early 1980s. This new market economy became a healthy market economy. Hence, the view that the first thirty years of the People’s Republic had delayed the development of the market economy is wrong. Without those thirty years, there would not have been a healthy foundation for the development of the market economy. It is also wrong to argue that the reforms were “an overnight return to pre-liberation” because the post-reform-and-opening-up market economy was fundamentally different in nature from the market economy before the People’s Republic was founded. The post-reform market economy was built on a new foundation.

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5.3.3 The Third Stage—Market Expansion During Early Reforms Many people remember the initial period of reform and opening up as a time of rapid economic growth, social vitality and smooth advancement of reform initiatives that benefited every sector of society. This was due to two reasons. On the one hand, China progressively introduced market mechanisms, implemented an open-door policy, and enhanced the micro efficiency of resource allocation. On the other hand, China had laid relatively firm foundations in basic industries, social equity and social security prior to reforms, giving the government strong regulatory capabilities. The role of the market was limited to ordinary competitive sectors, with prominent market failures yet to emerge. These were the dividends left over from the first three decades. Hence, market mechanisms played a positive role during this period, achieving a relatively perfect integration between “thesis” and “antithesis.” This is what is special about China’s market economy. Unlike Western countries, which first adopted a market economy before addressing market failures, the People’s Republic adopted a market economy only after establishing socialism as its fundamental political system and “inoculating” itself against market failures. Hence, unlike Western countries, where the emergence of market economies led to economic and livelihood crises, China’s socioeconomic development was able to achieve a greater balance between equity and efficiency during the early years of market-oriented reforms. This stage was a period of stable economic development, social harmony and stability in China. Specifically, there were at least four factors that powered China’s rapid growth during the early period of its reforms, two of which were supply-side factors, while the other two are demand-side factors. The first factor was the entry into the market of physical assets accumulated prior to reforms, which rapidly created supply capacity. Prior to reform and opening up, China had already accumulated large amounts of infrastructure, industrial assets, rural collective assets and human capital, equivalent to primitive accumulation for the development of the market economy. In the planned economy era, these assets had not fully entered the market. By contrast, during the early stages of reform and opening up, China implemented the household responsibility system in the countryside, decentralized authority over state-owned and collective enterprises in the cities and distributed their profits, as well as allowed the development of private businesses. These initiatives allowed assets accumulated in the past to enter market circulation, rapidly generating supply capacity. The second factor was the adjustment to the development strategy of prioritizing heavy industry, allowing resources to be allocated to sectors with greater micro efficiency. From the founding of the People’s Republic to the building of the Third Front in the 1970s, heavy industry and military industries had always been priority for development. In reality, these policies provided the “dividends” of peace for future generations at the expense of sacrificing the consumption of the present generation. By the early years of reform and opening up, China already had a peaceful environment and a nascent heavy industry base, making it more reasonable to adjust its

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former strategy of prioritizing the development of heavy industry. In urban areas, China prioritized the development of downstream and consumer industries such as the processing and light industries. In rural areas, China had the means to develop multiple forms of commercial operations and raise rural incomes as basic subsistence was no longer a problem. Light industries and agriculture are primarily ordinary competitive sectors where the market can play a more effective role. The third factor was to expand China’s open-door policy through the opportunities provided by stagflation in the West. When China widened its doors to the outside world in the early 1980s, it encountered unique opportunities. At the time, after decades of peaceful development after the Second World War, the West had again run into a capitalist economic crisis. Their physical economies were afflicted by overcapacity and insufficient domestic demand, while rising labor costs required them to transfer investment and low- and mid-tier industries to developing countries to bring down the prices of consumer products. At the same time, the West generally instituted accommodative monetary and credit policies in response to economic crises. These policies generated huge purchasing power by creating more money and encouraging deficit spending. The combination of that demand and China’s huge production capacity promoted the offshoring of Western industries to China as well as the rapid growth in Chinese exports of low-end products. The fourth factor was the rapid growth in Chinese incomes and an equitable societal structure that together generated strong domestic demand. In the early years of the People’s Republic, the state instituted a “high savings, low consumption” distribution model to concentrate resources for the development of foundational industries. In the late 1970s, with the initial completion of heavy industry accumulation, it became possible as well as necessary for China to appropriately raise urban and rural incomes. The specific routes included: raising procurement prices for agricultural products, reducing procurement quantities and liberalizing rural markets; raising the wage standards of enterprises and allowing the development of private firms and individually owned businesses. Agricultural procurement prices increased by 25.7% in 1979, and 38.5% from 1979 to 1981. During this period, the state spent over 140 billion yuan on raising procurement prices for primary and secondary agricultural products, raising workers’ wages, and arranging for urban employment and housing, which together accounted for more than 40% of fiscal revenue.5 During the initial period of reform and opening up, China maintained a relatively fair income distribution; its Gini coefficient was merely around 0.3. All of these enabled rapid growth in consumption, which increased from 63.5% of national income in 1978 to 70% in 1981. In the 1980s, annual growth in consumption averaged 15.3%, keeping pace with GDP growth and sustaining strong domestic demand. In sum, there was strong momentum in supply and demand during the early stages of reform and opening up. It was possible for reforms to be swiftly launched as well as satisfy every sector of society because the market economy then was built upon the sound socioeconomic foundations laid prior to reforms while at the same time 5 Calculated based on Table 1-15 in China Compendium of Statistics 1949–2008 compiled by the National Bureau of Statistics.

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seizing the opportunities presented by the expansion in global demand. This reflects the continuity and consistency between the periods before and after China’s marketoriented reforms. Reforms during this stage indeed transformed China into a vast land filled with hope and boundless energy. As Deng Xiaoping said in 1989, “this time there are all kinds of slogans but none voicing opposition to reform,”6 showing that reforms at the time were indeed universally supported. However, the foundations dating from the planned economy era will not last forever. Once their benefits are exhausted, the drawbacks of market mechanisms will materialize, leading to various social problems as well as inhibiting the healthy development of the market economy.

5.3.4 The Fourth Stage: Cooperation Between “Both Hands” The negative impacts of the market will begin to appear when the market develops to a certain point. Since the 1990s, in spite of the persisting extensive influence of the “market omnipotence” theory, China had already begun to harness the strengths of its socialist system to remedy market failures. On the one hand, China allowed the market to play its fundamental role in resource allocation; on the other, the government strengthened its roles in macroeconomic regulation, supporting SOE development, and provision of public goods. Because the government had a strong role in regulating the economy before 1978, the thrust of China’s reforms can be characterized as “liberalization” during its early stages. The role of government became more muted. However, by the early 1990s, social tensions emerged after the introduction of market mechanisms, resulting in greater public controversies regarding the market economy. In setting forth the “socialist market economy” as the goal of its reforms, China also made good use of the “hands” of both government and the market. In June 1992, Chinese leader Jiang Zemin said: More and more people in socialist countries are coming to recognize the positive role that markets play in economic development. We are in the process of discarding our former bias against markets. Of course, in stressing that we should fully acknowledge the strengths of markets, we are not saying that markets are perfect and can do everything. Markets have their own obvious shortcomings and limitations. For example, they cannot automatically keep the macroeconomic aggregate stable and in equilibrium; it is difficult for them to regulate a considerable portion of public facilities and consumption; regulation by market forces cannot achieve desired social goals in circumstances where social interests outweigh economic benefits; and it cannot achieve ideal results in monopolistic industries or industries operating on a particularly large scale. Therefore, this requires us to make use of the strengths of regulation by planning to remedy and restrain these insufficiencies and negative effects of regulation by market forces, keep the macroeconomy in equilibrium and ensure that the whole economy develops comprehensively. In areas where regulation by market forces is ineffective, we must use planning measures to allocate resources. At the same time, we must

6

Deng Xiaoping, Collected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 297.

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use planning measures to strengthen social security and adjust the redistribution of income in order to forestall polarization.7

China’s adoption of the market economy is never an abandonment of socialism. When setting the “socialist market economy” as its goal in 1992, China maintained its use of “both hands”, allowing the market to play its due role while using the strengths of its socialist institutions to remedy market failures. Although the relative strength of each “hand” may have varied in different periods and sectors, the overall role of the market has continually expanded since reforms, as has the role of government. Provision of infrastructure. This is one of the primary functions of government. After the reduction in infrastructure spending in the 1980s, China began to implement proactive fiscal policy under market economy conditions to boost infrastructure development after the Asian Financial Crisis of 1997. From 1998 to 2002, investment in water conservancy was equivalent to the total spent between 1949 to 1997; investment in public roads was 1.7 times the sum total between 1949 to 1997; China’s public road mileage skyrocketed from the 39th in the world to the second; and the number of telecom users increased by 500%, placing China at the top of global rankings.8 Since 2003, government-supported infrastructure development has also become the main factor driving economic growth. Development of state-owned enterprises. The SOE reforms of the 1990s retained many large SOEs while restructuring the small and medium-sized ones. The reforms concentrated SOEs in foundation industries and strategic sectors as well as increased spending on the technological transformation of SOEs. Supporting the development of rural regions. After the benefits of the household responsibility system had been largely exhausted by 1986, government spending on agriculture was gradually reduced. It became noticeable that farmers were at a disadvantage in the market and rural development ran into new obstacles. The eighth plenary session of the Thirteenth CPC Central Committee in 1991 declared that China must continue to prioritize agriculture and not neglect or weaken its fundamental status once the situation in agriculture improved. The Central Committee also stressed again that China should “on the foundation of stabilizing the household responsibility system, gradually enrich the content of collective unified management” and “gradually strengthen the collective economy.”9 Grain output and rural incomes increased considerably thereafter. But burdens on rural residents had not been reduced even by the late 1990s as they still had to bear the costs of public services and public management in the countryside. In the early 2000s, the central 7

Jiang Zemin, Selected Works of Jiang Zemin, vol. 1 (Beijing: People’s Publishing House, 2006), 200–201. 8 Zhu Rongji, “Report on the Work of the Government” [in Chinese], March 20, 2003. http://news. sohu.com/38/81/news207298138.shtml. 9 “Zhonggong Zhongyang Guanyu Jinyibu Jiaqiang Nongye he Nongcun Gongzuo de Jueding” [Decision of the CPC Central Committee on further strengthening work on agriculture and rural areas], passed by the eighth plenary session of the Thirteenth CPC Central Committee on November 29, 1991. People’s Daily, December 26, 1991.

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government formally proposed a policy of “giving more, taking less and deregulating” (duoyu, shaoqu, fanghuo) with regards to agriculture and rural areas. These entailed rural tax reforms and general reforms. The government increased spending on the countryside and improved rural public services and social security programs, which led to renewed growth in grain output and rural incomes. The rural income per capita increased by an annual average of 9.1% from 2004 through 2013, which played a significant role in maintaining macrostability. Redistribution and greater equality. A market economy cannot automatically lead to fairness. The central government took active measures to address the urban-rural and inter-regional divides that had been widening since the initiation of marketoriented reforms. To narrow regional gaps, the central government increased fiscal transfers to the provinces, particularly the economically underdeveloped ones in central and western China, reversing the increasing gap between China’s eastern and western regions since the 1980s caused by the “eating in separate kitchens” (fenzao chifan) fiscal policy. At the same time, the central government implemented policies with uniquely Chinese characteristics such as the “Great Western Development” (xibu da kaifa) strategy and paired-up assistance (duikou zhiyuan) programs. To reduce urban-rural divides, the central government carried out rural tax reforms, streamlined town(ship) institutions and reduced rural residents’ burdens in response to the problems of high rural taxes at the time. Rebuilding public services and social security systems. Although SOE reforms and rural reforms had energized businesses and the countryside, these came at the expense of disintegrating the social security programs of the planned economy era and made life more difficult for the general public. Beginning in the 1990s, the government established social security programs that covered healthcare, retirement, subsistence allowances (dibao) and social aid. These were first targeted at enterprise workers and then rural and urban residents. In the early 2000s, Chinese society began to rethink the marketization of healthcare and commercialization of education, criticize blind faith in economic growth and free markets, and correct the failure of governments to assume their duties in public services sectors by requiring them to play their due role in education spending and ensuring that the healthcare sector serves the public interest. These reforms are still ongoing. Since the economic reforms of 1978, there has been a “two-way movement” (shuangxiang yundong) in China. On the one hand, the scope of the market has continued to expand, liberalizing and developing productive forces. On the other, the government took measures to correct market failures and continue to provide a fair social foundation for the market economy. This process of “thesis–antithesis– synthesis” is the dialectics of the market economy, which are reflected in every aspect of China’s reform and opening-up initiative. The following sections will discuss the three most typical aspects: rural reforms, SOE reforms, and public sector reforms.

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5.4 The Countryside: Dialectics of Centralization and Decentralization Xiaogang Village in Fengyang County, Anhui Province, is known in China for being the birthplace of agricultural de-collectivization after 1978. While acknowledging its positive impact, the experiences of Xiaogang should not be absolutized or “extremized.” Neither should its success be regarded as the justification for replacing collective rural land ownership with privatization. In 2009, Shen Hao, the first Party secretary dispatched to Xiaogang Village by the Anhui Provincial Department of Finance, passed away in the line of duty. During the publicization of his progressive initiatives, people saw a Xiaogang Village that was quite unlike its image as the “first village of reforms.” Despite being the first village to implement the household responsibility system, Xiaogang Village was still mired in poverty and regularly relied on aid from higher levels. The locals were disunited: “basic subsistence was achieved overnight, but wealth remains elusive after twenty years;” “Xiaogang Village was for a time an ache in the hearts of the people of Anhui.” Before assuming his appointment at the village, Shen Hao had heard that: “Forget development. It would be a huge accomplishment if you could get these few hundred villagers to think the same way.” After arriving at the village, he found that “Xiaogang Village is nothing like what we imagined; even calling a meeting is impossible. The place looks dirty, chaotic and terrible.” Despite his efforts to organize the villagers to carry out road-building programs, repair housing, attract investment and develop the collective economy, these initiatives were plagued by obstacles due to their lack of cooperation.10 The example of Xiaogang Village reveals the dialectics of “centralization” and “decentralization” in the agricultural sector. As all land had been divided up when the household responsibility system was implemented, disagreements over land acquisition made it impossible to build mushroom greenhouses or new residential complexes. Poverty-stricken households known as wubaohu11 and the elderly with no surviving family were left to their own devices even during medical emergencies. The villagers remained mired in the “smallholder mentality”—easily content with minuscule wealth and lacking any motivation to work together. At a fundamental level, the emergence of these problems was related to the weakening of the functions of rural collective economic organizations. On the surface, the structure of the agricultural industry is the closest to a perfectly competitive market. In reality, however, individual farmers are disadvantaged in the market due to decentralized production, long production cycles and poor risk tolerance. Globally, few successful agricultural models are smallholder economies entirely exposed to the free market. Instead, they rely on government subsidies, industry protectionism and cooperatives to protect agriculture and enhance its competitiveness. The Americas have an abundance of land per capita, which makes 10

See Xiaogangcun Jiyi [Memories of Xiaogang Village], aired by China Central Television on News Probe on September 1, 2010. 11 See note in Chapter Four—Trans.

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family farms viable. Each farm is large enough to bear market risks. But in Asia and Europe, where land is scarce in per capita terms, it is common to adopt cooperative systems, where government support is received through cooperatives and integrated farmers’ associations, to avoid unfair competition between the urban and countryside and develop various forms of commercial farming. Farmers not only share in the proceeds from animal husbandry and farming, but can also receive support in several aspects, including financing, processing, circulation, supply of production materials, agricultural product supermarkets, and conversion of land zoning (from agricultural to non-agricultural purposes). The household responsibility system was the symbolic starting point of China’s economic reforms. This significance cannot be denied. However, there have persistently been views that regard the experiences of the household responsibility system as absolute dogma, arguing that since basic subsistence was achieved once land was divided to individual households, privatization would have the same miraculous effect in other areas of reform. In practice, the household responsibility system may have solved the problem of rural subsistence, but it failed to address issues such as improving agricultural incomes, rural prosperity, and sustainable rural development. In the face of new problems that emerged in the countryside after the household responsibility system, the central government began to explore new solutions to rural problems in the early 1990s. The core issue was how to handle the relationship between “centralization” and “decentralization.”

5.4.1 Reforms Cannot Stop at De-collectivization The first few years of the household responsibility system (de-collectivization) were a “golden age” for the countryside. Between 1979 and 1986, growth in per capita net rural incomes (calculated based on comparable prices) consistently exceeded urban incomes, nearing 20% at one point. But the benefits of the household responsibility system had been largely exhausted sometime around 1985 and new problems emerged in the countryside. Between 1985 and 1988, grain output stagnated for four consecutive years (see Fig. 5.3), with growth in per capita net rural incomes remaining below 5% (see Fig. 5.4). Over the period of the Sixth Five-Year Plan (1981–1985), total agricultural output grew by an average of 8.1% per year, but only by 4.6% over the period of the Seventh Five-Year Plan (1986–1990),12 demonstrating that solely depending on the household responsibility system was not an ultimate key to sustainable rural development and rural prosperity. The state reduced its spending on agriculture. Prior to reform and opening up, spending on agricultural infrastructure had never exceeded 20% of total infrastructure investment; in most years, it was around 10%. The third plenary session of the Eleventh CPC Central Committee called for agricultural investment to gradually 12

Liu Guoguang et al., Zhongguo Shige Wunian Jihua Yanjiu Baogao [Research report on China’s Tenth Five-Year Plans] (Beijing: People’s Publishing House, 2006), 540.

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(10000 Tons)

Year Growth in grain output

Grain output

Fig. 5.3 Grain output and growth rates from 1978 to 2008. Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010

Year Growth in urban per capita income

Growth in rural per capita income

Fig. 5.4 Growth in urban and rural per capita incomes from 1978 to 2008. Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010

increase to 18% of total infrastructure investment.13 In reality, however, agricultural investment was merely 8.7% during the period of the Sixth Five-Year Plan (1981– 1985), declining to 5% during the period of the Seventh Five-Year Plan (1986–1990), 13

Lu Xueyi, “Nongye Mianlin Bijiao Yanjun de Xingshi” [Agriculture faces relatively severe circumstances], China Rural Survey, no. 5 (1986): 5–12.

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with infrastructure investment slipping to 1.5%. In particular, investment in water conservancy projects—regarded as the lifeline of agriculture—constituted merely 1.6% of infrastructure investment during the Seventh Five-Year Plan, 5% lower than the average during the twenty-eight years prior to the 1980s. It is fair to say that water conservancy infrastructure was “resting on its laurels” during this period. This problem was temporarily obscured by the fair growth in agricultural output, but became pronounced after a few years.14 As for the countryside, after the implementation of the household responsibility system, the functions of rural collective organizations were weakened in aspects including the construction of agricultural water conservancy projects, financing, dissemination of technologies, and public services, all of which were once provided by the collective. A survey by a Chinese Academy of Social Sciences scholar in 1986 showed that around 50% of China’s water conservancy projects were not functioning properly, 70% of its reservoirs were operational but defective, while the irrigated area had declined by an average of 7 million mu per year since 1980. There had been significant declines in the actual inventory and usage levels of agricultural machinery nationwide. Many farming machines needed to be overhauled, but farmers neglected to repair the machines they used while the state no longer provided subsidies. In the early 1980s, Zhang Jinfu, the Party Secretary of Anhui Province, found during an inspection that the area irrigated by wells in the Huaibei region had fallen from 306,000 to 78,000 ha, a decline of 74.5%. The agricultural supply and marketing cooperative (gongxiaoshe) in Hefei procured 6475 pieces of cowhide between January and November 1980, a year-on-year increase of 70%, the reason being that cattle were previously taken care of by individual households and fed on state-allocated grain; after the implementation household responsibility system, some plowing cattle died of unnatural causes as they had no dedicated keepers.15 In some places, new collaborations between farmers became more difficult: “In a large expanse of land, a certain plot may be a dry field while others are irrigated; if a water canal passes through a dry field where it isn’t needed and the other party doesn’t allow it, your plot won’t get to be irrigated.”16 Endeavors that could have been mutually beneficial were impossible because transaction costs had increased after property rights became overly defined. The organization also became more difficult in areas that required collaboration, such as mechanized farming, irrigation, harvesting and processing, storage and transportation, and sales. The decline in rural organizational capacity placed farmers at a disadvantage in the markets: “In the face of rapidly changing information on commodities, it became difficult to sell hogs, rabbits, eggs, tea, cotton and grain! Most Chinese farmers have little farming capital.

14

Dong Zhikai, “Woguo Nongcun Jichusheshi Touzi de Bianqian (1950–2006 Nian)” [Changes in China’s rural infrastructure investment (1950–2006)], Researches in Chinese Economic History, no. 3 (2008): 29–37. 15 Zhang Jingfu, Yingming·Yousheng (Beijing: China Financial & Economic Publishing House, 2004), 138. 16 See footnote 13.

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One difficulty in selling their produce may leave them destitute and bereft of the ability to expand re-production.”17 In terms of agricultural technologies, the agricultural technology services system that used to rely on the communes was also weakened. Many agricultural technology service stations were restructured into commercial institutions responsible for their own profits or losses. Agricultural technology which used to be freely distributed were paid by farmers, whereas profit-making rather than the dissemination of public knowledge became the primary function of these stations, which affected technology diffusion in rural areas. Farmers also encountered difficulties in obtaining loans. During the people’s commune period, rural credit cooperatives were the primary channel for providing farmers with the financing they needed. The weakening of rural grassroots organizations also impacted the functioning of rural credit cooperatives. After solving the problem of basic subsistence, agricultural development entered a capital-intensive phase. The inadequate supply of financial services became a constraint on the technological upgrading of agriculture. Most of the TVEs that had a huge impact in the 1980s and 1990s were privatized. That considerably altered the distribution structure in the countryside and reduced farmers’ opportunities to share the profit of the collective economy. With the weakening in the capacity of rural areas to accommodate surplus labor, it became more unrealistic for farmers to “leave the land but not the village” and the urban migration of the rural workforce gradually became the main pattern since China’s reform and opening up. Between 100 to 200 million farmers sought work in cities during this period. From the perspective of cities and businesses, this did provide a source of cheap labor. But from the perspective of rural economies as well as political and social development, this labor migration hollowed out villages, disintegrated rural family structures and weakened rural governance. The weakening of social governance and public services in the countryside was another problem that emerged after the implementation of the household responsibility system. The communes were low-cost public governance and public service organizations that provided public services such as healthcare, education and aid. After the dissolution of the communes, the public services that used to rely on allocations from the collective lost their sources of funding. Public services were transformed from public goods to personal consumer goods. As a result, slogans like “people’s education by the people” (renmin jiaoyu renmin ban) and “people’s healthcare by the people” (renmin weisheng renmin ban) were proposed to enjoin rural residents to pool funds for public services. Education became a primary burden of rural residents in the 1990s as problems in fiscal spending on compulsory education in the countryside had yet to be resolved. Healthcare-wise, the coverage of rural cooperative healthcare declined from 90% in 1976 to less than 20% in 1985. Apart from a minority of relatively affluent villages, most rural residents had to fully foot their medical bills. In the cultural sphere, practices of traditional superstition were revived in many localities due to the lack of public cultural activities. 17

See footnote 13.

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After rural reforms, there was a lack of consensus on how to establish a new set of organizations and institutions. At the same time, there was a lack of good solutions to issues such as satisfying rural demand for public goods and protecting the dispersed smallholder farmers who had become vulnerable in the vast expanse of the market economy. In this sense, management and compensation for market failures through the forces of government, society and rural organizations remained the biggest post-reform problem in the countryside. The people’s communes may have played an immensely positive role prior to reforms, but they also had undeniable historical limitations. The communes were a form of organization that served the development of heavy industry. Their advantages had yet to be fully experienced by rural residents, many of whom were still influenced by the “small producer mindset” and were not highly inclined or able to work together. As experienced by those at the time: “Objectively, farmers need to cooperate and unite; subjectively, however, they fear a return to the centralized daguofan era. Farmers say they fear nothing except the second round of cooperativization. Such objective difficulties and ambivalence… still have several problems unresolved in theory and in practice.”18 The rural reforms that began in the 1990s were attempts to address these issues.

5.4.2 Comprehensive Rural Reforms The problems mentioned above began to emerge in the later half of the 1980s. In the early 1990s, the CPC Central Committee and the State Council reversed their previous inattention to agriculture and made the “three rural problems” (sannong wenti)19 a greater priority. The main measures included more spending on rural areas, “protective prices” (baohu jia)20 for grain procurement, regularization of rural taxation, and reducing the burdens on rural residents. The trend of decline in the proportion of investment in rural infrastructure began to reverse in the 1990s. During the Ninth Five-Year Plan period (1996–2000), investment in agricultural infrastructure skyrocketed to 115.1 billion yuan from 25.8 billion yuan during the Eighth Five-Year Plan. Pilot rural tax reforms also began during this period. These primarily included the abolishment of administrative levies and governmental funds and fundraising targeted exclusively at rural residents, such as township comprehensive fees (xiang tongchou fei) and rural education fundpooling (nongcun jiaoyu jizi); abolishment of the slaughter tax (tuzai shui); progressive elimination of universally mandated requirements on “accumulation labor” (jilei

18

See footnote 13. Referring to nongmin (farmers, or more broadly, rural residents), nongcun (villages, or more broadly, rural society), and nongye (agriculture). –Trans. 20 Essentially mandatory price floors for grain—Trans. 19

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gong) and “obligatory labor” (yiwu gong)21 ; adjustments to agricultural tax and “special agricultural products tax” (nongye techan shui)22 policies; and reforms to the collection and use of “village retention fees” (tiliu fei). On December 29, 2005, the Nineteenth Meeting of the Standing Committee of the Tenth National People’s Congress decided that the Agricultural Tax Regulations (Nongye Shui Tiaoli) would be abolished from January 1, 2006, which marked an end to China’s 2,600-year-long history of agricultural taxes. Tax reforms lessened farmers’ burdens, but had yet to fundamentally solve problems in the supply of rural public goods. Conversely, some localities ceased providing public services after the abolishment of agricultural taxes. For instance, a county in Anhui Province that had piloted reforms on taxes and fees saw its county-, townshipand village-level revenues decline by 50.36 million yuan—40% of its fiscal revenue— after tax reforms. These left the county with 11.67 million yuan in usable funds, while payrolls for officials and primary and secondary schoolteachers alone required 150 million yuan. Schools found themselves in the red, with some primary schools even having to hold classes outdoors due to a lack of funds to renovate dangerously dilapidated buildings. Rural town(ship) health centers (weisheng yuan) found themselves in a similar plight during this period, with only one-third able to operate normally, while another third found themselves barely able to sustain their operations. At least one-third of the administrative villages in the county were unable to function.23 In order to address these issues, the central government allocated more funding to the countryside. The central government increased fiscal subsidies such as direct grain subsidies (liangshi zhibu), comprehensive (aggregated) agricultural input subsidies (nongzi zonghe butie), quality seed subsidies (liangzhong butie) and agricultural machinery purchase subsidies (nongjiju gouzhi butie). It also established budgetary mechanisms to ensure adequate funds for universal compulsory education in rural areas and new rural cooperative healthcare systems. These measures considerably alleviated the abovementioned problems.

5.4.3 Rebuilding Rural Collective Organizations Since the 1990s, the central government primarily addressed the “three rural problems” by increasing spending on agriculture and strengthening the support provided by cities to rural areas while keeping the form of rural grassroots organizations unchanged. This was undoubtedly vital during this historical stage. 21

Yiwu gong refers to the requirement that able-bodied laborers contribute five to ten days of work each year on local flood prevention, afforestation, roads, and school construction; jilei gong refers to ten to twenty days of work per year on state water conservation projects and afforestation—Trans. 22 Generally referring to taxes levied on non-grain cash crops—Trans. 23 He Kaiyin, “Zaikan Nongcun Shuifei Gaige” [Revisiting reforms of rural taxes and levies], Anhui Juece Zixun, no. 5 (2002): 11–14.

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However, we must also realize that the “three rural problems” cannot be fundamentally resolved solely through external financing. Although those who worked on rural issues had already raised the question of “what kind of new organizational system should be established in rural areas” in the 1980s, the problem has yet to be fully resolved even today. It draws even greater attention today given the change in the stage of agricultural development and the new contradictions faced by the countryside. An answer to the question of what form of organization should be established in the countryside first requires a correct understanding of the experiences and lessons of China’s agricultural and rural development before and after reform and opening up, in other words a comprehensive understanding of the dialectics of “centralization” and “decentralization.” There is a common thread of experience in rural development before and after China’s reform and opening up, which is to adhere to collective ownership of rural land and to organize rural residents, as well as to establish internal operating mechanisms founded upon the collective economy that provide incentives for dynamism. Both “centralization” and “decentralization” are indispensable. Prior to reform and opening up, China had established a system of collective rural land ownership that overcame the limitations of a smallholder economy on modernization. This led to great improvements in rural public facilities, production conditions, public services, and social and cultural progress. The flaw was that China did not establish stable, institutionalized internal incentive mechanisms due to limited administrative capabilities and the constraints of domestic and international environments. These were also why some rural residents had a poor impression of communes and were reluctant to continue working together. After reform and opening up, villages strengthened incentives for individual farmers through the household responsibility system. Rural economies made great strides, but the level of collective collaboration declined, which was one source of the many problems at the time. The key to the next step in addressing rural issues lies in how to reorganize rural residents based on collective rural ownership. A solution to this problem has become even more urgent at present due to several reasons. First, this is required by the greatest basic national condition, i.e. China’s large population and scarcity of farmland. Even if the urbanization rate reaches 70% in 2030 as per current plans, there would still be over 400 million people living in the countryside, with merely over 4 mu of arable land for each rural resident. Under such circumstances, land would not only be a factor of production, but more importantly a means to ensure rural stability and farmers’ livelihoods. Given the imperfections of current laws and grassroots governance systems, powerful capital or even some local governments would seize farmers’ land if unrestricted land circulation policies were adopted. Farmers would lose their means of production and livelihood without receiving reasonable compensation. Land engrossment by large capital would undoubtedly result in the adoption of land- and capital-intensive technologies for the sake of economic benefits rather than technologies that can accommodate a large workforce. At that point, farmers would become merely employed laborers rather than rural landowners, accompanied by a massive loss of jobs for the agricultural population. Unrestrained land circulation and the weakening or abolishment of

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collective land ownership may enable a short-term boost in economic efficiency. But in the long run, it would shake the foundations of the countryside. Second, this is what is required by the progress in agricultural development. The upgrading of rural industries can be broadly divided into the following phases. The first phase took place in the people’s commune period and the early years of the household responsibility system, when the primary objective was to ensure basic subsistence through increased grain output. During this phase, the main measures were to improve rural infrastructure and encourage greater labor input. Smallholder family operations were well-suited to the needs of this phase and the problem of basic subsistence had been preliminarily solved sometime around 1985. The second phase was the pursuit of price efficiency and greater rural incomes. This phase required capital-intensive technologies and organized smallholder production and operations as the primary measure. The third phase was to pursue market efficiency and international influence like developed countries, with the objectives being to achieve stable long-term benefits through the marketization and internationalization of agricultural products. This phase requires a high degree of organization and industrialization to produce made-to-order branded, green and healthy agricultural products. As can be seen, progress in agricultural development is accompanied by a higher level of organization and public participation in agriculture. Given the constraints of a high population density, China’s rural organization can become more developed only by remaining committed to the collective economy. Finally, this is also required by the need to address practical issues in rural governance. Villages are not only agricultural production sites, but also farmers’ homes, ecological barriers, vessels of culture, and where hometown nostalgia is situated. Hence, villages cannot be merely regarded as sites for food production when rural policies are formulated. Although state and urban support for rural areas continue to grow each year, such support cannot be fully translated into a force for rural development given the weakening of rural grassroots organizations and low governance capacity. For instance, a bottleneck that currently limits the upgrading of rural industries— financing problems—has yet to be resolved. From international experience, cooperative finance is the main channel for supplying rural financing because of the relatively long cycles, small scale and high risks of agricultural production loans. Rural societies also lack formal credit systems, making it difficult to identify risk levels. To banks, rural financing is risky, generates low profits, and involves cumbersome procedures. As a result, regular banks generally do not regard rural areas as a primary market, which causes a chronic shortage in rural financing. Conversely, cooperatives have their roots in the villages and are managed collectively by rural residents, making them able to effectively use the traits of an “acquaintance society” (shuren shehui) in peer-to-peer risk screening and control, as well as establish financial organizations distinct from urban financial systems. Presently, the 1000-odd rural town and village banks are still commercial institutions due to the weakening of rural collective organizations. Few are truly rooted in towns and villages. Moreover, they are far from able to meet rural financing needs as they have strict collateral requirements to avoid risks, as well as long cycles and complicated paperwork. Under such circumstances,

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private lending is popular in the countryside, especially in rural areas below the town level, where high-interest private loans are often the main sources of financing for farmers. Weak rural governance capabilities also limit the “last-mile” implementation of state policies to support agriculture in village communities. For instance, the practice of disbursing rural subsistence allowances based on personal connections or personal relationships (guanxi bao, renqing bao) is prevalent in many localities because of inadequacies in grassroots governance. These problems show that we have reached a point where we must take Deng Xiaoping’s vision on the “two leaps” seriously. During a meeting with other members of the central leadership in 1990, Deng Xiaoping said: “From a long-term point of view, the reform and development of agriculture in socialist China will proceed in two leaps. The first leap was to abolish the people’s communes and institute the responsibility system, the main form of which is the household contract that links remuneration to output. This system marks a great step forward and should remain unchanged for a long time to come. The second leap will be to introduce large-scale operations and to expand the collective economy, so as to facilitate scientific farming and socialized production.”24 When Xi Jinping was the Party secretary in Ningde, an underdeveloped area in Fujian Province, in the 1990s, he pointed out that the key to alleviating rural poverty lay in the development of the collective economy: Some people say that, as long as farmers are able to be lifted out of poverty, it doesn’t matter if the collectives become poorer. But we say that is not right! In fact, it matters a great deal… Increasing collective economic strength follows the socialist path and is an important guarantee for achieving common prosperity… Strengthening the collective economy is the only way to revitalize agriculture in poor areas…. [as well as] a driving force for promoting the rural commodity economy.25

More people have begun to think seriously about how to rebuild rural collective organizations under China’s new circumstances. In 2018, the Guizhou Provincial CPC Committee proposed eight factors for the development of rural industries during a push to revolutionize rural industries: industry selection, training of farmers, technical services, financing, organization, production and marketing, linkage of interests, and grassroots Party building. None of these eight factors can be achieved through the efforts of individual rural households or residents; rather, progress in these aspects will require Party leadership and the role of rural collective organizations. This is a typical example of promoting rural development in the new era through expansion and strengthening of rural collective economies. The collective nature of land ownership in rural China mandates that rural cooperativization in the country can only take the socialist path rather than the approach taken in some capitalist countries, where land privatization leads to the engrossment 24

Deng Xiaoping, Collected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 355. Xi Jinping, “Building Collective Economic Strength in Townships and Villages to Alleviate Poverty,” in Up and Out of Poverty (Fuzhou: Fujian People’s Publishing House, 2014), 141–148.

25

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of land in the hands of a minority. Otherwise, the resultant ballooning of the rural wealth gap would not only undermine the bright prospects of common prosperity in the countryside, but also lead to social turmoil. Achievement of this new form of cooperativized production requires drawing upon the lessons of China’s own collectivization process in the 1950s as well as its existing state-operated farms and the various forms of cooperative practices in other countries.

5.5 SOEs and the Market SOE reform is the most influential, most difficult, and perhaps one of the most controversial reforms since China adopted reform and opening up in 1978. To date, whether to expand and strengthen SOEs remains a controversial issue. One view holds that the success of reforms was due to the “retreat of the state and the advance of the private sector” (guotui minjin), while the problems plaguing China’s economy now are resulted from the fact that with their “corruption, inefficiencies and monopolies,” SOEs have become the biggest institutional problem, a further development of which would be a rollback. How exactly should we regard these views?

5.5.1 SOEs Were a Key Force in Launching China’s Modernization After its founding, the People’s Republic established an economic system dominated by “ownership by the whole people” (quanmin suoyouzhi) and collective ownership. Some views hold that this signified a worship of public ownership and a leftist tendency in terms of ideology. These views are inconsistent with objective reality. China’s development of SOEs was a rational, objective need as private businesses could not take on the tasks of modernization. China’s modernization was a bid to build an independent and autonomous industrial system in a vast agricultural country deficient in capital, technology and talent by “breaking through” the monopolies of large countries in the face of an established global capitalist system. Although national capitalism (minzu zibenzhuyi) had sprouted in China after the First Opium War, China failed to industrialize and modernize. From an external perspective, China hoped to achieve industrialization through reliance on foreign investment, technologies and talent. The result was overreliance on foreign countries in key economic sectors such as resources, transportation and military industries, causing its economy to be unviable, which in turn jeopardized national independence and security. From an internal perspective, the industrial sector drew significant resources from rural areas, leading to rural land engrossment and bankruptcy, as well as the premature abortion of its industrialization process.

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China’s native industries went through turbulent times in the global system, a fate that befell all underdeveloped countries after the formation of the capitalist world system. Under the dual oppression of traditional institutions and international monopoly capital, China’s native industries could only be vassals and compradors at the mercy of others’ good graces. Many people had realized at the time that China’s poverty and weakness were ultimately due to its lack of a strong, independent industrial system. Many patriots also proposed the idea of establishing a state-owned sector to concentrate efforts on industrialization. For instance, Sun Yat-sen proposed in Fundamentals of National Reconstruction the approach of developing state-owned capital and a planned economy. This was also why patriotic capitalists such as Rong Yiren who had lived through previous regimes also sincerely embraced the CPC. The start of China’s great industrial age began with the establishment of a stateowned economic system in the 1950s. Between 1952 and 1978, China relied on its state-owned economy to concentrate resources to build industrial sectors such as machinery, metallurgy, non-ferrous metals, petroleum, electric power, transportation, chemicals and aerospace. The industrial assets accumulated each year after the founding of the People’s Republic were greater than the total amassed over the previous century, turning China into the world’s only developing country with a comprehensive range of industrial sectors. This is solid proof that SOEs were the central force in China’s economic development. Through large-scale collective collaboration by SOEs, resources were concentrated on weak links in industrial chains, achieving breakthroughs in key technological fields and rapid technology diffusion and universal availability. As “all-rounded corporations,” China’s SOEs run contrary to maintain economic doctrine. However, it was a more cost-efficient and manageable option to have stateowned corporations (or other entities) provide public services and social programs during the early stages of industrialization, when China lacked the means to provide professionalized, widely available public services. The public services provided by SOEs not only served their own employees, but also extended to their families and neighboring residents. This allowed China to meet the basic needs of workers’ families (including education, healthcare, housing) even at a very low level of economic development and made it possible to focus resources on industrial development. SOEs and collective enterprises also ensured full employment for the populace during the early years of China’s industrialization, avoiding the problems of unemployment that arose in other developing countries during their industrialization process and improving the quality of its entire workforce. These reflect the institutional strengths of SOEs. The role of China’s SOEs cannot be measured or denied based on Western theories. These facts show that the establishment and development of the state-owned sector by the People’s Republic was required by its nature as a socialist state, as well as the historical conditions and tasks of China’s development. It was the right choice made after reviewing the experiences over the 100-odd years since the beginning of China’s modern history. Since reform and opening up, SOEs have been the pioneers of China’s world-leading industries, including manned spaceflight, lunar exploration,

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deep-sea diving, high-speed railways, UHV power transmission and mobile telecommunications. SOEs are also superior to companies with other forms of ownership in areas such as production safety, employee welfare and corporate social responsibility. Practice has shown that SOEs are the vital force in the launch of China’s modernization as well as efforts to remedy market failures and achieve independent development.

5.5.2 The 1990s: SOE Losses Were not Entirely an “Institutional Problem” Many SOEs incurred losses in the 1990s, leading some to believe that they were inconsistent with the development patterns of the market economy. These views are inaccurate. From the perspective of Chinese history, China’s SOEs did not perform poorly, whether compared to private businesses or foreign companies. China’s SOEs have also achieved things that would have been impossible for private businesses. The difficulties that they encountered in the 1990s cannot be entirely attributed to “institutional problems” (tizhi wenti). Rather, they were caused by multiple factors, including changes in development strategies, macroeconomic business cycles, and population aging. In reality, SOE efficiency had been consistently high in the first decade after reform and opening up. SOE profit margins exceeded 20% in the 1980s; until 1988, less than 5% of SOEs incurred losses (see Table 5.1). Between 1978 and 1998, state-owned and state-controlled enterprises saw their industrial output grow by an annual average of 8.7%, total assets by 16.8%, and taxes paid by 1.23%. These growth rates were fairly high, whether in comparison with other countries or other periods in Chinese history. Of course, some may say that these were because of government subsidies and soft budget constraints. This view is incorrect. At the time, SOEs constituted the overwhelming majority of all Chinese businesses. Government subsidies also came from the taxes that businesses paid on their profits. It is impossible that all businesses relied on subsidies to survive. If SOEs relied on government subsidies or debt to sustain their operations, where did the financial resources for subsidies come from? In 1993, SOE losses began to escalate: an overall net loss was recorded for the first time in 1996. In 1998, two out of three of China’s SOEs were still making losses; total SOE profits were merely 21.37 billion yuan that year. According to mainstream economic theories, SOE losses are the result of defects in the public ownership system. This explanation is overly simplistic and arbitrary—a typical example of dogmatism. If SOE losses were caused by the “system” (tizhi), their sound performance in the 1980s would be unexplainable, as would be the sound performance of many SOEs (including those in competitive industries) since the 2000s. SOE losses in the 1990s were in part, but not primarily, due to problems with their institutional structure. The fundamental factors underlying SOE losses were

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Table 5.1 SOE finances during the early stages of reform and opening up Year

Profits and taxes (RMB million)

Total losses (RMB million)

Losses as a percentage of profit (%)

1978

63,400

4210

5.3

1980

86,440

3430

3.7

1985

115,280

3240

2.4

1988

151,410

8190

4.6

Source Liu Guoguang, Gongtong Lixiang de Jishi: Guoyou qiye ruogan zhongda wenti pinglun. Beijing: Economic Science Press, 2012: 93

the emergence of overcapacity and insufficient demand at the macroeconomic level, structural transitions, adjustments to the strategy of prioritizing the development of heavy industry, and the expansion of their corporate social responsibilities. Excess production capacity caused by the business cycle is the primary reason for SOE losses. After the decentralization-and-relinquishment reforms in the 1980s, SOEs gradually became more competitive. Under the new decentralized fiscal system, coupled with local governments’ encouragement of greater business investment, there was massive redundant construction among SOEs driven by the race to maximize profits. SOE investment in the 1990s was considerably higher than in the 1980s. Businesses became even more eager to invest after 1992, leading to peaks in investment levels in 1993 and 1994 that directly resulted in massive overcapacity. At the same time, spending power declined as a consequence of widening income gaps and the disintegration of social security programs. This is a typical case of insufficient demand and overcapacity caused by the market economy. Clearly, SOE losses at the time were not a result of public ownership. The emergence of large-scale overcapacity during economic downturns is a manifestation of the hysteresis and disorderliness inherent in market economy regulation. Extensive losses are inevitable for all businesses, SOE or otherwise. People mistakenly believe that soft budget constraints and compulsive investments are problems specific to SOEs only because most Chinese companies at the time were state-owned. After the global financial crisis of 2008, people found that soft budget constraints and overcapacity were problems that affected large private American companies as well as competitive Chinese industries, such as steel and electrolytic aluminum where private corporations had a market share close to or larger than SOEs. Were these also “institutional problems” caused by public ownership? This shows that compulsive investments were not a problem unique to SOEs and cannot be resolved by privatization. Conversely, it requires SOEs to make greater efforts to address problems caused by market failures. Changes in development strategy were another reason for SOE losses, which were also a reflection of the assumption of social responsibilities by SOEs. During the planned economy era, China concentrated SOE capital in heavy industries to swiftly build an industrial base and safeguard national security. This led to a lack of diversity in SOE products and SOEs’ insensitivity in responding to downstream consumer

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markets. Heavy industries involve large initial investments, high sunk costs and poor short-term profitability. There were also many SOEs located in regions with poor natural conditions and transportation networks for the sake of social equity and the construction of the Third Front. These SOEs had high operating costs as their accounts often included costs borne for downstream industries and other regions, and later even costs borne in advance for the development of private enterprises. After the 1980s, the heavy-industry-first policy was gradually retired, weakening the competitiveness of heavy industry-based enterprises, old industrial bases, resource-based enterprises, and enterprises in central and western regions which lack geographical advantages. This is akin to the eldest son who sacrifices his health during his youth working to support the family without building a nest egg for himself. It is only right that the other children shoulder some of his burdens in reciprocation of his past sacrifices after they reach adulthood. In addition, SOEs shoulder more social responsibilities than other companies. These social responsibilities have only increased since the 1980s, placing SOEs at a disadvantage compared to newly developed enterprises with other ownership structures. This includes the following aspects. First, SOEs bear responsibility for employment and social security. In China, SOEs have consistently employed as many as 70% of urban workers. Between 1978 and 2003, the wages of SOE workers grew by an average of 13.2% each year, compared to an average of 5% for private sector workers since the 1990s. SOE workers’ incomes grew at a far higher pace than private sector workers. SOEs have also consistently borne the burden of paying the salaries of retired personnel. The older the corporation, the more retired staff it would have, and the heavier its burdens would be. Healthcare costs also increased rapidly as the population aged. In 1993, SOE spending on medical bills constituted 10.8% of their payrolls, a hefty burden on their finances.26 Second, SOEs shouldered responsibilities such as aiding rural areas. In order to mitigate rural economic difficulties during the 1990s, procurement prices for primary and secondary agricultural products were raised by 87.7% from 1990 to 1995. SOEs paid 135% more for raw materials, but ex-factory prices of industrial products only increased by 1%.27 In particular, energy and resource-based enterprises were subject to price controls by the state, equivalent to bearing part of the costs of business for other companies. Government-imposed quality, safety and environmental requirements are also more stringent for SOEs. Finally, in order to support private and foreign companies, SOEs were also subject to higher taxes than other companies for a substantial period. Taxes on private companies were substantially lowered to support the development of the private economy. 26

Cao Chun, “Shehui Baozhang Chouzi Jizhi Gaige Yanjiu” [Research on the reform of mechanisms for funding social security], Ph.D. diss., (Research Institute for Fiscal Science, Ministry of Finance, 2012). 27 Liu Guoguang, Gongtong Lixiang de Jishi: Guoyou qiye ruogan zhongda wenti pinglun [The cornerstone of common ideals: Review of some major issues of state-owned enterprises] (Beijing: Economic Science Press, 2012), 97.

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Table 5.2 Taxes paid by each type of business from 1985 to 2000 Year

SOEs (%)

Collective enterprises (%)

Individually owned businesses/shareholding companies (%)

Others (%)

1985

21.3

12.8

41.7

15.6

1990

16.8

6.4

17.9

15.3

1995

14.2

3.2

3.2

2.3

1996

11.5

4.4

5.6

3.8

3.1

2000

10.6

5.1

6.9

4.0

3.3

Foreign companies (%)

Source Liu Guoguang, Gongtong Lixiang de Jishi: Guoyou qiye ruogan zhongda wenti pinglun. Beijing: Economic Science Press, 2012: 97

After 1990, SOE tax rates were significantly higher than collective enterprises, individually owned businesses and shareholding companies. According to estimates by Xu Zerong, for every 100 yuan in output during the 1990s, SOEs paid 13.28 yuan in taxes, TVEs paid 4.88 yuan, Chinese-foreign joint venture companies paid 5.06 yuan, while foreign companies paid 2.41 yuan (see Table 5.2).28 The growth of private enterprises cannot be decoupled from the contributions of SOEs. The first pot of gold for many private enterprises came from the restructuring of SOEs, with their assets, personnel and technologies acquired at relatively low prices or even at no cost from SOEs. To support the development of private enterprises, many localities sold these off at prices far below market value during SOE restructuring. Many local regions supported the development of private businesses through the conveyance of land and mineral resources at low prices. This also caused unfair competition between SOEs and private enterprises, one of the reasons for the difficulties faced by SOEs. It can be said that China’s private sector would have lost its foundation for profitability and growth without support from the public sector. There is also another reason for SOE losses that cannot be ignored. Over a period of time, SOEs changed the Party-committee-led system and the “two participations, one reform, triple combinations” (liang can, yi gai, san jiehe) administration system. It put less emphasis on Party leadership and the workers’ rights to run their own affairs, abandoning the political advantages of socialist democratic management within corporations. Reforms to the management structure of SOEs may have helped to boost the initiative of SOE managers, but might also lead to looser oversight over them. While the old oversight structures were weakened and new ones not fully established, some SOE managers engaged in opportunistic behavior or even gross corruption, examples being “tunneling” by intentionally bankrupting SOEs to create conditions for privatization or using SOE resources to run “factories within factories” (changzhongchang). SOE losses arising from such factors were unrelated to their public ownership structure. On the contrary, they were caused by abandoning the institutional advantages of public ownership. 28

Xu Zerong, “Guoyou Qiye dingneng Chongzhen Xiongfeng” [State-owned enterprises will definitely be able to revive their strength], China SOE, no. 11 (2011): 106–107.

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It can be seen that the difficulties encountered by SOEs were not due to the “institutional problems” of SOEs, unlike what believers of “mainstream economics” claim. They were due to overcapacity and changes in national development strategies. In reality, SOEs were revitalized in the twenty-first century after a series of reforms were adopted in the late 1990s, demonstrating that it is entirely possible to run SOEs well.

5.5.3 The Three-Year Campaign to Reform SOEs In 1997, the CPC Central Committee and the State Council set the goal of restructuring loss-making SOEs within three years, known as the “relieving difficulties in three years” (sannian tuokun) policy. The fourth plenary session of the Fifteenth CPC Central Committee in 1999 passed the “Decision of the CPC Central Committee on Major Issues Concerning the Reform and Development of State-Owned Enterprises” and formulated a basket of measures aimed towards alleviating the difficulties accumulated by SOEs and establishing a new system for managing state-owned assets. To address short-term challenges, China primarily adopted three “silver bullets”: debtfor-equity swaps; interest subsidies for technical innovation loans (jigai tiexi); and policy-based closure and bankruptcy (zhengcexing guanbi pochan). This three-year campaign laid a sound foundation for SOE reforms, with most loss-making large and medium-sized SOEs restored to health by 2000. The long-term measures adopted by the government for SOE reform and development were mainly reflected in the following three aspects. First, maintaining the dominance of public ownership. During the transition to a market economy, the central government stood firm against calls to fully privatize SOEs, stating that “proper running of large and medium-sized SOEs is not only an important economic issue, but also an important political issue.” Although various reasons led to the loss of some state-owned assets and damage to employees’ interests during this period, causing a sharp decline in the number of SOE employees from 110 million to 42.88 million, China remained committed to maintaining the dominant position of public ownership. Second, China made strategic adjustments to the layout of SOEs through a policy known as “keeping the large and letting go of the small” (zhuada fangxiao). The vast majority of small and medium-sized SOEs managed by prefectural- and county-level governments were restructured under a policy known as the “three consolidations” (sange jizhong), where state-owned assets were consolidated in three areas: (1) important industries and key sectors concerning national security and the lifeline of the national economy; (2) industries and sectors that may become leading industries in the future; (3) superior enterprises (youshi qiye) and industry pacesetters (hangye paitoubing). This reduced the number of central SOEs from 196 in 2003 to 125 in 2010. Third, China instituted a new system for managing state-owned assets, marked by the establishment of the State-owned Assets Supervision and Administration

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Commission (SASAC). This new system can be summed up as “three separations, triple unification, triple integration” (san fenkai, san tongyi, san jiehe). The “three separations” referred to: (1) separation of government functions and corporate industry (zhengqi fenkai), where the government authorized state-owned assets supervision and administration bodies to assume the responsibilities of financiers over state-owned corporate assets instead of managing SOEs directly; (2) separation of government functions and financial capital providers (zhengzi fenkai), where state-owned assets supervision and administration bodies do not perform government public administrative functions while other government institutions and departments do not exercise the responsibilities of financiers over state-owned corporate assets; (3) separation of ownership rights and operation rights, where state-owned assets supervision and administration bodies were prohibited from direct intervention in corporate business activities, thereby allowing SOEs to become genuine market entities and profits to become the main goal of their operations. The “triple unification” referred to the unification of rights, obligations and responsibilities. The “triple integration” referred to the integration of management over assets, personnel and corporate matters. The new system for managing state-owned assets greatly boosted SOE vitality and progress in their reform and development.

5.5.4 The Achievements of SOE Reforms There was once a period when SOEs had been “presumed guilty” in China and abroad, as though they implied monopoly, inefficiency and corruption by default. This is not so much a fact as a biased ideology. In reality, after more than a decade of development since SOE reforms, China’s SOEs (as represented by central SOEs) have become the heart of the Chinese economy and the primary engine driving China’s national development strategies. SOEs have consistently been dominant in strategic industrial frontiers such as the aerospace, high-speed rail, large aircraft, military industry and telecommunications sectors, as well as vital fields concerning national security and basic livelihoods such as petroleum, petrochemicals, electricity, transportation, and the development of mineral resources. SOEs have become more competitive in strategic sectors and occupied the strategic high ground in their industries. Their independent innovations in sectors such as the aerospace and high-speed railway industries have placed them at the global frontier. China’s smart grids have attained world-leading standards, allowing China to consistently maintain safe and stable operations even as the West repeatedly experiences widespread power outages. In particular, central SOEs, as the heart of the state-owned economy, have led the development of industrial clusters. With the accelerated international expansion of China’s central SOEs after the global financial crisis in 2008, the rise of China’s first generation of global companies has begun to take shape. The Fortune Global 500 rankings in 2016 included 110 Chinese corporations, over 90 of which were owned or controlled by the state. This will enable

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China to become a world leader in a new generation of economic and financial globalization, something as significant as the overseas expansion of British MNCs in the nineteenth century and American MNCs in the middle and late twentieth century. As a bulwark against global market risks, SOEs safeguard national economic security. Globalization will have an ever-greater impact on China as its economy develops. Developed countries manipulate raw materials, energy resources and financial markets at will through MNCs and large financial institutions. If developing countries do not have companies of adequate scale, their economic lifelines would inevitably be controlled by others. China’s SOEs act as an anchor in this area. When international crude oil prices rose in 2008, Sinopec and PetroChina subsidized domestic market prices by over 100 billion yuan. When the world was swept by an international food crisis between 2006 and 2008, social unrest erupted in some countries due to food problems, whereas China’s central food companies resolutely followed government-set minimum procurement prices, sale by auctions, and interprovincial inventory transfers to maintain the stability of food markets. Companies such as China Minmetals Corporation and China Nonferrous Metal Mining Group, the “pacesetters” of the overseas expansion of China’s non-ferrous metal industry, have set up operations in Australia, South America and Africa. At the same time, they have integrated into local communities and fulfilled their social responsibilities. Regarded by host countries as “all-weather friends,” they have become messengers spreading the vision of peaceful diplomacy and contributed to the protection of national interests and the advancement of common development. SOEs head technological progress. To date, central SOEs have over 70,000 valid patents, with many of their technologies at the global forefront. China State Construction Engineering Corporation has undertaken many highly challenging building projects internationally, whereas China Communications Construction has designed and built ten of the twenty-six bridges in the world with a main span greater than 1000 m. Shenhua Group is the world’s largest producer and seller of coal and has a fatality rate per million tons of coal lower than developed countries such as the US. Independently developed novel aluminum electrolysis technology by corporations like the Aluminum Corporation of China has reached world-leading standards and been exported as full technological packages. The global financial crisis spawned a new technological revolution. SOEs should establish strong confidence in innovation, remain committed to self-reliance and independent innovation, and dare to take uncharted paths. Notably, the high-speed railways and large aircraft that have become iconic symbols of China are exemplars of the accomplishments of SOEs from importing, digesting and absorbing new technologies to reinvention and independent innovation. From 2011 to 2014, SOEs led or participated in four of the five projects that won a special prize in the State Scientific and Technological Progress Awards; of the forty-nine projects that won first prize, central or local SOEs led or participated in twenty-five, or over half.29

29

“Guoqi Nangkuo Yiban Guojia Keji Jinbujiang” [SOEs bag half of national technology progress awards], November 1, 2015, http://www.stutimes.com/toutiao/a3809160673/.

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5.5.5 Strengthening Institutional Confidence in SOEs For a substantial period of time, there has been a multitude of views on whether China should establish SOEs and help them grow bigger and stronger—diffident and nihilistic views that blindly emulate Western textbook doctrine. The development of the state-owned sector is a comprehensive toolbox for remedying market failures; SOEs play a role in managing macroeconomic imbalances, providing public goods, eliminating externalities and regulating income disparities. Whether from the perspective of history or present realities, whether before or after reform and opening up, SOEs have been and are the primary force driving China’s modernization and protecting the fundamental interests of its people. This is an inevitability of history, reality and future progress. SOEs are the key force in the development of the national economy. Further SOE reforms must heed China’s national conditions, the laws of the market economy, as well as avoid the haphazardness of the market. Proper SOE reforms require an accurate assessment of China’s SOEs. First, SOEs are corporations and must therefore obey the universal laws of business development. These include becoming true market entities that abide by the rules of the market, the establishment of robust corporate governance structures, the establishment of operating mechanisms with incentives and constraints, and transparency in information disclosure. After many years of reform, these institutional mechanisms are being continually improved. There is little controversy in this area. Second, as China is a major country that is still developing, its SOEs shoulder the mission of participation in international competition. After developed countries relied on their gunboats to achieve primitive capital accumulation and established a global order for the division of labor, developing countries lost the opportunity to fairly participate in market competition, as they generally had little capital and could only rely on state capabilities to consolidate resources in order to participate in the global discourse on equal terms. Therefore, many developing countries, as well as many newly independent states set up SOEs after World War II. Mainstream economists have argued in recent years that these practices had failed, an argument that is inconsistent with the facts. The gap between developed and developing countries narrowed between the 1950s and the 1970s, a phenomenon that cannot be untied from the development of their state-owned sectors and the attainment and safeguarding of their economic sovereignty. Today, the breadth and depth of China’s participation in international competition have reached an unprecedented scale. China’s SOEs possess advantages in scale, financial resources, technology, management and human talent that were formed over the course of history. As such, they should rightfully be the primary leaders as Chinese enterprises make effort to compete globally and vie for influence in global affairs. China should not have blind faith in free trade and the dogma that “smaller is better” and abandon its institutional advantages.

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Third, SOEs are enterprises of a socialist nature and exercise the functions of remedying market failures and curbing the privileges of capital, preventing the haphazardness of the market. Developed capitalist countries have also been exploring ways to limit market failures and capital privileges since the late nineteenth century, the establishment of SOEs being one of the primary means. The US’s Tennessee Valley Authority remains to date a well-run SOE, while Germany once had as many as 1100 wholly state-owned corporations. In France, more than half of railways, postal and telecommunications services, airlines and ports are operated by SOEs. As a socialist country, China has even greater means to use SOEs to regulate labor relations, maintain ecological balance and safeguard national security. Amidst the many economic and financial crises in recent years, China may well have been devastated by transnational capital if not for a contingent of battle-ready SOEs that acted as an anchor. Reflections on SOE reforms must respect rather than be severed from history. In the thirty years prior to reform and opening up, the state and the people established a political contract where the people were willing to work at SOEs for low wages and benefits with the expectation that the fruits of their development would be shared with the population once the public sector grew stronger. Without public ownership and expectations that the fruits of their labor would be universally shared, China would not have been able to achieve industrialization from such a low starting point. Comparisons with other countries further reveal the significance of reforming and developing China’s SOEs. After wholesale privatization, Russia lost an industrial system that could compete with Western transnational capital and was reduced to an exporter of resources and raw materials like Middle Eastern and African countries. Latin American countries have also implemented absolute privatization since the mid-1970s. This may have reduced fiscal outlays in the short run but ultimately led to widespread unemployment and polarization. When financial capital was swiftly concentrated in the hands of a few large consortia and most national economic activities fell under their control, societies and economies fell into crisis. Of particular note is that when they turned towards privatization, Russia as well as countries in Eastern Europe and Latin America were more economically developed than China. China would be worse off than Russia, India, or the Philippines if it carries out wholesale privatization today. Externally, it would be unable to safeguard national sovereignty and territorial integrity; domestically, it would be unable to protect the interests of its people. The path towards the rejuvenation of the Chinese nation would come to an end. This is also an important reason why some Western countries are aggressively pushing the idea of wholesale privatization to China.

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5.5.6 Clarifying Misconceptions and Misrepresentations of SOEs SOE reforms are still ongoing. There are indeed many issues in China’s SOEs that cannot be ignored and require attention and solutions. However, there are also influential views that attribute the entirety of these problems to SOEs’ public ownership structure and go on to demonize SOEs. They believe that privatization is the only solution to these problems. Some say that “SOE monopolies suck profits from private businesses” (guoqi longduan, yu min zhengli). Most of these accusations are unfounded. There are two scenarios in “SOE monopolies.” The first is that SOEs have gained greater scale and competitive advantages over the past, which benefits China’s international competitiveness. In essence, this is an issue of industry consolidation. For instance, the US allowed Boeing and McDonnell Douglas to merge even though it knew that would lead to a monopoly in the American aviation market, showing that the US saw global corporate competitiveness as a greater priority rather than simply setting its sights on the domestic market. This is something that China should learn from the US. In reality, the performance of SOEs in global markets shows that they rely on the core competitiveness generated by scale rather than their monopoly positions. The most profitable SOEs are not only from industries like petroleum, petrochemicals, electric power and telecommunications, but also from competitive sectors such as shipbuilding, automotive, shipping, metallurgy and construction. The overseas oilfields of PetroChina and Sinopec are all located in geologically complex regions where foreign companies are unwilling to set foot. Chinese SOEs are competitive even without administrative protections or when facing disadvantageous conditions. The second are industries with natural monopolies, examples being railways and power grids. Globally, most companies in these industries are SOEs, only that they are prevented from excessive profiteering by virtue of their monopolies through stringent regulations. Because SOEs serve policy objectives, coupled with the fact that they are government-owned and subject to the highest oversight, SOEs can effectively steer clear of these risks. Solutions to problems with these monopolies mainly rely on regulatory oversight, democratic management and information disclosures. On the contrary, privatization may well backfire. Some say that SOEs are inefficient. This is sometimes true. Private enterprises have more flexible mechanisms and can effectively avoid problems such as redundant staffing and employee “free-riding.” Moreover, many private entrepreneurs are hardworking and financially astute. These are the strengths of private enterprises. Yet we must also realize that SOE efficiency manifests not only as economic efficiency but also social efficiency. For instance, the construction of infrastructure involves large investments and long horizons. China’s railways constitute 6% of global mileage but 24% of total freight volumes. Freight volumes per kilometer are three to six times as high as those in Europe and the US; these can reach more than ten-fold for trunk lines. Chinese railways may not be efficient from a solely economic perspective,

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but China’s economy would not have achieved such high growth rates without these large freight volumes. The state-owned sector also bears the social responsibilities of optimizing industrial geography and promoting balanced national development. The establishment of a large or medium-sized SOE in central or western China alone is able to boost the economic growth of an entire region. Such enterprises would not be as economically efficient as those in eastern China, but they are indispensable. Some blame SOE monopolies for declines in private investment. This is tantamount to blaming buses for causing traffic congestions. Clearly, traffic jams are caused by an excess of private cars, not buses. Investment is subject to cyclical declines even under private ownership conditions as a blind corporate pursuit of profits leads to excess investment, overcapacity and declines in average profitability. Declines in private investment in China are also due to the exhaustion of investment opportunities caused by over-rapid investment growth in the past, and it is one-sided to assume that growth in private investment will remain at constant levels without accounting for market changes. Rather, it is the non-profit, public-benefit and strategic sectors and links that still have room for investment. However, private capital does not yet have adequate ability and awareness to contribute towards these fields, thus requiring SOEs to play a key role in these investments. Hence, declines in private investment are primarily due to market changes and cannot be blamed on SOE monopolies and restrictions. In China, SOEs and private enterprises work together and complement each other. To avoid creating tensions between SOEs and private businesses, we should be cautious with such a provocative statement as “the state sector squeezing out the private sector.” Some say that market vitality can be stimulated only by privatizing SOEs. This is a discourse trap that makes it seem as though only markets and private businesses are “dynamic,” while public ownership is “ossified”. This is an incorrect characterization that mechanically assumes things have stayed the same since the early stages of reform and opening up, when SOEs were king and appropriate reduction in their proportion was necessary. At present, however, privatization in ordinary competitive sectors cannot alleviate the overcapacity that is already prevalent and may even exacerbate it. Privatization in sectors with natural monopolies, such as energy and natural resources, would increase the risks and costs of running the economy. The extensive collusion between government officials and businessmen, safety incidents and environmental destruction in Shanxi’s private coal sector in the past saw some improvement only after those companies were placed under SOE management. Privatization in sectors with economies of scale, such as railways and telecommunications, would disrupt network integrity as well as raise transaction costs and safety risks. Privatization in public service sectors such as utilities, healthcare and education would threaten the non-profit nature and fairness of public services as well as impact livelihoods and income distributions. Clearly, privatization does not guarantee economic vitality, regardless of sector. On the contrary, it might result in immense social costs and risks. A fragmented economic structure cannot possibly be dynamic. There are also those who blame SOEs for issues common to industry regulation and industry policy. For instance, overcapacity is caused by disorderly competition between enterprises and loosening of planning and oversight in some localities and

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industries. However, certain localities merely call for limits on SOE production. Another example would be the repeated occurrence of land plots sold at record prices, which is the result of real estate policies. Since merely 1.9% of property developers are SOEs, this problem cannot be solved by simply requiring SOEs to exit the property market; instead, that would make it more difficult for the government to modulate the market. Yet another example would be the over-expansion of public hospitals, which is caused by profit-seeking. Merely restricting the growth of public hospitals or going as far as to privatize them without reversing their profit-seeking nature would only make healthcare more difficult and expensive for ordinary people. These misconceptions are primarily caused by fitting mainstream economic theories to China’s realities. However, even Western economists do not believe that private ownership is necessarily more efficient than public ownership. Oliver Hart, who received the Nobel Prize in Economics in 2016, argues that markets become inefficient when their transaction costs reach a certain level, whereas changing ownership structures is an alternative means to reduce transaction costs and raise efficiency. Joseph Stiglitz, who received the Nobel Prize in Economics in 2001, criticized the assertion that SOEs are less efficient than private companies in Whither Socialism?, arguing that there is a simple logical fallacy in the idea that private corporations are more efficient than SOEs and was an economic theory for dummies.30 We can see that there is adequate theoretical justification for the existence of SOEs even in rigorous Western economic theories. More importantly, some argument against China’s SOEs carries with it the selfinterested demands of foreign MNCs. As China’s SOEs grow, launch acquisitions and develop resources internationally, MNCs and foreign governments feel a sense of crisis and pressure. It is only natural for them to manufacture public opinion in the hope of China would “disarm” itself. They do the same to other developing countries. In such situations, we must on the one hand remain independent and not allow others to lead us by the nose; on the other hand, we must have a sense of urgency in deepening reforms to improve SOEs’ public image such that they can withstand intense scrutiny.

5.6 The “Great Transformation” of the Public Sector The development of public services and the provision of public goods are two of the most important functions of modern governments. Markets primarily address problems of efficiency rather than aim to achieve equitable and sustainable development. Hence, both socialist and capitalist countries have set up public sectors to achieve public interest goals.

30

Cai Wanhuan and Liu Zhen, “Guanyu Guoyou Qiye Taolun de Zuixin Jinzhan ji Beijing Yuanyin Fenxi” [Regarding the latest discussions on SOEs and analysis of background reasons], Study & Exploration, no. 11 (2012): 87–91.

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During the planned economy era, China’s public services system was integrated with the planned economy and SOEs. It relied on full funding or shortfall funding from the state and was not profit-oriented; the organization of production and provision of services were based on plans. A planned economy may be inefficient when it comes to the transmission of economic information, but it has unique strengths in public services as fair, needs-based provision is the foremost imperative of basic public services. “Money-based allocation” is the fundamental nature of the market economy and inevitably undermines the principles of fair and universal services. This is precisely why socialist countries with planned economies were more efficient in providing public services than capitalist states after the Second World War. A 2015 study by Wang Shaoguang found that back in 1980 countries where the Human Development Index (which mainly measures education and health levels) outstripped economic development levels were mainly the socialist countries of that time.31

5.6.1 Reducing Fiscal Allocations and Encouraging Competition During the initial period of reform and opening up, reductions in fiscal allocations and spending were the general direction of public-sector reforms. The government tacitly allowed or even encouraged the public sector to develop and generate revenues on its own and permitted it to charge fees for public services, which were linked to employee incomes. At the same time, state sector and rural reforms turned SOEs and rural collectives into relatively single-minded economic organizations, weakening or even abolishing their duties to deliver public services. Decentralization-and-relinquishment policies that encouraged competition had a broad scope of coverage, encompassing not only public sectors in the general sense (such as healthcare, education, science and technology, culture); even the military and a substantial portion of government organs were encouraged to engage in commercial activities. During the early stages of reform and opening up, this direction stimulated the vitality and initiative of public service institutions and greatly advanced the development of the public sector. These were progressive at the time. However, not long after reforms, this profit-seeking, market-oriented, commercialized direction came into conflict with the objectives of public services. The most direct consequence was greater burdens on residents. Stronger profitseeking by public service institutions led to a rapid increase in fees. In the education sector, this was reflected as a large increase in the share of tuition and miscellaneous in the total revenue of educational institutions as well as a sustained decline in the 31

Wang Shaoguang, “Lishi Bijiao Shiye zhong de Zhongguo Wunian Guihua” [China’s Five-Year Plans from a comparative historical perspective], in Proceedings of the symposium “20th Century Socialism: Ideas and Practices in Soviet Union and China” at the School of Humanities at Tsinghua University in 2015, p. 9.

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share of government funding. In the healthcare sector, residents’ spending as a share of healthcare expenditures began to increase from the early 1980s onwards, peaking at 60% in the early 2000s. This was not only higher than in developed countries (under 20%), but also higher than average levels in developing countries. Second, the principle of universal access to public services was undermined, leading to greater inequity and imbalance. Trends of aggregation towards urban areas, wealthy regions, and the minority of key institutions emerged. In particular, public services in the countryside were weakened, prominently in the healthcare and education sectors. Those with spending power hoped for better services. This then triggered the expansion of a few prestigious schools and hospitals, leading to even greater inequity (Fig. 5.5). In the healthcare sector, after the marketization of healthcare, institutions extensively procured medical equipment, improved their physical facilities and attracted good doctors to enhance their competitiveness. In the short run, this spurred the emergence of a number of good hospitals, but at the expense of wider regional divides and weaker grassroots healthcare institutions. The undermining of the past referral system (fenji zhenliao tixi) caused congestion at large hospitals, making medical care difficult and expensive. At the same time, the over-expansion of large hospitals changed technical approaches to health services. Appropriate techniques and basic drugs, which were cost-efficient means of treatment, gradually faded away,

Individual

Society

Government Year Individual Society Government

Fig. 5.5 Healthcare expenditures in China from 1978 to 2011. Source China Health Statistics Yearbook 2013, Peking Union Medical College Press, 2013

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while costly approaches involving bloated prescriptions were favored. The commercialization and marketization of healthcare caused improvements in health to fall behind the pace of economic growth. Compared to countries with the same level of economic development, levels of health and economic development in China were synchronous in 1960, and national health levels were ahead of countries with similar levels of economic development in 1981. Between 1981 and 2000, however, main health indicators in China dropped to those of the average level, demonstrating that progress in the health of China’s population was slower than economic growth during this period. A World Health Organization report in 2000 ranked China’s healthcare system fourth from the bottom in terms of equity. In January 1997, the CPC Central Committee and State Council issued the Decision on Health Reforms and Development, which determined that healthcare programs are social non-profit undertakings where the government implements certain welfare policies. However, the guiding principles of this directive were not very well implemented. There were similar changes in the education sector. With the commercialization of education, there was a change in the balance between access and quality. Better resources were concentrated in “key schools,” artificially widening gaps between public schools in terms of resource allocation and educational quality. Inter-school, inter-regional and urban–rural disparities became greater. Advancement to higher levels of schooling became the goal of less prestigious schools and their students, which reinforced examination-based education. Although relevant authorities continually advocated holistic education (suzhi jiaoyu), given the imbalance in educational resources, many methods had the reverse effect of benefiting students from affluent families and wealthy regions, further widening inequities in educational opportunity. Commercialization and marketization also undermined the integrity of some public services, which came to prioritize only profitable objectives and focus less on or even ignore products that were less or not profitable. In the education sector, this mainly manifested as poor quality in early childhood education and vocational education, which were not part of the compulsory education system. In the healthcare sector, this mainly manifested as the weakening of services in public health and preventive health, where social benefits were great but space for profit was small.

5.6.2 Rebuilding the Public Services System The commercialization and marketization reforms in the public sector rapidly led to undesirable consequences. High medical and education expenses increasingly became severe social problems in the 1990s. Meanwhile, the inadequacies of social security and the rising costs of public services exacerbated social tensions and also impacted core efforts such as SOE reforms, expansion of domestic demand and strengthening of agriculture. These impacts promoted public-sector reforms. Beginning in the early 1990s, China began to tackle problems in funding for compulsory education. The China Educational Reforms and Development Outline issued by the CPC Central Committee and the State Council in 1993 and the Decision

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on the Reform and Development of Basic Education issued by the State Council in 2001 specified that primary and secondary schoolteachers’ salaries were the responsibility of local people’s governments. However, as educational resources were still unevenly distributed, competition over exam success rates led to the consolidation of quality educational resources, which in turn reinforced that very competition between schools. Strong public concerns regarding “school selection” problems and excessive schoolwork for primary and secondary students also induced many deviant and even corrupt practices, which distorted the goals of educational development and undermined educational equity. These problems have yet to be fundamentally alleviated. Healthcare system reforms began to incubate after the SARS epidemic in 2003, with the main direction being strengthening government responsibilities. The direction of healthcare reforms was officially set in 2006: “government guidance and social participation” as well as the commitment to the non-profit nature of public healthcare. Key aspects of healthcare reforms were initiated at the grassroots level from 2009 to 2012, leading to the preliminary formation of a medical insurance system with basic employee health insurance, basic health insurance for urban residents, and the New Rural Cooperative Medical Scheme as the main elements. Most grassroots healthcare institutions became non-profit organizations. However, because reforms of public hospitals, the most important part of the healthcare system, had yet to be fully initiated, the profit-seeking nature of the healthcare system remained fairly strong and healthcare costs continued to grow at a relatively high pace. The general public had yet to fully experience the benefits of these reforms. In the late 1990s, China began building a comprehensive social security system to complement SOE reforms and rural reforms. Modern society resolves the various risks faced by the public by building social safety nets, which have at least three objectives. The first is mutual aid that distributes risks that individuals cannot bear across the societal or even national level. These include, for instance, illness, unemployment and poverty, which in many cases are not entirely attributable to personal misdeeds and can hardly be borne by any single person or their family. The second is inter-generational equity. Ageing, disease and death are part of natural life. Social assistance to children and seniors who are unable to work is a means for sharing the fruits of development between generations. The social safety net achieves this mainly through endowment insurance. The third is greater social equity. Social security is the embodiment of mutual aid between members of society. Unlike ordinary goods, where those with greater means can consume more, social security contributions are based on each person’s ability to pay and the benefits are distributed equitably. This naturally enhances social equity, with the strong helping the weak, the rich helping the poor, affluent regions helping poorer regions, the young helping the elderly, the healthy helping the sick, and property owners helping those without. Beginning in the 1990s, Chinese society began to enter a high-risk stage with the weakening and disintegration of past safety nets provided by rural collectives and work units, as well as the advancement of the market economy. It took China over ten

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years to rebuild a nearly universal social safety net, completing a journey that took Western countries more than a century. The minimum subsistence allowance program (dibao) for urban residents was established in 1997, while the urban employee basic medical insurance system began to be promoted in 1999. From 2003 onwards, China successively expanded access to employee health insurance, urban residents’ health insurance, and the New Rural Cooperative Medical Scheme. In 1997, the State Council decided to implement an urban employees’ retirement security program that combined public funding with individual savings accounts, which had covered most formal sectors by 2015.

5.6.3 From Efficiency First to Ensuring Fairness Fairness is an eternal human pursuit. Among all political philosophies, whether Chinese or foreign, ancient or modern, socialism places the greatest emphasis on fairness. Equality is not abstract but rather divided into specific levels. In a market economy, “fair rules” or “equality in opportunity” much sought after are the most rudimentary forms of fairness, meaning that everyone has an equal right to participate in economic and political activities. This is a view of equality that took form after the bourgeois revolution and signifies progress over the distribution of resources based on birth and lineage in feudal society. However, under capitalist modes of production, superficial “equality in opportunity” obscures actual inequality—the unequal rights caused by the possession of capital. Although every individual enjoys equal rights in theory, the fact is that those with more capital have greater means to enjoy these rights: a destitute worker can only have the freedom to choose which factory to work at. Workers and capitalists may seem to be equal, but capitalists possess capital, resources, and fame. Through the advantageous social resources in their command, capitalists have the absolute advantage in forming political parties, contesting elections and shaping discourse. Hence, state regimes are mostly constituted by capitalists with certain advantages and the agents that they support, whereas it is nearly impossible for the proletariat to become part of the regime. As such, equality is achievable only in terms of rules and the starting lines. Even Western countries have to continually correct social injustices through certain public policies to improve social equity. These policies include government redistribution through taxation, welfare programs and minimum wage systems. Essentially, they serve to level the playing field between capital and labor, as well as curtail the privileges of capital in the distribution of resources. After its founding and the completion of socialist transformation, the People’s Republic achieved public ownership of the factors of production and eliminated the inequality caused by possession of capital, thereby creating the conditions for full equality. However, China was still far from meeting the conditions described by Marx as necessary for distribution according to labor, which was why Mao Zedong vetoed any proposal to fully implement a free-supply system (gongji zhi). In his old age, Mao mentioned that China still had an eight-tier wage system; these “bourgeois rights” can

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only be appropriately constrained, but not fully abolished. After reform and opening up, China boldly introduced market mechanisms and a private economy. Markets and capital brought about social divisions and began to widen social disparities, although this achieved the goals of motivating labor and improving efficiency during the initial period of reforms. At the same time, a market economy implied the free circulation of resources, which inevitably led to urban–rural and inter-regional inequities as well as inequity brought about by the division of labor. Under such circumstances, the CPC Central Committee with Deng Xiaoping as its core warned that: “If polarization occurred… The contradictions between various ethnic groups, regions and classes would become sharper and, accordingly, the contradictions between the central and local authorities would also be intensified. That would lead to disturbances.”32 The Party and the government began to take measures to narrow inter-regional, urban–rural, and inter-social-group divides. The first measure to be implemented was to narrow regional divides, primarily through fiscal allocations from the central government to local regions. In 1988, Deng Xiaoping proposed a strategic vision that came to be known as the “two big pictures” (liangge daju). The first was: “The coastal areas, which comprise a vast region with a population of 200 million, should accelerate their opening to the outside world, and we should help them develop rapidly first; afterwards they can promote the development of the interior. The development of the coastal areas is of overriding importance, and the interior provinces should subordinate themselves to it. When the coastal areas have developed to a certain extent, they will be required to give still more help to the interior. Then, the development of the interior provinces will be of overriding importance, and the coastal areas will in turn have to subordinate themselves to it.” Deng also opined that “the advanced regions have the obligation to help the backward.”33 In 1995, the CPC Central Committee began to formulate the Great Western Development Strategy (xibu da kaifa zhanlue), pointing out that pre-emptively studying policies to properly manage problems and narrow the gaps between economically prosperous regions and underdeveloped regions was the only way to eventually achieve the goal of common prosperity proposed by Deng.34 The Party believed that seizing the moment to develop the western regions under conditions of insufficient domestic demand was important for the sustained, rapid and healthy development of the entire national economy. The Great Western Development Strategy was officially launched in 1999. Through the institutional advantages of China’s centralized political system, it created unique systems, such as pairedup assistance across different regions and inter-transfer of cadres (ganbu duidiao), which had a positive impact on reducing regional disparities. 32

Deng Xiaoping, Collected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 364. Li Junru, “Lun Deng Xiaoping ‘Liangge Daju’ Sixiang yu Xibu Dakaifa Zhanlue Juece” [On Deng Xiaoping’s thought on the “two big pictures” and the strategic decision-making on the western development strategy], Qianxian, no. 5 (2000): 4–7. 34 Zeng Peiyan, “Zhanlue Jueze: Disandai zhongyang lingdao jiti de yuanjianzhuoshi—Xibu dakaifa zhanlue juece de tichu he shijian” [Strategic decision: The profound vision of the third generation of central leadership—the proposal and implementation of the western development strategy], Literature of Chinese Communist Party, no. 2 (2010): 29–37. 33

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Apart from the excessive divides caused by historical, natural and locational conditions, inequality between capital and labor was the principal cause of social inequity. The relations between capital and labor were the core of the main tensions in relations of distribution under a market economy. In the early days of Western market economies, inequities between capital and labor in relation to distribution were the primary factor behind social polarization. These included depriving workers of their right to rest, depressing the share of wages in income distribution, the extension of work hours and deterioration of labor conditions. Through these channels, business owners were able to sustain production and profits, and thereby unceasingly expand their investments, while the working class became poorer, leading to insufficient domestic demand. During the early stages of reform and opening up, China’s central and local governments encouraged corporations, public institutions as well as villages to widen income gaps as a rethink of the past “egalitarianism” and “high savings, low consumption” models, encouraging the notion that “to be rich is glorious.” Many “ten-thousand-yuan households” (wanyuan hu)35 emerged in the countryside, while urban work units were also encouraged to raise wages. This was the best period in distribution relations since the People’s Republic was founded, manifesting as rapid compensatory wage increases for employees. As worker numbers were not high during the early days of the People’s Republic, their wages made up only 10.5% of GDP in 1952. Workers’ incomes as a share of GDP rose swiftly as the number of workers increased, peaking between 1958 and 1963 at around 20%. This proportion remained stable between 15 and 18% in the two decades between 1970 and 1990. Beginning in 1990, worker’s incomes as a share of GDP progressively declined to around 10.8% in 2000. Meanwhile, with structural changes in the workforce, where informal migrant workers replaced formal employees as the main component, the labor market became more commoditized, primarily manifesting as unstable employment contracts, overtime work, wage arrears and low social security coverage. Given these circumstances, China began to address problems in protecting the rights and interests of workers in the early twenty-first century, the most important measures being the enactment of laws on labor and labor contracts. While labor contracts were used to protect consumer rights and interests, much attention was also directed to addressing arrears in migrant workers’ wages and expanding their social security coverage, among other measures. Estimates show that the long-stagnant wages of migrant workers had begun to rise since 2012. Of course, there is still large room for improvement in current income distribution patterns and the protection of labor rights. However, China has already made huge strides in this direction. Although China also experienced various problems in the protection of labor rights during the early stages of the market economy, it did not see the sort of vicious polarization that afflicted the early stages of Western modernization. Moreover, at any sign of polarization, the Party and the government would adopt timely corrective measures 35

Referring to rural households with an annual income above 10,000 yuan, an astronomical sum at the time—Trans.

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to ensure the improvement of workers’ rights and the sustained development of economy.

5.7 China’s Socialist Market Economy In recent years, some have argued that China’s reform is no different than “marketization reforms,” which introduced more market factors and reduced government intervention on the basis of planned economy, while reformed public ownership and transitioned towards private ownership. As reported in the Financial Times: “Although officially communist, China started to abandon centrally planning the economy in the late 1970s and gradually embraced market reforms that have spurred almost four decades of breakneck economic growth.”36 Some believe that China’s economy was able to take flight because it had eliminated blind faith in socialism, public ownership and the planned economy—not caring whether the system was capitalist or socialist or if ownership was public or private—allowing China’s economy to coast along exuberantly until the present day. These views, highly influential at one time, were in fact misinterpretations. Although the market economy plays a significant role in China, its socialist market economy is fundamentally distinct from Western capitalist market economies. In terms of ownership foundations, public ownership remains the cornerstone of China’s economy. As such, China’s market economy and Western capitalist market economies have different ownership foundations. Whether before or after marketoriented reforms, China has adhered to the principal status of public ownership. The public sector is the primary economic foundation for China’s initiation of modernization, safeguarding of national security, and protection of the common interests of its people. As of the end of 2012, the operating assets of China’s tertiary sector totaled around 487.5 trillion yuan (including the assets of individual business owners [geti gongshanghu]), among which the public sector accounted for 258.4 trillion yuan, or about 53%. If non-operating assets are included, China’s total non-governmental assets would reach 518 trillion yuan, among which public sector assets account for 289 trillion yuan, or 55.8%; this figure does not include undeveloped resource assets other than arable land.37 Clearly, China’s public sector remains the mainstay of its national economy. Furthermore, the role of the public sector is not only reflected in terms of quantity, but also in terms of quality and control. While remaining dominant in military industries, aerospace, energy and agriculture, sectors relevant to national security and basic livelihoods, the public sector is also spread across many foundational public sectors, for instance, railways, infrastructure, electric power, healthcare 36

Yang Yuan, “Professors call for more Marxism in economics courses,” Financial Times, June 2, 2016. http://www.ftchinese.com/story/001067850. 37 Pei Changhong et al., “Zhongguo Jiben Jingji Zhidu: Jiyu lianghua fenxi de shijiao” [China’s Basic Economic System—A Perspective Based on Quantitative Analysis]. http://finance.sina.com. cn/stock/t/2015-12-25/doc-ifxmxxsp6914222.shtml.

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and education. These sectors do have economic benefits, but their greater role is to provide services for all of society. The spillover effects of these sectors lower the costs of overall economic development. This is yet another example of the ability of the state sector to exert control over the economy. In terms of the scope of their role, China’s markets are limited to economic sectors where they can function effectively, especially in ordinary competitive sectors, whereas the government limits their role in sectors with natural monopolies, sectors that involve non-economic objectives such as national security, and sectors relating to social responsibilities. In social and cultural sectors, China on the one hand allows the market to play its necessary part, while on the other hand harnessing the due role of government in institutional design, service provision and regulatory oversight, necessitating that healthcare reforms must be in the public interest and culture should not be for the purpose of commercial gain. In essence, these add a “firewall” between economic policies and socio-cultural policies, limiting the functions of the markets to areas where they can function effectively. More importantly, China prevents political power from being controlled by capital through institutional safeguards. Since the economic foundation necessarily determines the superstructure, the use of the power of capital to influence politics is an unavoidable phenomenon in capitalist countries, where the private ownership of large capital predominates. By contrast, China’s economic and political system can effectively prevent owners of large capital from influencing political power. This is possible because China, on the one hand, upholds Party leadership over its economic system and the principal status of public ownership, especially the ability of public ownership to exert control in key sectors. On the other hand, China severs channels for any “marriage” between capital and power through means such as the Party’s organizational system, the selection of officials by people’s deputies, and Party leadership over the military and ideology. Finally, the past thirty years of China’s reforms was not a process of expanding the boundaries of the market and shrinking the role of government. The market has had a huge impact in areas where it is effective, but that was not without boundaries. Once the role of the market exceeded its boundaries, for instance when healthcare and education became overly commercialized, the state would adopt corrective measures. Neither did the role of government shrink. Judging from government spending, China’s tax revenue as a share of GDP declined for a period of time during the early stages of reform and opening up, but this percentage has been growing since after the 1990s. In terms of government behavior, government functions have expanded in other areas even as direct intervention in routine corporate affairs was trimmed back. The functions of China’s government have expanded in areas such as industry policy, fiscal transfers, coordination of regional development, macroeconomic regulation and the provision of public services. China’s reform and opening up is not simply “marketization” reforms because the reform-and-opening-up policy was a process where two trends worked together. On the one hand, China allowed the market to play a foundational, decisive role in resource allocation, eliminating impediments to market competition in ordinary

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competitive sectors. On the other hand, China harnessed the role of the Party, government and the general public to rein in the market and limit its role, preventing its boundaries from expanding infinitely and alleviating its adverse impact on society and individuals, while also building a new foundation for the market economy during this process. These characteristics make China’s market economy fundamentally different from Western market economies. There are common laws that govern the functioning of markets. In this aspect, there is no difference between China’s market economy and those of other countries. But China’s economic growth has been more successful compared to some other developing countries because China has a strong Party and government that represent the fundamental interests of its people.

5.7.1 China’s Economic Miracle Lies in the Integration of Socialist Institutions and the Market Economy The integration of socialist institutions and the market economy was not a Chinese invention, but part of European social democracy ideas that arose during the capitalist social reforms in the twentieth century. “Market socialism” argues that economic institutions and socialist institutions are not necessarily related and advocates public ownership of the factors of production. For instance, Gerald Cohen maintains that market socialism is socialism because it overcomes the separation of labor and capital. In market socialism, there are no capitalists that own capital and are at odds with laborers. However, they have different views regarding the specific forms of public ownership over the means of production (examples being state ownership, collective ownership and a universal shareholding system) and advocate the allocation of resources through market economies. After the Second World War, cooperatives and employee-owned companies have grown in some European countries, but private ownership remained dominant. In particular, their political systems continued to be influenced by monopoly capital groups. Thus, their envisioned “market socialism” failed to become reality despite some degree of social improvement. China was the first country to integrate basic socialist institutions and a market economy. China’s economic miracle since reform and opening up was not only due to the market economy, but also the basic institutions of socialism, as mainly reflected in the four following aspects. First, pre-1978 socialist development laid the material and social foundations for reform and opening up. The large amount of public assets accumulated by SOEs and collective enterprises prior to reforms became the material foundation for the development of the market economy. As a result, China was able to marketize these state-owned assets directly without having to go through a long and bloody process of primitive accumulation. The comparatively complete public services system formed before reform and opening up made China’s level of human resources higher than contemporaneous developing countries and provided a quality workforce for the

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development of manufacturing industries. The fair and stable society formed before reform and opening up also laid an equitable starting point for the early states of market-oriented reforms and enabled the rapid formation of a competitive market environment, allowing the people to share in the fruits of reforms, which in turn boosted domestic demand and investment. Second, China built the best infrastructure among developing countries, lowering the costs of economic development. Infrastructure is a precondition for economic development. China’s socialist system allowed it to build infrastructure far more advanced than other developing countries (and even better than developed countries in certain sectors) over mere decades. Infrastructure requires large investments and often has economies of scale and network effects. China’s feat could not have been accomplished without its basic socialist system. Collective rural land ownership also greatly reduced the costs of economic development and provided rural residents with basic livelihood security, allowing them to accept lower wages in the cities. It also reduced transaction costs in the development of urban industry and transportation networks, as well as avoided the overly high transaction costs caused by fragmented property rights in countries where land was privately owned. Third, China was able to better address market failures than most developing countries due to its socialist system. The market cannot automatically ensure macroeconomic stability and social equity; neither can it provide public services, achieve sustainable development, or realize the growth of strategic industries with economies of scale. Many developing countries also fell into the middle-income trap because they failed to properly address these problems, whereas China has consistently maintained macroeconomic stability. Economic growth rates fluctuated, but only within a limited range. Moreover, hyperinflation and debt crises have never occurred in China, unlike many other developing countries. In merely over a decade, China managed to achieve universal basic social security, a goal that took developed countries more than a century and that many developing countries have yet to achieve. China has also been able to take swift and strong action against severe environmental pollution. Fourth, China’s socialist system ensured that it could open its doors to the outside world on its own terms. Since the twentieth century, all developing countries have faced along their paths towards modernization a global order that has already been dominated by the West and its monopoly capital. Developing countries can compete globally only by relying on the government to consolidate capital and resources. Moreover, an international competition on comparatively equal footing is possible only through commitment to political independence and open-door policies on one’s own terms. China’s strong state-owned sector has allowed many of its corporations to expand globally. China proved through action that socialist systems and market economies can be integrated. In the past, it was believed that socialist countries could not adopt market economies as the “universal value” of a global market economy would be lost as soon as a market economy is labeled “socialist.” Yet, after more than two decades of building a socialist market economy, more people have come to realize that the “socialist market economy” is an integrated whole, especially after the perils of the free market and neoliberalism were exposed in Western capitalist market economies

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during the global financial crisis of 2008. China’s market economy is unexceptional except for the word “socialist” that prefixes it. Since the reforms of 1978, the older generation of revolutionaries that included Deng Xiaoping and Chen Yun, as well as subsequent generations of China’s central leadership, have adhered to the “two-point theory” when it came to the relationship between the government and the markets. Deng, the architect of China’s economic reforms, was the first to raise this proposition. According to Deng, “If we adopted the capitalist system in China, probably a small number of people would be enriched, while the overwhelming majority would remain in a permanent state of poverty.”38 Clearly, Deng had never wavered in his commitment to the socialist path. On November 15, 2012, the first plenary session of the Eighteenth Central Committee elected a new generation of central leadership. Xi Jinping stressed that “Socialism with Chinese characteristics is socialism and nothing else;” “We must have confidence in our path, our theory and our system”,39 emphasizing China’s confidence in its own path. The third plenary session of the Eighteenth Central Committee in 2013 further delineated the boundaries between the markets and government as well as the boundaries between economic policy and social policy, pointing out economic reforms should allow markets to play a decisive role, while government responsibilities in social sectors should be strengthened in order to promote social equity. This position limits the operation of the market to sectors where it should play a role. On issues relating to the roles of the market and that of the government, it is necessary to adhere to dialectics and the “two-point theory” and ensure that both the “invisible” and “visible” hands are properly used, such that the government and the market can complement and coordinate with each other to promote sustained and sound socio-economic development.

38

Deng Xiaoping, Collected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 229. Xi Jinping, “Guanyu Jianchi he Fazhan Zhongguo Tese Shehuizhuyi de jige wenti” [Some issues on upholding and developing socialism with Chinese characteristics], in Party Literature Research Institute of the CPC Central Committee, Shiba Da yilai Zhongyao Wenxian Xuanbian [Selection of important documents since the Eighteenth CPC National Congress], vol. 1 (Beijing: Zhongyang Wenxian Press, 2014), 109.

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Chapter 6

Chinese Democracy

6.1 Introduction The conventional view holds that China is not a democratic country. This chapter will refute this view and point out that Chinese democracy has greater advantages than the Western multi-party system. China is a democratic country. This chapter will use China’s healthcare reforms as a case study of Chinese democracy, primarily because healthcare reform is a political and economic flashpoint in many countries, making it an appropriate yardstick for international comparison. For instance, Obama placed healthcare reforms at the top of his administration’s agenda, but these reforms ran into overwhelming resistance. After taking office in January 2017, Trump immediately announced his intention to abolish Obamacare. China has already taken a comparatively successful approach to healthcare reforms. A comparison of healthcare reforms in China and abroad can reveal the characteristics and strengths of China’s political institutions and democracy.

6.2 Democracy Solves Problems President Xi Jinping has stressed that democracy is not an ornament; it is used to solve problems faced by the people. The CPC Central Committee and China’s various levels of government deal with a myriad of issues. What does it take for a reform to catch the notice of the Central Committee and central government and become part of the agenda? The question of “who decides what reforms” is known in political science as “agenda-setting,” a highly important power. Unlike Western countries, where the setting of reform agendas is mainly influenced by interest groups and public opinion, China’s reforms are generally focused on concrete issues. There are effective channels for focal issues and bottlenecks in socioeconomic development, public demands for a better life, and tensions arising from imbalanced and inadequate growth to reach © CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_6

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Party and government decision-making levels and thereby spark progress in reforms. This is the most direct embodiment of Chinese democracy.

6.2.1 Problem-Driven Reforms During the planned economy era, China built a rudimentary but universal basic healthcare system that greatly improved public health. After 1978, China’s healthcare system changed greatly. Government responsibilities in the healthcare sector gradually weakened, as did the coverage of healthcare security. Meanwhile, healthcare institutions became more commercialized and marketized. At the time, marketization and commercialization had positive historical significance in the sense that they allowed China to rapidly boost its healthcare resources and thereby considerably enhanced healthcare services and technologies as well as increased the income of medical personnel. However, excessive marketization and commercialization increasingly made healthcare less available and more expensive. In 2002, 45% of urban residents and 79% of rural residents had no healthcare security. Personal medical expenditures as a proportion of total healthcare spending increased from about 20% in the early stages of China’s reform and opening up to 60% in 2001, far higher than the global average. By 2001, one-third of town(ship) health centers in China were barely able to sustain their operations, while another third had basically fallen apart; the number of doctors in the countryside was merely two-thirds that in 1975, while the number of health workers had declined from 3.28 million in 1975 to 270,000 in 2001. From time to time, disease caused people to fall into or return to poverty. These problems gradually came to the attention of the Party and the government through feedback from people’s deputies, inspections by Party and government organs as well as media reports. The SARS outbreak in 2003 was also another major factor behind the launch of comprehensive healthcare reforms. In late 2002, a new infectious disease—SARS— emerged in parts of southern China and focused societal attention on healthcare. In April 2003, the CPC Central Committee made a number of personnel adjustments. Crisis-driven reforms are able to rally social consensus and more strongly advance reforms. China’s centralized and effective political system makes it easier to unite mindsets and galvanize action through political mobilization during crises. As a result, China can more strongly and effectively respond to crises.

6.2.2 New Mindsets and Philosophies Crises may be effective in driving reforms, but it could also exact a great toll on society. Hence, while paying due attention to the impact of crises, China adopts preventive measures in advance through top-level policy. This is another mechanism

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for launching reforms—taking measures to nip problems in the bud through the adoption of new mindsets and philosophies. While this round of healthcare reforms was spurred by a crisis, new mindsets were needed after reforms entered uncharted waters. In August 2016, the CPC Central Committee convened the first National Health and Fitness Conference in the history of the People’s Republic of China, during which Xi Jinping delivered an important address. The conference called for a strategic priority for the development of people’s health, swifter progress in the Healthy China program, plans for the incorporation of health into all policies, as well as increased scope and intensity of work on healthcare. These marked the expansion of healthcare reforms into comprehensive reforms throughout all aspects of health and fitness. This innovation in theory was not merely driven by a crisis, but was a preventive decision focused on the possible impact on socioeconomic development that may potentially result from the emergence of largescale disease burdens and health problems in the next few decades. This reflects how progress in reforms can be galvanized through new mindsets and philosophies. Reforms to the healthcare system have already been placed on the decision-making agenda of the Party. However, there are still disparate ideas on the question of “what and how to reform.” China has harnessed the strengths of its consultative democracy system in the process of resolving this problem, forming a more comprehensive toplevel design after several rounds of consultations between higher and lower levels as well as internal and external parties.

6.3 Top-Level Design and Consultative Democracy Consultative democracy is a form of democracy unique to China’s socialist democratic politics. Whether democratic rights are enjoyed by a people is judged by whether they have the right to vote in elections, as well as whether they have the right to continuously participate in everyday political life. It is judged by whether the people have the right to conduct democratic elections, as well as whether they have the rights to carry out democratic decision-making, democratic management and democratic oversight. China’s democracy is a people’s democracy, where, under the leadership of the Party, every public matter can be publicly and amicably discussed, such that the greatest synergy between the wishes and needs of the public can be found. In recent years, different views on healthcare reforms emerged in Chinese society. In general, there were two arguments. The first stressed the public-welfare nature of healthcare and advocated the establishment of a government-led healthcare system. The second stressed the commodity nature of healthcare and advocated the establishment of a healthcare system where the market played a decisive role while the government primarily exercised the role of a regulator. How might a consensus be formed? Transparency in policy making, achieved through large-scale studies by Party and government organs as well as direct public participation, exhibited the strengths of China’s political system.

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6.3.1 Local Experiments: Crossing the River by Feeling the Stones Local initiative in experimentation with reforms was one of the major sources of China’s reform theory and practices. After problems in the healthcare sector were exposed in 2003, proactive experiments by some localities and departments accumulated rich experience for reforms before the central government had formulated comprehensive plans. Xi Jinping, then the Zhejiang Party secretary, pointed out in a speech at the eighth meeting of the eleventh Zhejiang provincial Party committee held on July 28, 2005: “Without health, there will be no well-off society, and without health modernization, there will be no modernization of the whole society. We must… Enable the people of the whole province to enjoy fair, high-quality and efficient health care services, further prolong the healthy life expectancy of residents, and the population health indicators reach the level of moderately developed countries in the world… To build a strong health Province, we must adhere to people-oriented, benefit the people, and promote the harmonious development of man, self, society and nature. We must adhere to government leadership and social participation, give play to the leading role of the government in formulating health policies, providing public services and eliminating health differences, attract all kinds of social organizations and social members to participate in health development, and form a responsibility sharing mechanism. Zhejiang Province was the first to implement a “Strong Health Province” (weisheng qiangsheng) strategy. In 2004, the provincial Party committee and provincial government were the first in China to propose this strategy based on the “EightEight Strategy” (baba zhanlue). The province was the first in China to make health an important development goal. This was an experiment by a local government to proactively change governance approaches and development models.1 Other experiments include: In 2006, Minister of Health Gao Qiang proposed at the National Health Work Conference that, given the temporary challenges in fully restoring the non-profit nature of public hospitals, municipal-level localities should select some of their public general hospitals as pilots for changes in operating mechanisms. This would entail the establishment of affordable hospitals or wards and the implementation of full budget-based administration where revenues would be handed over to the government, which would also fund their expenditures. “Affordable hospitals” were piloted in places such as Beijing. Such hospitals in Beijing, Jiangsu, Shandong, Chongqing and Xinjiang, known variously as huimin yiyuan, pingjia yiyuan or aixin yiyuan, were public hospitals fully funded by the government that served low-income and disadvantaged groups, effectively reducing healthcare costs. Such hospitals in Xuzhou, a

1

Xi Jinping, Gan Zai Shichu, Zou Zai Qianlie [Work on the concrete, walk on the front] (Beijing: Zhonggong zhongyang dangxiao chubanshe, 2006), 346.

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city in Jiangsu, charged an average of merely 19 yuan in consultation fees, one-fifth of the average at other hospitals. Guangdong pioneered the implementation of subsidies for rural doctors. In 2006, the provincial Party committee decided that all administrative villages in the province should have healthcare stations (weisheng zhan) by the following year. “Village doctors” at these stations would receive government subsidies, with each village receiving 10,000 yuan per year. This corrected the long-term neglect of basic healthcare in rural areas. At the time, this had demonstrative significance for the rest of the country. China’s five northwestern provincial-level divisions (Shaanxi, Gansu, Ningxia, Qinghai and Xinjiang) restored the non-profit nature of healthcare institutions. These five regions were less economically developed and faced even greater challenges in healthcare, which was also why they launched healthcare reforms earlier. These regions had already developed some fairly mature practices by 2007, before China launched its national healthcare reforms. Ningxia and Shaanxi piloted pharmaceutical procurement tendering schemes. Given that healthcare providers were buttressing their finances through medical prescriptions, a phenomenon known as yiyao yangyi, commercial graft in the procurement, sale and use of drugs had become an “unwritten rule” (qian guize). Once the drugs came out of the factory, their prices would be marked up by multiple intermediaries before they were dispensed to patients. Ningxia Hui Autonomous Region initiated unified pharmaceutical procurement, pricing and delivery in January 2006, a policy that effectively lowered drug prices. However, the implementation of this policy met with great resistance as it encroached upon vested interests in the pharmaceutical distribution chain. The experiences gleaned from these experiments were incorporated into China’s subsequent healthcare reform program, an example of successful bottom-up decisionmaking. At the same time, local pilots during this period also included another approach, which was to reduce government spending, privatize public hospitals and encourage hospitals to compete and turn a profit. The hope was that this would cut costs and increase efficiency, the most typical example being Suqian, a city in Jiangsu Province. Suqian initiated healthcare reforms in 2001 that aimed to reduce government responsibilities and fully privatize healthcare institutions. The city restructured public health institutions such as public hospitals, blood banks and emergency rooms, which were transferred to investors. All 135 public hospitals in the city were restructured into market entities. In June 2006, Professor Li Ling of Peking University and her research team published A Report on Healthcare Reforms in Suqian (Jiangsu Sheng Suqian Shi yigai diaoyan baogao). During their survey, nearly ten researchers visited hospitals as patients interviewed doctors and patients during the process before they held conversations with relevant authorities. The team found Suqian a serious problem in overtreatment. As hospitals reinforced incentive policies where remunerations were based on departmental revenues, it became more, not less, common for doctors to exaggerate patients’ conditions during consultations and steer them towards more

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tests and surgeries. The practice of receiving commissions for prescribing drugs and tests intensified rather than abated. Even blood banks and emergency facilities, which are pure public goods, were also pushed to the markets. Urgent care facilities collected franchise fees from hospital networks, which undermined the urgent care system and led to detrimental consequences. The report argued that Suqian’s experiences in allround reform of the healthcare sector had been proved by theory and practice to be unfeasible. Medical care had become even more expensive for ordinary folk and potential healthcare problems became worrying. Suqian took the wrong track in healthcare reforms and the local Party committee and government would later reverse their wholesale privatization scheme. In this sense, encouraging local experiments is an effective institutional arrangement for ensuring that reforms are in the right direction and can correct themselves if not.

6.3.2 From the People, to the People Through surveys and research, China elevates grassroots experience and public wisdom into national policy and completes top-level design for reforms after a repeated top-down, bottom-up process. Surveys and research are a basic approach taken by the Party when initiating healthcare system reforms, an area closely related to public welfare. Periodic inspections at the community level were also periodically carried out by the central authorities and local Party and government officials. For instance, Xi Jinping inspected the Puhuangyu Community Health Service Center in Fengtai District, Beijing, in December 2012, during which he visited and spoke with patients. On April 3, 2007, Xi visited the Yinhang Subdistrict Community Health Service Center in Shanghai and held a conversation with residents visiting the clinic. On another occasion on June 9, 2011, Xi took a special investigation of local clinics during a visit to Cuba and indicated that China should learn from Cuba’s experiences in building a primary healthcare system. Other national leaders have also carried out inspections at healthcare facilities on many occasions. Various Party and government bodies also inspect primary healthcare facilities as part of their regular duties and necessary procedure in policy-making. For instance, when Anhui Province was carrying out primary healthcare reforms in 2009, leading officials from the provincial Party committee visited local communities to learn more about healthcare issues. With respect to the different opinions of various departments, Executive Vice Governor Sun Zhigang organized two large-scale inspections to map out the actual mark-up rates for drugs dispensed by healthcare facilities as well as form a detailed picture of their finances. Amidst public debates, central government ministries and commissions also gradually formed reform approaches through surveys and inspections. During the implementation of reforms, central top-down design and local initiative were closely integrated. On the one hand, the central government determined the “prescribed actions” (guiding dongzuo) and standard models of reforms. These

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included minimum standards for healthcare security and fiscal allocations, mechanisms for the five facets of primary healthcare reforms (jiceng yigai wufangmian jizhi), and a list of essential medicines that all localities were required to comply with. On the other hand, within the framework and targets set by the central authorities, China provided ample room for local initiative and timely promoted local successes nationwide. During the initial period of this round of reforms, some requirements were looser. There were few hard metrics and localities had so much leeway that some were at a loss. After primary healthcare reforms, the central government became aware of these problems and strengthened the stipulations of hard indicators based on local experiences, effectively advancing nationwide reforms. This “top-down, bottom-up” Chinese approach to reforms, which allowed trial and error while maintaining government control, made it possible for the central government to set general directions and targets. This approach also gave localities the initiative to creatively explore specific approaches that were suited to local conditions.

6.3.3 Participation by Think Tanks in Independent Research Apart from surveys by government authorities, think tanks also played an important role in top-level design of reforms. In early 2007, the Leading Group for Deepening Health Care System Reform commissioned six institutions (Development Research Center of the State Council; Peking University; Fudan University; the World Bank; the World Health Organization; and McKinsey) to carry out independent studies on plans for overall healthcare reforms, a first in the history of public policy making in China. Think tanks also played a role in the policy making process. For instance, leading State Council officials authorized the Counsellors’ Office of the State Council to carry out independent surveys and studies in June 2008 as there were still controversies over parts of the healthcare reform program that involved reforms of public hospitals. The Counsellors’ Office formed a research team comprising Chen Quanxun and five other counsellors, which examined over forty healthcare institutions in nine provinces and municipalities over half a year to form proposals for public hospital reforms. This became one of the main bases for this aspect of overall healthcare reforms. It was because the decision-making process fully embodied the principles of “top-down, bottom-up; from the people, to the people” that the Opinion on Deepening Health Care System Reform had two significant strengths. First, its principles and concepts were correct and progressive, and had a strategic vision. The Opinion embodied sound principles such as the foundational role of health in well-rounded human development, adherence to the non-profit nature of public healthcare, and the building of a universal primary healthcare system. Second, the plan was comprehensive and touched on every area related to the healthcare system, including hospitals, medical insurance, government spending, talent development, the pharmaceutical industry, prices, informatization, administration, health legislation and media outreach. It is difficult for other countries to implement such comprehensive reforms.

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However, due to the rivalry between various departments, the healthcare reform plan did not provide clear conclusions regarding some controversial issues, which had to be resolved during actual implementation.

6.4 Interaction Between Democracy and Centralism The Opinion issued in 2009 consisted of macro-level guidelines that laid out a multitude of tasks. However, these tasks could not be all carried out at the same time. Decisions had to be made on which were more important and should be implemented first. Where to start with reforms? How should they be implemented? What should be done first and what should be left for later? These were issues related to implementation roadmaps. Choosing appropriate breakthrough points and the right paths would reduce resistance and increase motivation for reforms, allowing more to be accomplished with less. Otherwise, reforms would take twice the effort for half the results, or even fail to be implemented. Problems relating to the breakthrough points and pathways of reforms were resolved by local governments during the implementation process. The following challenges were the first to be encountered during the implementation of the Opinion. First, the Opinion did not provide clear guidance on some key issues due to disagreements between various departments, instead adopting a conciliatory approach. For instance, the Opinion established the Essential Drug System (jiben yaowu zhidu). Under this system, primary healthcare institutions were required to provide essential drugs to patients at cost price, which went some way towards preventing healthcare providers from profiting through mark-ups. However, the Opinion did not provide clear guidelines on how healthcare providers should recoup their lost income after drug mark-ups were banned. As a result, most localities did not have the means to actually implement this system. The public hospital reform pilot aimed to encourage public hospitals to act in the public interest and control the excessive rise in healthcare costs by discouraging the bloated prescriptions and unnecessary tests caused by the prevailing healthcare financing model as well as rooting out corruption in the pharmaceutical distribution chain. However, attempts to solve these problems ran into huge resistance. First, reforms had to overcome longstanding vested interests in the pharmaceutical distribution chain. This involved links in the distribution process and also the personal interests of some medical personnel and government officials. In practice, there was great resistance but little motivation to push these reforms through. Second, after abolishing the current healthcare financing model, how might hospitals recoup their lost income and ensure business as usual? The Opinion laid out three channels: increased government spending, medical insurance reimbursement and adjustments to the prices of healthcare services. However, these three channels respectively fell under the ambit of three departments (finance; medical insurance; reform and development), which ultimately could not reach a consensus on compensation mechanisms

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for public hospitals. Public hospitals continued to operate under the old mechanism of sustaining their finances through pharmaceutical profits. Second, healthcare reforms were not a high priority for the various levels of government. The healthcare reform plan was issued in April 2009, when the world was gripped in the financial crisis. Under the pressures of an economic downturn, the ingrained “growth-first” mindset regained the upper hand. Along with the fact that the healthcare reform plan did not lay out quantitative metrics and timetables regarding certain issues, many localities found themselves at a loss as to how reforms should be implemented. Under these circumstances, local experiments played an important role in setting the stage for reforms, of which the most prominent were the breakthroughs in primary healthcare reforms by Anhui Province from 2009 to 2010 as well as the breakthroughs in public hospital reforms by Sanming, a city in Fujian Province, since 2012.

6.4.1 Breakthroughs by Anhui Province in Primary Healthcare2 Anhui Province was the first to achieve a breakthrough in the implementation of the Essential Drug System. In 2009, the province discovered during inspections that primary healthcare institutions primarily relied on pharmaceutical sales to sustain their operations. Impropriety in pharmaceutical procurement and sales was prevalent, as were excessive and inappropriate drug prescriptions. Some healthcare facilities even administered several antibiotics at the same time, endangering patients’ health; some became the “personal turf” of their directors, with plenty of “ghost staffers” on the payroll; some town(ship) governments saw healthcare facilities as money-spinners and would set annual targets for their contributions to local government coffers. The Anhui Party Committee and provincial government believed that resolving these problems not only required abolishment of the mechanisms that incentivized healthcare providers to buttress their finances through drug prescriptions and increased government spending. More importantly, old systems had to be overhauled and new mechanisms established. Otherwise, increased government spending would bring no benefit to the general public. To this end, they rolled out two fundamental reforms focused on eliminating healthcare providers’ financial dependence on drug prescriptions: procurement of essential drugs by public tender and overhauling the operations of primary healthcare institutions. The specific measures included: 1. Establishment of management systems specifying that government-run primary healthcare institutions were non-profit public institutions whose personnel and operational budgets were funded by public finances. 2

The content of this section is based on materials gathered by the author during field research on healthcare reforms in Anhui from July 25 to August 4, 2011.

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2. Establishment of competitive personnel systems to avoid keeping non-productive personnel on the payroll. Staff appointments in primary healthcare institutions became competitive. The chiefs and department heads of these institutions were appointed through public selection (gongkai xuanba). Anhui Province “re-channeled” (fenliu) 21,000 personnel who either lacked the requisite qualifications, formal job positions or were perpetually absent from work. 3. Establishment of incentive-based remuneration to prevent free-riding. Performance assessments for primary healthcare institutions and medical personnel were centered upon service quantity, quality, effect and patient satisfaction. As appraisal outcomes were linked to remuneration, doctors’ incomes were no longer linked to drug prices. 4. Implementation of new pharmaceutical tender systems that prevented multiple mark-ups to drug prices. All drugs used at primary healthcare institutions were procured and delivered through unified systems, eliminating intermediary links and allowing medicines to be sold at cost price. This system pushed many small, disorganized and poorly run pharmaceutical plants out of the market and severed the “chain of interests” in the distribution of pharmaceuticals. The resultant streamlining of pharmaceutical distribution chains reduced drug prices. 5. Ensuring adequate financial reimbursement. After drug mark-ups were banned, the government subsidized the personnel and operating costs of primary healthcare institutions. In addition, the government specified that the salaries of health workers would be aligned with local public institutions and would not be lower than pre-reform levels. To achieve this, Anhui Province increased government spending by around 1.5 billion yuan per year. After these reforms, government responsibilities were duly fulfilled. The share of fiscal allocations in the overall income of primary healthcare institutions surged from 12.8 to 52.1%. Primary healthcare institutions became government-funded bodies that followed the government agenda. Healthcare workers no longer had to depend on pharmaceutical sales to generate income and could focus the bulk of their energies on enhancing public services. There was a noticeable decrease in bloated drug prescriptions, and healthcare facilities shifted their focus from revenue to regulatory compliance. Procurement through public tender cut off channels whereby health workers gained illicit income and prevented pharmaceutical companies from the improper competition through rebates. The use of pharmaceuticals became more regulated, while triple or double use of antibiotics also became highly rare. Reforms also simplified pharmaceutical procurement channels and ensured reliable drug quality. Over 90% of pharmaceuticals were sourced from the top 400 companies in China, improving the quality of medicines while reducing prices by around 40%. Doctors gained a greater sense of social responsibility and honor, and also cherished their jobs and status more. Average outpatient consultation fees decreased by 22.1% in the first half of 2011 compared to the same period in 2010. Average hospitalization bills declined by 10.1%, with the Largest decline being 49.7%. There were even patients from neighboring provinces who sought medical care at primary healthcare institutions in Anhui.

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This shows that local governments take different approaches to healthcare reforms than the central government. The central government primarily sets guiding principles and macro-level institutional policy, while local regions needed to further determine the “what” and “how” of reforms, as well as communicate the specific measures to officials in each county, city and township. Anhui’s experiments overcame tough challenges in national healthcare reforms and were promptly popularized. The State Council timely summarized Anhui’s experience and adjusted national plans, specifying that nationwide efforts in 2011 would focus on “promoting comprehensive reforms of primary healthcare institutions through the Essential Drug System.”

6.4.2 Breakthroughs in Reforms of Public Hospitals in Sanming, Fujian Despite the large number of services provided by primary healthcare institutions, problems with healthcare costs and availability were primarily found in large hospitals. The reform of large public hospitals faced huge resistance. Sanming, a city in Fujian Province, was the first to successfully overcome these obstacles. Since 2012, Sanming has carried out comprehensive reforms of all twenty-two public hospitals at county level and above, becoming China’s first prefecture-level city to do so. In a nutshell, the city’s reforms consisted of two initiatives that other localities had not carried out. First, Sanming thoroughly banned drug mark-ups and controlled pharmaceutical prices through anti-corruption measures and overhauling regulations on the circulation and usage of pharmaceuticals. All twenty-two public hospitals in the city abolished mark-ups on drugs, equipment and consumables. Hospital incomes were increased through adjustments to service fees and increased fiscal subsidies. Sanming launched a vigorous campaign against commercial graft and imposed penalties on several hospital administrators and pharmaceutical companies. In April 2012, the city began to monitor 129 common drugs. Companies found to offer kickbacks were blacklisted and banned from supplying pharmaceuticals. Doctors’ prescription rights were strictly regulated: antibiotics that topped dosage rankings for three consecutive months were temporarily banned and the prescribing physicians were given verbal warnings. Medical personnel found to have received kickbacks were subject to penalties, as were their healthcare institutions. Depending on the circumstances, these ranged from revocation of their licenses, cessation of medical insurance reimbursements, removal from the medical insurance network, and holding their leadership accountable. Second, Sanming boldly reformed the remuneration system in public institutions, implementing an annual salary system for doctors (technicians) and clinical pharmacists. Average salaries were set at three to five times of average income levels, with annual salaries for residents, attending physicians, deputy chief physicians and chief physicians respectively set at 70,000, 120,000, 180,000 and 250,000 yuan.

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The total payroll at each hospital was verified by the government on a case-bycase basis. Within the scope of the total approved payroll, each hospital carried out performance appraisals that incorporated service quantity, service quality and medical ethics, widening internal income differentials. The city abolished pharmaceutical mark-ups, regulated pharmaceutical usage and increased the legal income of medical personnel. This carrot-and-stick approach improved incentive mechanisms. The comprehensive reform of public hospitals in Sanming impacted the core institutional mechanisms of public hospitals, broke the chain of vested interests that permeated the distribution of pharmaceuticals and improved incentive mechanisms for hospital administrators and health workers. After reforms, hospitals became nonprofit organizations rather than for-profit companies; doctors once again became healers of disease rather than peddlers of pharmaceuticals; drugs were once again used to treat disease rather than generate profit. As these reforms were targeted in the right direction, it did not take long before they had a pronounced impact. Drug costs in Sanming declined from around 900 million yuan in 2011 to 746 million yuan in 2012 and then to 567 million yuan in 2013; the percentage of drug costs declined from 47.1% in 2011 to 28.2% in 2013 and remained stable thereafter. Medical insurance funds reversed their revenue shortfalls, while medical personnel saw an increase in their legal incomes and became more motivated. Apart from a few who had received excessive kickbacks in the past, most healthcare workers saw a considerable rise in their actual incomes as under-table gains were replaced by legitimate income. They also gained a stronger sense of professional pride, belonging and motivation. However, Sanming’s healthcare reforms were also strongly attacked in the public sphere as they provoked illicit interests in the pharmaceutical distribution chain. With strong support from President Xi, the Leading Group for Further Reform under the CPC Central Committee reviewed reports on Sanming’s experiences in healthcare reforms in 2016. Subsequently, the CPC Central Committee and State Council made plans to promote Sanming’s experience in ten provinces, pushing these reforms to a deeper level.

6.5 People-Oriented Reforms Reforms inevitably run into resistance as they impact vested interests. Healthcare reforms in developed countries primarily face three great obstacles: (1) attempts by commercial insurance companies and the pharmaceutical industry to undermine government efforts to control healthcare costs; (2) liberalist ideological barriers against the establishment of non-profit healthcare systems; (3) internal wrangling caused by partisan politics and the administrative bureaucracy. These problems do exist in China, but the difference is that China was able to overcome these barriers through the strengths of its political institutions. After the 1990s, lower government spending and looser regulatory oversight on pharmaceutical distribution formed a complex network of interlocking interests that involved hospitals, doctors and pharmaceutical circulation links. A large swathe of

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pharmaceutical distribution companies inflated drug prices through a process known as guopiao3 and pocketed the difference. An investigation by a province in 2006 found that pharmaceutical companies sold their products using official invoices (fapiao) issued by companies from other provinces (in essence money laundering). Winning bids at provincial-level tenders were three to four times as high as factory prices, while the final prices paid by patients were four to five times as high. For instance, cefotaxime sodium injections had a factory price of 4.6 yuan, winning bids of 21.5 yuan, and were sold by healthcare institutions at 24.7 yuan. The difference between the factory price and final price were divvied up among the various parties involved, with healthcare institutions pocketing a 15–20% drug mark-up, the delivery company taking a 6% delivery fee, the pharmaceutical representative earning a sales commission of around 20%, doctors netting a prescription rebate of about 30%, and the company outside the province pocketing a 10% handling fee. The most important measure in primary healthcare reforms and public hospital reforms is to streamline the factory-to-hospital pharmaceutical distribution chain through means such as unified tender, implementation of the Essential Drug System, and adoption of the “two-invoice system” (liangpiaozhi), which would squeeze out inflated costs and illicit income. This inevitably affects vested interests in the pharmaceutical distribution industry. Hence, ever since healthcare reform plans entered the pipeline, affected parties have hoped to influence or oppose such reforms through the National People’s Congress, Chinese People’s Political Consultative Conference and industry associations, while concurrently manipulating public opinion and backing research studies. There have been three characteristic peaks in their efforts. The first round was the pharmaceutical distribution industry influenced the formulation of healthcare reform plans through organized activities before the enactment of the 2009 healthcare reform program. During the planning phase, relevant parties proposed methods such as designated production of essential drugs, unified distribution and government pricing. These are also common practices internationally that help to keep essential drugs affordable. However, these have an impact on vested interests in the distribution chain. As a result, pharmaceutical industry associations began to track the concerns of key policy departments through various means in 2006 as well as took the initiative to reach out and provide them with large amounts of reference materials and reports in their favor. Occasionally, they would even use the media to draw the attention of policy makers, putting pressure on them when pushing industry opinions and recommendations to the public through the print media, internet and television. Sometimes, they would even directly fund experts and research institutes sympathetic to their positions to carry out policy studies and thereby influence the views of relevant authorities and their leaders. Clearly, China had already formed vested interest groups somewhat similar to the lobby groups in the West. Through public expression of opinion, manufacturing of public opinion, support for research, and relationships with government officials, these groups pushed healthcare reform programs to include measures that benefited 3

Essentially issuing official invoices (fapiao) for pharmaceutical products on behalf of unlicensed entities in exchange for payment. –Trans.

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them but undermined the overall public interest. At the same time, however, China’s problems with interest groups were fundamentally different from Western countries’ as the Party had the means to keep interest groups in check. Actions by these stakeholders may have influenced measures by some departments and localities, making reforms slower and tougher. However, they did not change the overall direction of reforms. Despite its many inadequacies, China’s healthcare reforms have demonstrated the strengths of China’s theory, institutions, and path. China has a pronounced urban– rural divide and a disproportionately large low-income population group. Formal employment remains disproportionately low while migrant workers constitute a huge floating population, causing dramatic changes in China’s social structure. International experience suggests that these are impediments to the establishment of a universal healthcare system. The World Bank believes that universal health insurance coverage is possible only in urbanized countries where formal employment is the norm. Due to the aforementioned factors, Asian countries with large populations, such as India and the Philippines, have been slow in promoting health insurance. China has been able to preliminarily establish the world’s largest healthcare safety net within a relatively short timeframe, strengthen the world’s largest primary health services network and rebuild a primary healthcare system across the nation. This represents progress in healthcare reforms in the face of complex national conditions. The comprehensiveness and systematicity of China’s healthcare reforms, as well as their intensity and speed, have drawn widespread attention internationally. The experience and lessons of other countries show that smooth progress in healthcare reforms first requires avoidance of repeated policy “seesawing” caused by political cycles. Due to their political cycles, most developed countries lack consistency in their healthcare reform policies, which often flip back and forth. For instance, David Cameron’s government ended Gordon Brown’s healthcare reforms after taking office. In the US, the Democrats and Republicans have jostled over universal healthcare for a century. Obamacare aimed to expand insurance coverage and control healthcare costs; however, due to the intransigence of existing institutional frameworks, coupled with maneuvers by political forces and interest groups, wrangling over insurance coverage expansion alone continues even today. Health insurance coverage instead fell from 83.9% in 2009 to 83.7% in 2011. Second, deviations in reforms caused by weak administrative capabilities must be avoided. Progress in healthcare reforms requires strong leadership and administrative capabilities. In the 1980s and 1990s, developing countries in Latin America and East Asia ran into economic troubles and had to slash healthcare spending. Meanwhile, their governments lacked the capacity to regulate physicians’ behavior and curb corruption, lowering the social equity of their health systems and coverage of disease prevention programs. China’s healthcare reforms were targeted at the overall, long-term needs of the healthcare system and implemented through strong, stable and consistent policies that were an exceptional highlight in global healthcare reforms. China’s political system has its own strengths and can outperform other countries in achieving universal basic healthcare. These strengths are reflected in at least the following aspects.

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First, public ownership is adopted in China’s key sectors, which prevents interest groups from “kidnapping” the government and causing a welfare trap. Avoidance of the welfare trap requires China to learn from the lessons of the West. Welfare traps in Western countries are ultimately the result of their political and economic systems, where there is a divide between governments that wield power at the front and monopoly capital groups that control the government from behind. These groups are unwilling to provide welfare for the general public through taxation and public hospitals, but the political parties that govern at the front end have to provide these things to win votes. This conundrum forces the government to print money and issue debt, which ultimately leads to the welfare trap. By contrast, China has a political party and government with a strong governance capacity. Although interest groups have an influence on government policy, they do not have complete control over government decisions. Hence, the government can introduce healthcare security policies that benefit the majority and finance these policies through taxation and returns on state-owned assets instead of being kidnapped by monopoly capital groups. In this sense, public ownership is the governance foundation of the Party. This bears relevance not only to politics, but also economics. Second, Chinese-style consultative democracy involves extensive discussions and surveys. By taking the mass line, decision makers can incorporate opinions from all sectors of society into the policy making process, especially opinions from grassroots communities. Healthcare reforms have been able to make substantial progress because of “open-door decision-making” throughout the process, from planning to implementation. Opinions were solicited from all sectors of society, including foreign and private institutions. The Standing Committee of the NPC and some local people’s congresses carried out special surveys on healthcare reforms—the first time in many years that such activities had been publicly carried out. The populace participated in discussions on healthcare reforms through forums, the internet and newspapers. This national debate on healthcare reforms expanded orderly political participation. There were also many members of the public who exposed corruption in the pharmaceutical distribution chain through various media channels, which also added momentum to institutional reforms. The facts have shown that the masses are the true heroes, and the people are the creators of history. Third, the Party has strong political and organizational strengths that allow it to centrally plan and strongly advance reforms. The first was the unification of mindsets, clearly specifying that healthcare reforms are a political duty of the Party and the government. The Party consistently put the welfare of the people first in the face of the major adjustments to vested interests and various risks and doubts that emerged during reforms. The second was the establishment of a strong leadership system. The State Council set up a leading group for healthcare reforms while the main leaders of each locality took personal charge. Officials overseeing individual aspects of reforms dedicated all their efforts. Together, this formed a strong mechanism for coordinating and advancing reforms. A strict accountability system was established, ensuring that every person carried out their tasks and duties. Periodic reports, supervision talks (yuetan) and oversight (duban) were instituted. The last was the establishment of proper approaches to human resources management that protected officials who

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dared to take risks. The facts have shown that the Party’s tight organization, unified thinking and ability to smoothly relay directives are China’s political strengths that enable it to implement challenging reforms. Most importantly, all reforms must first answer the question of “for whom”. Reforms that are for the greatest majority reflect socialist values and are the political character of the Party. Internationally, modern healthcare systems were the result of long-term workers’ movements rather than spontaneous evolution. The world’s first social health insurance program was established by Germany in 1883 in response to workers’ movements and to alleviate tensions between labor and capital. After the Second World War, the Labour Party launched universal free healthcare in Britain, a system that the Conservatives retained and improved to win public support. Medicare (for the elderly) and Medicaid (a health insurance program for the poor) were established in the US in 1965 during an era of racial conflicts and tensions between labor and capital. The American government launched a series of social policies known as the “Great Society” movement. Healthcare reforms in developing countries were also generally launched by left-wing political parties inclined towards the lower and middle classes. The Party is the core force of China’s workers’ movement. Healthcare reforms are part of the Party’s political character, an embodiment of socialist values, and a natural part of socialism with Chinese characteristics. Even though socialist systems had been established in merely a minority of countries, capitalist states have been absorbing socialist ideals since the nineteenth century, driving the transformation of barbarous liberal capitalism into welfare capitalism. To date, despite the disparities among various countries and political parties in their understanding of socialism, the basic values of socialism—greater social justice, protection of the economic and political rights of ordinary workers, assurance of basic social welfare—remain a banner for the quest for a better world. In developed countries, social security was something achieved through the agonizing sacrifices made by millions over lengthy struggles. Socialist countries like the USSR and China had managed to build rudimentary but extensive social safety nets despite their underdeveloped economies. Between 1949 and 1978, China’s average life expectancy had risen from 35 to 68 years, reaching levels in mid-tier developed countries at the time. China’s healthcare reforms were able to make relatively quick progress also because China had remained committed to the basic values of socialism and benefit the greatest majority.

Chapter 7

Chinese New Model of Modernization

7.1 Introduction On the evening of July 6, 2021, at a summit of leaders of more than 500 political parties and political organizations from over 160 countries, Xi Jinping, general secretary of the CPC Central Committee, delivered a keynote address, in which he stated that the Communist Party of China will unite and lead the Chinese people in pressing ahead with Chinese-style modernization to make new contributions to humanity’s search for ways to modernize. At the celebration meeting, Xi stressed that the Party had developed socialism with Chinese characteristics, promoted the coordinated development of material, political, cultural, social and ecological civilization, and created a new path of Chinese modernization and a new form of human civilization. Xi believes that Chinese-style modernization shares certain commonalities with other countries, but also has unique traits stemming from China’s national conditions, culture and history. The modernization China wants to achieve is one that aims for common prosperity, balance between material and spiritual wellbeing, harmony between man and nature, and peaceful development. Since the global financial crisis, a once-in-a-century world-changing event, global attention has been drawn to the China Model. As Western economies fell into a prolonged slump and their political governance fell into disarray, the international community increasingly recognized the merits of China’s political and economic system. As a result, the CPC and China’s socialist system gained greater approval as China became a positive force acting as a counterweight to the West and contributing positive energy to the progress of human civilization. This will require us to develop new theories beyond Western-centric ideas and discourse systems, and summarize the China Model in conjunction with China’s practices in reform and development. Building on the historical review in the previous five chapters, this chapter will discuss the China Model from five aspects: philosophical foundations, economic systems, political institutions, social equity and international strategy. © CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_7

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Since American scholars proposed the Beijing Consensus as a counterweight to the Washington Consensus, the international influence of China’s development path has continued to expand. Research on the China Model has become commonplace, but so have objections to the term “China Model” itself. The accomplishments of China’s development have caught the eye of the world not only because of its economic achievements. More importantly, China did not blindly emulate Western models. Apart from a minority of longstanding advanced countries, development and prosperity eluded those countries that copied Western development models after the Second World War, with some even falling into turmoil and disintegration. After the dramatic changes in Eastern Europe and the dissolution of the Soviet Union, the optimism of “the end of history” permeated Western society. People began to believe that capitalist systems founded upon free markets and multi-party democracy represented “the end of history” in the sense that humankind had found the optimal social system. However, in less than twenty years, the global financial crisis had driven their optimism into oblivion. In contrast, China not only stood its ground against the shocks of the crisis, but has also become the most stable engine of global economic growth today. This is the context amidst which growing open discussion, research and approval of the China Model took place. However, research on the China Model often draws more attention abroad than at home. Overseas approval of the China Model has been growing while research and recognition by the Chinese intelligentsia remain low. Chinese intellectuals are still used to gauging China with the West as a measure, fitting Western theories to China’s realities and using Western methods to solve China’s problems. They either argue that “there is no such thing as the China Model” and that “talking about the China Model is to oppose reforms,” or attribute some of China’s existing problems to the China Model and hint that it would not last. The emergence of such views is related to the over-influence of Western academic paradigms and discourse systems in China. Such phenomena are detrimental to China’s continued journey on its own path and create the risk that China will fall into the middle-income trap. It might be the case that China could emulate the Soviet Union sixty years ago and the West thirty years ago. But what today’s China needs is independent exploration; China has entered a “no man’s land” in institutional innovation. To this end, theoreticians and academics need to return to the Chinese context and explain the China Model from its own historical experiences.

7.2 A Few Misconceptions of the China Model To understand the China Model, we must first clear up a few inaccurate conceptions.

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7.2.1 Is the China Model an “American Knock-Off”? Proponents of this view argue that there is no such thing as the “China Model”— China succeeded simply because it learned from the American economic system. The Chinese path is but a “knock-off of the American path” since the main propositions of the Washington Consensus—marketization, privatization, liberalization, small government and deregulation—have already been realized in China. This is a view that only scratches the surface. In reality, there is a clear distinction between China’s socialist market economy and the Washington Consensus. China rejected rather than followed the Washington Consensus in terms of the economic system—the most fundamental aspect. Its state-owned sector continues to dominate foundational and strategic industries. Unlike some developing countries, China remained committed to opening up step-by-step on its own terms rather than prematurely liberalizing capital-account convertibility. On the whole, the Party and the Chinese government have strong governance capabilities. These institutions effectively prevented the market from functioning indiscriminately and prevented capital from profiting without restraint. In turn, this prevented the economic collapses that emerged in some Asian, Latin American and Eastern European countries after the implementation of neoliberal reforms. The Washington Consensus is not a maxim, but rather a concept exported to developing countries through the World Bank by Western countries led by the US with the goal of furthering their global strategy. The Washington Consensus propagated by the US was greatly at odds with actual American practices. For example, during the Asian Financial Crisis of 1997, Western economists recommended a laissez-faire approach instead of active intervention. Yet, when the US ran into its own financial crisis in 2008, it adopted measures to rescue the markets with great fanfare. The US encouraged “small government” in other countries through the World Bank even though Western governments were far larger than those of developing countries. Thus, the Washington Consensus is in part an export of ideology meant to weaken developing countries’ capacity for independent development. Its ultimate purpose was to serve the global strategies of developed nations.

7.2.2 Does the Success of the China Model Lie in “Progressive Reforms”? In the 1990s, the Soviet Union rammed through absolute privatization and marketization reforms in a few hundred days, which ultimately led to catastrophe. Thus, some believe that the China Model, or China’s success, lay in its “progressive” transition towards a market economy rather than adopting the Soviet approach. This view praises China’s “dual-track system” (shuanggui zhi) and “economic reforms before political reforms” approach, arguing that this model was able to maintain social stability and reduce “ideological resistance.”

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There is some truth to this view in the sense that it recognizes the detriments of the USSR’s “shock therapy.” However, it is essentially flawed in that it misconstrues the fundamental goals of reforms. Such views still regard Western models as the eventual aspiration for China’s reforms and are still a form of the “imitation theory” or “convergence theory.” In reality, China’s reforms do not aim to converge towards Western models, whether radically or progressively. Regarding “progressive reforms” as a successful experience for China is tantamount to acknowledging that the directions of China’s reforms are to converge towards the West; otherwise, whether reforms are progressive or not would be irrelevant. Attributing China’s success to “progressive reforms” and the Soviet failure to “radical reforms” focuses on trivial aspects and causes people to overlook the distinctions between the fundamental paths and directions of Chinese and Soviet reforms.

7.2.3 Is “a Strong State and Large SOEs” a Shortcoming of the China Model? Proponents of this view believe that strong government, large SOEs and investmentdriven economic growth are the characteristic qualities of the China Model. They argue that this development model was the root cause of overcapacity, extensive growth models, and environmental pollution. The point of reforms was to correct these problems, meaning that there is nothing to be proud of about the China Model. This is a one-sided interpretation. First, the size of the government is not a criteria in our judgment of its quality. “Big governments” may make mistakes, while “small governments” may lack the ability to carry out even the most rudimentary functions of government. The governments of the world’s poorest and most disorderly countries are “small governments” in the most typical sense, while developed countries outstrip undeveloped ones in the size of government, fiscal expenditures and regulatory scope. This suffices to show that the quality of government cannot be judged merely by its size or strength. Second, while there may be some truth in attributing investment-driven growth and overcapacity to “big government,” this misses the essence of the problem. In Western countries, investment-driven growth leading to overcapacity has been a cyclical phenomenon since the Industrial Revolution. Prior to the Great Depression in 1929, the world adopted laissez-faire economic policies. This was “small government” in the typical sense, but it still led to rapid growth in investment, and subsequently, severe overcapacity. Ultimately, overcapacity is a phenomenon caused by the profit-seeking of capital under market economy conditions. People feel that China’s overcapacity is caused by “big government” because local governments in China have been using preferential policies to attract investment in a contest to boost GDP and tax revenues over the past ten to twenty years. This phenomenon exists not because the government is “too big,” but because the government conflated its

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role with that of market entities and relaxed its functions in law enforcement, environmental protection, labor security and public security in pursuit of short-term, localized economic growth. Solving this problem is not about a simple repudiation of “big government,” but rather reducing government intervention in the microlevel commercial activities of businesses while strengthening government functions regarding industry policy, regulatory enforcement, labor security and public services in order to reduce the haphazard nature of the market. Finally, the history of China’s development shows that a powerful government is China’s strength. A major reason that the modernization process in many developing countries was often interrupted is that their governments were too weak and ineffective to provide basic public goods, implement socioeconomic development plans or ensure basic social equity. Without a strong administration, China would not have been able to build a unified national market nor consolidate resources to achieve industrialization within a short timeframe and thereby maintain social equity. Of course, there are still many problems in today’s government, but these cannot be solved by shrinking its size. In an unfair society, the general public can be protected only by relying on the forces of the state. Under such circumstances, cession or shrinking of the powers of the state would simply give powerful interest groups access to more resources and widen social gaps.

7.2.4 Is the China Model a “Low-Welfare Model”? Proponents of this view argue that China’s economic development is underpinned by the over-exploitation of workers. There is some truth in this view in that it recognizes China’s deficiencies in the protection of workers’ rights and interests and the provision of a social safety net. However, it cannot be said that China’s economic growth was supported by “low welfare.” Whether or not welfare standards are low is relative. Social equity and welfare levels are subject to the constraints of historical conditions. Inaction is not an option, but neither is going beyond the limits of what is possible in a particular era. Welfare standards in China are indeed low compared to developed countries, but this is a result of China’s stage of development and the historical distribution of global wealth. There is no comparability between China and the high welfare standards of developed countries, which were founded upon centuries of wealth accumulation and colonial exploitation. Compared to other developing countries and the early stages of industrialization in developed countries, China is not only not a “low-welfare” country, but had established basic living security, basic healthcare and basic education systems earlier than them, outperforming countries at the same level of development. China does not privatize land ownership, ensuring that all rural residents had land for farming and housing. This form of welfare and security alone places China ahead of those countries with huge displaced populations after land privatization. Workers’ rights and interests are also better protected after the promulgation of the Labor Law. In recent years, growth in wages has begun to outstrip growth in labor productivity

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(although this is still compensatory growth). These demonstrate that “low welfare” should not be regarded as a feature of the China Model despite the need for further improvement in Chinese workers’ welfare.

7.2.5 Is the China Model “Bureaucratic Capitalism”? China has adopted a market economy. At the same time, the Party and the government have strong governance capacity. Some describe the China Model as “authoritarian politics + liberal economics,” or “leftist government, rightist economics” (zhengzuo jingyou). There are even some who call it “state capitalism” or “bureaucratic capitalism.” These conclusions, too, deviate from reality. Ultimately, “leftist government, rightist economics” can never be a stable structure. The superstructure is determined by economic foundations; whoever controls the economic foundation controls the superstructure. A “leftist government, rightist economics” model where the economic foundation is at odds with the superstructure cannot remain stable over the long run. Either the economic foundation or the superstructure will have to change. To be more specific, if a “free economy” means unrestrained marketization and privatization, the inevitable outcome would be the consolidation of capital and its subsequent control of the superstructure. This is a pattern of history. After the Second World War, “leftist government, rightist economics” became the model in some Southeast Asian countries, which used the coercive power of government to promote neoliberalism and push through wholesale marketization and privatization. The result was the concentration of wealth in the hands of oligarchs and the destruction of social equity and solidarity. To this day, these continue to impede their modernization. “Leftist government, rightist economy” is inconsistent with China’s realities. First, China’s market is not an unrestricted free market. Second, the Party is widely respected by the people but does not conduct “authoritarian politics.” China’s political system is different from those of Western countries. Through the NPC system, autonomous grassroots governance, public participation in the policymaking process, room for local initiative under a centralized government, and a merit-based system for personnel appointments, China’s political system can more directly and effectively reflect the will of the people than Western-style democracy. As such, China’s model of democracy has unique strengths. A country could not have made such accomplishments in economic development and betterment of living standards if its political institutions were undemocratic. Thus, it is inaccurate to characterize China’s development model as “leftist government, rightist economy.”

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7.2.6 Does Praising the China Model Equate to Resisting and “Backtracking” Reforms? Proponents of this view argue that advocacy of the China Model is to reject reforms and “turn one’s back to global trends.” In their view, there is no value to the Chinese path. Hence, China should pursue foreign paths of development and embrace “global trends” or “universal values.” In other words, China should integrate into “global trends” through “reforms.” In reality, to say that the Chinese path is equivalent to resisting reforms is to set a language trap that imposes a “presumption of guilt” on the Chinese path. In essence, this view allows only for “wholesale Westernization” reforms, but not reforms with Chinese characteristics that follow a Chinese path. Based on this view, it follows that all the peoples of the world ultimately should follow a single standard, a single model and take the same development path, which would be the modernization path of Western countries. This is inconsistent with historical materialism. Are there common patterns in the development of humankind? Of course there are, and these patterns can be identified and understood. However, is the modernization path taken by Western countries the common model for the development of human society? That is not the case. Merely one billion or so people have achieved modernization through the Western model. Can the Western model be said to be a “universal value” without having been validated by the other six billion or so of the world population? The fact is that the success of contemporary developed countries owes more to particular factors rather than attributable to a common pattern. There are some who regard the China Model as antithetical to comprehensive advancement of reforms, arguing that advocacy of the China Model is to oppose reforms. Such views are actually turning China’s reform and opening up into a synonym for wholesale Westernization. China’s reforms do not aim to change its socialist political and economic directions and institutions or fully emulate Western development paths. The China Model is not in conflict with the comprehensive deepening of reforms. Rather, it aims to align reforms more closely with the history and realities of China’s development. Why are there those who regard the China Model and economic reforms as diametrical? On the one hand, this is due to a lack of confidence in China’s institutions and theory, which induces them to apply Western economic theory while ignoring the specific political, economic and cultural foundations underlying China’s economy. On the other hand, this is because they look only at China’s accomplishments after adopting an open-door policy but not the continuity between the eras before and after reform and opening up. As a result, it is impossible for them to form a comprehensive understanding of the China Model. I argue that a summary of China’s experience must first address at least two problems. First, the China Model should be able to link the periods before and after reform and opening up. At present, most theories explaining China’s economic development view these periods as antithetical and fail to see their continuity. As discussed previously, the success of the Chinese path cannot be decoupled from the

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groundwork laid during the first thirty years of the People’s Republic. Neither can these two periods be viewed in isolation, nor one used to deny the other. Currently, mainstream economists are generally disapproving of the era before China’s reform and opening up, and in-depth research is rare. The China Model cannot be understood without a proper understanding of the three decades before reform and opening up. Second, a study of China’s economic development model cannot be limited to the economic domain. It has to integrate economics with China’s politics, society, culture and international strategies. Currently, summaries of China’s experience in economic growth are mostly confined to discussions of the economy solely from the perspective of economics. This is related to biases in the current development of the discipline. Neoclassical economics, the mainstream Western school of thought, has made great progress in techniques like mathematical modeling, but neglects the historical, cultural, political and social factors behind economic behavior. Those who use such methodologies naturally miss the impact of China’s unique historical conditions on economic growth. I argue that the China Model differs from Western approaches in five aspects: (1) the philosophical foundations of dialectical materialism and historical materialism; (2) utilizing while also constraining markets and capital such that they serve the people; (3) prioritizing social development over economic growth such that social equity becomes a growth driver that empowers all-round human development; (4) an international strategy centered upon the greater good in the pursuit of shared interests; (5) a new form of democratic politics centered upon Party leadership and the mass line. These five tenets are a common thread connecting the eras before and after China initiated market-oriented reforms in 1978 and are the pillars of its successful economic development.

7.3 The First Pillar: Dialectical Materialism and Historical Materialism The greatest characteristic of the China Model is that it does not remain unchanged; rather, it signifies a development path that constantly emancipates mindsets and explores approaches that are different from textbook dogma as well as the path of other countries. As Mao Zedong wrote, “the history of mankind is one of continuous development from the realm of necessity to the realm of freedom. This process is never-ending,” and therefore, “man has constantly to sum up experience and go on discovering, inventing, creating and advancing. Ideas of stagnation, pessimism, inertia and complacency are all wrong.”1 Rejecting any form of “fatalism,” building the historical self-confidence and historical consciousness to take a new path, constantly learning from experience over the course of practice, opening up new horizons of development, and transcending the cyclical pattern of history: these are 1

Mao Zedong, Mao Zedong Zhuzuo Xuandu [Selected readings of the works of Mao Zedong], vol. 2 (Beijing: People’s Publishing House, 1986), 845.

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the most salient characteristics of China’s development path and the most valuable qualities of its theory, as well as the philosophical foundations of the China Model. These philosophical foundations originate from the materialist traditions and pragmatic character of Chinese culture, as well as the theories of dialectical materialism and historical materialism.

7.3.1 Taking a New Path of Our Own The historical consciousness of “taking a new path” first originated from the realization that old approaches were not effective. In the 100-odd years between 1840 and 1949, China mimicked the West in every aspect, from implements to institutions, from ideas to culture, but none of these saved China from poverty. Despite realizing that old approaches were ineffective, the Chinese nation rejected the notion of “historical fatalism” and the destiny imposed upon it by Western countries. Instead, China established a high degree of historical self-confidence and historical consciousness and painstakingly explored a new path. This historical self-confidence and historical consciousness originate from the naïve materialist tradition and pragmatic character of traditional Chinese culture. Since antiquity, China has placed greater emphasis on worldly affairs and practical problems than logical inquiry based on pure concepts. The Book of Changes says: “When a series of changes has run all its course, another change ensues. When it obtains free course, it will continue long.” This naïve materialism, which emphasizes development and change, is characterized by its pragmatism, which made Chinese culture highly inclusive and adaptable, as well as imbued it with the belief that human destiny is not preordained. After Marxism reached China, it integrated with the pragmatism of traditional Chinese culture to become the scientific basis for understanding and transforming the world. Chinese communists believe that ideas can sometimes have a huge impact on the material. With a grasp of the patterns, one gains the agency to use them to transform the world. Chinese communists also believe that “theory is capable of gripping the masses as soon as it demonstrates ad hominem, and it demonstrates ad hominem as soon as it becomes radical.”2 They believe that China can find a less costly and more straightforward new path through a summary of historical experiences and lessons. China was able to stay firm against pressure and reject fatalism precisely because it had established historical self-confidence and historical consciousness in taking a new path. It neither blindly emulated foreign models nor became dependent on other countries, but strove to transcend the cyclical rise and fall of dynasties that had plagued its long history. Since the end of its imperial era, China has overcome three comparatively severe inclinations towards dependency and blind faith. The first was the KMT government’s blind faith in the US in the political and ideological realms. By contrast, the CPC 2

Marx and Engels, Selected Works, vol. 1 (Beijing: People’s Publishing House, 1995), 9.

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independently launched the New Democracy revolution, mobilizing the masses to seize victory in the revolution and avoiding the fate of dependency on other countries. The second was China’s dependency and blind faith in the USSR for a time after the founding of the People’s Republic. Beginning in 1956, Mao Zedong explored means to surpass the Soviet model and prevent China’s dependency on the USSR, and eventually managed to find a socialist path distinct from the Soviet approach and avoided the tragedy that befell the USSR and Eastern Europe. The third was when Deng Xiaoping resolutely rejected notions of wholesale Westernization after reform and opening up, and personally led the fight against capitalist-style reforms in order to keep China’s reform and opening up on the socialist path. The historical self-confidence and historical consciousness to take a new path of its own have become China’s strong source of inspiration for freeing itself from dependency and forging its own path towards modernization. Historically, the loss of intellectual and cultural subjectivity and self-confidence was an important reason why underdeveloped countries are unable to untrap themselves. This was also the case before the People’s Republic was founded. A society where blind faith in other cultures is prevalent would hardly be able to muster the self-confidence needed for modernization. In the new millennium, the Party called for China to strengthen selfconfidence in its path, theory, institutions and culture. This was a reaffirmation of the pragmatic rationality and cultural subjectivity of the Chinese nation.

7.3.2 Constantly Transcending one’s Own Experiences China has been able to continually transcend not only the Western path but also its own successful experiences, daring to recognize and rectify its own errors. This was possible due to the methods of dialectical materialism and historical materialism. To transcend one’s own historical experiences is harder than to transcend the development paths of other countries. Early on, the Soviet Union had also transcended the Western path; however, the shortcomings of the highly centralized economic system formed during the Stalinist era began to emerge as the stage of development changed. In the nearly four decades between Stalin’s death (1953) and the dissolution of the USSR (1991), the country failed to adjust its development strategy. After Gorbachev took office, the USSR erred in its fundamental strategy when it blindly emulated the Western model. Leading Party officials lost their ideals and beliefs, which led to the tragedy of dissolution. The USSR had managed to “surpass the West,” but not “surpass itself.” It was the Soviets that defeated themselves. The seventy-odd years since the founding of the People’s Republic were a process of continual self-revolution and self-transcendence. China made several adjustments to its specific development strategies and paths while retaining its commitment to the socialist direction. China neither limited itself to the constraints of foreign models, textbook theories, nor remained complacent over its past successful experiences.

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Instead, China preserved its ability to independently adjust its development strategies, which allowed it to overcome every new challenge encountered along its development path. Regardless of which historical period, none of China’s institutions and paths were artificially engineered. When the People’s Republic was founded in 1949, nobody knew what socialist industrialization would be like. Similarly, when China reformed and opened up in 1978, nobody knew what the socialist market economy would be like. Instead, China found its own unique path and system by sticking to the right direction and correcting its mistakes, from theory to practice and back again. The People’s Republic’s development path over the past seventy-odd years was a process of continually facing new situations and solving new problems. After the reform and opening up of 1978, China has repeatedly revised its specific policies. These adjustments were without exception based on contemporaneous historical conditions and for the purpose of harnessing grassroots initiative and creativity. It was adherence to a methodology based on dialectical materialism that allowed China to avoid subversive mistakes on the whole despite some missteps in its development. Moreover, China’s choices during every historical stage and point were in line with the needs of the times.

7.3.3 Turning Philosophy into a Weapon of the People China’s ability to constantly sum up its experience, transcend old paths, and constantly reinvent itself is inseparable from the importance the Party attaches to theoretical guidance, especially in philosophical inquiry. The communist movement was the largest social transformation movement guided by theory in human history. The mission of communist parties is to take untrodden new paths. As such, they have to learn from lessons in the history of human development and absorb the beneficial components of all civilizations. This is why communist parties need the guidance of theory. A large country like China cannot possibly respond to risks and challenges if it lacks the right theoretical guidance. True philosophies are the essence of their zeitgeists. After the founding of the People’s Republic, Mao Zedong placed great importance on the study and popularization of philosophy. He encouraged philosophers to write essays on dialectical materialism in simple language and called on leading officials to develop an interest in and habit of learning philosophy. Mao also criticized idealism, metaphysics and rigid mindsets that went from one extreme to another without room for any middle ground, emphasizing that observation of society should apply the law of the unity of opposites and advocating acting in accordance with dialectics3 in order to “liberate philosophy from the confines of the philosophers’ lecture rooms and textbooks and turn it into a sharp weapon in the hands of the masses.”4 The great German poet Heinrich Heine once wrote that Germany was brought onto the path of philosophy by Kant, 3 4

Mao Zedong, Collected Works, vol. 7 (Beijing: People’s Publishing House, 1999), 200. Mao Zedong, Collected Works, vol. 8 (Beijing: People’s Publishing House, 1999), 323.

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and hence philosophy became a national cause.5 Similarly, after the founding of the People’s Republic, philosophy was no longer the domain of a minority of scholars. The mindsets of dialectical materialism and historical materialism, in particular, had become part of the contemporary Chinese mindset and become the philosophical foundation for constantly transcending old approaches.

7.4 The Second Pillar: Placing Markets and Capital in the Service of the People One challenge in the economic development of socialist countries is how markets and capital should be regarded. Capitalist modes of production, where markets are the primary means for allocating resources and the pursuit of profits by capital drives growth, are the primary means of global economic growth since the advent of modernity. Capitalist modes of production helped to unleash the productive forces but are also the source of cyclical crises. Hence, capitalist modes of production have been criticized for as long as they have existed, with Marxist critiques having had the most profound influence. Marxism argues that modes of production driven by the capitalist pursuit of profit will eventually result in antagonism between the bourgeoisie and the working class, in turn leading to an expansion and consolidation of anti-capitalist forces; capitalism will ultimately dig its own grave. However, history did not play out as Marx envisioned: socialism emerged first in underdeveloped Eastern countries like the USSR and China. The founding of these Eastern socialist states was founded upon two logics. The first was the logic of Marxist theory—to first carry out a revolution in the weak parts of the capitalist world and establish socialist states. The other was the inherent logic of social development in each country. To underdeveloped countries, there is no alternative to socialism. Only the socialist path could enable them to shake off dependency, break through the constraints of the smallholder economy, and embark upon industrialization. However, as these countries were not founded under circumstances where capitalism had greatly developed, and the contradictions of capitalist modes of production had not been fully exposed, they faced an unavoidable question: how should capital and markets be regarded after socialist institutions had been established? This is a question that Marx did not answer. Neither do Western countries have the criteria to do so. On this question, China forged a path different from the USSR’s and the West’s after the explorations made before and after reform and opening up: to fully harness capital and markets while using the power of its socialist state to constrain them such that they serve socialism and the people. This model differed from the USSR’s approach of eliminating markets as well as the Western approach of allowing capital to direct the economy and civic life. Instead, this model was based on the level of productivity during that stage in human history, allowing markets and capital to fully 5

Heinrich Heine, On Germany (Beijing: The Commercial Press, 1980), 307.

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play their role while preventing the infinite expansion of the role of the market and the dominance of capital over society. The idea of utilizing while constraining markets and capital has a long history in China. Although the commodity economy was not dominant in ancient China, the state had already developed the practice of achieving specific goals by influencing market supply and demand through the direct trading of goods. Duke Huan of the state of Qi, the most powerful of the Five Hegemons of the Spring and Autumn Period, appointed Guan Zhong as his chancellor. Through intervention in the production of important material goods, the state of Qi waged economic warfare on the other states and gained the upper hand over their armies. During the Western Han dynasty, Emperor Wu established state monopolies over trade in salt and iron. The resultant revenues were used to fund military campaigns, bolster state finances and suppress local rebellions. In essence, this is a question of how the relationship between the state and large private capital should be managed. In modern times, visionaries such as Sun Yatsen had also realized that the development of capitalism was necessary, but so was keeping capital in check. “Keeping capital in check” was one of the most important parts of Sun Yat-sen’s economic thought. During his travels in Europe in his youth, Sun witnessed the polarization and social crises in capitalist societies caused by the monopoly of large capital, leading him to propose the Three Principles of the People (sanmin zhuyi). Sun also advocated state ownership of large capital and large plots of land, as well as the incorporation of profits from land inflation into public coffers. In fact, Sun became a socialist in his later years, arguing that the people’s livelihood (minsheng zhuyi), one of the Three Principles of the People, is socialism. After its founding, the People’s Republic has been consistent in utilizing while constraining the market and capital both before and after reform and opening up. China’s approaches have varied in intensity and form only because of differences in the stage of development. People tend to recall that Mao Zedong had stressed that China must steer clear of the capitalist path. However, they forget that Mao first emphasized that capitalist factors must be recognized and utilized while limiting their negative impacts though the apparatus of the socialist state so that they can serve socialism. In practice, Mao consistently opposed two inclinations. On the one hand, he opposed premature abolishment of commodity trade, the private economy and the law of value. Mao admonished and prevented some localities from prematurely abolishing commodity trade, the wage system and currency in favor of a free distribution system in 1958. On the question of the bourgeoisie, Mao wrote that “exploitation of the working class for profit constitutes one side of the character of the national bourgeoisie, while its support of the Constitution and its willingness to accept socialist transformation constitute the other… [but this antagonistic contradiction] can be transformed into a non-antagonistic one and be resolved by peaceful methods.”6 On the other hand, Mao also stressed that China cannot accept the systems and values of capitalist institutions in a wholesale, unprincipled manner. The most typical example 6

Mao Zedong, Collected Works, vol. 7 (Beijing: People’s Publishing House, 1999), 170.

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of Mao’s position can be found during the debates over rural cooperativization during the early years of the People’s Republic, when he allowed the encouragement of the development of the rural smallholder economy for a certain period while also stressing that China must make progress towards socialist goals rather than stopping at “consolidating the New Democratic Order.” Mao’s justification was that successful organization was also a form of productivity that could promote growth in agricultural production. In the early 1960s, Mao believed that China could explore various forms of production responsibility systems and distribution systems within the collective economy as long as rural land ownership systems remain unchanged. Deng Xiaoping, the architect of China’s reform and opening up, stressed that China should boldly introduce market mechanisms while keeping the forces of the market and capital in check and remaining committed to the socialist path. Deng emphasized that “The aim of socialism is to make all our people prosperous, not to create polarization. If our policies led to polarization, it would mean that we had failed; if a new bourgeoisie emerged, it would mean that we had strayed from the right path.”.7 When meeting foreign dignitaries in April 1990, Deng said: “The situation in China is unique; even if 51% of the people get rich first, the other 49%, or more than 600 million people, will still be in poverty, making stability impossible. Capitalism is not feasible in China; only by building socialism and realizing common prosperity, can society be stable and develop.”8 China’s attitude towards the market economy enabled the country to harness the creativity of the market while avoiding its haphazardness. This was a choice made by China based on historical experiences. Countries that fully emulated Western development models failed to find a successful path of development. Instead, they found themselves dependent on other nations. In particular, the USSR and some countries in Eastern Europe and Latin America believed that deregulation would automatically lead to rapid economic growth. Things turned out differently. The contradictions of capitalism were fully revealed by the outbreak of the global financial crisis. In time, people will develop a deeper understanding of these problems.

7.4.1 Integration of Public Ownership and the Market Economy China has adopted an economic system which is dominated by public ownership but allows other forms of ownership to develop alongside. This is the institutional foundation for harnessing the role of the market while remedying its failures. The public sector, in itself, is a comprehensive institutional arrangement that remedies

7

Deng Xiaoping, Selected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 110–111. Deng Xiaoping, Deng Xiaoping Nianpu (1975–1997) [Chronology of Deng Xiaoping (1975– 1997)] (Beijing: People’s Publishing House, 2004), 1312.

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market failures and limits the privileges of capital. Adherence to the dominant position of public ownership and integrating it with the market economy are China’s institutional strengths and important factors in the success of the Chinese path. Whether before or after reform and opening up, the public sector has been vital to China’s modernization (see Chaps. 3, 4 and 5). China’s practices have enriched the theories of public ownership economy. Traditional Marxism primarily regards public ownership as a means for the working class to control the factors of production, achieve united freedom of labor and avoid the oppression of capital. However, production forces have not yet reached a level where private ownership can be fully replaced by public ownership. As such, what is the role of public ownership during this stage in history? China’s experiences demonstrate that the role of the public sector manifests at least domestically and externally. Domestically, the primary role of the public sector is to protect the common interests of the people by remedying market failures, maintaining social equity and providing public goods. In sectors with natural monopolies, public ownership can effectively prevent monopolistic companies from generating super profits and ensure that their profits are shared with society, which in turn benefits the entire economy. China’s public ownership of land lowers the costs of economic development so that the state can develop industry, commerce and infrastructure through the conveyance of state-owned land without the need to levy taxes. Commitment to the dominance of public ownership endows China’s development with an important feature, i.e. prioritizing the development of foundation sectors that are in the public interest, constantly consolidating the groundwork for long-term economic development. These public goods can be divided into two broad categories. The first is “hardware,” including capital equipment, material infrastructure (energy, transportation, telecommunications, etc.) and strategic industries (cutting-edge technologies, military industries, etc.). This increases the potential for economic growth in the long run and lowers the costs involved. The other is “software,” including investment in health, education and basic scientific research. In these sectors, China has expanded the availability of public services through institutions that are generally owned by the public. Externally, public ownership safeguards the interests of the Chinese people in the global arena. In today’s world, MNCs have become a primary form of large international monopolistic corporations, especially after the globalization of neoliberalism in the 1980s. MNCs often have influence comparable to or even exceeding that of sovereign states. Their monopolies often harm the national economies of developing countries, which can only rely on the existence and competitiveness of SOEs to keep them in check. Some dependent economies in Latin America, Africa and Asia are in reality serving the interests of MNCs as they lack strong national corporations of their own; most profits flow overseas and are not shared with the man on the street.9

9

Chen Ping, “Jiaru Zhongguo Guoqi Zhende bei Siyouhua” [If Chinese SOEs were really privatized]. http://www.guancha.cn/chen-ping/2013_04_17_139040.shtml.

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The role of China’s SOEs is similar to how German companies “occupy the strategic high ground.” Germany’s “social market economy” model is the archetypical example of the “Rhine model,” a capitalist economic model somewhat different from neoliberalism. Unlike the Anglo-American model (Anglo-Saxon model), which emphasizes free competition, profits and minimal welfare. Instead, this model features a capitalist market economy that stresses appropriate state regulation and social security, premised upon free competition. In this model, enterprises compete under a framework enacted by the state. It emphasizes social equity and collective interests, adopts strict regulations on labor rights and welfare, whereas corporate investment focuses more on innovation and the long run, striking a balance between short-term and long-term interests.10 During the initial stage of modernization, the pursuit of short-term profits remains the main behavioral model of many Chinese companies. Under such circumstances, SOEs’ innovation and their focus on longterm, foundational investment becomes a strength that makes up for the shortcomings of economic development. As can be seen, China has been able to surpass other countries in strategic sectors and ensure basic living standards and social stability. China achieved modernization at a lower price than Western countries while staying clear of the poverty traps that some dependent developing countries have fallen into. The public sector played a crucial role in these areas.

7.4.2 The Private Sector Under Socialism The private sector has already become an important part of China’s economy, yet it shows unique qualities in comparison to capitalist countries. China’s national corporations had failed to develop before the People’s Republic was founded. On the one hand, this was due to feudal forces and external capitalism, which deprived the private economy of the capacity for independent development. On the other hand, this was because of the private sector’s inherent flaws. In the early days of the People’s Republic, Zhou Enlai pointed out that: “there is also a dark and decadent side to the Chinese national bourgeoisie: economically, they are tied in a hundred and one ways to imperialism, feudalism and bureaucrat-capitalism. At the same time, like the bourgeoisie of any other country in the world, the Chinese bourgeoisie is by nature solely concerned with profit, benefiting themselves at the expense of others and seizing every opportunity to gain an advantage by trickery. Therefore, many of them… resort to such criminal activities as bribery, cheating, reaping exorbitant profits and tax evasion. They steal state property, harm the people’s interest, and 10

Ding Chun, “Anggelu-Sakexun Moshi yu Laiyin Moshi de Bijiao: 20 shiji 80 niandai yilai De, Fa he Ying, Mei jingji biaoxian he chengyin fenxi” [Comparison of the Anglo-Saxon and Rhine Models: Analysis of the economic performance of Germany and France versus the UK and the US since the 1980s and the underlying factors], Forum of World Economics & Politics, no. 4 (2007): 41–48.

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corrupt state functionaries in order to pursue their own selfish interests.”11 This was also one significant reason for the socialist transformation of capitalist industry and commerce. During the early days of the People’s Republic, the frailty and dependency of the national bourgeoisie meant that they could not shoulder the tasks of modernization and industrialization. The post-reform-and-opening-up development of the private economy may appear to be “an overnight return to pre-liberation”; in reality, however, there had been fundamental changes in the environment faced by the private sector. The establishment of the socialist system, thirty years of infrastructural development, and the adoption of public ownership provided new historical conditions for the development of private businesses. Independence in political sovereignty and the economic system freed the private economy from dependence on foreign capital and gave many Chinese entrepreneurs room to perform. This process tells us that the socialist system and public ownership should not be regarded as antithetical to the private economy. There is a significant distinction between the private sector in contemporary China and the private sectors in old China and Western countries. The core of this distinction is that China’s private sector has certain socialist elements and has become a part of socialism with Chinese characteristics. These socialist elements include the following. First, China’s private sector must support the leadership of the Party in political matters and support the socialist system. This is the fundamental aspect that distinguishes it from a capitalist private sector. China can influence companies through Party theories and the Party line. There are many private entrepreneurs in China with work experience in Party or government organs and SOEs. They place great importance on Party building and have transformed the Party’s political and organizational strengths into factors for regulating corporate governance and enhancing competitiveness. Second, some of China’s national entrepreneurs have inherited the exceptional elements of traditional Chinese culture. Their high sense of responsibility towards the state, nation and society helps to prevent market haphazardness and excessive profiteering. For instance, Huawei, though a private corporation, stresses innovation and gives all its employees a stake in the company’s equity. Its CEO, Ren Zhengfei, applies CPC ideals and organizational culture in corporate governance. The company has a lofty sense of idealism and strong solidarity, proactively participates in international competition, and has become a leader in the overseas expansion of China’s telecommunications industry. Third, the relationship between the Chinese government and private capital is a novel relationship that sets a firewall between capital and power. Unlike in Western countries, where large monopoly capital can directly influence and manipulate the government, China’s system forbids capital from influencing the state. Although there was a period of time when there were transactions between capital and power, these are prohibited by Chinese law and Party discipline. In March 2016, Xi Jinping 11

Zhou Enlai, Zhou Enlai Xuanji [Selected works of Zhou Enlai], vol. 2 (Beijing: People’s Publishing House, 1984), 81–82.

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summarized the new relations between government and private businesses as “close” but “clear.”12 “Close” refers to the cooperation between Party and government organs and private businesses, where the state provides services that aid in corporations’ development; “clear” refers to the clear boundaries between capital and power, lawful running of businesses and prohibition of interference with political authority through illicit money-for-power deals. This is a strength of China’s system that prevents a “winner takes all” situation by capital. There is another common viewpoint that is noteworthy. Some believe that the CPC, as China’s governing party, stresses communist ideals and the dominance of public ownership to an extent that may scare off private entrepreneurs and lead to a capital flight. These views require clarification. The CPC has never regarded private enterprises as a target of revolution. The socialist transformation during the early days of the People’s Republic took the form of joint public–private commercial operations founded upon the willingness of private enterprises and with due compensation for their owners. Moreover, China has strengthened protections for private businesses since reform and opening up. These include, for instance, the promulgation of laws protecting property rights (such as the Property Law). Emphasis on the dominance of public ownership and the drawing of boundaries for private capital serve to aid rather than limit the development of private businesses. The goal of the Party is to achieve communism but adherence to communist ideals does not imply immediate abolishment of private ownership. Based on the principles of historical materialism, for a significant period in the coming future, China will still need to draw upon the positive roles of commodity production, the market economy and private capital while suppressing their negative impacts. Chinese entrepreneurs all find this acceptable as long as the issue is put out in the open and the boundaries on the development of private capital are clearly delineated so that the growth of the private sector is supported when it benefits the national and public interest and cautioned if it harms the interest of the state and the nation.

7.4.3 A Government that Can Steer the Market Economy Proper management of the relationship between government and the market is a core issue in reforms of the economic system. In terms of its functions, the Chinese government neither adopts the Soviet approach of “running the whole show unilaterally” (baoban daiti) nor becomes an inept “small government.” Instead, China continually strengthens the capabilities of the state while adopting market mechanisms. 12

“Xi Jinping zai Kanwang Canjia Zhengxiehui de Minjian Gongshanglian Weiyuan shi Qiangdiao Haobudongyao Jianchi Woguo Jiben Jingji Zhidu Tuidong Gezhong Suoyouzhi Jingji Jiankang Fazhan” [Xi Jinping stresses unwavering adherence to China’s basic economic system and promoting the healthy development of diverse forms of ownership during a joint panel discussion of CPPCC National Committee members from the CNDCA and the ACFIC], Xinhua Daily Telegraph, March 5, 2016, p. 1.

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The Party has emphasized that all leading officials must strengthen their “ability to steer the market economy”and that the government is neither a “watchman” nor a “referee” in the functioning of the economy. More importantly, China’s socialist government represents the interests of the people, governing and steering the markets and capital on their behalf. The economic functions of the government are not only reflected in the formulation of rules and the maintenance of macroeconomic stability, but also in important areas such as the development of the public sector, provision of public services, maintenance of social equity, promotion of common prosperity, and participation in international competition. China took a different approach from the West in adopting a market economy. Western countries had market economies before they progressively strengthened government functions, so they were unable to avoid the severe flaws and drawbacks caused by market haphazardness, including economic crises, wealth gaps and global economic imbalance. By contrast, China, as a socialist country, first established a people’s state before adopting a market economy. The socialist market economy is integrated with the basic socialist system and has new traits and advantages that are distinct from traditional market economies. On the one hand, it harnesses the positive aspects of market mechanisms to enhance the dynamism of economic development; on the other hand, it can better remedy market failures through the advantages of the socialist system, including public ownership of production factors, distribution according to work, regulation through national development plans, balanced coordination, independence and autonomy, and common prosperity. Based on the history of China’s economic development, a proactive government has long been a boon for economic growth, whether in the pre- or post-reform-and-opening-up period. A proactive government has prevented China from falling into two traps that befell developed and developing countries during their economic development. The first trap is a weak government that lacks the necessary capacity for governance; the other is the “capture” of government by powerful interest groups, which turn government into a representative of minority interests. People tend to only remember Adam Smith’s “invisible hand” but overlook the historical context amidst which he proposed this theory. Smith lived in an era of primitive capitalist accumulation. In The Wealth of Nations, he denounced capitalists’ exploitation of workers by manipulating and bribing politicians, and called for an end to this collusion between government and business by allowing the “invisible hand” to function.13 Clearly, Smith was not against government intervention in general. Rather, he was opposed to corrupt governments that collude with the bourgeoisie to oppress workers. On this point, Smith and Marx were in strong agreement. In chapter 24 of Das Kapital, when discussing “the socalled primitive accumulation of capital,” Marx denounced bourgeois governments for the “fraudulent alienation of the State domains [and] the robbery of the common

13

Lang Xianping and Yang Huirui, Zibenzhuyi Jingshen he Shehuizhuyi Gaige [Capitalism spirit and socialist reform] (Beijing: The Oriental Press, 2012), 17–19.

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lands”14 and the “[taking away] from the workers the right of association but just acquired,” leaving wage laborers in a state of dependence akin to slavery.15 The difference was that Marx and Smith proposed different solutions. Smith believed that since governments may be bad actors, it was preferable to eliminate government intervention and minimize the scope of government functions. There was some sense to this in an era when industrialization had just begun, and social life was not as complex. But with greater industrial development, social life became more complex while market failures became more pronounced, making the role of government increasingly important. At this point, Marx’s solution gradually gained the upper hand: allowing governments to play their due roles instead of making them smaller. After the Great Depression in the 1930s, bourgeois governments began to strengthen their roles in maintaining social equity, providing public services (such as healthcare, education and environmental protection) and establishing SOEs that fulfilled social responsibilities. These were a response to continuous workers’ movements and economic crises. As socialist states emerged, institutional competitions drove bourgeois governments to more forcibly strengthen the role of government and remedy market failures, leading to the formation of social democracy and welfare capitalism. After the 1980s, neoliberalism premised upon less government intervention swept the globe and spurred short-term economic growth. But this also expanded the North–South divide and domestic social disparities. In particular, many countries in Eastern Europe, East Asia and Latin America embraced the concept of “small government,” implemented privatization, slashed social security programs and loosened financial regulations, which then led to economic crises. Evidently, the crux of the problems lies not in the size of government but in what it does. On the one hand, a government may collude with interest groups to plunder the interests of society; on the other, a government can formulate economic development strategies, curb monopoly capital, safeguard social justice, provide public services and protect national interests externally. In the real world, some hope to bind the “plundering hand” of government to benefit the country and the people, whereas others hope to bind the “protective hand” of government so that it does not curb interest groups, regulate income distribution or provide social welfare, and thereby protect the interests of property owners. Clearly, these two forms of limitations on government power may well have entirely divergent consequences. The problem is more complex for developing countries. Due to their immature institutions, developing countries’ governments simultaneously have the qualities of a “plundering hand” and a “protective hand.” Under such circumstances, advocacy of “small government” can easily lead to confusion, the result being the misalignment of government functions and abdication of the government’s duty to protect. The lessons of Eastern Europe and Latin America show that some international lobbyists go all out to advocate SOE privatization, financial deregulation and minimal welfare in developing countries because they want to cripple government in the name of “restraining government power” for the purpose of protecting their advantageous 14 15

Marx and Engels, Collected Works, vol. 5 (Beijing: People’s Publishing House, 2009), 842. Marx and Engels, Collected Works, vol. 5 (Beijing: People’s Publishing House, 2009), 851.

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position in the international economic order. Therefore, it should be clarified that “restraining government power” is not to weaken the state but rather to allow for stronger, more effective governance. Laissez-faire markets that go unchecked will decimate all human social relations under the coercion of capitalist interests, turning everything into commodities and stripping social relations of their natural and social attributes. When destitute workers become commodities, they are helpless against exploitation by capital, which then leads to sharp social divisions and antagonisms. When land becomes a commodity, vicious engrossment, widespread vagrancy and environmental destruction result. When natural resources become commodities, the natural environment will be exploited beyond the point of no return. Neither can laissez-faire markets provide equitable healthcare and education. Hence, governments need to fulfill their duty of keeping the power of capital in check. It is during a turbulent era of intensified international competition and frequent crises that a proactive government manifests its institutional strengths. Compared to many countries that have failed to modernize or fallen into the middle-income trap, China’s proactive government demonstrates the country’s institutional strengths. In the face of present problems in government, China needs to deepen reforms. However, this does not imply blind faith in “small government” nor abandoning China’s institutional strengths.

7.5 The Third Pillar: People-Centered Approaches One key issue in the path of economic development is striking a balance between equity and efficiency as well as a balance between economic growth and human development. On these issues, Western countries pursued economic efficiency before addressing problems of equity and prioritized economic growth over human development. There are two problems with this approach. First, it comes with hefty social costs. It took the working class in Western countries a long period of struggle to gain relatively fair social status and safety nets. Second, social polarization is immensely difficult to reverse once it has taken form. In particular, it is difficult for developing countries that are on the periphery in the world system to form governments that represent the interests of the middle and lower classes as their politics are easily influenced and controlled by global capital. Judging from practice, most developing countries have not managed to find good solutions to problems of social equity and human development. On this problem, China took a new approach, which was to prioritize the wellbeing of the people, prioritize social revolution over economic revolution, prioritize social progress over economic development, and keep human development appropriately ahead of economic development. In sum, China focused first on problems of social equity before development of its economy. This was why China was able to, despite a very low level of economic development, effectively and stably consolidate resources for modernization. This was also why China was able to unite its people in jointly

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striving towards long-term goals, avoid the hefty social costs incurred by Western countries in the early stages of their development, and allow the Chinese economy to take off at a relatively steady yet rapid pace.

7.5.1 Social Revolution Before Economic Modernization Balancing equity and efficiency is a longstanding problem in economic growth. At the microeconomic level, equity and efficiency appear to be contradictory; however, from a macroeconomic perspective, equity is consistent with longer-term growth. China was able to overcome the bottlenecks of modernization because it had carried out the most profound social revolution in history. Pre-1949 China was a stratified and highly inequitable society. For most of the populace, polarization impeded the expansion of consumer markets and the enhancement of human capital. For the state, interest groups segregated the state and the people. These interest groups plundered huge amounts of social wealth, rendering the state unable to consolidate resources in the heavy industries that it needed most. The state even fell under their control, becoming a tool for their profit-seeking. Even though visionaries among the KMT were aware of the need to curb corruption (i.e., to curb oligarchies, as represented by the four major clans of the time) and implement land reforms to win over the hearts of the peasantry, these policies were impossible to carry out as the KMT itself was part of these interest groups. By contrast, the CPC had its roots in the community and had no relationships with the various interest groups of that era, allowing it to win public support through land reforms. After its founding, the People’s Republic carried out a profound social revolution, a primary hallmark of which was the transformation of existing interest groups. In the countryside, China achieved comparatively fair distribution of land; in the cities, China established the foundations for public ownership by confiscating the property of bureaucrat-capitalists and taking over foreign assets, allowing for a fairer distribution of the primary factors of production and eliminating the various “rentier classes” that profited without laboring. The limited surplus could be directly distributed between the state and the people, allowing resources to be concentrated in key sectors to develop heavy industry, while also equitably distributing limited consumer resources to ensure improvements in basic living standards. The state could also use its limited resources to prioritize the building of a universal social safety net that was fair and cost-effective. These conditions overcame the impediments that China’s traditional social structure imposed on the development of its economy. Social revolution was the force that launched China’s modernization. Social revolution was a large-scale popular movement that swept away China’s stratified social structure and propagated a culture of fairness, turning the state and the people into a community with common interests and uprooting China’s entrenched class system. The People’s Republic established a fair, egalitarian society with a safety net and organizational capabilities, transformed China’s disunited, unequal, rickety and riskprevalent social structure, and gave work, dignity, security and hope to a populace

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that had endured centuries of humiliation and harm. Workers gained the sense that they were their own masters working for themselves, a mindset that was a great incentive during an era when economic resources were lacking. Since the 1980s, the “farewell-to-revolution” view was fashionable for a period of time. Such views held that revolution had disrupted China’s modernization and argued that China would have modernized long ago if not for the revolution. These views, which regard revolution and construction as entirely separate, are inconsistent with historical facts. After 1840, history gave China an opportunity to develop capitalism, but China’s national capitalism could not develop independently in a semi-colonial context. Today, there are still many developing countries that have never been through a social revolution. Polarized social structures and the existence of interest groups are one source of their enduring turmoil. In some Asian countries, caste systems remain entrenched while land is privately owned. Vagrant farmers are commonplace, while consumption capacity and levels of human capital remain very low. In some developing countries, land is owned by large landowners and capitalists, making the wealth gap a source of continued social unrest. The practices of the People’s Republic in the early days show that social revolution allowed China to achieve modernization on a more equitable basis as well as continually add new impetus for development by safeguarding social justice. China’s prioritization of social revolution also solved sensitive problems that plague many countries: ethnic and religious issues. An important reason that the People’s Republic was able to properly manage ethnic relations and achieve ethnic harmony was that the Party did not regard ethnic issues in isolation but rather as a problem of social equity. The Party saw that the oppression faced by ethnic minorities at the time was in essence class oppression. In response, the Party united the toiling masses in regions with large ethnic minority populations (such as Xinjiang and Tibet), overthrew the rule of aristocrats and slaveowners, and united the working classes of all ethnic groups by building a sense of identity as members of the socialist family that transcended narrow ethnic sentiments. Poor people constituted a majority of the population of any given ethnic group, especially those that had not been through democratic reform and remained in the stage of feudal society or even slave society. Only by uniting the greatest majority of the grassroots population could China build a stable social foundation. This bears important lessons even today.

7.5.2 Growth Through Common Prosperity Fairness is an eternal human pursuit. In traditional agrarian societies, social disparities took longer to form as social division of labor and interactions were not significant. Although the emergence of capitalist societies allowed for the robust development of productive forces, it failed to ensure equity and justice. Conversely, forces dominated by capital increasingly divided society into two antagonistic classes. Its profit-seeking nature meant that capital would flow to areas with greater profitability, causing urban–rural, inter-regional, and labor-capital disparities to be far greater

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in capitalist societies than traditional societies. World history shows that existing Western paths have not yet achieved coordinated development. The high level of development in developed Western countries came at the expense of an expansion in the North–South divide. Most developing countries are still taking the path of dependent development; the parts that have integrated into the world system are a world apart from most of their countryside. In other words, there has yet to be a major country that achieved coordinated development primarily through its own resources. The People’s Republic’s quest to narrow its three major disparities began as early as 1956. The people’s communes and the encouragement of the growth of rural commune and brigade enterprises in the 1970s were attempts to reverse the urbancentric path of industrial development and encourage “on-the-spot industrialization” in the countryside. China’s previous two rounds of decentralization, the construction of the Third Front and the “down to the countryside” movement were conscious actions to narrow urban–rural disparities and achieve coordinated development. Coordinated development is not only an innate requirement of development but also an experience unique to the China Model. The implementation of strategies for coordinated development was indispensable to China’s ability to maintain faster and more sustained economic growth than other developing countries. The most significant effects of China’s narrowing of its three major disparities were shown in the 1980s. During the early stages of reform and opening up, China was one of the world’s major countries with a relatively fair distribution of income, with a Gini coefficient of merely around 0.3. It was this equitable starting point that gave China prosperous markets and strong domestic demand in the 1980s. This is an experience unique to China’s development process. It also offers direct guidance for consolidating new growth drivers today.

7.5.3 Prioritizing the Development of Education and Health Are free healthcare, compulsory education and social security possible in a stage of low economic development? This has long been an issue of debate in China. Globally, most countries modernized before establishing and improving their public services and social safety net. By contrast, China chose a different path, which was to first develop social undertakings and provide universal access to primary healthcare, basic education and social security even as its economy was highly underdeveloped. This was significant in two respects for modernization. On the one hand, human capital is the most vital factor in productivity. By providing universal education and health services, China greatly boosted its human capital and formed an educated, disciplined industrial workforce that became a plentiful labor resource for reform and opening up. On the other hand, housing, healthcare and education are basic human needs. By making primary healthcare, basic education and social security universally available, the People’s Republic greatly lowered uncertainties in the lives of its people and reduced the costs of keeping the economy running, making it possible to consolidate resources for the “high savings, low consumption” industrialization strategy.

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In the longer run, universal healthcare and education are preconditions for free allround human development. “Universal freedom in the face of capital” is the nature of liberty in capitalist societies. Although people are now free from feudal systems, they are subject to the dictates of capital. Whether or not one has capital becomes a precondition for the enjoyment of freedom. The provision of social security and access to public services seeks to prevent the alienation of man and create the conditions for free all-round human development. By prioritizing the development of the people’s health and education, there was a long period during which China’s level of social development considerably outstripped its global economic development ranking, laying the groundwork for national stability, economic development and social progress.

7.6 The Fourth Pillar: A Global Community of Shared Future How should developing countries manage in the face of globalization? This is a key issue concerning paths to modernization. In the era of globalization, capitalist modes of production have spread across the globe. In particular, neoliberal economics became the mainstream after the 1980s. Unrestricted flows of capital and commodities spurred the dynamism of economic development but also expanded the North–South divide, causing some countries to fall into the middle-income trap. The globalization of capitalism may have two impacts on developing countries. First, economic globalization may to a certain extent boost economic development and the dissemination of technology, which can narrow the gap between developing and developed countries. Second, economic globalization may cause developing countries to lose their economic sovereignty and national security, lock them into the lower tiers of the industrial chain, and widen the gaps between developed and developing countries. In practice, the globalization of capitalism led to the second outcome more often than the first. Nearly all developing countries that can benefit from the globalization of capitalism are small countries with unique geographical locations and natural resources. The aim of the People’s Republic’s international strategy is to strive for the first outcome and avoid the second by developing its economy and catching up with developed countries. The key to achieving this lies in holding oneself to high standards when poor and contributing to the wellbeing of all when successful. Just as the Chinese old saying, “if poor, one attends to his own virtue in solitude; if advanced to dignity, he makes the whole world virtuous as well”, the former means to participate in globalization on one’s own terms, opening up to the outside world in an orderly manner, and safeguarding national and industrial security when doing so. The later means safeguarding global equity and supporting the development of Third World countries, as well as securing one’s legitimate rights to development through the sustainment of global justice. These two precepts are one and the same. As China

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is a major developing country, to safeguard global justice is to secure fair rights to development for itself.

7.6.1 Independence and Autonomy: Attending to Virtue in Solitude When Poor After its founding, the People’s Republic did not directly join the world system as a mere link like ordinary developing countries. Instead, it independently participated in global governance and carved out space for its own development by improving global equity. Domestically, an independent development strategy gave China an independent industrial system and prevented economic and technological dependency. China is a large country with plentiful resources and huge markets, rendering it immune to the threat of blockades. As long as the country had initial capital and technology, China would be able to achieve domestic economic circulation without the need for international markets. Hence, the strict American embargo imposed on China in the early years of the People’s Republic had the reverse effect of motivating China to independently develop technologies. If China had succumbed to the pressures of foreign powers instead of taking an independent path of development, this might have given it a period of peace and aid. But in the long run, this would have been economically and politically unfeasible. Economically, submitting to foreign powers would mean that China could only join an international division of labor that was dominated by major countries. Given that China had yet to build a heavy industry base, this would have locked Chinese industries in the lower tier, greatly delaying industrial upgrading and the development of a full-fledged industrial system. Politically, the price of dependency on foreign powers would be to lose some sovereignty and strategic space, to accept an international landscape drawn up by these foreign powers, as well as to allow domestic politics to be influenced or even controlled by foreign powers. In 1993, Jiang Zemin summarized this as: “The shifting international situation in recent years has made us more clearly and deeply aware that in acting independently and on its own in the course of socialist construction, and tirelessly seeking a path suited to China’s own conditions, the CPC fostered a spirit of being self-reliant, not depending on others, eliminating irrational fears and seeing through fallacies that has played a major role in safeguarding the country’s sovereignty and the nation’s dignity and consolidating and developing the socialist system.”16 Apart from its own strategic needs, another factor that compelled the US to lift the embargo on China in the 1970s was that China, despite the prohibition, had already managed to form a full-fledged industrial system.

16

Speech by Jiang Zenmin at a meeting to celebrate the centenary of Comrade Mao Zedong’s birth [in Chinese]. http://www.gov.cn/test/2009-11/27/content_1474648.htm.

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It is necessary for a major country to maintain control over key technological and strategic sectors. After reform and opening up, China was able to work with foreign parties and import technologies on relatively equal terms only because it already had an independent industrial and technological system. For instance, McDonnell Douglas collaborated closely with China in the 1980s, which would have been impossible if China lacked the capability to independently develop large aircraft. China’s independent industrial and economic systems gave the country a strategic deterrent against nuclear powers in the early 1970s, allowing for a shift in national defense strategies from passive to active defense. China became able to keep adversaries at arm’s length, creating a peaceful environment for development after reform and opening up.

7.6.2 Upholding the Greater Good in the Pursuit of Shared Interests: Contributing to the Wellbeing of All When Successful In remarks delivered during a seminar on the work of neighborhood diplomacy in 2013, Xi Jinping proposed the concept of upholding the greater good in the pursuit of shared interests. Based on the fine traditions of Chinese culture and the diplomatic traditions of the People’s Republic, and in line with the contemporary trends of peace, development, cooperation and mutual benefit, Xi proposed that China’s foreign diplomacy work will uphold the greater good in the pursuit of shared interests and provided incisive insights on what this meant. Xi pointed out that: The greater good reflects one of our ideals as communists and a socialist state. It is not a good phenomenon that some people in this world lead lives of plenty while others do not. True happiness and wellbeing are when all people share common joy and wellbeing. We hope that the entire world can develop together and especially hope that developing countries can accelerate their development. Shared interests mean to adhere to the principle of mutual benefits rather than a zero-sum game where someone wins, and another loses. We have an obligation to help poor countries however we can. Sometimes, we have to prioritize the greater good over self-interest. By no means can we focus solely on self-interest and split hairs at every turn.17

After its founding, the People’s Republic has upheld the principles of independence, the greater good, and shared interests. China has supported national liberation movements and democratic movements in Third World countries, gaining strong moral authority among the international community and gaining the support and aid of Third World countries. Eventually, China also won recognition and respect from global powers including the US and the Soviet Union. 17

Wang Yi, “Jianchi Zhengque Yili Guan Jiji Fahui Fuzeren Daguo Zuoyong: Shenke linghui Xi Jinping tongzhi guanyu waijiao gongzuo de zhongyao jianghua jingshen” [Adhere to a correct view of righteousness and benefits, actively play the role of responsible major countries: Deeply comprehend the spirit of Comrade Xi Jinping’s important remarks on diplomatic work], People’s Daily, September 10, 2013.

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China’s development not only helps to correct imbalances in global development by working with other developing countries to secure more equal development opportunities. Through its own accomplishments in development, China also brought confidence and hope to other developing countries, helping them to overcome blind faith in the West and believe that it was possible to take a new path and build a different world. Professor Joseph Nye of Harvard University argues that China’s economic growth has not only immensely benefited developing countries; its unique development model and path is also regarded as a template for some developing nations. More importantly, the political values, social development model, and foreign policy practices advocated by China will further resonate with and influence the global public.18 Professor Vladimir Popov of the New Economic School in Moscow maintains that China’s development model, or the East Asian development model, is irresistibly attractive to all developing countries as this model has engendered an unprecedented round of growth in global economic history, and also runs counter to the neoliberal economic prescriptions provided by the US (see Footnote 18). Abdoulaye Wade, former President of Senegal, has said that while the West complains about China’s slow pace in democratic reforms, they cannot obscure the fact that the Chinese are more competitive, more efficient and better adapted to the African business environment than their critics; it is not only Africa that needs to learn from China—there is much for the West to learn as well (see Footnote 18). In terms of modernization of developing countries, China and most Third World countries are states that had modernization exogenously thrust upon them that share the common goal of transcending a capitalist world system and Western development paths. Hence, Mao Zedong once passionately proclaimed that the next fifty to hundred years would be a great era of radical change in the world’s social institutions—an era of upheaval unparalleled by any in the past.19 Mao also believed that the twenty-first century would be a time of great change for China; the country would transform into a socialist industrialized nation, and the time would come for China to make greater contributions to the human race.20 Deng Xiaoping has confidently pointed out that China’s reforms were a Chinese as well as global experiment that he believed would succeed; if so, that would provide certain experiences for the world’s socialist causes and the development of undeveloped countries.21 The international strategy of the People’s Republic is a unity of the greater good and shared interests as well as a unity of China’s national interests and international justice. China has ended its century-long plight of peripheralization and forced dependency in the world system and embarked on independent integration into the course of globalization. China has upheld the principles of independence, the greater good 18

Zhao Zhe, “Guowai Reyi ‘Zhongguo Moshi’ jiqi Qishi” [Lively foreign debates on the China Model and their lessons]. http://politics.people.com.cn/GB/143465/8669550.html. 19 Party Literature Research Institute of the CPC Central Committee, Jianguo yilai Mao Zedong Wengao [Manuscripts by Mao Zedong since the founding of the state], vol. 10 (Beijing: Zhongyang Wenxian Press, 1996), 32. 20 Mao Zedong, Collected Works, vol. 7 (Beijing: People’s Publishing House, 1999), 157. 21 Deng Xiaoping, Selected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 135.

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and shared interests, not only enabling its own development and progress, but also increasingly deepening its global influence. A new international order relying on morality and responsibility rather than gunboats and violence to surpass the path of capitalist globalization will be the contribution of a developed China to the world.

7.7 The Fifth Pillar: Party Leadership and the Mass Line What sort of governance should China build? What is the relationship between the ruling party and the people? These are issues of great importance to the modernization process. China also explored a new model with respect to these issues, which was to organize the people in an orderly fashion under Party leadership and ensure that the state and the people share common goals and interests through the mass line and consultative democracy. Under the centralized and unified leadership of the central government, China has harnessed local and grassroots initiative, forming a political landscape that is simultaneously centralized and democratic, disciplined and free, and integrates national solidarity with individual dynamism and wellbeing. This state-society relationship is different from the juxtaposition of state and society in Western “civic society.” It prevents the state from being influenced by special interest groups as well as social tensions and divisions caused by extremist populism. By coalescing synergy for development, China has bolstered social solidarity, prevented changes in the fundamental character of the Party and the state, and enabled policymaking consistent with the overall and long-term interests of society.

7.7.1 The Communist Party as Vanguard China’s modernization was organized and led by the Party, which played a core role in China’s modernization. Party leadership is the most essential trait of the Chinese path. The lack of a government that could unite the will of the nation and form common goals was an important reason why pre-1949 China was unable to modernize. Neither the Qing government nor the Republican government was able to launch the modernization process. The Party’s victory in the revolutionary war is often explained from political and military perspectives. This overlooks the fact that the revolutionary war led by the Party was not only a military and political struggle but also a competition between economic development models. In a showdown that decided China’s fate— the War of Liberation—the failure of the KMT government was not only a political and military defeat but also an economic defeat. This failure was caused by a few characteristics of the KMT government. First, the KMT regime relied, at a fundamental level, on plutocrats and foreign capital, making it impossible to carry out a land revolution in the countryside that would ensure farmers could till their own land. Wei Lihuang, a KMT general, once

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said: “The Eighth Route Army [of the CPC]’s tactics are good and beyond us. After the dissolution of the Army, everyone can come back and bring several partner with them, while the moment we send our troops out, they’re gone for good.”22 The Party was able to win over the majority of the peasantry primarily through land revolution. Farmers that had long been oppressed and exploited became staunch supporters of the Party after land reforms, eagerly enlisting in the army to protect the fruits of their labor. Second, the KMT government was too fragmented to extend its influence to the grassroots. Formally, the KMT regime was a modern government, with political parties, a legislature and a president. But this regime was akin to duckweed floating on water as it was far too divorced from China’s grassroots. Without a firm foundation, its hold over China’s vast land floundered eventually. At the time, regions below the county level continued to retain forms of organization characteristic of traditional society. As Ray Huang, a renowned historian, put it, Chiang Kai-shek rebuilt China’s upper class but not its grassroots communities. That task was completed by the Party. The biggest problem caused by an administrative system that encompassed only the upper classes was the state’s poor governance capacity and inconsistent policy. The intentions of the central government would have mutated by the time they reached the grassroots. This was highlighted in the two top wartime priorities of tax collection and military conscription. Third, the bureaucratic structure and governance culture of the KMT was severely out of tune with China’s realities. During KMT rule, China had already formed a distinct dichotomy. In the large coastal cities, particularly in foreign concessions, there was already a high degree of modernization as well as globalized lifestyles and cultures. In towns and the vast countryside, there was still a vast population mired in poverty, with most villages stuck in traditional social structures far removed from modernization. Moreover, as the ruling party, high-ranking KMT officials had very different backgrounds and life experiences from China’s lower classes, while their knowledge structures and philosophies were stubbornly westernized and detached from China’s local realities. In terms of representation and value orientations, the KMT was at most a government that represented a wealthy, elite minority. Despite not lacking men of capability, ambition and conscience, the KMT government remained fundamentally dependent on foreign powers externally and plutocrats domestically. Consequently, the KMT was doomed to fail. Compared to the KMT, the CPC was deeply rooted in the grassroots of China. The Party’s membership structure transitioned from one dominated by intellectuals to one dominated by workers and farmers, while also absorbing many members from the progressive intelligentsia. With its roots in local communities, the Party carried out land reforms that won it the support of China’s farmers. The Party also built a well-disciplined army, giving it strong organizational and social mobilization capabilities and making its theories deeply popular. Thus, after the People’s Republic was founded in 1949, the Party was able to use its strong organizational strengths to 22 Zhou Dajiang, Dangshi Shangjian [Lessons for business administration from CPC history] (Beijing: People’s Publishing House, 2006), 40.

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swiftly respond to the economic crisis inherited from the KMT regime, quickly unify the financial economy and consolidate China’s limited material supplies and taxes. These measures allowed China to avoid excessive issuance of currency or public debt, preventing the dilemma of simultaneous inflation and fiscal bankruptcy. The organizational strengths of the Party allowed China to organize its people through an efficient organizational system. This made it possible to combine various factors of production at a lower cost and consolidate resources for industrialization despite underdeveloped market mechanisms. Because the Party had the advantage of close ties with the masses, it was able to eliminate various interest groups, to remove the constraints on modernization imposed by the old pattern of vested interests, to maintain its tradition of equality among military officers and enlisted soldiers, and, in this way, to build a fairer society and prevent wealth disparities during the modernization process. It was also because it shared weal and woe with the people that the Party and the government were able to formulate long-term plans for national development and convince the people of the need for “great beneficient policies” (da renzheng) that were in their long-term interest. The Party was able to safeguard China’s independence and sovereignty in the global arena thanks also to domestic stability. Strong state power is the driving force and an institutional strength for China’s modernization, not a flaw or problem.

7.7.2 An Organized Populace Because of the strong organizational capabilities of the Party, some Westerners characterize China’s system as “authoritarian,” implying that China is undemocratic and should return state power to society. Such views that regard the state and society as diametrically opposed are too one-sided. Western political theory considers the masses as the mob, a group of disunited, irrational individuals incapable of action. The Party, by contrast, has succeeded in organizing the populace, turning the socalled mob into members of society, such that the Chinese people share common ideals and values and are capable of collective endeavors in a rational manner. The Party implements the mass line as both the leader and the students of the masses. The Party and the people share a common long-term goal. This was a new relationship between the Party and the people that transcends the class antagonisms and populism of the West. Organizing the people is a highly complex endeavor. The American political scientist Mancur Olson, known to be the scourge of special interests, has argued that “special interests” such as industry associations, unions, cartels and lobbyists are concerned only with their own welfare, not with the general welfare of society. Upon gaining policy influence, they can impede technological progress and the rational allocation of resources. Typical examples include US agricultural and arms conglomerates. India has been pursuing a policy of free trade, but that has yet to bring prosperity and development, primarily because of the obstacles posed by the profit-sharing groups established by the caste system. The rapid development

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of Germany and Japan after the Second World War was possible only because the war had decimated vested interest groups. Olson argues that China’s rapid economic development after reforms was due to a series of past political movements which eliminated vested interests and provided a highly equitable launchpad for the early stages of reform.23 If special interests are capable of organization, why is it that the general public, who are greater in number, cannot? In The Logic of Collective Action, Olson points out that the more dispersed the interests of ordinary workers are, the greater the urge to free-ride, and hence the harder it is for the working class to organize. Chinese society has a tradition of rural autonomy, but this is a passive approach. Although that had helped to sustain rural stability, living standards that could only accommodate the barest necessities, in the long run, would make it impossible to pool resources to achieve technological progress. The result would be social stagnation. In the era of industrialization and urbanization, this system will be quickly disintegrated under the impact of industrial, commercial and financial capital. Grassroots organization is a trait that distinguishes China from most developing countries as well as a unique force driving China’s modernization. After the founding of the People’s Republic, the state effectively achieved breakthroughs in key technological sectors by organizing grassroots communities to carry out large-scale industrial and agricultural production, mass experiments and innovation activities. This not only alleviated shortages in capital and technology, but also provided work for a large surplus labor force (something common in most developing countries) and allowed the economy to achieve full employment. At the microeconomic level, full employment may reduce operational efficiency. But at the macroeconomic level, it allows the entire workforce to be put to good use. This may be one of the reasons why the People’s Republic was able to build its industrial base so quickly.

7.7.3 The Mass Line and Consultative Democracy Through grassroots organization, the People’s Republic in the early days constructed a new form of state-society relations, the cornerstone of which was the mass line. The Party formed intimate bonds with the people during the revolutionary war, which became the basis for the legitimacy of the founding of a new China. Party leaders have stressed the need to maintain these bonds ever since. These bonds are reflected in the relationship between the state and society, which can be called a “people’s society” and is distinct from Western “civic society,” where the relationship between the state and society is antagonistic. In a people’s society, the state and the people share common ideals and work towards shared goals. Gamesmanship between the state and society in Western countries is often concerned with short-term interests. The state and society are adversaries, and that 23

Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities, trans. Li Zenggang (Shanghai: Shanghai People’s Publishing House, 2007).

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makes two extremes likely. At one extreme, polarization results when powerful groups wrest control of the government and society. At the other extreme, one-sided emphasis is placed on the short-term, localized interests of the underclasses, resulting in extreme populism. Organizations such as labor unions, which are meant to protect workers, may also become interest groups that hinder national competitiveness. By contrast, the integration of state and society in the People’s Republic ensures that the state and the people share common interests and goals. The people share in the fruits of national development and are hence willing to heed the state when it calls for them to make temporary sacrifices in exchange for long-term interests. This form of cooperation transcends what Olson called the collective cooperation dilemma. As such, China’s “people’s society” is at a higher level than Western “civic society.” China’s ability to form a high degree of cooperation between the state and society is the result of the Party’s focus on maintaining its close bonds with the people through the mass line and preventing a socialist state from opposing the interests of the people. The mass line and consultative democracy have become key features of Chinese democracy that surpasses the Western system of “one person, one vote,” an electoral system that superficially accords many rights to voters but only a limited range of choices. When the economy is doing well, democracy serves as an embellishment for the political legitimacy of the capitalist system. When the economy is in the doldrums and social tensions flare up, democracy becomes an obstacle that blocks people from constraining the abuses of capital. At this point, capitalist regimes will show their true face and preach the “uselessness of democracy.” For China, it is necessary to oppose the wholesale emulation of Western democracy as well as the “uselessness of democracy” theory since both arguments, in essence, represent the interests of capital at the expense of the common good. The selection of China’s top leadership depends on a long period of training and testing at the grassroots level, as well as on the votes of higher-level Party members. As such, the selection of China’s top leadership involves a tripartite combination of individual ability, intra-Party democracy, and the experience and wisdom of Party elders. China’s institutional model represents an innovation in the history of humankind. It does not fit the definition of autocracy or the so-called democracy of the West. Instead, it reflects the innovative nature of the democratic political system formed under Party leadership, with the mass line and consultative democracy at its core. This vibrant system has proved to be consistent with China’s national conditions and demonstrated its superiority over Western electoral democracy. If China’s political system were not democratic, it would be impossible to explain the country’s rapid socio-economic development in the sixty years since the People’s Republic was founded.

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7.7.4 Local Competition Under Centralization Proper handling of the relationships between the central government and local regions is vital to the economic development of a large country. The relations between the central and local governments in China have traits that are quite unique in comparison to other countries. In China, the relationship between the central and local governments is a combination of political centralization and economic decentralization. This allows the central government to maintain control over local governments, prevent local governments from forming special interest groups, and better address the negative externalities that arise as a result of miscoordination between local governments. It is this fluid and flexible relationship between the central and local governments that allows their division of powers to be adjusted during different points in time as required by changes in circumstances. China’s First Five-Year Plan implemented a highly centralized planned economic system to consolidate resources for the development of heavy industry. This period was when the central government had the greatest sway over the economy in the history of the People’s Republic. In the late 1950s and early 1970s, the central government carried out two rounds of large-scale decentralization, which boosted local industrial development and inter-regional competition. In the early stages of reform and opening up, the central government launched another round of large-scale decentralization. Later on, in the early 1990s, when inter-regional competition intensified and resulted in “fiefdom economies” (zhuhou jingji), the central government re-centralized authority over the economy, especially in terms of fiscal budgets. After the management of heavy and chemical industries were delegated to local governments in the twenty-first century, local governments have become more active in the heavy chemical industries and real estate sectors. While this promoted economic development, it also led to problems such as economic bubbles, excessive debt and overcapacity. Since the 18th CPC National Congress, the new Central Committee with Xi Jinping at its core once again stressed the need to strengthen awareness of the need to follow Party guidelines and correct the disorderly competition caused by over-emphasis on local initiative. This shows that the relationship between the central and local governments in China is not fixed and immutable, but rather a flexible entity that can be adjusted as circumstances change. Inter-regional competition under a centralized government is a force that drives China’s economic growth. This phenomenon has been studied by some scholars, who have termed it the “tournament model” (jinbiaosai moshi). Local governments attract high-quality factors of production by improving the investment environment and public services. Although this model has resulted in problems such as disorderly competition, overcapacity, and environmental pollution, these are not inevitable consequences of inter-regional competition since China sets boundaries that allows the central government to exercise strong control over the actions of local governments through administrative, economic, and legal regulations, as well as institutional

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arrangements such as personnel transfer and exchanges. As long as rational incentives are provided and adjusted based on changes in the stage of development, the inter-regional competition model can continue to function. More importantly, this relationship between the central and local governments not only drives economic growth, but also provides a tool for policy experimentation and rigorous decision-making. The central government sets the goals and directions for reforms while local governments carry out policy experiments. The central government then promotes successful local initiatives and encourages their implementation by other localities. The process can be repeated many times. This “from practice to knowledge and vice versa” process between the central and local governments is a methodology for policy experimentation by trial and error. After all, China is a huge country—even if local policy experiments are unsuccessful, this mechanism allows China to steer clear of major policy risks. Furthermore, communication between central and local authorities, as well as between government officials, ensures that higher-level agencies and their subordinate counterparts can act in tandem and smoothly advance the policy trial-and-error process. After entering the information age, the general public can learn about policy experiments in other localities through various open media channels, which in turn places pressure on local governments and encourages competition among them. Hence, this relationship between the central and local governments also incentivizes local governments to respond to public opinion, which demonstrates the role of the mass line in the government’s policymaking process.

Chapter 8

Understanding Marxism in China

8.1 Introduction Marxism is often misconstrued as a “theory for revolution” rather than a “theory for development.” Since reform and opening up, many people have myopically attributed China’s success to the renunciation of Marxism. After the global financial crisis, both the West and China began to rethink Marxism. In reality, as long as one abandons dogmatic labels of Marxism and views the Chinese path from broader historical perspective, one would easily realize that its present success benefited from the application and development of Marxism in China and was the result of the “Sinicization” of Marxism. None of the most important choices in contemporary China deviated from the Marxist track. Under the guidance of Marxism, China will leap over the “Caudine Forks” of history and build an ideal society. An understanding of Marxism is integral to understanding the Chinese path. To be frank, Marxism has found itself in a somewhat nuanced situation in contemporary China. On the one hand, Marxism is enshrined in law as China’s guiding thought; on the other, Marxism faces doubts and challenges in the real world. In the eyes of some, Marxism is just something that requires lip service when necessary but has long been discarded. In disciplines such as economics, Western schools have become the “mainstream,” while Marxism has been rendered silent and mute. In the waning years of the USSR, some Soviet leaders lost their faith in Marxism and even privately claimed that “communism is but an empty phrase to coax the people.”1 This was an important psychological trigger for the collapse of the Soviet Union—confusion in ideals and beliefs is a major hidden hazard for a socialist state. There are some causes for the emergence of these phenomena. Marxism is established upon an analysis and critique of capitalism, but China had never established a

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Pang Zhuoheng, “Lun Lishi Zhouqilü: Jianshuo shenme shi minzhu” [On the law of historical cycles: and on what democracy is], Red Flag Manuscript, no. 9 (2013): 4–11. © CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_8

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typical capitalist system. Without any comprehensive, deep knowledge of the shortcomings of capitalism, the Chinese easily attributed some problems that emerged during socialist explorations to mistakes in Marxism. After reform and opening up, China actively absorbed capitalist technologies and cultural accomplishments. If one lacks a full understanding of the laws of history and sees only the developments in the forty years since reforms, one very well may erroneously believe that “Marxism is no longer applicable.” However, as Marx put it, the degree to which a theory develops in a country is ultimately decided by the degree to which it satisfies the needs of the country. Since reform and opening up, China’s adoption of a market economy was inevitably accompanied by some problems that had once afflicted developed capitalist countries. At the same time, people gradually became aware of the practical significance of Marxism. Since the 18th CPC National Congress, the CPC Central Committee with Xi Jinping at its core has repeatedly emphasized the study of Marxism. The neglect of Marxism is gradually being remedied. At the same time, since the financial crisis, the world has also seen an upsurge of interest in Marxism. To understand Marxism requires a sound answer in terms of theory to the following question: what is the relationship between Marxism and the development of contemporary China? A few views on this question must first be clarified: First, can Marxism still explain today’s world? Marxism was born in the nineteenth century when Europe had just begun the Industrial Revolution and was still in the stage of primitive capitalist accumulation. The world has changed greatly since then, with huge improvements in social welfare, public programs and social equity, as well as certain restraints on the forces of capital. On the surface, the problems that Marxism sought to address had already been resolved in modern capitalist countries. Some believe that Western countries today are even more “socialist” than socialist countries. Marxism, therefore, is outdated. Second, was China’s economic development successful because of its adherence to Marxism, or because it had abandoned Marxism? (Put differently, “turning right while signaling left?”) This view holds that Marxism is in essence a theory for revolution; it can be used to guide revolutions but not development. Marxism is not “market economics”; developed countries learned from modern economics, not Marxism. Moreover, Marxism opposes market economies, while Marxist countries were too embroiled in all sorts of conflict to develop their economies. China’s socialist market economy was successful because it abandoned Marxism. Today’s lip service to Marxism is nothing more than a political need or historical inertia. This slogan would be discarded sooner or later. Third, even if it is acknowledged that Marxism is scientific, it is not yet time for China and humanity to adopt socialism. This view can be called the “outpacing theory” (chaoqian lun) or the “remedial lesson theory” (buke lun). Those who hold this view argue that, according to Marx, socialism is possible only when capitalism is highly developed. Hence, China (as well as other countries) had adopted socialism too early and now had to take “remedial lessons” in capitalism. As for what socialism is like, “no one can say for sure.”

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How should these views be regarded? This is not merely a theoretical question, but also decides the direction of China’s next step and offers guidance to other countries at the gate of modernization. After understanding the foundations of the China Model, a re-examination of world history since the Industrial Revolution reveals that humankind is still living under the social and economic laws revealed by Marx. China succeeded because it mastered and applied these laws: utilizing and absorbing, while also striving to transcend capitalist modes of production. China turned Marx’s vision of future societies into a path for realizing socialism. This is the crux and root of the success of the Chinese path.

8.2 Humanity is Still Living Under the Laws Revealed by Marx China built a socialist system and modernized in a time when the capitalist world system had already formed. In that case, why is it that China needs to take a new path? Why is it that a blind emulation of capitalist modes of production cannot achieve the modernization of China? It was Marx that revealed the answers to these questions.

8.2.1 Tendency of the Rate of Profit to Fall: Capitalism’s Achilles Heel Can Marxism explain today’s world? We can start our discussion from the global financial crisis of 2008. The most prominent manifestation of the financial crisis was the decline in corporate profitability, whereas the “tendency of the rate of profit to fall” is the core problem discussed in the third part of the third volume of Das Kapital. Marx and Engels use the law of “tendency of the rate of profit to fall” to explain why capitalism will lead to cyclical economic crises and eventually collapse. The “tendency of the rate of profit to fall” refers to the progressive tendency of the general rate of profit to fall (as time goes by) while the rate of surplus-value or the degree of capitalist exploitation of labor remains unchanged. Why is it that corporate profits will decline despite growth in productivity? Let us attempt a cursory explanation. Capital is divided into constant capital and variable capital. Constant capital refers to production factors such as raw materials, machinery and equipment, which retain their original value during the production process and merely transfer their value into the product. For instance, the value of a car includes the value of material capital such as steel and rubber. Variable capital refers to capital used to purchase labor. Not only does labor create value (wages) that compensates for the value of labor, but also creates surplus-value that leads to an appreciation in the value of capital.

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The fundamental difference between constant capital and variable capital is that constant capital (materials) does not create new value but merely transfer their own value into products, whereas variable capital (labor) can create new value, otherwise known as surplus-value. As productivity grows, one worker can operate more machines and produce more products. Why does profitability decline when there are more products? Because the profits of firms originate from the surplus value created by workers. When working hours and wages are constant, the surplus-value produced by workers is fixed although the scale of production and total capital is continually expanding. In other words, firms’ expenditures have grown but their profits have not. Hence, the rate of profit declines in the long run. Based on the general law of the tendency of the rate of profit to fall, Marx and Engels proposes a theory on the economic cycle in capitalist society: the pursuit of profit by capital increasingly expands the scale of production. At the same time, because distribution is dominated by capital while workers’ purchasing power declines (the proletariat becomes relatively impoverished), products are left on the shelf and capital turnover is interrupted. Businesses are forced to idle their productive forces, leading to an economic crisis. However, the “tendency of the rate of profit to fall” is only a referential framework. In real life, profits decline on a fluctuating trajectory rather than a straight path because there are also countervailing trends that stem declining profitability. Actual changes in profitability are decided by the relative strength of these two trends. Das Kapital puts forth five types of “countervailing trends” that capitalists would use to rescue profits in the face of declining profitability. The first is greater exploitation of labor, including lowering workers’ wages, extending working hours and increasing labor intensity in order to increase surplus-value. These were the main methods used in the early stages of capitalism. The second is to slash wages to below the value of labor, an obvious means for protecting the rate of profit. The third is to cheapen the elements of constant capital, since declining profitability will be stemmed if machinery and other forms of equipment are cheaper. The fourth is to create a relative surplus population. Marx argues that the more developed capitalist modes of production are in a state, the more pronounced its relative surplus population would be. The result would be low prices and large numbers of available or unemployed workers. The existence of surplus labor demotivates firms from raising wages since they can hire workers without doing so. In this regard, Engels’ The Condition of the Working Class in England has pointed out that the wages of workers in Manchester at that time were suppressed to a level that only allowed for bare subsistence. The fifth is foreign trade for the sake of gaining access to greater markets, cheaper labor and raw materials, which similarly prevents the rate of profit from declining. History has shown that Marx’s analysis is correct. Crises of overcapacity, insufficient consumption and declining profitability will occur cyclically in capitalist societies. Once these crises emerge, capitalists and capitalist countries will compensate for the decline in the rate of profit through the aforementioned means. However, these methods can only delay but not eliminate these crises. Once these measures are exhausted, the economy will collapse. Economic crises eliminate surplus capital

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through a form of “disruptive creation,” thereby paving a road for new growth. This is the “law of historical cycle” of capitalism.

8.2.2 The Historical Cycle of Capitalism Many schools of thought in economics have proposed explanations for the cyclical occurrence of economic crises in capitalist countries. The most fundamental difference between Marx’s theory on economic crises and the theories proposed by other schools is that Marx believes capitalist economic cycles are not abnormal phenomena that occurred by happenstance or temporary deviations from market equilibrium, nor caused by incidental factors such as speculation, policy errors or external shocks. Rather, they are the inevitable consequence of capitalist modes of production. The century or so since Das Kapital was published has fully validated Marx’s theories on economic crises. Capitalism brews crises even as they generate prosperity. When capitalist societies are unable to resolve these crises on their own, these crises will erupt in the form of economic collapse or war, giving rise to new social revolutions and a new economic cycle. This “prosperity-to-crisis” historical cycle takes place in five stages (see Fig. 8.1). In the first stage, social and technological revolutions boost productivity, leading to a boom. At this point, the market is not yet saturated and large amounts of land, labor and natural resources are idle. Capital would be able to generate profits once it enters the market. This stage is a period of vibrant dynamism for capitalism. In the second stage, the law of declining profitability begins to work as capital accumulates. Competition between businesses intensifies and leads to overcapacity and an excess of capital surplus. At the same time, the proletariat becomes relatively impoverished, effective demand is insufficient, and an economic crisis is brewing. This stage is akin to the transition from summer to autumn. In the third stage, capitalist countries adopt various measures to delay and counter the tendency of the rate of profit to decline in the face of downward economic pressures. Such measures include. 1. Greater exploitation of workers. This is the most direct way to sustain capital profits and includes cracking down on unions, suppression of wages, slashing social security and social welfare. From the perspective of the short run and individual firms, these measures help to lower labor costs and allow capital to generate greater profits. But from the perspective of society as a whole, these measures will intensify polarization and worsen overcapacity and insufficient demand. 2. Deregulation and encouragement of “financial innovation.” When the real economy runs into trouble, large amounts of capital flow to the financial industry and grow by sucking profits from the real economy. An over-expansion of the financial industry had occurred prior to the Great Depression of 1929 and the global financial crisis of 2008. The over-expansion of the financial industry also

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Failure of self-equilibration mechanisms causes economic crisis or war that eliminates overcapacity. The elimination of capital gives birth to a new social revolution

Starting point for a new technological revolution

Capitalist self-equilibration Capital outflow Financial expansion Greater exploitation Debt stimulus

Capital expansion and industrial prosperity

Overcapacity Surplus of capital Economic downturn

Starting point for a new technological revolution Capital expansion and industrial prosperity Overcapacity Surplus of capital Economic downturn Capitalist self-equilibration Capital outflow Financial expansion Greater exploitation Debt stimulus Failure of self-equilibration mechanisms causes economic crisis or war that eliminates overcapacity. The elimination of capital gives birth to a new social revolution

Fig. 8.1 From prosperity to crisis: the historical cycle of capitalism

created the illusion that the services sector (chiefly the financial industry) is a symbol of industrial upgrading. Excessive expansion of the financial industry forms an external loop disconnected from the real economy that is sustained by false credit. Any fluctuations in the real economy will lead to an avalanche-style collapse. 3. Overseas expansion. During the early days of capitalism, European countries overcame deficiencies in local resources, labor and markets through the slave trade and colonialization. When global anti-colonial movements swept the globe in the twentieth century, Western countries turned to export capital and products to the Third World, securing resources cheaply through financial and military

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means. While this helped them to temporarily abate their crises, the consequences were an expansion in the North–South divide and global economic imbalances. 4. Monetary or debt expansion. Illusory spending power is created during economic downturns through the issuance of currency and governmental and individual debt-spending. Such methods were widely adopted in Western countries after the 1980s, eventually turning them into debt-laden states and their citizens into “negative bourgeoisie” saddled with hefty or even lifelong debts. Clearly, these methods are adjustments to the relations of production within the institutions of capitalist countries that seek to mitigate economic crises when they occur. However, these are temporary stopgap measures that merely divert, dilute and delay crises. In the fourth stage, a full-blown crisis or war breaks out. Once the aforementioned means are exhausted, economic crises may occur and trigger social crises, manifesting as economic downturns, burst bubbles, shrinking demand and social polarization. The methods employed by capitalists to protect their profits do nothing but exacerbate the eventual crisis. Suppression of wages and welfare will simply expand social polarization and lower workers’ spending power. Financialization of the economy (including in the property sector) to digest overcapacity expands asset bubbles and results in asset prices that are higher than their actual value. As these inflated prices are sustained solely by expectations, any crack in the capital chain will reverberate across the system and lead to an avalanche-style collapse. Debt issuance and creating inflation to rescue markets are in reality attempts to save wealthy capitalists and will strengthen interest groups. External expansion exacerbates international tensions between major countries and North–South divides, while also pushing developing countries to the brink of revolution. None of these methods aim to rescue a crisis. Instead, they allow the chariots of capitalism that are constantly on the brink of crisis to run wilder and wilder, eventually leading to an ultimate crisis. In the fifth stage, the social reforms or revolutions engendered by crisis and war create the conditions for new prosperity, realizing “disruptive creation.” The world wars were the pinnacle of capitalist economic crises. Crisis and war cause the popping of bubbles, the depreciation of capital and the weakening of interest groups. Meanwhile, war often requires the establishment of a strong government to curb interest groups and rebuild a fairer society, tantamount to a new social revolution. Of course, such revolutions carry an immense price tag. In the periphery countries of the world system, economic crisis and war often lead to what Lenin described as “war causes revolution, revolution stops war.” Both world wars had triggered national independence movements in colonies. This is a manifestation of historical dialectics.

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8.2.3 Has Capitalism Saved Itself? Some have raised doubts that, although Marxist theory might have been appropriate to Marx’s era, capitalist countries have been free of sharp labor-capital tensions in recent decades. Polarization has shrunk and society has become harmonious. Marx’s predictions that “capitalism is doomed” and Lenin’s proposition in the early twentieth century of “capitalism in decay” have not come true. So, are Marx’s accounts on capitalism still valid? Or has capitalism transcended the historical cycles revealed by Marx and saved itself? Indeed, since the Second World War, developed capitalist countries have adopted some measures to restrict the privileges of capital, improve social equity and raise the socioeconomic status of laborers. For instance, developed countries have widely established social safety nets that alleviated the polarization between the rich and the poor. Through macroeconomic regulation and state intervention, the fluctuations of cyclical economic crises have been greatly reduced. In this respect, Anthony Crosland, a British Labour Party theorist of the 1950s, maintains that there are significant distinctions between post-WWII capitalism and the capitalism criticized by Marx and Engels: capital no longer had all-dominant privileges; the knowledge economy had blurred the lines between capitalists and the working class; the functions of government had extended to every aspect of social life; and basic welfare systems had been established. He thus argued that the socialism envisioned by Marx had already emerged in Europe. Many in China also believe that Marxism had become a “cure” that could save capitalism, that the fundamental contradictions of capitalism can be resolved without the need to resort to socialist revolution, public ownership and Communist government. In that case, is the Marxist critique of capitalism no longer valid? Has modern capitalism resolved its inherent contradictions? Has socialism and capitalism already “converged”? Needless to say, things are not that simple. The “improvements” in capitalist societies were made possible by unique historical conditions, which include the following aspects. First, the Second World War caused Western capitalist countries to exhaust the surplus capital that they accumulated over many years. This suppressed asset bubbles and weakened the monopoly capital groups of the past, which gave governments the means to adopt measures that restrained capital and improved social equity. Second, the competing institutions of socialist countries (chiefly the USSR) exerted external pressures on capitalist societies. The Soviet Union established the first socialist state with universal employment and labor security in human history, where the working class enjoyed a high degree of social prestige. In response to Soviet competition and to stem the spread of socialism, Western countries had no choice but to also develop social welfare programs. Support by socialist countries such as the USSR and China for workers’ movements in capitalist countries and anti-imperialist, anti-colonial and anti-hegemonic struggles in colonies also created pressure on capitalist countries. However, these external pressures gradually weakened and dissipated after the 1980s. The privileges of capital in Western countries

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rapidly expanded as the power of capital greatly exceeded the forces that kept it in check. As a result, crises related to capitalist modes of production re-emerged. This demonstrates that the fleeting balance between capital and labor in Western countries from the 1950s to the 1970s (termed the “Keynesian compromise” by some scholars) was merely an incidental phenomenon that emerged under specific conditions. It does not show that capitalist societies can resolve their inherent contradictions on their own. Lastly, the high-welfare model of developed capitalist countries was founded upon the exploitation of developing countries. The capitalist system allowed a minority of countries to prosper but did not offer a path of development for most others. Capitalism did not eliminate crises but merely diverted them to developing countries. A handful of developed countries established “welfare societies” domestically to alleviate social tensions by plundering global resources. The price was that most developing countries remain mired in poverty while the polarization between developed and developing countries has never been resolved. The welfare states of the West could never have existed without the “factories of the world” like China. In summary, the developments of capitalism over the past two centuries had all been anticipated by Marx. As revealed in Das Kapital, the law of cyclical declines in the rate of profit caused by capitalist modes of production remains a fact to the present day. Since the 1980s, Western countries have continued to expand outward, forming a global “trichotomy”: Africa and Latin America provide raw materials; East Asia provides labor; Europe and the US rely on debt to expand consumption. This is an archetypical global capitalist system. This inequity in global division of labor triggered a global economic crisis, which again demonstrated that capitalism by itself cannot eliminate cyclical overcapacity and insufficient demand, nor the resultant polarization and economic bubbles. Consequently, they have to divert their crises to periphery countries. This also means that the modernization of periphery countries not only requires discarding traditional social structures (for instance feudal land institutions), as developed Western countries did in the past, but also overcoming the impediments of imperialism on their modernization. In other words, they have to fight imperialism and feudalism, something far more arduous than the modernization process of the minority of developed countries. This is the source of the legitimacy of the Chinese revolution. This is why revolution and development are one and the same.

8.3 The Middle-Income Trap is a Capitalist Trap From the establishment of the capitalist system in the UK in 1825 to the outbreak of the First World War in 1914, capitalism experienced “a century of peace” and gave rise to the first batch of capitalist powers. These countries are also the mainstay of contemporary developed countries. However, their populations account for less than one-sixth of the global total. Modernization will be far more difficult for the

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rest of the world’s countries, which account for five-sixths of the global population. On the one hand, underdeveloped countries do not have colonies that span the globe and can use global resources to alleviate the contradictions arising from capitalist development. On the other hand, the existing powers would use a host of methods to sustain an unfair international political and economic order to keep themselves at the apex of the global pyramid. Amidst this backdrop, how should developing countries, China included, overcome core countries’ suppression of periphery countries and find a modernization path different from that of the West within a world system dominated by capitalist modes of production? The answer to this question would help us understand the global significance of the Chinese path.

8.3.1 The Trap of Capitalist Globalization Lenin’s Imperialism marked its centenary in 2016. The first systematic Marxist treatise on globalization theory, its main views include: imperialism is a corrupt, parasitic form of capitalism; the export of capital is a means for imperialism to resolve domestic contradictions, which divides the world into a minority of usurious creditor states and a majority of debtor states in the imperialist age. During Lenin’s time, the UK was the center of the capitalist world: Britain gradually turned itself from an industrial state into a creditor state, with proceeds from interest, dividends and speculation increasingly gaining relative weight in its national economy. This reminds us of the similarities between the US today and the UK back then. External expansion decimated the economies of underdeveloped countries as well as their politics, societies and cultures. Imperialism achieved the rule of a tiny minority over the majority, whereas because colonies were limited, outward expansion inevitably led to war. Imperialism led to greater national oppression while imported capital exacerbated various contradictions and led to increasingly strong resistance, which could easily become dangerous actions in opposition to foreign capital. Lenin also provided a strategy for the proletariat to respond to financial capital: “The reply of the proletariat to the economic policy of finance capital, to imperialism, cannot be free trade, but socialism.”2 History shows us that the laws discovered by Marx still hold. Moreover, the closer we are to crises and major historical inflections, the more persuasive Marxism becomes. After the Second World War, capitalist exploitation took on a different form, mutating from direct military occupation into reliance on finance, MNCs, ideological exports as well as a still considerable number of armed invasions. These led to imbalances in the global economy. Western economies progressed towards financialization and debtification, while the Third World countries that depended primarily on the export of resources and labor-intensive goods either lost their economic gains 2 [Russia]Lenin, Imperialism, the Highest Stage of Capitalism (Beijing: People’s Publishing House, 1964).

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and economic sovereignty as their national industries were decimated, or were laden with heavy social burdens and exhausted their natural resources and environments because of over-reliance on labor-intensive industries. This was the consequence of a global division of labor under capitalist conditions. When China decided to open its doors and integrate into the world economy in the 1980s, Deng Xiaoping issued a timely reminder against blind optimism: “From the economic point of view, the two really great issues confronting the world today, issues of global strategic significance, are: first, peace, and second, economic development. The first involves East–West relations, while the second involves North–South relations. In short, countries in the East, West, North and South are all involved, but the North–South relations are the key question.” Deng also said that: “In short, if the countries in the South are not duly developed, the countries in the North will find only very limited outlets for their capital and products; indeed, if the South remains poor, the North will find no outlets at all.”3 Peace and economic development are the “really great issues confronting the world.” Problems are difficulties and challenges; they are goals that have yet to be achieved and are worthy of strenuous pursuit. Unlike what some people think, it is not the case that the current era has become “a world of peace and development” where arsenals can be retired. Theotonio Dos Santos has also said something similar: “It is impossible to build a society that can reach the stage of development that the developed countries have reached today, under the present historical conditions” as “underdevelopment is the result of the same historical process that gave rise to economic development (the development of capitalism itself).”4 The logic here is precisely the historical cycle of capitalism arising from capital’s profit-seeking nature, as revealed by Marx long ago. This is the true answer as to why most developing countries have fallen into the middle-income trap.

8.3.2 Efforts by Periphery Countries to Break Out of the World System With oppression comes resistance. Since the twentieth century, there has been working-class opposition against capitalists in developed capitalist countries. The situation in underdeveloped countries is even more complex. On the one hand, they have to overcome the constraints of their domestic traditional societies to develop their economies and modernize. On the other, they have to avoid the oppression of the global capitalist system and protect the interests of their people. Modernization is impossible without economic growth. But without the ability to stay independent 3

Deng Xiaoping, Selected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 105–106. Zhang Linli, “Baxi Jingji Fazhan de Lishi Fenxi (1930–1984)” [Historical analysis of Brazil’s economic development (1930–1984)], Master’s thesis (Inner Mongolia: Inner Mongolia Minzu University, 2012).

4

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Table 8.1 Regional GDP per capita and disparities (1990 international dollars) 1000 1500 1820 1870 1913 1950 1973 Western Europe

400

774

1998

1232 1974 3473 4594 11,534 17,921

Western offshoots

400

400

1201 2431 5257 9288 16,172 26,246

Asia (excluding Japan)

450

572

575

543

640

1231

2936

Latin America

400

416

665

698

1511 2554 4531

5795

635

Eastern Europe and Soviet Union 400

483

667

917

1501 2601 5729

4354

Africa

416

400

418

444

585

1365

1368

World

435

565

667

867

1510 2114 4104

5709

Largest regional gap

1:1

2:1

3:1

5:1

9:1

19:1

853 15:1

13:1

Source Maddison. The World Economy: A Millennial Perspective, Peking University Press, first edition 2003, p. 16

amidst the capitalist world system when launching the modernization process, their economic development may fall into the middle-income trap. Since the twentieth century, most underdeveloped countries have broadly taken four paths in their quest towards modernization: dependent capitalism, nationalist capitalism, Soviet-style socialism and Chinese-style socialism. Practice has shown the first three to be unsuccessful. Dependent capitalism and nationalist capitalism share certain commonalities. Economically, both have established economic systems dominated by private ownership and developed market economies; politically, they adopt multi-party democracy. They differ in that nationalist capitalism often adopts some measures to protect national interests, including trade protectionism, a state-owned sector within certain boundaries, priority on the development of foundation industries, and restrictions on foreign investment. Capitalist countries that adopted nationalist capitalism achieved a certain measure of success in economic growth between the 1950s and 1970s, established an industrial base to some extent, and somewhat narrowed the North–South divide (Table 8.1). The Four Asian Tigers are the archetype of dependent capitalism, but their rise took place in unique geopolitical environments that are inapplicable to large developing countries. After the 1970s, under the impact of neoliberalism, countries that originally adopted nationalist capitalism policies often tended to adopt dependent capitalism and fell into the middle-income trap, resulting in stalled economic growth, polarization, populism, social unrest or even national disintegration. These phenomena show that periphery countries have yet to find a successful path to modernization regardless of whether they adopted nationalist capitalism or dependent capitalism. First, the capitalist systems of periphery countries generally did not spontaneously evolve, but were extraneously imposed by foreign powers under colonial conditions. These countries often did not undergo full social revolutions and had yet to completely break free from the constraints of feudal systems. The influence of traditional economic structures, social structures, powerful clan lineages and cultures of stratification remained prevalent. India had initial conditions for modernization that

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were superior to China’s, as well as more arable land. But because India had been colonized for a long time and had not undergone a thorough anti-imperialist, antifeudal revolution, its feudal land institutions and caste culture became impediments to modernization. Even if the modernization process had begun, periphery countries would also see the emergence of crony capitalism and bureaucrat capitalism during this process, which would then create relatively large distributional coalitions during the early stages of their economic development and consequently social polarization that cut short their modernization. Second, periphery countries that adopted capitalist systems had to become part of the capitalist world system if they opened their doors to the outside world. In particular, these countries generally accepted neoliberalist ideas after the 1970s, leading them to abolish trade protectionism and implement privatization to attract large infusions of capital from developed countries. This mode of capitalist production readily led to foreign capital monopolizing and squeezing their domestic industries. The lifelines of their national economies fell under the manipulation of international monopoly capital and lost their capacity for independent development. Finally, in the political realm, these countries often adopted Western competitive electoral democracy before they had modernized. In essence, this was democracy that was dominated by capital. In most Western developed countries, bourgeoisdominated regimes were already highly stable and election outcomes had little impact on policy. That was not the case for developing countries, where competitive elections led to short-termism, social fragmentation and populism. The actions of political parties were transient, making it difficult to produce a strong and stable ruling party that would plan and invest in long-term national development. Coupled with private ownership, this readily led to economic polarization. Competitive election systems also exacerbated polarization, leading to social fragmentation and antagonism. It is thus apparent that in a world system dominated by capitalist powers, taking the capitalist path may be effective for periphery countries with smaller economies. But for the majority that lack the requisite resources and geopolitical conditions, the capitalist path leaves them dependent on major countries, which prevents them from overhauling their domestic economic, political and social structures. The failure of periphery countries manifests as the middle-income trap. According to a World Bank report in 2007, although several countries have been able to escape their initial poverty traps, achieve an economic take-off and reach the middle-income stage, only a very few can go farther. Most would find themselves in the middleincome trap, the most typical examples being Latin American countries, most of which had experienced both rapid growth and protracted economic stagnation. For example, per capita income in Argentina rose from around USD 5000 in the early 1950s to USD 8000 in the early 1970s. However, between 1974 and 1996, its per capita income remained stagnant between USD 6000 to USD 8000. Circumstances in Brazil, Mexico and Chile were similar. The middle-income trap has become a topic of extensive concern in China in recent years. We cannot take a metaphysical view to the middle-income trap. It is not necessarily the case that an economy falls into a trap when its development reaches the middle-income stage (per capita GDP of around USD 10,000). That did

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not happen to the advanced countries of today. In essence, the middle-income trap is a manifestation of capitalist crises in middle-income countries. The roots of the middle-income trap lie in the failure of these countries, under capitalist conditions, to address external problems preventing their independent development and domestic inequities in sharing the fruits of development. Some larger developing countries had once made great achievements during their modernization but suffered setbacks along the way as they had failed to solve the two aforementioned problems. Latin American countries are the most typical examples. The emergence of the middle-income trap shows that underdeveloped countries today can no longer achieve modernization through the capitalist path. Five-sixths of the world population need a new path towards modernization.

8.3.3 Only Socialism Can Free Countries from Dependency and Crisis The existence of the middle-income trap and the failure of underdeveloped countries which took the capitalist path to modernization illustrates one principle: only socialism can free them from dependency and crisis. The establishment of socialist institutions and severance of links with capitalism are fundamental to underdeveloped countries seeking to escape exploitation and achieve independent development. Capitalism entered the phase of maturity in the nineteenth century, when capitalist modes of production had spread across the world and spurred national independence movements in the Global South. The October Revolution of 1917 in Russia, the founding of socialist states such as China after the Second World War and the national liberation movements in Asia, Africa and Latin America were all part of this movement. Marxist scholar Samir Amin terms this the “Awakening of the South,” arguing that periphery countries have taken their place in history since the twentieth century. He particularly approves of Mao’s view that state independence, national liberation and people’s revolutions have become indomitable historical trends, maintaining that this slogan had allowed China to integrate the socialist and national liberation movements and thereby ensure that the liberation of the people equated to the liberation of its various ethnic groups. For developing countries in the world system, the quest for socialism and the quest for national interests are one and the same since their exploitation by the capitalist system could be overcome only through the socialist path. This was also why China replaced “Workers of the world, unite!” with “Workers and oppressed peoples of all countries, unite!”—a more inclusive motto. Underdeveloped countries could protect their right to development in a capitalist system only by uniting their peoples, achieving national liberation, and state independence.5 5

For more on Samir Amin’s abovementioned views, see Ding Ye, “Zhiyou Shehuizhuyi Daolu Caineng Baituo Yifu Yu Weiji: Fang Aiji zhuming jingji xuejia Saimier Aming” [Only the socialist path can free one from dependency and crisis: interview with renowned Egyptian economist Samir Amin], Studies on Marxism, no. 3 (2016): 16–24.

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The Soviet model was the first to emerge in the process of breaking out of the capitalist world system. The USSR was successful as it was the first, after the capitalist Industrial Revolution, to overcome the universal dominance of capitalism and achieve modernization through a path entirely different from that of the West. The Soviet model transformed socialism from theory into practice. The USSR freed itself from dependency on capitalist countries and, for a time, even had a trade system that could compete with the capitalist world. In terms of cutting-edge technologies and social security, the Soviets also reached a level that had taken Western countries centuries of development to achieve, allowing the USSR to become a superpower on a par with the US. Internationally, the Soviet Union contributed to the rebalancing of the global landscape by forcing improvements in capitalism through institutional competition, and by supporting anti-colonial independence movements in the Third World. Even so, the Soviet model was not a successful one. Economically, the USSR established a formal system of public ownership, but it failed to truly establish socialist relations of production or reasonable incentive mechanisms, thus stifling local and grassroots initiative. Politically, the Soviets failed to make socialist democracy a reality and thus could not ensure the long-term stability of their socialist state. In specific terms, they failed to prevent the alienation of their socialist regime. After absorbing Soviet experiences and lessons, China has paved its own socialist path with Chinese characteristics, a world-historic breakthrough that has not departed from the Marxist track. The following section will discuss three of Marx’s most representative works—Das Kapital, The Civil War in France and Critique of the Gotha Programme—to demonstrate how China has echoed Marx’s thought across time and space on the issues of greatest significance: modes of production, theories of the state, and social equity.

8.4 Reversing the Relationship Between People and Capital From an economic standpoint, the greatest difference between the Chinese path and the Western path lies in their inverse approaches to the relationship between people and capital. Instead of allowing people to be subjugated by capital, the Chinese path turned capital into a servant of the people. On the surface, Marxism opposes capitalism, and therefore must also oppose capital and wish to eliminate it. This view is incorrect. Marx does not oppose capital in general. By contrast, he first acknowledges the progressive historical significance of capitalism, saying that the bourgeoisie had created more and greater productive forces in less than a century of class rule than had been created in all previous epochs. However, the difference between Marx and philistine Western economists is that his ideas are based on historical materialism and does not regard capitalism as a system that would remain perpetually unchanged. On the contrary, Marx believes that all institutions of society are products of history and capitalism must therefore be viewed in two ways. Capital created immense productive forces, but its unfettered expansion

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would lead to its consolidation and in turn anarchic production, relative impoverishment of the proletariat and, eventually, economic crises. The unrestrained privileges of capital turned all things into commodities and all social relations into relations of commodity and trade. As these modes of production proliferate, social production would increasingly deviate from its purpose. Eventually, production would serve the needs of capital appreciation rather than actual human needs. Marx also points out a direction for solving this problem, which is to replace private ownership with true social ownership that places factors of production under the joint control of workers to avert the privileges of capital and carry out planned production. However, Marx is not in a position to provide specific solutions for how “social ownership” and “planned production” are to be achieved. The USSR relied on public ownership to achieve rapid industrialization, which initially demonstrated the superiority of public ownership. The Soviets eventually failed not because of public ownership but because of the alienation of public ownership—the interests of the wielders of capital, the Soviet Communist Party, became contrary to the interests of the people. This is akin to the logic of the well-known adage in Liu Zongyuan’s On the Feudal System (Fengjian Lun) that the ancient Qin dynasty collapsed not due to its institutions but because of its policies. Similarly, the Soviet failure was a failure of specific policies, not a failure of the socialist system. New systems take time to be perfected; continuous improvement by learning from failures is necessary for the growth of a new system. The lessons learnt from the Soviets allowed China to better manage the relationship between people and capital through institutions enabling the people to control capital. Through the confiscation of bureaucrat capital and comprador capital, the People’s Republic of China in the early days established the planned economy, people’s communes and state monopolies over basic necessities, thereby achieving capital accumulation primarily through the domestic economy. Capital that came from the people was put into the service of the people. Thus, the costs of capital accumulation were distributed fairly among all and the fruits of capital accumulation were similarly shared. This socialist method of capital accumulation differs from its early Western counterparts, which relied on plundering the resources of their domestic societies and colonies. In the circulation and functioning of capital, China kept capital in check through the dominance of public ownership and proactive economic regulation by the state, allowing capital to be subjugated by and serve the people rather than allowing it to override society and enslave the people. Because the people held the reins over capital, China was able to consolidate its limited surplus into capital to develop industries or sectors that served long-term imperatives in the public interest. It was also because of China’s commitment to placing the people first that the CPC was able to organize the people to overcome its capital inadequacy despite the dearth of capital and technology. This is “organization of capital by people” rather than “organization of people by capital,” which averts the unemployment and vagrancy caused by capital scarcity and thereby enabling the entire people to participate in socialist progress and share in its fruits.

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More importantly, the CPC recognized that the people’s right to run the country was the greatest right of all. In order to avoid the alienation of public ownership that occurred in the USSR, China took a huge stride beyond the Soviets on the path to true public ownership through expanding economic democracy and raising the political status of ordinary workers and farmers by implementing democratic management pilot programs in SOEs and rural communities. Of course, China’s quest in this respect is far from over and will continue to require persistent effort. Internationally, China as well as many countries in Asia, Africa and Latin America, won time to develop their domestic industries by strengthening the forces of national capital and implementing some degree of trade protectionism during the early stages of modernization. Even after building a relatively complete industrial base, China did not adopt an unprincipled open-door policy. By contrast, it proceeded cautiously in areas related to national security. Marx has proposed general directions for eliminating the shortcomings of capitalism but not specific paths. In this sense, the success of the Chinese path is a victory for Marxism as Marx has helped the Chinese people to understand the might as well as the flaws of capital so that China can proactively utilize capitalism while restraining and transcending capitalism.

8.5 From the Civil War in France to the Modernization of State Governance Another factor behind the success of the Chinese path is that China had established a government that represented majority rather than minority interests, thereby avoiding problems that have occurred in most developing countries, such as disunity or the seizure of the fruits of development by special interests. This is also in line with Marx’s vision of the states of the future. Some believe that Marxism is for “big government,” “statism,” and “dictatorship.” In reality, however, Marx’s works are full of criticisms of the state. On this point, Marx and Adam Smith, who advocates the “invisible hand,” are in agreement. Adam Smith lived in the age of primitive capitalist accumulation. In The Wealth of Nations, he denounces capitalists for exploiting workers through the manipulation and bribery of politicians and calls for an end to collusion between government and business such that the “invisible hand” can function.6 Clearly, Smith does not oppose government intervention in the abstract but rather corrupt governments that collude with the bourgeoisie to oppress workers. On this point, Smith and Marx are in high agreement. In Das Kapital, Marx vividly describes how bourgeois governments and capitalists worked together to exploit workers: “fraudulent alienation of the State domains [and]

6

Lang Xianping and Yang Huirui, Zibenzhuyi Jingshen he Shehuizhuyi Gaige [Capitalism spirit and socialist reform] (Beijing: The Oriental Press, 2012), 17–19.

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the robbery of the common lands”7 and “[taking away] from the workers the right of association but just acquired,” leaving wage laborers in a state of dependence akin to slavery.8 On the topic of working hours, Marx points out that “capital in embryo—when beginning to grow, secures the right of absorbing a quantum sufficit of surplus-labor, not merely by the force of economic relations, but by the help of the State.”9 Clearly, Marx and Smith share the same views on the oppressive nature of capitalist states. However, they propose entirely different solutions. Smith argues that since states are oppressive, they should be replaced by the “invisible hand,” whereas Marx’s insights are more profound. Marx argues that private ownership would result in the oppression of workers by capital even without the state. The state can be abolished only after the future realization of communism abolishes classes and class oppression. At that point, society would be governed autonomously by the entirety of its constituents. However, before this, workers had to establish their own state to remedy the oppressive nature of the state. In other words, Marx advocates the transformation of the state into a workers’ state, unlike Smith’s “doing away with the state.” How might such a state be established? Marx merely made a theoretical prediction, whereas the Paris Commune movement of 1871 turned his vision into reality. The Paris Commune of 1871 was the first government in history built by the working class. On March 28, the working class of Paris announced the founding of the Paris Commune in the city hall plaza. After two elections, held respectively on March 26 and April 16, 80 members were elected to the Commune council in the latter half of April. These included 34 workers, 12 staff members and 34 intellectuals. Workers and ordinary staff members made up the majority of the council. Although Marx previously believed that conditions were not yet ripe for Europe to establish workers’ regimes, he supported the Paris Commune after its founding. After the Paris Commune failed, Marx immediately wrote The Civil War in France to summarize the lessons of its downfall, pointing out that “the true secret [of the commune was that] it was essentially a working class government,” “the working class cannot simply lay hold of the ready-made state machinery, and wield it for its own purposes”10 and that “the direct antithesis to the empire was the Commune,”11 whose entire purpose was to prevent the state and its apparatus from turning from the servants into the masters of society (see Footnote 10). In terms of specific practice, Marx proposed the Commune as simultaneously an executive and legislative body 7 [Germany]Marx and Engels, Collected Works, vol. 5 (Beijing: People’s Publishing House, 2009), 842. 8 [Germany]Marx and Engels, Collected Works, vol. 5 (Beijing: People’s Publishing House, 2009), 851. 9 [Germany]Marx and Engels, Collected Works, vol. 5 (Beijing: People’s Publishing House, 2009), 312–313. 10 [Germany]Marx and Engels, Selected Works, vol. 2 (Beijing: People’s Publishing House, 1966), 460. 11 [Germany]Marx and Engels, Selected Works, vol. 2 (Beijing: People’s Publishing House, 1966), 522.

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where councilors were elected. Its public officials could be replaced at any time and, like councilors, received only workmen’s wages. The standing army was replaced by a national militia. After the October Revolution of 1917, Russia established the first socialist state but failed to solve the problem of long-term stability. In the late 1950s, a debate on theory erupted between China and the USSR. An important reason was that the CPC discovered and pointed out a problem that the USSR failed to notice: how should a communist party, after assuming power, prevent the alienation of itself and the state into the masters of society antithetical to the people rather than the servants of society. After the 1950s, the privileges of Soviet officials and corporate executives gradually expanded and ossified to form a new privileged elite, whereas corporate hierarchies became as rigid as those in capitalist companies. Lastly, it was also this privileged class that dissolved the USSR in defiance of the wishes of its peoples and claimed its immense state-owned assets for their own, becoming the new oligarchs. Later generations will tread this old path if they fail to learn its lessons. Mao Zedong had noticed this alienation in the Soviet regime and sought ways to prevent China from making the same mistake. The Civil War in France had a great influence on him during this process. It is common knowledge that Mao was well-versed in Chinese history, but few know that he was also familiar with Western history, especially the history of modern France. In this respect, he was most interested in the French Revolution and the Paris Commune. When the protests of May 1968 unfolded in France, Mao expressed in a conversation on June 3 that year that France had the traditions of the Paris Commune and encouraged those present to read up on some reference materials.12 The Paris Commune had long been an inspiration for Mao’s thoughts on opposing bureaucrat capitalism and expanding the people’s democracy. During the Cultural Revolution, the periodicals published much content that opposed bureaucratism and privileges based on the principles of the Paris Commune, for instance, “preventing the state and state organs from turning from the servants of society into the masters of society”13 and advocating that the government of proletariat states must “wipe out all remnants of privilege systems and rank systems.” Officials were expected to be servants of society that took the initiative to curb bourgeois rights and subjected themselves to public oversight instead of lording over the people. Mao hoped to find a path that combined public ownership and economic democracy to prevent the alienation of a party and government that represented the working masses into a special interest group. His approach involved extensive political participation and adherence to the mass line—from the people, to the people. “The people must have the right to manage the superstructure” rather than have “the state to be

12

Chen Jin, “Mao Zedong Weishenme Xihuan Du Tan Faguo Jindaishi?” [Why did Mao Zedong like to read and discuss modern French history?], Literature of Chinese Communist Party, no. 1 (2011): 117–120. 13 Lu Canghua, “Yongyuan Baochi Gongren Jieji de Bense” [Always maintain the true nature of the working class], People’s Daily, October 16, 1973.

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managed by only a section of the people, that the people can enjoy labor rights, education rights, social insurance, etc., only under the management of certain people.”14 These ideas were also reflected in his 1973 poem To Guo the Senior After Reading ‘On Feudal System,’ Written in classical Qilü Style: My friend, please stop criticizing Qin Shi Huang; His actions of burning books and burying the Confucians should be reevaluated. The founding emperor is long gone, but the achievements of Qin remain, And notwithstanding its high renown, the learning of Confucius is in fact worthless chaff. All later generations followed the political-legal system of Qin, And your book Ten Critiques is not a good treatise. Please carefully reread the Tang thinker [Liu Zongyuan]’s “On Feudal System,” And don’t retreat from Liu to the King Wen of Zhou.15

The first emperor of the Qin dynasty, Qin Shi Huang, defied popular opinion among his courtiers and replaced China’s former fiefdom system (fenfeng zhi), a proto-model of federalism, with the commandery-county system (junxian zhi), an early form of centralized government, which extended the power of the imperial court into local regions, thereby strengthening the power of the state and reducing its reliance on powerful local clans. Mao’s praise of Qin Shi Huang was not made in a literal sense, but rather an expression of his thoughts on the future direction of Chinese socialism. For over two millennia, eras when the commandery-county system was well implemented, and powerful local gentry were kept in check were eras of sound governance and economic development. In the nascent years of the Han dynasty, the court implemented both the fiefdom and commandery-county systems to placate the nobles that had supported Liu Bang (the founding emperor). This eventually led to a civil war known as the Rebellion of the Seven States and the restoration of the commandery-county system after the revolt was quashed. The Eastern Han dynasty, in its late years, implemented a commandery quota system known as the chaju zhi, which gradually led to the formation of powerful clans. Local officials and powerful clans formed common interest groups that eventually led to the decline and end of the dynasty. Similar phenomena also occurred in the Tang Dynasty. Liu Zongyuan’s On the Feudal System was in fact an appraisal of the merits and flaws of centralized versus federalist government. The essay argued that, under the fiefdom system, local nobles were too powerful to eliminate, while most of their fiefdoms were poorly governed. Hence, the commandery-county system was superior. Mao’s praise for Qin Shi Huang and Liu Zongyuan’s essay in his old age was a pronouncement that the Party would not allow bureaucratic organs to become new “fiefdoms.” China had

14

“Mao Zedong 1959 Nian 12 Yue Zhi 1960 Nian 2 Yue Du Sulian Zhengji Jingjixue (Jiaokeshu) Tanhua Jilu [Transcript of Mao Zedong’s comments on reading the Soviet Union’s Political Economy (Textbook) from December 1959 to February 1960], Literature of Chinese Communist Party, no. 5 (1992): 3–6. 15 Chen Jin, Mao Zedong Yuedu Shi [History of Mao Zedong’s reading] (Beijing: SDK Joint Publishing House, 2013), 258.

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to guard against local powers like those in its history, as well as learn from the Soviet lesson and prevent the alienation of the CPC into a special interest group. Discussing the past leads to thoughts of the future. Despite the great changes in the characteristics of China’s stage of development, how to achieve long-term stability remains a core concern for the Party. During his Southern Tour in 1992, Deng Xiaoping said: “It will probably take another thirty years for us to develop a more mature and well-defined system in every field.”16 The Third Plenary Session of the 18th CPC Central Committee pointed out that the overall goals of further reforms were to improve and develop the system of socialism with Chinese characteristics and further modernize China’s system and capacity for governance. This is an endeavor in the new era to answer the historical question of “how to govern a socialist state.”

8.6 “Eliminating Bourgeois Rights” and Common Prosperity Fairness is an eternal human pursuit and the most evocative development goals of socialism. However, what is fairness and how it might be realized are very complex questions. The greatest difference between Marxism and other schools of thought on equality is that Marxism is not only concerned with superficial fairness but, more importantly, substantive fairness. Compared to feudal society, capitalism represented progress in terms of social equity. For instance, workers were freed from the serfdom of feudal society. From the standpoint of law of value of equal exchange, it seems that all are equal. This is superficial equality. However, this superficial equality masks substantive inequalities. Although capitalists and workers appear to be equal on the surface, they are never equal in terms of the opportunity for the enjoyment of this “equality.” As capital accumulates, inequalities in circumstances of birth, natural conditions and incidental factors will continually expand. Later scholars have termed this the Matthew effect: “the rich get richer and the poor get poorer.” Capital has this power because of the existence of surplus value. The owners of capital can obtain the labor of others without due compensation, whereas the more consolidated capital is, the more able they are to do so. Thus, inequalities in the possession of capital cause inequalities that in turn are the source of all inequalities. Marx raised the following example: “[a worker] is compelled by social conditions, to sell the whole of his active life, his very capacity for work, for the price of the necessaries of life, his birth-right for a mess of pottage.”17 The “fair exchange” between workers and capitalists seems mutually voluntary but that is not actually the case since one side controls capital while the other can only sell their labor. In short, private ownership cum equivalent exchange is the fairest 16

Deng Xiaoping, Selected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 372. [Germany]Marx and Engels, Collected Works, vol. 5 (Beijing: People’s Publishing House, 2009), 312–313.

17

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form of distribution that capitalism can achieve, but this superficial equality obscures actual inequalities. In that case, by what means might fairness be achieved? According to Marx, the mode of distribution is determined by the mode of production. To speak of distribution without consideration of the mode of production, particularly the ownership of production factors, is futile. In the international communist movement, including in China, there have always been views that separate distribution and ownership, arguing that public ownership is not the only means for fair distribution, which can be achieved through taxation and social welfare as well. Marx’s answer to this question is that discussion of distribution is futile without considering production; true equality can be achieved only through equal possession of the factors of production. Under socialist conditions, the public ownership of production factors meant that distribution would not be based on production factors, eliminating the possibility of the owners of capital grabbing the fruits of others’ labor through capital and thus paving a path for true equality. In Critique of the Gotha Programme, Marx argues that the Gotha Programme had separated the issues of production and distribution. Marx criticizes the simplistic view that universal suffrage could give workers’ representatives access to the legislative power, which would in turn lead to the realization of socialism. He points out that: “The capitalist mode of production, for example, rests on the fact that the material conditions of production are in the hands of nonworkers in the form of property in capital and land, while the masses are only owners of the personal condition of production, of labor power. If the elements of production are so distributed, then the present-day distribution of the means of consumption results automatically. If the material conditions of production are the co-operative property of the workers themselves, then there likewise results a distribution of the means of consumption different from the present one.”18 True fairness in distribution cannot be achieved without changing private ownership. This has been clearly demonstrated by the experiences of contemporary countries. The period between the 1950s and the 1970s was a period when inequalities in distribution in Western countries were the smallest. But it was also a period where the forces of capital were curbed and public ownership constituted a greater share of the economy, especially in the face of institutional competition from socialist systems in the international arena. After the 1980s, capital regained the upper hand and income distributions became more unequal in the West and countries that adopted neoliberalism, for instance, Latin American states. This was also one of the causes of the global financial crisis in 2008. Socialism paves a path for eliminating inequality as it adopts a system of distribution according to work, eliminating the inequalities between capital and laborers. All fruits of labor (apart from necessary deductions for public programs) are accorded to workers—a major stride over capitalism. However, socialism has yet to achieve true equality as different people have different capacities for work and different numbers of dependents. Hence, equality in form (distribution according to work) obscures 18

[Germany]Marx and Engels, Collected Works, vol. 3 (Beijing: People’s Publishing House, 2009), 436.

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inequality in fact. Marx calls this form of inequality “bourgeois rights.” He believes that socialist societies are still unable to achieve true equality and had to acknowledge and accept bourgeois rights. In simple terms, this means that productive forces are not advanced enough in the primary stage of socialism for “egalitarianism” and “distribution according to need.” Otherwise, it would result in the loss of initiative. Marx’s notion of “bourgeois rights” had a profound impact on Mao Zedong, who regarded an equal society as his life’s pursuit. The People’s Republic of China built the most equal society in China’s history, where the dominance of public ownership and distribution according to work prevented vicious polarization. At the same time, Mao also realized that equality was subject to the constraints of the times. Therefore, bourgeois rights could only be “restrained under socialist conditions” and not eliminated. This was also why in 1958 Mao rejected the proposal of abolishing commodity trade and currency and advocating a full free supply system. Mao emphasized that “the law of value was a great school.” Deng Xiaoping’s ideas on the nature of socialism are also a continuation of Marx’s views on equality. He summarizes the essence of socialism as “liberation and development of the productive forces, elimination of exploitation and polarization, and the ultimate achievement of prosperity for all.”19 Here, “productive forces” refers to the relations of production, since productive forces cannot liberate themselves. It is the relations of production that can liberate and develop productive forces, whereas people are the core element of productive forces. To liberate the productive forces is in essence to give play to the initiative of people. As for how this might be done, that would require an answer to what holds initiative back. Under capitalist conditions, it is capital that holds it back. Under Soviet-style socialist conditions, it was bureaucratism that holds it back. Thus, “liberation and development of the productive forces” requires free all-round human development enabled by opposing man’s enslavement by capital and the suppression of initiative by bureaucratism. Elimination of exploitation and polarization, and the ultimate achievement of prosperity for all, as the essence of socialism, is precisely where it outshines capitalism. Adherence to common prosperity has been China’s goal since the Mao era. China’s efforts in building an equal society are not only a requirement of the socialist system but are also a driver of economic growth. China was able to create the conditions for economic modernization and cost-effective resource accumulation because of its social revolution in the early years of the People’s Republic of China. During the socialist construction era, China was able to stimulate initiative despite material impoverishment because it had established relations of equality between every person. Pre-reform establishment of relatively fair social foundations and universal access to basic education and primary healthcare created the strong drivers of postreform economic growth. China did not turn its back on the Marxist pursuit of equality. Instead, it forged ahead under the guidance of Marxism, neither going against its stage of development nor taking the path of inaction. Where historical conditions allowed, China works to narrow social disparities and progresses step by step towards common prosperity. 19

Deng Xiaoping, Selected Works, vol. 3 (Beijing: People’s Publishing House, 1993), 373.

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Since 2012, the Party, under Xi Jinping, has regarded common prosperity as a core goal of governance. Xi has written that: High-quality development requires high-caliber workers. Only by promoting common prosperity, increasing urban and rural incomes, and improving human capital can we raise total factor productivity and build a strong base of momentum for high-quality development. We are now living in a world in which income inequality is a glaring problem. Some countries have witnessed the growth of a huge gulf between rich and poor and the collapse of the middle class, which has led to social division, political polarization, and a surge of populism. This is a profound lesson. We in China must make resolute efforts to prevent polarization and promote common prosperity in order to safeguard social harmony and stability.

In the same essay, Xi further points out: Bringing prosperity to all is an essential requirement of socialism, as well as an important feature of Chinese-style modernization… By 2035, we will have made more notable and substantive progress toward common prosperity, and equitable access to basic public services will be ensured. By the middle of this century, common prosperity will be basically achieved, while gaps between of individual incomes and actual consumption levels will be narrowed to an appropriate range.

At the end of 2020, China eliminated extreme poverty. The 98.99 million people in rural areas who were living below the current poverty threshold had all shaken off poverty. All the 128,000 impoverished villages and 832 designated poor counties have got rid of poverty. China had eliminated poverty over entire regions and eradicated extreme poverty. From 2012 to 2020, China’s central and local governments have invested nearly 1.6 trillion yuan in special poverty alleviation funds and issued 668.8 billion yuan in poverty alleviation re-lending. More than 3 million first Party secretaries and resident working team members have been dispatched for targeted poverty alleviation efforts. A total of 307 institutions of the central government provided targeted support to 592 impoverished counties, while the armed forces provided aid to 4100 povertystricken villages. A total of 343 counties (or equivalent administrative divisions) in 9 eastern provincial-level administrative units have offered paired assistance to 573 poor counties in 14 provincial-level administrative units in central and western China. These ambitious measures demonstrate China’s resolve in eradicating extreme poverty for nearly one-fifth of the global population. Their success has not only been pivotal to the global eradication of poverty but also provided other developing countries with valuable insights. China’s development path and poverty alleviation have far surpassed Western economics in theory and practice. Western development economics has, too, long pondered the best path for underdeveloped countries to modernize, so far without much success. Notably, global economic integration has only further widened international income gaps after the 1980s. Many countries have fallen either into the poverty or middle-income traps. Western economics fails to fully uncover the root causes of poverty because it suffers from at least two blindspots. The first is its lack of historical perspective.

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Poverty is, first of all, a historical problem. Objective factors such as natural conditions aside, one important cause of poverty in the modern era is that capitalist globalization has been expanding global polarization. The growth of developed countries and the poverty of the Third World are two sides of the same coin. Poor countries can escape this fate only through political and economic independence. Mainstream Western economics has lost touch with its intellectual tradition of historical inquiry as its energies turned toward mathematical modelling. Consequently, it fails to appreciate the historical roots of poverty. The second blindspot is its lack of political-economy perspective. Poverty is a problem spanning a broad spectrum. Most scholars are preoccupied by issues such as food, healthcare, education and loans—immediate factors of poverty. But addressing the root causes of poverty requires social reforms that eliminate the institutions that persistently engender polarization. The world needs the ability to inspire grassroots communities to believe that they can change their destiny. The deprivation of the poor by interest groups must be put to an end. In short, the world needs people-centered governance systems. Contemporary Western economics has departed from its roots in political economy and segregated separated political, social and economic factors. As a result, the discipline cannot extend its gamut beyond individual household poverty to social and institutional issues. The economics of poverty reflects the “poverty of economics.” The 2019 Nobel Prize in economics was awarded to Abhijit Banerjee, Esther Duflo and Michael Kremer for their “experimental approach to alleviating global poverty.” The three scholars conducted extensive contrastive experiments to uncover the causal links between poverty and factors such as nutrition, health, education, finance and governance. Their fieldwork went a great way toward tackling poverty. However, despite their great efforts, they did not find fundamental solutions to poverty. One of their representative works, Poor Economics, introduces many examples in this regard, including inadequate basic infrastructure, lack of public health services in communities, poor public schools, the reluctance of financial institutions to extend loans to poor communities, the lack of engagement with the poor, and weak or corrupt governments that hinder poverty alleviation programs. Although charities and external assistance can alleviate these problems, any improvements are still a drop in the bucket in the absence of strong institutions. These problems have been effectively solved in China. The Party has led the people in a thorough social revolution, gave less well-off citizens access to land and other means of production, and laid an institutional foundation for common prosperity. Grassroots Party organizations have been pivotal in expanding basic healthcare and education, making China one of the earlier developing countries to do so. These efforts have overcome the problem of weak community-level governance faced by many developing countries. The intensity and breadth of China’s poverty alleviation far exceed anything achievable by international organizations, charities and commercial institutions. Over the past forty years, China has lifted more than 850 million people out of poverty— over 70% of the global total. That was possible because China adopted methods based on historical materialism and political economy through the strengths of its

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socialist system. The three scholars might find better answers to their questions if they ever conduct in-depth research in China.

8.7 Why China Was Able to Leap Over the “Caudine Forks” Finally, we shall discuss a theoretical problem that consumed Marx’s energies during his old age, a problem that also concerns any appraisal of the Chinese path— the “Caudine Forks” problem: Can underdeveloped countries jump straight into socialist society without going through the capitalist stage? Obviously, a clear elucidation of this problem from theory concerns the theoretical legitimacy and pragmatic rationality of China’s socialist path.

8.7.1 The “Outpacing Theory” and “Remedial Lesson Theory” In China, there have long been various forms of the “outpacing theory” and “remedial lesson theory” arguing that China’s adoption of socialism was premature and hence needed to go back and tutor itself in the ways of capitalism. The debate around this issue is ultimately about interpretations of the Caudine Forks problem. The “outpacing theory” maintains that the adoption of socialism by countries like the USSR and China is contrary to Marx’s original ideas. According to Marx, to enter socialism requires capitalism to be highly developed. It is a mistake for poor countries to adopt socialism, an “artificial skipping of the historical stage” that “violates economic laws,” and the reason for the Soviet dissolution. Since they had missed the capitalism class, they had to take “remedial lessons”—the USSR failed because it “skipped remedials,” whereas China’s economic reforms are in fact “capitalism remedials.” The remedials are still ongoing and the course would have to go on until China finishes learning from the West, including the adoption of their political systems, multi-party competition and SOE privatization. The practical significance of this problem lies in whether capitalism is a necessary stage of social development. Many countries have yet to industrialize; are the capitalist path and integration into the capitalist world their only options for modernization and industrialization, or is there another? If another possibility exists, then it is possible for the China Model to succeed. If it is proven by theory to be impossible, the China Model would no longer be persuasive. Whether underdeveloped countries can skip the capitalist stage and go straight to socialism is the “Caudine Forks” question. It originated from a letter from Vera Zasulich, a Russian populist, to Marx in 1881 asking for his thoughts on the prospects of the historical development of Russia, especially his views on Russian rural

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communes. As Russia had a tradition of public ownership of land, the letter particularly hoped Marx would share his views on the rural communes: “You would be doing us a very great favour if you were to set forth your ideas on the possible fate of our rural commune, and on the theory that it is historically necessary for every country in the world to pass through all the phases of capitalist production.”20 Zasulich raised this question because Russian populist thinkers, including herself, believed that Russia had a communal tradition of primitive rural communes and could therefore bypass capitalist society and directly transition to socialist society through its own unique path. This was the heart of the populist sociopolitical program. By contrast, their opponents argued that capitalism was a necessary phase, with Das Kapital as their source of authority. Hence, Zasulich wrote to Marx hoping for clarification.

8.7.2 The Four Drafts of Marx’s Reply Marx and Engels once envisioned that socialist revolutions would simultaneously occur in the developed capitalist countries of Western Europe and North America. Subsequently, after studying eastern countries and ethnonational development, they came to the view that, under certain conditions, less economically and culturally developed countries can carry out socialist revolutions without fully developing capitalism and embark on the socialist path. In order to reply to Zasulich, Marx spent over a month making four revisions. In the first draft of his reply, Marx clearly stated that Russia’s rural communes can skip the Caudine Forks of the capitalist system, meaning that they could avoid the humiliations and disasters of the capitalist system and go straight to socialism. However, Marx made three subsequent revisions. The first three drafts were lengthy, while the final version mailed to Zasulich was little more than a page long. And the letter itself seemed slightly ambivalent. Does this show that Marx himself was not yet convinced of his views on the problem? In his reply to Zasulich in March 1881, Marx wrote: The analysis in Das Capital therefore provides no reasons either for or against the vitality of the Russian commune. But the special study I have made of it, including a search for original source material, has convinced me that the commune is the fulcrum for social regeneration in Russia. But in order that it might function as such, the harmful influences assailing it on all sides must first be eliminated, and it must then be assured the normal conditions for spontaneous development.21

Marx was truly a great thinker. The key points in this passage were subsequently each proven true. The core tenet of the passage is that the Caudine Forks were 20

[Germany]Marx and Engels, Collected Works, vol. 3 (Beijing: People’s Publishing House, 2009), 703. 21 [Germany]Marx and Engels, The Complete Works of Marx and Engels, vol. 35 (Beijing: People’s Publishing House, 1971), 160.

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surmountable; not every country needed to pass through capitalism to reach socialism like the Western European countries. However, this required the means to eliminate negative forces that would attack from all directions and ensure that it had the normal conditions for natural development.

8.7.3 What Blocks the Caudine Forks? Since Marx’s reply to Zasulich, the Caudine Forks question has become a Goldbach’s Conjecture of Marxism to which many theorists have offered answers. However, it is history’s own reply that is more important. Still, it might aid in our understanding of history if we can take a look at the views which maintain that the Caudine Forks cannot be transcended. The first view is that Marx and Engels themselves had not understood this problem. For Marx, despite indicating that transcending the Caudine Forks was possible in the first three drafts of his reply, his final letter provided an ambiguous passage rather than a full explanation, showing that Marx was not extremely confident in his own views. Furthermore, some scholars have cited Engels’ view, expressed in his Refugee Literature of 1874, that the bourgeoisie is a necessary precondition for socialist revolution, demonstrating that Engels and Marx diverged in their views on this issue in their old age, as well as that Engels did not think it was possible to skip capitalism straight into socialism. The second view insists that capitalism is the foundation for socialism. Without passing the capitalist phase, how could a society enter socialism? Proponents cite Engels’ On Social Relations in Russia (Afterword) of 1894: “it is a historical impossibility that a lower stage of economic development should solve the enigmas and conflicts which did not arise, and could not arise, until a far higher stage.”22 Indeed, the high level of material civilization, democracy and freedom in capitalism represented great progress over feudal society. Socialism should not take a whole new path from scratch instead of inheriting all the advantages of capitalism and correcting its shortcomings. Without passing through the capitalist stage, what would socialism be based on? Specifically, according to this view, there are two reasons why the capitalist stage cannot be skipped. First, it is impossible to achieve the socialization, commercialization and modernization of production without the full development of capitalism. Consequently, the material conditions for the establishment of socialism are absent. Second, without capitalist society, it is impossible to fully understand and expose its shortcomings and form a strong proletariat. Consequently, there would be no motivation for socialist revolution. This view cites the example of rural cooperatives. Cooperative systems also exist in capitalist countries, but they are fully developed and were formed on the basis of private ownership. Meanwhile, Chinese cooperatives

22

Marx and Engels, Complete Works, vol. 22 (Beijing: People’s Publishing House, 1965), 502.

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are guided by a minority of demonstrative pioneers. There are peasants who do not understand why cooperatives are needed and why they cannot work alone. The third view is that Soviet and Chinese practices have shown that the Caudine Forks are insurmountable, and that “remedial lessons” are needed. One of the most important reasons for the Soviet dissolution was that after glasnost, Western thought and culture shocked the Soviet psyche and decimated the Soviets’ confidence in socialism. At a minimum, this shows that despite its strong material civilization, the Soviet Union did not achieve a cultural and ideological progress that could compete with that of capitalism. China has introduced some capitalist practices after reform and opening up, which does appear to be a “remedial lesson.” This appears to indicate that the Caudine Forks are insurmountable.

8.7.4 Why is China Able to Leap Over the Caudine Forks? For China to cross the Caudine Forks, it is necessary to analyze the three above views and explain how China was able to achieve a high level of material civilization and transcend capitalism before fully developing capitalism, as well as manage the downsides that emerge in the development of capitalism. In the early years of the People’s Republic of China, this question was unanswerable as China’s productive forces were too backward for any discussion of skipping capitalism. Neither did China have the means to answer this question during the early stages of reform and opening up as the country had yet to transition to a market economy. However, after 40 years since reform and opening up, the China of the twentyfirst century can and must revisit the Caudine Forks problem. The current era makes surmounting the Caudine Forks necessary and possible. First, the formation of the capitalist world system has made it impossible for undeveloped countries to follow the Western European path to modernization. Surmounting the Caudine Forks has become an inevitable choice. In Marx’s time, mature capitalist systems had been established only in a minority of countries. By the beginning of the twentieth century, the global capitalist system had already been formed. Under the exploitation of the capitalist powers, undeveloped countries could not rely on the capitalist system to modernize, leaving them with no choice but to leap over the Caudine Forks. In 1937, Mao Zedong said in a conversation with Nym Wales that because China had been and was still a semi-colonial country, there was no prospect of developing capitalism as in Western Europe; the Chinese bourgeoisie might dream of developing capitalism, but the situation and reality in China did not allow it. But with the leadership of the proletariat, it would be possible for China to skip capitalism right to socialism in the future in view of the global situation.23 Today, China’s success contrasts with the middle-income trap that has 23

Nym Wales and Xiong Jianhua, “Mao Zedong he Nimu Weiersi de Tanhua” [Conversation between Mao Zedong and Nym Wales], Mao Zedong Thought Study, no. 1 (1985): 145–150.

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befallen many countries, proving that crossing the Caudine Forks is the only option on the path to modernization. Second, China has proved that socialism and the market economy can co-exist and that the full development of a commodity economy can be achieved without going through the stage of capitalist society. This provides a theoretical justification for crossing the Caudine Forks. Given the current levels of productivity, information technology and human enlightenment, the market is still the main means for resource allocation. Logically speaking, there are two possible ways to cross the Caudine Forks: one is to find another way to allocate resources while the other is to develop a market economy under socialist conditions. With respect to the former, the experiences of the Soviet Union and China have shown that a planned economy is advantageous for the development of heavy industry and other basic industries. However, given existing technologies, it cannot yet solve the problem of resource allocation in most areas of the economy. Of course, with progress in information technology, whether a planned economy is achievable is a question that can continue to be explored. The other possibility is to develop a market economy under socialist conditions. As long as it can be proved from theory and practice that socialism is compatible with a market economy, then it is perfectly possible to develop a market economy in a socialist society. In other words, there is no way to skip the full development of a commodity economy, but underdeveloped countries do not necessarily need to retrace the capitalist path. The tasks of capitalist countries during the stage of economic growth can be completed under the conditions of a socialist market economy to achieve an advanced level of material production. “Remedial lessons” are necessary, but these lessons are on the market economy and the development of productive forces, not on the capitalist system. After 20-odd years of development, China has basically established a socialist market economy, as well as provided a basis in theory and practice for the coexistence of socialism and a market economy. The reform of Chinese SOEs has shown that public ownership can be integrated with the market economy. In fact, even in Western capitalist countries, large joint-stock corporations have already achieved the separation of ownership and management. In terms of operational mechanisms, there is no essential difference between SOEs and corporations in a capitalist market economy, indicating that socialist systems are compatible with market economies. Third, in the era of globalization, capitalist modes of production have impacted every corner of the world. Underdeveloped countries need not go through the full stage of capitalist development to deeply experience the influence of capitalism and thereby develop the historical consciousness of transcending the capitalist system. An important argument against crossing the Caudine Forks is that underdeveloped countries have yet to go through the stage of capitalism and therefore cannot deeply understand its shortcomings and oppose it. This criticism is valid if we examine any single country in isolation. However, after the world reached the era of capitalist globalization at the beginning of the twentieth century, underdeveloped countries have not needed to enter the capitalist stage themselves in order to fully experience its evils since they were the ones most directly and profoundly affected by the cyclical

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crises of capitalism. Without having yet enjoyed the material civilization brought by capitalism, these countries have experienced its exploitation and destruction. This makes it easier to form internal opposition to capitalism. The unique path of China’s revolution lies in the integration of nationalist and antiimperialist demands. China first established an alliance between workers and farmers to seize the reins of government. Subsequently, China did not fall into populism or smallholder socialism as a result of opposition to capitalism, but instead carried out capital accumulation under the leadership of the state. This “simultaneous elimination and development of capitalism” transformed the historical consciousness of anti-imperialism and anti-colonialism into a national consensus to take the path of socialism with Chinese characteristics. Fourth, under the conditions of globalization, socialist elements are also growing within capitalist countries. Underdeveloped countries can directly leverage the existing productivity level of capitalism (this was also mentioned by Marx) while also learning from the experience of capitalist countries in managing market failures and restraining capital. The development of capitalism in the West, the plundering of periphery countries by capitalist countries, and movements within capitalist countries to keep capital in check are creating the conditions for Eastern countries to “leapfrog.” In fact, socialist elements are growing in both Western and Eastern countries, a trend that had not yet fully emerged in Marx’s time. China’s practices have shown that it is possible to avoid the painful process of capitalism by crossing the Caudine Forks. Establishing socialist governments and relations of production before developing the economy is equivalent to “inoculation” against the downsides of capitalist production, which can be remedied through the socialist state upon their emergence. Capitalist countries went through a long period of exploration, paid a hefty price and experienced fierce class struggles (including wars) to achieve equality between capital and labor within the limits of their basic institutions. For underdeveloped countries to cross the Caudine Forks is to alleviate or even avoid this immensely costly process. China’s practices have also proved that the development of a socialist market economy cannot completely steer clear of the macroeconomic imbalances, polarization and ecological damage that occur in capitalist market economies. However, socialism is inherently more able to correct these problems. In particular, in a huge socialist state like China which has a centralized and unified political system, experimentation with reforms can be carried out through local pilots. This trial-and-error approach reduces the possibility of making mistakes in overall national development. Fifth, China’s practices in crossing the Caudine Forks are in line with the philosophy of dialectical materialism. According to Marx, philosophers get to know the world by various means, but the problem is to change the world. Through an understanding of the laws of social development, developing countries can actively use these laws to change the world and the course of world history, which is the pragmatic character of Marxism. The view that the Caudine Forks cannot be crossed, in reality, merely considers the decisive role of productive forces on the relations of production and the economic base on the superstructure. It fails to see the countervailing

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impact of the superstructure on the economic base and the relations of production on productive forces. This is why the CPC has attached importance to ideology since its founding and regards the ideals and beliefs of its members as the life of the party. Ideological leadership and the maintenance of ideological purity are also necessary for the transition to a market economy. From an economic development perspective, this is the only way to achieve what Marx has stated: “the harmful influences assailing it on all sides must first be eliminated, and it must then be assured the normal conditions for spontaneous development.”24 Clearly, strengthening the Party’s ideological work and guaranteeing its leadership over ideology and culture is a prerequisite for socialist countries to cross the Caudine Forks—an issue of life or death. At this point in our discussion, we can understand why Marx was hesitant on the Caudine Forks question. His hesitance stemmed from his awareness that there would be more challenges for underdeveloped countries to leapfrog into socialism in comparison to first having reached an advanced stage of capitalism. Economically, a lower starting point will lead to protracted disadvantages in terms of their economies, technologies and capital. Ideologically, commitment to ideological and cultural leadership would invite competition and challenges from the capitalist world. Without a strong ability to think dialectically, people would be easily swayed by the capitalist development path. Crossing the Caudine Forks is not a panacea. Neither has China yet fully crossed the Caudine Forks. In his later years, Deng Xiaoping repeatedly emphasized that China must never take the capitalist path, an opinion that was not without foresight. As the People’s Republic of China had just experienced the lessons of the old China after its founding, it was easier to form the consensus that the capitalist path would not work. However, after reform and opening up, in particular the adoption of a market economy, some have tended to look at superficial phenomena and mistakenly think China has grown rich and strong by “learning from capitalism”, which then leads to misjudgments on the right path forward. Therefore, choices in terms of theory, system and path will exist throughout the stage of socialism. There will still be long fights to sort out right and wrong. China’s answer to Marx’s “Caudine Riddle” has gone far beyond his envisioning. Marx has pointed out that the capitalist system is based on the complete separation of the producer from the means of production, the entire development of which is founded on expropriation of the agricultural producer, while the historical inevitability of this movement is clearly confined to the countries of Western Europe.25 Marx spent his entire life in Europe and was careful to restrict his theories to the continent, knowing that the European experience could not guide the development of all countries. This was the clear-headedness of a great thinker. At the same time, he also cautiously pointed out that Eastern countries may find a different socialist 24

[Germany]Marx and Engels, Complete Works, vol. 22 (Beijing: People’s Publishing House, 1965), 502. 25 [Germany]Marx and Engels, Complete Works, vol. 19 (Beijing: People’s Publishing House, 1963), 430.

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path and fervently hoped that the Russian rural communes of the time would be a new pillar of Russian society. Marx had similarly high expectations for China. His attention to China was not limited to the country itself. Rather, he placed China in the context of the global development of capitalism and analyzed China’s problems from the standpoint of the grand goal of human emancipation. Through internationalist perspective, Marx and Engels correctly pointed out that the root causes of China’s poverty and weakness were, internally, the decay of its institutions and, externally, the expansion of imperialist aggression. In the long Chinese struggle for national independence, Marx and Engels openly published a series of articles expressing their sympathy, support and hopes for the Chinese people. Their concern for China’s problems was not born of narrow sympathy but a correct understanding of the laws of history. Marx and Engels predicted that the Chinese nation would be able to stand anew in the East through ardor and persistence, confident that within a few years, the world’s oldest empire would be in its death throes and a new epoch would dawn in Asia.26 Because of the long cultural traditions and unique national conditions of this great nation, Marx and Engels believed that socialism in future China would have its unique characteristics. As early as in 1850, they had predicted that Chinese socialism may be to European socialism what Chinese philosophy is to Hegelian philosophy.27 Only what is national is universal, like what Marx once pointed out: whatever nations do as nations are also done for human society. China spent more than seventy years to achieve not only great development for itself but also preliminarily discover a new and convincing path of development for humankind. World history has changed far beyond Marx and Engels’ imagination in the hundred-odd years since their era. In particular, the rise of developing countries as a group, as represented by Eastern countries, has become a major force transforming the capitalist world order and influencing the global landscape. Socialist solutions are becoming increasingly indispensable to rectifying imbalances, discoordination and unsustainability in today’s world. The problems faced by China and the world today are far more complex than the crossing of the Caudine Forks and require humanity to comprehensively scrutinize the development practices of the capitalist and socialist systems since the twentieth century, so as to find a new path that can solve the new problems facing humankind.

26

Marx and Engels, Selected Works, vol. 1 (Beijing: People’s Publishing House, 2012), 800. Wei Jianhua, “Makesi he Engesi Zenyang Kandai Zhongguo: Da qingnian pengyou wen” [How Marx and Engels saw China: answers to questions from young friends], Marxism & Reality, no. 1 (2015): 1–13. 27

Chapter 9

A Macro-historical View of the Global Crisis

9.1 Introduction After the outbreak of the 2008 global financial crisis, the world fell into the age of financial crisis, and the Chinese economy entered a new normal. From a macro-historical perspective, the global financial crisis was a cyclical outbreak of the fundamental contradictions of capitalism that marked the end of the post-WWII economic cycle and proved, once again, that there were fundamental flaws in the Western development model. However, history had not ended, nor would it end. The world crisis implies that the new classical school and its development theories, which have been popular since the 1980s, as well as neoliberalist theories and policies, are no longer able to support a new phase of rapid global growth. The advent of a new era will require a new paradigm.

9.2 The Root of Western Decline: Expansion of Capital The global economy has been sluggish since 2008, when the subprime mortgage crisis broke out in the United States. It has been over a decade since the global financial crisis, making the Great Recession the longest economic downturn since the end of the Second World War. The global financial crisis pushed the world into yet another era of great upheaval and division. History tells us that this financial crisis was an overall outburst of the tensions accumulated in the seventy-odd years since the Second World War. These tensions have their roots in the basic contradictions of capitalism. As capital expanded while the rate of surplus-value remained unchanged, an endogenous trend of declining average profitability emerged in the private sector. This trend then gives rise to a periodic cycle in capitalist economies: “industrial revolution—capital expansion— declining rate of profit—economic crisis—destruction of capital—new industrial and © CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_9

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social revolutions.” Declines in the rate of profit are ultimately the consequence of problems caused by the expansion of capital: overcapacity, lack of effective demand, and polarization. In the quest for profits, capital would seek outlets through the expansion of the financial industry, overseas expansion and cuts to workers’ welfare. However, these are mere band-aids. Once these measures outlive their usefulness, an economic crisis erupts. Economic crises and the wars they engender eliminate surplus capital and bring the economy into a new cycle of development. The present economic crisis was, essentially, produced by these dynamics of capital.

9.2.1 The Source of the Crisis: Over-Expansion of the Forces of Capital The roots of the financial crisis can be at least traced back to the mid-twentieth century. The Great Depression that began in 1929 and the subsequent Second World War weakened the power of monopoly capital in capitalist countries and gave governments more authority to keep capital in check. Between the 1950s and the 1970s, the forces of labor and capital were relatively balanced in Western countries, a situation known as the “Keynesian compromise.” During this period, Western countries experienced rapid technological and economic development. Their societies were relatively stable and equitable, while the social safety net grew increasingly robust. This was a “golden age” in the history of capitalism. However, the cyclical laws governing the dynamics of capital continued to function. After over twenty years of post-war peace and development, the re-accumulation of capital in the 1970s led to overcapacity, surplus capital and declining profitability. States carried out economic stimulus through expansionary fiscal and monetary policies that caused a combination of inflation and economic stagnation—otherwise known as “stagflation.” In the face of stagflation, political forces representing monopoly capital ascended the stage of history. These political forces adopted measures aiming to narrow the scope of government regulation, expand the power of capital and undermine labor interests. Their excuse was that government regulation had overreached, and public budgets were over-inflated. The theoretical basis for these measures was neoliberalism, which advocated lesser government intervention and allowed the free market to optimize the allocation of resources. Ronald Reagan and Margaret Thatcher were the faces of neoliberalism. Major initiatives implemented by their governments included: privatization of the state-owned sector; encouragement of the free global flow of capital; less government intervention on capital; encouragement of financial innovation; lower income taxes; and reductions in social welfare. These policies, in essence, enriched the wealthy and the private sector at the expense of the poor and the public sector. In the short run, they boosted capital profits; in the long run, however, they exacerbated the basic contradictions of capitalism. Consequently, neoliberalism

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failed to revive Western economies. Instead, it led to financial bubbles, wealth gaps, livelihood crises, environmental deterioration, and ultimately a financial crisis. Economic stagnation was the first manifestation. Since the stagflation of the 1970s was caused by capital accumulation, neoliberal policies that sought to sustain growth by expanding the power of capital could only have the opposite effect. The US economy grew merely 2.62% per year from 1980 to 2007, lower than the 3.6% between 1951 and 1973, whereas growth rates were only 1.42% from 2008 to 2013.1 Financial bubbles were the second manifestation. With the expansion of capital, the real economy could no longer support the needs of capital appreciation. Consequently, capital pushed governments to narrow their powers, loosen regulations and encourage financial innovation. In reality, this concealed their true goals—fraud and speculation—and alienated the financial sector from its original role of serving the real economy. In other words, the M-C-M’ (money–commodity–money’) circulation pattern became an M-M’ (money–money’) pattern, while virtual financial products increasingly became the subject matter of financial transactions. The total daily volume of financial transactions on the international market increased from $2.3 trillion in 1983 to $130 trillion in 2001.2 This process led to widespread fraud, speculation and bubbles as financial products with low credit ratings were packaged as investment-grade products. Bubbles were created to attract investment fueled entirely by expectations. Lacking support from the real economy, this game of musical chairs would eventually collapse. Financialization was, in essence, a tool for monopoly capital to plunder the real economy. Polarization was the third manifestation. Income gaps in Western countries were relatively stable between the 1950s and the 1970s. The adoption of neoliberalism after the 1970s lowered the status of workers through cuts in taxes and social welfare, as well as the weakening of unions, leading to rapid expansion in polarization. The Gini coefficient in the US increased from 0.372 in 1980 to 0.451 in 2008, returning to levels last seen before the Great Depression in 1927. The combined wealth of the richest 1% of the population expanded from 10% of the national wealth in 1980 to 23.5% in 2008. From 2009 to 2011, the wealth of the top 7% increased by 28%, while the remaining 93% of the population saw a decline in their net worth. In 2012, the incomes of the top 1% increased by 19.6%, while income growth for the remaining 99% was merely 1%. The income gap was even more alarming in developing countries that were heavily impacted by neoliberalism like those in Latin America. The American sociologist Saskia Sassen has argued that words like poverty and inequality are no longer sufficient to describe today’s realities. She proposed the concept of “expulsions”—the middle class can be rendered destitute overnight, and every person is at risk of being displaced from the social ecosphere.

1

Michael S. Koyama, A Surfeit of Stuff: Capitalism in a Systemic Crisis, trans. Tong Jin (Social Sciences Academic Press, 2016), 10. 2 Yi Shenbo, “Restoration of Class Power: Neoliberalism from Neo-Marxist Perspective: A Review on David Harvey’s View of Neoliberalism” [in Chinese], Journal of Nanchang Hangkong University (Social Sciences), no. 3 (2012): 74–79.

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Ronald Reagan, who assumed the US presidency in 1981, was one of the icons of neoliberalism. Reagan won votes by promising tax cuts, whereas his famous proclamation that “government is not the solution to our problem, government is the problem” is still an aphorism to those in China who believe that markets are omnipotent. However, the record has shown that Reagan propagated the notion of “small government” primarily to loosen regulations on capital as well as reduce protections for the underclasses, which widened social polarization. During his terms in office (1981–1988), the incomes of the bottom 20% of income earners declined from 4.8 to 4.2% of the total, while that of the top 20% rose from 42.7 to 45.1%. Taxes paid by the top 10% of income earners decreased by 8.6% from 1984 to 1988, while the next 10% paid 2.4% less. The tax burden on the lowest and second-lowest 10percent brackets, by contrast, increased by 3.8–3.9% over the same period.3 Clearly, this enriched the wealthy at the expense of the poor under the guise of “tax cuts,” which exacerbated tensions rather than alleviating wealth disparities. Capital expansion exacerbated polarization not only within individual countries but also across the globe. Through the outward flow of capital and financial (and monetary) hegemony, developed countries were able to plunder periphery countries. The net worth of the world’s 358 wealthiest people in 1996 was equivalent to the combined incomes of the poorest 45% (2.3 billion) of the world population; the assets of the three wealthiest tycoons in 1998 exceeded the combined gross national output of the least developed countries and their 600-million-strong populations.4 The fourth manifestation was the commercialization and marketization of public services. As investment in the real economy had reached saturation after the 1980s, Western countries privatized and commercialized public services to varying degrees to meet the demand of capital for profits. These measures allowed capital to enter the public services sector and opened the floodgates for their profiteering, swiftly increasing the costs of public services such as healthcare and education. Huge amounts of fiscal spending went towards special interests such as pharmaceutical corporations and insurance companies, one of the causes for the welfare trap that some countries fell into. The commercialization of public services laid heavier burdens on residents and increased the costs of keeping the economy running. Consequently, it posed more difficulty to the development the real economy and at the same time encouraged the greater flow of capital to the financial industry and public services sector, forming a vicious cycle. Clearly, the global financial crisis was essentially a capitalist economic crisis. As the pursuit of profits by capital led to declining profitability, capital colluded with political power to find an outlet. The resultant expansion in the privileges and freedom of capital made the unplanned nature of capitalist production even more pronounced. Production deviated from the actual needs of society, while large volumes of capital 3

Li Zhen, “‘Huashengdun Gongsi’ yu Fazhanzhong Guojia ‘Xinziyouzhuyi’ Gaige” [The Washington Consensus and neoliberal reforms in developing countries], World Economics and Politics, no. 5 (2002): 69–74. 4 Wen Yang, “G20 Dang Kanqing, Shijie Jingji Haizai Xinziyouzhuyi Feixu shang Zhengzha” [The G20 should see that the world economy is still flailing on the ruins of neoliberalism]. http://www. guancha.cn/WenYang/2016_08_30_372836.shtml.

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created financial bubbles. Finance and real estate became tools for exploiting middleand low-income earners. Social divisions were further widened by cuts to taxes and social security programs—measures that enriched the wealthy at the expense of the poor. Spending power declined, and growth in consumption had to be fueled by debt. These led to capital gluts and inadequate effective demand on a global scale. These factors were the root of the global financial crisis. In the face of crisis, populism began to rear its head in Western countries. What is noteworthy is that Western populism is essentially a revolt by the underclasses against polarization. A New York Times article on June 24, 2016, titled “Populist Anger Upends Politics on Both Sides of the Atlantic,” pointed out that when income inequality reaches a certain point, social discontent would reach a critical point and erupt into conflict (see Footnote 4). Populism is an extremist response by the masses against neoliberalism. As such, the eradication of populism ultimately requires the elimination of the soil that allows it to arise. In China, the prevention of populism requires CPC leadership, people-centered development paradigms and staunch commitment to prosperity for all.

9.2.2 The World is Still Unequipped to Exit the Crisis The roots of the global financial crisis mean that it will continue to trap Western countries in the short run for the following reasons. First, the crisis was not wrought in a day. This crisis was an overall outbreak of the frictions that have been building since the Second World War. Neoliberal economic policies caused polarization, economic financialization, environmental destruction and global economic imbalances that cannot be remedied by short-term policy adjustments. Social crises such as refugee problems and ethnic issues have yet to run their full course and may add fuel to the fire for the economy. Second, the political systems of Western countries are unable to fundamentally address the crisis. The last time that the capitalist world successfully dealt with a global crisis was in the post-1930 era, as represented by Roosevelt’s New Deal and post-war European reconstruction. A strong government able to curb monopoly capital and adjust vested interests was possible because of the immense costs of the Great Depression and the war, which had largely suppressed capital. By contrast, “capital” was not “curbed” after this global financial crisis; monopoly capital remains highly influential. The Western response to the crisis since 2008 shows that the diversion of crises to developing countries remains a primary measure—implemented, for instance, by recalling offshore investment and more stringent trade protectionism. These measures might be somewhat effective in the short run, but they are in fact temporary expedients that had no effect on improving the world economy. Monopoly capital groups still have a great deal of influence on domestic politics in Western countries. Despite strong calls by the underclasses for greater social equity and checks on the privileges of capital, the actual implementation was challenging. The healthcare

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reforms pushed by Obama were merely moderate improvements within the framework of capitalism. Even so, they were strongly assailed by capital groups as public health insurance would undermine the interests of commercial insurance and pharmaceutical companies. In addition, the information age has made it easy to sway public opinion towards another extreme, leading to populism and the fragmentation of state governance, which makes it even harder to achieve consensus on major reform measures. Third, Western countries no longer have the means to implement crisis response measures that have proven effective in the past. The income disparities and debts (both public and private) in Western countries have reached historical highs, leaving neither room for a Keynesian response (expansionary fiscal and monetary policies) nor a neoliberal response without exacerbating the crisis. At least three preconditions are needed for the world to exit the crisis. First, there must be a global process to curb the excesses of capital. The capitalist countries of the past achieved the outflow of surplus capital through war and colonialization, whereas today’s Western countries have yet to complete this process. With the rise of emerging economies, alliances between these economies to rebalance the international political-economic order may become a means for the outflow of surplus capital. Developed countries need to reverse the tendency for excessive expansion of capital, strengthen income distribution and curb special interests (such as the financial industry) in order to lay a foundation for new development. Second, there must be greater global equity. Capitalist economic crises manifest as income distribution crises that are no longer confined within an individual country. Instead, they manifest as an imbalance in the global distribution of income. The global division of labor has become a “trichotomy” where developed Western countries dominate finance, technology, currency and military affairs, as well as acquire greater added value in global industrial chains through monopoly pricing. Manufacturing nations, represented by those in East Asia, find themselves at the middle and lower tiers of the global industrial chain, relying on labor substitution and the export of raw materials and primary processed products to obtain added value. The huge surplus-value of these industries is transferred to developed countries. Resource-rich countries, as represented by those in Latin America, are comparatively weak in the political sphere. After they accepted neoliberal concepts in the 1990s, they relinquished economic sovereignty and became exporters of cheap resources. Hence, balance in global political-economic relations must be restored before the restoration of balance in the global economy. Developing and developed countries should be given equal development opportunities. Underdeveloped countries should be supported in strengthening their development capabilities in sectors such as infrastructure, health and education. Underdeveloped countries should also be given a greater say in global governance. Only then can the global economic imbalance be resolved and the surplus capital of developed countries find new markets. Third, innovation in global development philosophies and political systems. Since the global financial crisis, neoliberalism has been diminished but remains highly influential, especially in some developing countries. Both the East and the West have become aware of the problems extant in past models of development and proposed

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new development goals, including social harmony, equality, dignity, health and environmental conservation. This signifies a progress compared to the excessive pursuit of economic gain in the past and allowing capital to profit without restraint. However, the replacement of old ways with new ones will not be an easy task. At present, mainstream Western culture and theories cannot provide support for exiting the crisis. Western political systems are showing trends towards fragmentation and populism. Their societies are mired in divisions and antagonisms, while core values are being challenged. These circumstances make it highly difficult for them to consolidate new motivation and consensus for overcoming the crisis.

9.3 The Dilemma of Mainstream Western Economics The global financial crisis created challenges not only for capitalist institutions, but also for mainstream Western economic theory. The two main Western economic schools of thought—Keynesianism and neoliberalism—were responses of Western developed countries to economic crises. On the surface, Keynesian economics emphasizes government intervention while neoliberalism stresses the role of the market. But both are founded upon capitalist economic systems. Although both are effective to a certain degree in the short run, they merely delay or divert crises rather than address their root causes.

9.3.1 Keynesianism: Focusing on Economic Aggregates but not Distribution After the Great Depression of the 1930s, Western countries hoped to adopt measures that would blunt the shock of the crisis, which led to the ascent of Keynesianism. Keynesian economics argues that inadequate aggregate demand is the primary factor behind economic downturns. The solution would be for government to “turn on the fiscal taps,” in other words, expand aggregate demand and achieve full employment through the construction of public works, raising social welfare and strengthening redistribution. The difference between Keynesianism and Marxism is that the former believes that crises can be eliminated simply through redistribution without touching economic ownership systems and modes of production. This is the Lassallism criticized by Marx in Critique of the Gotha Programme. Keynesianism created the conditions for the golden era of capitalism after World War II. From the 1940s to the 1970s, Western countries had lower income gaps, stable and equitable societies, and relatively high economic growth rates. These were phenomena rarely encountered in Western history. However, Keynesianism fails to eliminate the roots of capitalist cyclical crises and merely delays their onset. It only stimulates aggregate demand but does not change the relations of distribution. Despite

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having alleviated labor-capital frictions and expanded aggregate demand, Keynesian measures are unsustainable as they rely on government debt and the plunder of the Third World. The “tendency of the rate of profit to decline” is irrepressible. Beginning in 1973, Western countries again fell into the stagflation dilemma, showing that there was little room for Keynesian policies to work.

9.3.2 Neoliberalism: Exacerbating Rather Than Alleviating Crises In the face of the stagflation dilemma in the late 1970s, the forces of monopoly capital, which had been re-empowered after decades of peaceful development, pushed neoliberalism onto the historical stage. Neoliberalism attributed stagflation to Keynesian stimulus policies, arguing that expanded demand had led to debt-laden governments, excessive spending on welfare, and uncompetitive companies. Neoliberalism advocated tax cuts, greater labor mobility, reduced social welfare and the unrestricted circulation of capital. As these measures focused on areas related to production, they also came to be known as “supply-side economics.” Supply-side management did not achieve the expected effects. In terms of overall performance, post-1980 GDP growth in developed Western countries was significantly lower than before the 1980s. Deregulation intensified the financialization of the economy, while tax and welfare cut upset the balance between capital and labor formed after the 1940s and exacerbated polarization. Economic stimulus through expansionary monetary policy and greater debt (public as well as private) led to high leverage ratios. Since it was difficult to adjust primary income distribution, states primarily relied on redistribution to sustain high welfare levels, which subsequently led to the welfare trap. These were all root causes of the global financial crisis. Clearly, Keynesianism (“demand-side management”) and neoliberalism (“supplyside management”) of the West are different policy ideas for dealing with economic crises under a capitalist framework. Due to the constraints of their basic political and economic institutions, these theories focus exclusively on such superficial issues as supply and demand, fail to touch on the underlying dynamics of capitalist economies and, for that matter, prove to be inadequate. Their main instruments—fiscal, monetary and tax policies—are able to regulate the economy only indirectly. These methods do not extend to the relations of production, ownership systems, means of distribution, or interpersonal relations in the production process. They could have some effect in the short run, but both fail to address the root causes. Moreover, their capacity for “symptomatic relief” may lead to “drug dependency” that will sow the seeds for even more severe consequences. After the financial crisis, the world began to rethink Western economics in general and neoliberalism in particular. Once a staunch believer in neoliberal economics, the Japanese economist Iwao Nakatani re-examined his beliefs after the Japanese economy suffered under Koizumi’s neoliberal reforms. Nakatani decided that it was

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wrong for Japan’s national policies to be based solely on the logic of American economics as it was overly “naïve” to believe in the value of capitalist globalization and market supremacy, as well as the idea that the “state” should refrain from intervention in the markets as far as possible. He further pointed out that, while capitalist globalization can bring vitality to the world economy, it also had “essential defects” that manifested in three aspects: (1) global economic instability; (2) wider wealth disparities due to the disconnect between production and consumption; (3) environmental destruction due to the pursuit of profit above all else.5 Lam Hang-chi, founder of the Hong Kong Economic Journal and a Hong Kong columnist renowned for his incisive writing, publicly announced in 2008 that he had been converted from an advocate of laissez-faire capitalism into a believer in socialism and expressed regret for being a “blind disciple in free markets” in his youth. He renounced his prior belief that the sole function of a company is to maximize profits for its shareholders and stated that socialism could indeed sustain social equity; in addition, he argued that the rise of China would benefit human welfare if China can develop policies that balance the pursuit of wealth and socially equitable development.6

9.4 Review of China’s Economic Growth An examination of the global economic crisis provides a historical context for understanding China’s New development stage. In 2021, Xi explained the concept of China’s new development stage in an important conference: [The new development stage] will see our Party lead the people in completing the historic transformation from standing up and becoming prosperous to growing strong… Thanks to the tireless efforts made since the PRC’s founding, and especially in the past 40-odd years since the adoption of the reform and opening up policy, China reached new levels in economic strength, scientific and technological capability, composite national strength, and living standards by the end of the 13th Five-Year Plan period (2016–2020). China is now the world’s second largest economy, the largest industrial nation, the largest trader of goods, and the largest holder of foreign exchange reserves. China’s GDP has exceeded RMB100 trillion yuan and stands at over US$10,000 in per capita terms. Permanent urban residents account for over 60% of the population, and the middle-income group has grown to over 400 million. Particularly noteworthy are our historic achievements of building a moderately prosperous society in all respects and eliminating absolute poverty—a problem which has plagued our nation for thousands of years. These are significant milestones in our process of socialist modernization, and lay a solid foundation for marching toward the Second Centenary Goal during the new stage of development.

5

[Japan]Iwao Nakatani, “Riben Xinziyouzhuyi Jixianfeng de Chanhuilu” [Confessions of a Japanese vanguard of neoliberalism], cited from World Socialism Tracking Research Report (2009–2010) (Beijing: Social Sciences Academic Press, 2010), 251–255. 6 Shu Shi, “Lin Xingzhi ‘Zhuanxiang’: Zuobie ‘mangmu ziyou shichang xintu’” [Lam Hang-chi’s “turn”: Bidding farewell to “blind free market devotees”], China Business News, June 25, 2008.

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Shortly after the founding of the PRC, our Party put forward the goal of building a modern socialist country. Over the course of 13 five-year plans, we have laid a solid foundation for achieving this goal. The next 30 years make up the development stage in which we will finally complete this great ambition. We have worked out the roadmap and timetable for our development going forward. By 2035, or within three five-year plan periods, we will basically achieve socialist modernization. Then, by the middle of this century, after completing another three five-year plans, China will become a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful.

In order to understand China’s new development stage, we must review the history of China’s economic growth since market reforms in the 1980s.

9.4.1 The Three Main Drivers of Growth in the Early Stages of Reform and Opening Up From the standpoint of production, economic growth is primarily driven by labor, capital and technology. After commodities are produced, there must be demand in the form of investment, consumption and exports. Of these, investment and consumption include the public sector (government) and the private sector. Substantive growth in any of these factors will stimulate the rapid development of the overall economy and become the main engine for economic growth during that period. Economic growth in the early stages of China’s reform and opening up (1980–1998) benefited from the three following factors. The first was the marketization of assets accumulated prior to economic reforms. Prior to reforms, the state-owned economy was primarily concentrated in foundation and strategic sectors, whereas consumer industries were underdeveloped. After reforms, large amounts of capital flowed into civilian consumer sectors. The vast noncommodity assets accumulated in the past began to enter the market and became the material foundation for rapid supply expansion during the early stages of reforms. Decentralization and the household responsibility system were able to have an immediate impact in the early years of China’s reforms because of the vast amount of state-owned assets that had been previously amassed. Second, Western stagflation had generated foreign demand as well as the need to relocate industries. China’s reform and opening up coincided with the emergence of overcapacity, surplus capital and insufficient demand in the West. The resultant need of Western countries to shift their surplus capital and production capacity offshore happened to align with China’s demand for foreign technologies and capital. At the same time, labor costs were rising in the West. The competitive prices of Chinese exports provided China with a huge export market. The third was the robust domestic demand created by fair income distribution. As China had a fair social foundation prior to economic reforms, reform measures during this period were able to benefit most of society in the form of rapid and relatively equitable income growth. China’s Gini coefficient in the early 1980s was merely around 0.3. These conditions facilitated rapid growth in consumption. The

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share of consumption in China’s national income grew from 63.5% in 1978 to 70% in 1981. In the 1980s, consumer spending grew at an average annual rate of 15.3%, keeping pace with GDP growth and sustaining strong domestic demand. As such, economic growth from the 1980s to the early 1990s was the result of a synergy between pre-reform accumulation and post-reform development. Reforms during this period achieved a sound balance between equity and efficiency. But this was made possible by specific historical conditions—vast assets that had yet to be marketized, equitable initial income distributions, robust international demand and space for the relocation of foreign industries. From the late twentieth century to the early twenty-first century, these growth drivers had already been unleashed to a fair extent, as indicated by the widespread difficulties faced by enterprises in the mid-1990s. Under these circumstances, new growth drivers emerged in China’s economy.

9.4.2 The Four Drivers of Growth in the Early Twenty-First Century After the mid-1990s, corporate profitability declined broadly (see Fig. 9.1). In particular, economic growth and corporate profitability reached their lowest levels since reform and opening up around the time of the Asian Financial Crisis in 1998. Although the economic system played a part, this situation was primarily caused by macroeconomic cycles and was a manifestation of the cyclical nature of the market economy. Why do we say so?

( Year)

Fig. 9.1 Returns on capital for Chinese companies from 1980 to 2014. Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010: Table 1-35

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On the one hand, market competition led to declining profitability. China’s enterprises had become more competitive after the decentralization-and-relinquishment reforms of the 1980s. After 1992, local governments and enterprises became far more motivated, resulting in tremendous zeal for investments, real estate, stocks and development zones. It had become abundantly clear by the mid-1990s that aggregate supply had outstripped aggregate demand for the first time since China adopted a market economy. For instance, between one-third and one-half of television, refrigerator and automotive production capacities were idle in 1996. Overcapacity led to declining corporate profitability. On the other hand, domestic demand was no longer as robust as it was in the 1980s, and aggregate demand had become insufficient. Consumption declined from 50% of national income in the 1980s to 45% in the late 1990s. There were three reasons for inadequate consumer demand. The first was the relative decline in workers’ incomes. Workers’ wages constituted 15.6–17.5% of gross national income from 1980 to 1989, averaging at 16.3% over the decade. This declined to 11–12% between 1997 and 1999, the lowest levels since reform and opening up (see Fig. 9.2). The second reason was China’s deficient social safety net. Many corporations had undergone bankruptcy restructuring, which broke up existing labor security systems. The government reduced spending on public programs such as healthcare and education, rural grassroots organizations were weakened, rural residents faced heavier burdens on their finances, while the distribution and consumption of welfare (in the form of direct supply of goods) had become commercial transactions denoted in cash and relegated to the markets. The expected increase in future expenditures led people to cut back on their spending.7 The third reason was the widening of income disparities, especially the relatively large wealth gaps caused by reforms of SOEs and rural TVEs. Moreover, urban–rural income gaps had rebounded after experiencing a period of decline in the 1980s. China’s Gini coefficient increased from 0.3 in the early 1980s to 0.412 in 2000 and to 0.479 in 2003,8 which lowered average domestic consumer demand. In summary, apart from external factors, the economic fluctuations in 1998 were caused by problems related to inadequately developed markets as well as problems related to market failures. Beginning in 1998, the CPC Central Committee and the State Council adopted measures that ended the economic downturn and ushered in a new period of growth. These measures can be divided into two categories. The first was to continue tapping on the potential of market mechanisms and open up new market sectors to find an outlet for surplus capital and production capacity. This included the abolition of eight industrial ministries and placing heavy and chemical industries under the purview of local governments; restructuring many small and medium-sized SOEs; greater marketization in the education, healthcare and housing sectors; and, at the international level, joining the World Trade Organization and 7

Liu Guoguang and Liu Shucheng, “Luelun Tonghuojinsuo Qushi Wenti” [A brief discussion on deflationary trends], Lilun Daobao, no. 3 (2000): 2–4. 8 Remarks by Ma Jiantang, commissioner of the National Bureau of Statistics during a State Council Information Office press conference on January 18, 2013.

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(Year) Fig. 9.2 Workers’ wages as a percentage of gross national income from 1952 to 2008. Source National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010: Table 1-5

further expansion of the open-door policy. The second category consisted of greater public spending in the form of large-scale increases in government investment in important forms of infrastructure. After these reforms, the primary drivers of China’s economic growth in the first decade of the twenty-first century can be summarized as: “dual competition, dual demand, low wages.” “Local tournaments” were the first driver, referring to the competition between corporations as well as between local governments. This period saw an intensification of the “local tournaments” model—competition among local governments to promote economic growth and attract investment—that had gradually formed after reform and opening up. The “separate kitchens” fiscal system formed after the enactment of the tax assignment system (fenshuizhi) incentivized competition between localities. Most small and medium-sized SOEs were restructured, while the decentralization of administrative authority over foundation industries such as coal, steel, metallurgy and non-ferrous metals provided plentiful resources for inter-regional competition. After housing reforms, fees from land conveyance became an important source of local revenue. The confluence of these factors boosted the initiative of local governments and corporations and greatly increased the motivation of local governments to develop the heavy and chemical industries. In 2012, China’s production of raw coal, steel, non-ferrous metals, electrolytic aluminum and automobiles were respectively 2.6 times, 5.0 times, 3.7 times, 5.7 times and 5.9 times of 2002 levels, exceeding the growth multiples in the previous decade (see Table 9.1). The second driver was the huge demand for investment in infrastructure and real estate. Housing reforms that encouraged purchases of commercial housing

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Table 9.1 Output of major heavy industry products from 1978 to 2012 Product

1978

Raw coal (billions 0.6 of tons)

1992

2002

2012

Relative output in 2002 (1992 = 1)

Relative output in 2012 (2002 = 1)

1.1

1.4

3.7

1.2

2.6

80.94

192.52

955.78

2.4

5.0

Steel (millions of tons)

22.08

Non-ferrous metals (millions of tons)

1

2.99

10.12

36.97

3.4

3.7

Electrolytic aluminum (millions of tons)

0.21

0.96

3.58

20.21

3.7

5.7

Automobiles (millions)

0.15

1.07

3.25

19.28

3.0

5.9

Source China Statistical Yearbooks for the relevant years

made infrastructure and real estate the main sources of investment demand. Huge investment demand from the combination of real estate and land finance, as well as the expansion of infrastructure construction, drove the rapid expansion of heavy industries, chemical industries, equipment manufacturing and raw materials industries. The third driver was the huge external demand generated by expansionary fiscal and monetary policies in the West. In the early twenty-first century, Western economies adopted expansionary fiscal and monetary policies that created immense foreign demand through government debt and encouragement of debt-fueled consumption. This demand stimulated export-oriented industries in China’s coastal regions. Rapid growth in exports made up for insufficient domestic demand. From 1998 to 2006 (before the global financial crisis), exports grew from 17.9% to 35.7% of China’s GDP, while the ratio of total foreign trade to GDP grew from 31.6% to 64.8% (see Fig. 9.3). The fourth driver was the “low-wages advantage” brought about by the marketization of the workforce. SOE reforms in the period around 1998 transformed the structure of China’s industrial workforce from one dominated by formal employment in SOEs to one dominated by migrant workers (whose labor relations were less rigid), increasing the mobility and marketization of the workforce. On the one hand, this gave businesses greater bargaining power, allowing them to reduce workers’ wages and welfare to support growth in corporate profits. On the other, the relative decline in wages and welfare affected the expansion of domestic demand, increased the reliance of enterprises on cheap labor and weakened their incentives to innovate. These became a symptom of the continuation of China’s non-intensive model of economic development (see Fig. 9.4).

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(Year) Export/GDP

Total export-import volume/GDP

Fig. 9.3 Imports and exports as a proportion of GDP from 1995 to 2013. Sources: National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010: Table 1-6; China Statistical Yearbooks for the relevant years

(Year) Export/GDP

Total export-import volume/GDP

Fig. 9.4 Changes in the proportion of investment and consumption from 1978 to 2010. Sources: National Bureau of Statistics, China Compendium of Statistics 1949–2008, China Statistics Press, 2010: Table 1-6; China Statistical Yearbooks for the relevant years

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As such, domestic investment and foreign demand (both generated by unique external conditions), the competition between local governments and between businesses, along with “low labor costs,” constituted the main drivers of economic growth in the first decade of the twenty-first century. It was necessary to adopt such measures in the 1990s, but we must also realize that these practices cannot be duplicated since historical conditions have changed. How have historical conditions changed? These changes can be broadly divided into two categories. On the one hand, there were changes in the objective environment and external constraints. The outbreak of the global financial crisis brought an end to Western demand created by loose monetary and fiscal policies. China’s existing stock of unsold property expanded rapidly, leaving little room for continued growth in the sector. Resource-based industries and export markets for primary products became increasingly saturated even as domestic resources and environmental constraints were tightening. The shifting of surplus rural labor to other forms of employment had ended, while the demographic dividends of the workforce had passed their peak. The working-age population had begun to shrink, and China no longer had an infinite supply of labor. In other words, many of the factors that contributed to economic growth at the start of the twenty-first century had vanished. On the other hand, some institutional mechanisms that had promoted economic growth had been weakened or had even turned from engines into obstacles. First, the investment generated by competition among local governments had turned from a factor contributing to economic growth into a factor that exacerbated market haphazardness and caused overcapacity. Second, fragmented and unconsolidated industry structures hindered enterprise transformation, upgrading and dynamism while also intensifying disorderly competition. Third, excessive dependence on cheap labor had become a disadvantage rather than a strength for the competitiveness of enterprises. Fourth, excessive marketization of public programs had become a factor that impeded rather than boosted economic growth. Changes in these four areas are, to a certain degree, related to excessive faith in the markets—the belief in the superiority of greater market competition, smaller corporations, stronger labor mobility, and greater marketization of social programs. Neoclassical economics might view further marketization and privatization as a panacea, especially for China and other developing countries. However, after the global crisis, the problem may no longer be that simple. The current problems facing China’s economy, on the one hand, include problems caused by failures to allow markets to function properly, for instance, administrative approvals that cover an excessive range of subject matter; problems in the prices of important resources and production factors that have yet to be ironed out; rigid bureaucracies in the management of public institutions and SOEs; unregulated market order and inconsistent rules; the prevalence of protectionism in industries and localities; and disparate governance systems between urban and rural areas.9 These problems are now better understood. On the other hand, however, there are still problems caused by the flaws 9

Zhang Yu, “Gengduo Shichang, Gengduo Shehuizhuyi” [More markets, more socialism], People’s Daily, March 10, 2014: 5.

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of the market, including overcapacity, wealth disparities, insufficient demand, environmental pollution and insufficient supply of public goods. These problems are clearly not caused by “remnants of the planned economy” but rather the flaws of market mechanisms. To a great extent, these are inherent downsides that cannot be avoided even in advanced capitalist market economies. Thus, it is futile to hope that further marketization can remedy the flaws of the market. China, and the rest of the world needs to reflect upon neoliberalism and find a new economic paradigm that integrates state and market incentives.

9.5 A Re-examination of Neoliberalism China’s reforms are firmly guided by clear principles. To ensure that economic reforms stay on the right path, China must prevent itself from being misguided by neoliberal paradigms.

9.5.1 Misconception I: Blind Faith in Marketization Such views hold that the growth of China’s economy since reform and opening up was entirely due to marketization. Hence, it is necessary to further expand the role of the market so that more unmarketized sectors can be brought into the markets and create new growth drivers. This view exaggerates the role of the market. Since reform and opening up, China’s socialist market economy system has indeed greatly mobilized the initiative of hundreds of millions of people and promoted the optimal allocation of resources. However, this role of the market economy is conditional and limited. Market mechanisms have positive as well as negative effects. Regarding the market as sacred doctrine without accounting for changing historical conditions will make it impossible to take the right approaches towards market regulation. First, theory tells us that greater marketization is not always better. That a perfectly competitive market can achieve optimal allocation of resources is a theorem of Western economics. However, the conditions required for this theorem to hold are too demanding to attain in the real world. They include the following assumptions: (1) perfect rationality—that every economic agent is rational and able to comprehend and identify all information he or she needs; (2) perfect markets—that there are complete markets for all goods, services, assets and financial contracts, and that transactions of any form are possible; (3) perfect competition—that the market has an infinite number of homogenous producers and consumers; (4) absence of externalities—apart from the trade of goods at equivalent value, any individual’s behavior has no other impact on society or the environment; (5) absence of economies of scale— that utility functions, production functions and market structures are “non-convex,” so as to ensure the existence of an equilibrium. Evidently, these conditions cannot

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be met in the real world. They are merely a starting point and reference in Western economics for discussing problems (even if Western economics is considered to be thoroughly scientific). They are tantamount to vacuum states in physics and cannot directly guide real-world work. Even if markets are perfectly efficient, that will only maximize economic efficiency.10 However, is economic efficiency the only goal of human society? Social equity, personal education and health, environmental safety, vibrant culture—these goals are as important as economic efficiency. The sole pursuit of economic efficiency will conflict with these goals. Second, Chinese history does not support the view that China’s economic growth since 1978 was entirely due to market-oriented reforms. The market economy did contribute to China’s rapid economic development in the early 1980s, but this could not have been achieved without the marketization of the vast state-owned assets amassed before reform and opening up. Other indispensable factors include China’s equitable income distribution and social safety net, as well as a unique global landscape that generated growing foreign demand. It was the huge latent domestic demand and capital stock accumulated in the previous 30 years that allowed the market to function. Since market-oriented reforms would have been futile without these preconditions, it is not the case that growth can always be stimulated through marketization. Finally, China currently has problems stemming from market inadequacies as well as overly active markets. There are even inherent defects in its markets. For example, as discussed previously, the marketization of basic public services has not only increased the costs of economic operations and suppressed domestic demand; it has also corrupted the behavior of public service providers, undermining the efficiency and quality of services. The marketization of the workforce, while boosting labor mobility and lowering costs, has suppressed demand, bred income disparities and affected growth in human capital. These impacts are detrimental to overall economic growth in the long run. The lack of market regulation also has a direct impact on overcapacity and environmental damage. Governments and markets each have laws that govern their genesis, development and demise. Human productivity has not yet reached a level allowing for the abolition of commodity trading. Neither has it reached the point where the state is abolished. After the Industrial Revolution, Western market economies drove the development of productive forces, but their negative effects were present from the very day they were formed. The functions of government in maintaining economic stability, providing public goods and improving human capital were proposed during the process of remedying market failures. As government functions became stronger, they created the conditions and dynamism for the development of market economies, in turn bringing the market economy to a higher level. This is a form of progress through continuous “negation of the negation.”

10

Or more accurately, Pareto optimality, which is not maximal economic efficiency.

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Countries that have succeeded in developing their economies have strong governments as well as developed markets. Meanwhile, some countries with weak governments do not have sound market economies. During the early stages of China’s reform and opening up, excessive government regulation was the main contradiction. Today, in the face of new development contexts, we must recognize issues of government overreach as well as the problems caused by market failures—excessive income disparities, insufficient domestic demand, fragmented industrial structures, anarchic cut-throat competition and lags in the development of human capital. These have become bottlenecks for the transformation and upgrading of China’s economy. As a socialist country, China is in a better position to exercise government functions that remedy market failures. Continuing to apply approaches based on blind faith in the markets will be either futile or even worsen these problems, turning the attempts to preserve growth into hands that stifle economic development. The Egyptian-French Marxist scholar Samir Amin once said: “I worry that in postMao China, some would have the misconception or illusion that China would quickly catch up to become a developed capitalist sovereign state once it fully marketizes after reform and opening up. This is the mere pipedream of Sun Yat-sen and the Kuomintang. However, Chiang Kai-shek and the Kuomintang have proved that this dream cannot be realized. I believe that if they are aware of this impossibility, they would understand that there is no path save socialism.”11 His reminder is worthy of our attention.

9.5.2 Misconception II: Blind Faith in Privatization Some believe that China’s economic growth since reform and opening up was the result of the “retreat” of SOEs and expansion of the private sector. They also believe that private firms are often more efficient than SOEs and, thus, economic difficulties can be resolved through the privatization of SOEs. This view is also erroneous. First, there is no theoretical justification for the notion that private firms are naturally more efficient than SOEs. Empirical evidence shows that performance levels vary among both SOEs and private firms (whether Chinese or foreign). The existing scholarly literature does not support the view that private firms are necessarily more efficient than SOEs. From the standpoint of Chinese history, the majority of Chinese businesses were still state-owned in the 1980s, but that did not prevent rapid growth in profitability and efficiency. Meanwhile, the efficiency of private firms has also been declining rapidly since the global financial crisis in 2008. Thus, it is untenable to argue that private firms are always more efficient than SOEs. Moreover, microeconomic efficiency is not the only criterion for determining the quality of a firm. Private businesses may outperform SOEs in microeconomic operations, cost control, 11

Ding Ye, “Zhiyou Shehuizhuyi Daolu Caineng Baituo Yifu Yu Weiji: Fang Aiji zhuming jingji xuejia Saimier Aming” [Only the socialist path can free one from dependency and crisis: interview with renowned Egyptian economist Samir Amin], Studies on Marxism, no. 3 (2016): 16–24.

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and adaptability to market demand. However, they are also likely to cause market haphazardness and a waste of resources. From the standpoint of Western history, SOE privatization was a popular idea underlying neoliberal reforms in Western countries in the 1980s and after. Privatization, however, failed to promote the growth of their economies. The statement that SOEs are necessarily must be falsified. Regardless of ownership structure, all contemporary firms will face the principal-agent issue—the separation of ownership and management—once they reach a certain size. The production model of cottage industries in Adam Smith’s day has long been history. In that model, there is no difference between SOEs and private firms in terms of their internal behavior. The “decision-making flexibility” in private firms is often attributable to the fact that most of them are family businesses or otherwise lacking in institutionalized management structures. This “decision-making flexibility” comes with great risk. It might help firms grow quickly when the economy is booming, including through the use of loopholes in the rules. These firms may be at an advantage in such cases, but they are unsustainable. Second, the contributions of the private sector may have been instrumental to China’s rapid economic growth since reform and opening up, but it must be recognized that the initial development of private businesses was enabled by the resources and support provided by SOEs. Prior to the founding of the People’s Republic of China, the country lacked a strong state sector. Its private sector was similarly weak, as well as concentrated in light industries (such as textiles). The development of private enterprises since China’s reform and opening up may have been the result of their hard work, but it was also the outcome of changes in macroeconomic cycles. Otherwise, it would be impossible to explain why many other developing countries that have adopted private ownership have not managed to achieve growth rates comparable to China’s. Moreover, SOEs played a significant role in basic innovations—innovations characterized by long cycles, large investments and strong positive externalities on the rest of the economy. SOEs have an advantage in this regard. Last, during the early stages of reform and opening up, the development of the private sector effectively boosted growth because SOEs constituted a disproportionately large share of the economy, whereas China’s industrial structure was dominated by heavy industry. Under such circumstances, the introduction of the private sector—which is more attuned to market dynamics—allowed for improvements in the industrial supply structure. However, China’s industrial structure has changed. Overcapacity and declining profitability are already rampant in the ordinary competitive sectors where private enterprises can play a role. Privatization of SOEs in such sectors will not remedy these problems. Privatization of nonprofit SOEs with natural monopolies may boost economic growth in the short run. But that will compromise the nonprofit nature of public services, increase their costs and may affect the public welfare. Two examples in recent years illustrate this situation. The first was the integration of coal resources in Shanxi, which for a period provided ammunition for attacks on the displacement of private firms by SOEs. At the time, small privately run coal mines were plagued by a host of problems. Part of them was later integrated and acquired by

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SOEs. The integration of coal resources in Shanxi was primarily an effort to address safety issues as well as protect the environment and natural resources. State-owned coal mining companies had long outperformed private firms in terms of spending on production safety and compliance with resource conservation rules, which accounts for their higher costs. The disproportionate share of private enterprises in Shanxi’s coal sector coincided with a period of resource grabbing and frequent safety incidents that also exacerbated social frictions such as wealth disparities. The consolidation of coal resources by large SOEs restored rationality to coal mining in Shanxi as well as the distribution of the resultant economic gains. It also made coal production safer. The other example is Northeast China. The rapid decline in the growth of local economies, especially in Liaoning Province, has been a subject of debate in recent years. Some views erroneously attribute these economic difficulties to the disproportionately large size of the public sector. From a horizontal standpoint, the disproportionately large share of SOEs in the northeast was not the cause of its economic difficulties. Shanghai and Chongqing, municipalities where SOEs are even more economically dominant than in Liaoning, both have economic growth rates that outperform the rest of the country. They are also leaders of their respective regional economies. Shanghai’s SOEs have total assets, revenue and profits that respectively constitute one-tenth, one-eighth and one-fifth of China’s state-owned assets system. Moreover, they generate more than 20% of Shanghai’s GDP. If central SOEs are included in the count, the state-owned sector will account for 50% of Shanghai’s economic output, compared to a mere 30% in Liaoning. Yet, in the first half of 2016, the economies of Chongqing and Shanghai grew at 10.7 and 6.7%, respectively, outperforming Liaoning. From a vertical standpoint, China’s northeast regions developed at their most rapid pace during the planned economy era as well as the early stages of reform and opening up, when SOEs were in the absolute majority. Their woes began in the twenty-first century after a substantial decline in the proportionate share of SOEs in the local economy. This alone absolves the state-owned sector from responsibility for the decline of the northeast. For many years after the founding of the People’s Republic of China, the northeast shouldered many of China’s social responsibilities across the nation, a major cause of their contemporary difficulties. Since 1949, their energy products were mainly supplied to other provinces without reimbursement or at government-set prices. The proceeds from their natural resources were diverted to other regions, resulting in a monolithic industrial structure that is the primary cause of their difficulties. The industrial structure dominated by heavy industry and resource industries in the past will naturally encounter difficulties when resources are exhausted and heavy industrial products are surplus. The resources of SOEs were depleted; would the same not have happened to private firms? Similarly, the Great Lakes Region in the US and the Ruhr region in Germany are heavy industry rustbelts. Their transformation did not involve SOEs or government intervention—why was it just as difficult for them to repivot their economies? Another reason for the difficulties in the northeast, China’s industrial rustbelt, is the large outlays on retirement benefits and elderly care. Neither was this caused

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by SOEs. The dependency ratio in Heilongjiang, for instance, has reached 1:1.16. Many young people have left the northeast for jobs elsewhere, but elderly retired industrial workers have remained behind—leading to a substantial fiscal burden in the region. Meanwhile, coastal regions such as Guangdong have low dependency ratios that allow them to reduce labor costs. Hence, this is also a manifestation of the northeast’s sharing of social costs for other regions. These problems can only be solved by distributing social burdens through greater transfer payments on a national scale. The excessive reliance on low-tier service industries and real estate in some parts of the northeast is also a cause of its economic crisis, which similarly cannot be abated by privatization. What is more important now is to draw upon the region’s relatively complete system of manufacturing industries and research institutes to make long-term strategic investments that will compensate for their past sacrifices and generate new growth impetus. The promotion of economic growth through SOE privatization took place under specific historical conditions and does not indicate that private firms are better than SOEs in boosting growth. On the contrary, some of the current problems in economic development are caused by inadequacies in the role of SOEs and in the supply of public goods. These problems include fragmented industrial structures, insufficient labor protections and production safety, and a lack of research and development in not-for-profit, strategic technologies. The solution will require greater efforts by SOEs in the provision of long-term, strategic public goods. Growth in private investment has declined significantly in China since early 2016. Some believe that private investment has been the primary driver of growth since reform and opening up, whereas excessive government regulation is the main reason for the current decline. Therefore, deregulation would revive growth rates. Such views are not accurate. While sensitive to market signals, private investment is also cyclical in nature. Even in Western capitalist countries that adopt private ownership, there are cyclical changes in investments by private firms. This is a reflection of the innate laws of a market economy instead of a result of government regulation. Private investment is declining primarily because its speedy growth over the past decade had caused a rapid expansion in production capacity while demand has run into bottlenecks. In turn, this led to overcapacity as well as declining profitability. Under such circumstances, looser regulations on private investment will not achieve the effect of encouraging investment. Even if there is some effect, that will still exacerbate overcapacity and create greater difficulties for future economic growth. For instance, private investors are eager to expand into areas such as the acquisition of high-quality SOE assets or investments in public services such as healthcare and education. In reality, however, these will have significant side effects. There might be huge sums of money hoping to enter the healthcare and education industries. But most investors are unwilling to make the long-term investments required to train teachers and doctors. Instead, they source talent from public hospitals and public schools to establish elite institutions. This enriches investors in the short run but makes the entire public services system more costly and inequitable.

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9.5.3 Misconception III: Blind Faith in “Small Government” Proponents of this view hold that China’s economic growth since reform and opening up was enabled by “small government.” Therefore, less government intervention would generate greater economic growth. As long as the economic functions of government are reduced, the markets would become more dynamic and keep the economy growing. This belief in the merits of small government and minimal regulation is an archetypical tenet of neoliberalism. This view, which originated in the West, was not from economics textbooks—rather, it is a discursive fetish with religious undertones that emerged after neoliberal reforms in the West in the 1980s. Domestically, monopoly capital promotes these discourses to break through government restrictions on the privileges of capital and thereby generate even greater super profits. Internationally, it is a tool for exporting ideology to developing countries so that developing countries would abandon their national economic policies and the developed countries would be able to consolidate and strengthen their dominance over the global economy. Ideological factors aside, neither theory nor practice supports the “small government” paradigm. Strong government action was instrumental to the early stages of modernization in the West. The first capitalist countries, such as the UK and the US, had implemented strict domestic trade protectionist policies in their early years. Moreover, the conditions for their industrialization were achieved by their governments’ opening of overseas shipping routes and land enclosure campaigns. Germany and Japan, part of the next generation of capitalist states, prioritized the development of heavy industry during the early stages of their modernization through government-led state capitalism. During the early stages of economic development, the initiation of modernization is even more difficult for developing countries without a strong government. Conversely, the vast number of developing countries currently caught in the poverty trap are hampered by weak government. During the early stages of modernization, governments play the roles of maintaining security and order, building a unified domestic market, providing public services and implementing industry policies. However, these countries failed to modernize as their governments were unable to perform their basic functions. Modernization did not lead to weaker government functions in Western countries. On the contrary, governments in developed countries are notably stronger than in developing countries. Views that disparage all forms of government regulation in the belief that only the fittest can survive in the markets are not supported by the facts. Actual markets suffer from information asymmetry: buyers are less sophisticated than sellers. Government regulations, standards, certification and information disclosure enable market players to acquire information at lower costs and make the right decisions. There are some who mistakenly believe that China’s economic growth since reform and opening up was due to “less regulation.” One of the main arguments in favor of this view is that the Chinese economy took off after the relaxation of

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government regulations on diverse forms of business in the countryside and private enterprise in the cities during the early stages of reform and opening up in the 1980s. This is a historical fact, but that growth was not the result of deregulation. The countryside already had the requisites in place for developing diverse forms of business. Deregulation simply turned this possibility into reality. Although administrative approvals do continue to impede development, there are also areas that require greater government regulation. For instance, in areas such as food safety, fire safety, environmental protection and private hospitals, approval processes are not overly stringent. On the contrary, there are areas which should be covered but are not. Streamlined and effective government is a valuable Chinese tradition. From the standpoint of facilitating government services for the general public, streamlined administration and delegation of authority are entirely necessary. However, blind faith in deregulation and indiscriminate shrinking of government functions will fail to generate economic growth and possibly even create new risks and increase ineffective supply. For example, simplistic deregulation in industries related to the environment, safety and planning will cause harm to society arising from businesses’ pursuit of profits (negative externalities). Looser regulations on financial institutions may increase financial risks such as fraud and speculation. Some localities have loosened approval processes for private hospitals to attract investment and stimulate their economies, resulting in large flows of capital to the healthcare sector for shortterm financial gain. Subsequent oversight becomes more challenging while patients have to endure greater suffering. The provision of public goods is a government duty that, if abandoned, may contribute to short-term economic growth. However, that is unsustainable in the long run and will lead to enormous side effects. In terms of ways of thinking, to hold blind faith in absolute marketization, private ownership and small government is to regard China’s successful experiences during the early stages of reform and opening up as absolute dogma—ultimately, it fails to realize that circumstances have changed. China has indeed gained much valuable experience from its reform and opening up. At the same time, reform and opening up is an endeavor with an infinite horizon. China’s basic national conditions have changed greatly since the early stages of its reform and opening up. Some approaches that had been successful are no longer tenable. Neither do successful experiences in economic reforms necessarily apply to the realities in other areas. This requires us to refrain from regarding past practices as absolute dogma and constantly give new meaning to the concept of “reforms,” which, after all, are too vast and profound endeavor to be reduced to mere formulas. History has shown that it is easier to overcome blind faith in the experiences of others but not one’s own. China’s experiences gained from its successful reform and opening up are valuable assets. However, that does not mean that China can afford to rest on its laurels. Deng Xiaoping described reforms as “crossing the river by feeling the stones”—implying that the experiences of reform and opening up should not be regarded as absolute dogma. Rather, it requires constant review of what has been

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done, so that right approaches can be maintained, wrong approaches can be corrected, and new problems can be tackled promptly. Only through continued emancipation of the mind and adherence to fact-based approaches can China avert the dogmatization of its experiences in reform and opening up, remain committed to truth, correct its errors and ensure that reforms are always adapted to new practices.

Chapter 10

China’s New Era (2012–)

10.1 Introduction Since the 18th CPC National Congress in 2012, China has entered a new era. China, the world, and even the whole humanity, have reached new historical junctures in their development. Domestically, there have been changes in the principal contradictions in Chinese society. Higher expectations for future living standards have created new contradictions and problems that need to be addressed. Internationally, the global financial crisis marks the emergence of dilemmas in the Western development path, making it necessary for China to transcend existing paradigms and find a new development path. A review of history shows that the greatest driver of China’s economic growth will be a people-centered return to socialist production that serves the purpose of prosperity for all and meets the people’s needs for a better life. This will also encourage China to continually explore transformation and discover new paths towards modernization for humanity. The 18th CPC National Congress was convened in 2012. In the face of complex domestic and international developments, the CPC Central Committee with Xi Jinping at its core has given intense attention to problems regarding the path and direction of China’s development. A new, profound movement to emancipate the mind is now taking place across the vast land of China. Its themes include overcoming blind faith in the Western path; building confidence in the paths, theories, institutions and culture of China; greater emphasis on leadership by the CPC; staunch commitment to the direction of socialist reforms. The CPC has confidently ushered in the dawn of a new era in China. China’s entry into a new era was not the result of chance. It was because the development of Chinese society, the development of world socialism, and the development of human society had reached a critical juncture. In the seven decades or so since the People’s Republic of China was founded, China has grown into the world’s second-largest economy. The Soviet model, Euro-American model and other foreign

© CITIC Press Corporation 2023 Y. Jiang, A New World is Possible, Understanding China, https://doi.org/10.1007/978-981-19-8918-6_10

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models, once the subject of keen attention in China, are unable to rise to the challenges faced by contemporary China. Neither can any of the theories or practices that currently exist in the world. Human society is still seeking new paths of development, especially in the case of many developing countries, which have an even greater need for a modernization path superior to the capitalist mode of production. China has entered uncharted territory in institutional innovation without navigator or reference. More than at any other point in history, the Chinese nation needs to build the historical self-confidence and historical self-consciousness that will enable its independent progress. At present, the engines and prospects of China’s next phase of economic growth are universal concerns for the country. Based on an analysis of historical and contemporary realities, we propose that a people-centered development model, adherence to socialist goals of production and higher living standards for the people are key if its economy is to sustain rapid growth. On July 1st, 2021Xi Jinping remarked at the centenary of Communist party of China that CPC have adhered to and developed socialism with Chinese characteristics, promoted the coordinated development of material, political, ideological, social civilization and ecological civilization, created a new path of Chinese modernization and a new form of human civilization. “China has provided a new choice for developing countries that want to accelerate development and to maintain their independence, and contributed Chinese wisdom and Chinese solutions to solving human problems.” This means that China’s rise will not threaten the world, but will contribute to creating a better world for mankind. China has proved with its own story that Communists are good not only at destroying an old world through revolution, but also at building a new world.

10.2 The Historical Logic of the New Era In 2017, the 19th National Congress of CPC officially announced that socialism with Chinese characteristics had entered a new era and established the guiding position of the Xi Jinping Thought of Socialism with Chinese Characteristics in the new era. The Congress summed up the main strategy of this thought as “Fourteen insistences”, that is: (1) Adhere to the party’s leadership over all work. (2) Focus on the people. (3) Continue to deepen reform in an all-round way. (4) Adhere to the new development concept, which includes innovation, coordination, green, openness and sharing. (5) The people are the masters of the country. (6) Adhere to the comprehensive rule of law. (7) Adhere to the socialist core value system, which includes prosperity, democracy, civility, harmony, freedom, equality, justice, the rule of law, patriotism, dedication, integrity and friendship. (8) Ensure and improve people’s livelihood in the course of development. (9) Adhere to the harmonious coexistence between man and nature. (10) Adhere to the overall concept of national security. (11) Adhere to the Party’s absolute leadership over the people’s army. (12) Adhere to “one country, two systems” and promote the reunification of the motherland. (13) Continue

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to promote the construction of a community with a shared future for mankind. (14) Adhere to the principle of comprehensively and strictly administering the party. The entry of the twenty-first century China into a new era was not happenstance. It was because the development of Chinese society, the development of world socialism, and the development of human society had reached a critical juncture. To understand the new era, we must first understand its macrohistorical logic.

10.2.1 The Logic of China’s Social Development After its founding, the People’s Republic of China answered two questions: how socialist systems and modern development can be achieved in a major Eastern country; how a socialist state can survive, develop and thrive amidst the world capitalist system. China achieved the integration of socialism and market economies and the integration of socialist China and the capitalist world system. China created an economic miracle and stayed clear of the wrong paths taken by socialist states such as the USSR, such as closing off to the world or changing its fundamental nature. Beginning from the 18th CPC National Congress on 2012, socialism with Chinese characteristics gradually entered a new era. This era has to answer the following question. Given the constraints of foreign and domestic resources, environments and markets, how might China build a better form of socialism in a vast, highly populated land that will more widely reflect the superiority of socialism, improve living standards in a more substantial and balanced manner, become a strong modern socialist country in every respect, and make greater contributions to humankind? The new era marks changes in the historical conditions of China’s social development. Existing development models and theories are no longer able to fully solve the problems of this new era. Domestically, there has been a qualitative rise in people’s expectations for a better life. However, the supply side of the economy has yet to adapt to the new needs of the people. The growth that was once supported by the expansion of the labor force, capital, resources and external markets has now reached an inflection point. Market-oriented reforms and rapid economic growth have also accrued many new frictions, examples being unbalanced regional development, widening income gaps, eco-environmental damage, inadequate public services, national security threats, and alliances of interest between some officials and special interests. Judging from postfinancial crisis trends, Western countries are also unable to fully solve these problems. China will more strongly uphold CPC leadership and harness the advantages of its socialist system to explore means to better remedy market failures and improve social equity. This will allow China to outperform capitalist countries in development while also catching up with the times. Externally, capitalist globalization has begun to reverse its cycle of ascent. During the early stages of reform and opening up, capitalist globalization was on the rise, and China’s opportune open-door policy became a major engine of economic growth. But the global financial crisis of 2008 marked a reversal in the post-WWII

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economic growth cycle in the capitalist world. China needs to assess contemporary global development trends and reposition itself in an evolving international landscape, participating, along with other countries, in the shaping of a new order of globalization. These new conditions, new problems and new missions are unprecedented in Chinese history. They also mark that China has entered a new stage after 40 years of reform and opening up. Profound adjustments are needed in its development goals, methods and strategies. The new era is not a negation of the period before or after reform and opening up. Instead, it is a common legacy, development and transcendence of these two periods. Through a philosophical process of “thesisantithesis-synthesis (see chapter 5),” it will achieve a new leap forward.

10.2.2 The Logic of Marxism and Socialist Movements The logic of the world socialist movement is the second layer of logic needed to understand the new era. The outbreak of the global financial crisis in 2008 demonstrates that the inherent capitalist contradiction—the socialization of production and the private ownership of production factors—still exists. The financial bubbles, polarization, ecological crises and global imbalances in Western countries are the products of innate contradictions in capitalism and cannot be fully resolved under a capitalist system. Hence, there have been more believers in Marxism, supporters of socialism and advocates of the Chinese path, which may lead to a revival of socialism. Of course, a socialist movement of the twenty-first century should have new traits of its own. Since the 18th CPC National Congress, the Party has formed Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era during its exploration of new development paths, responding to the most fundamental questions of contemporary Marxism. • Ideas on the principal challenge for society and the purposes of production reflect the principles of Marxist political economy. Xi stresses that the economic structural supply-side reforms fundamentally aim to meet the people’s increasing material, cultural and environmental demands, as well as achieve the purposes of socialist production. This distinguishes the goals of socialist production from those of capitalist production. Socialist production is centered upon the needs of the people rather than the appreciation of capital. The problems of overcapacity, environmental pollution, unbalanced distribution and financial bubbles, whether in China or abroad, emerged because the modes of production have deviated from the purposes of production. Ideas on the principal challenge for society and the purposes of production aim to correct these problems and answer the “how” and “what” of socialist production. • Ideas on the modernization of China’s governance system and capacity answer Marx’s questions on how socialist countries can achieve progress. Xi stresses in

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2013 that “The overall goal of comprehensively deepening reform is to improve and develop the socialist system with Chinese characteristics and promote the modernization of the national governance system and governance capacity.” Marx proposed in such works as The Civil War in France the goal of consortia of free workers. Lenin proposed the theory of the dictatorship of the proletariat. However, the USSR did not have a proper answer for how to build a mature and stable socialist state, and its failure in this respect resulted in privileges, corruption and the alienation of the state. Xi Jinping Thought on the modernization of China’s governance system and capacity provides an answer for building a mature, fullfledged set of institutions for building a socialist country. This is of groundbreaking significance in the history of the socialist movement. • Ideas on putting the people first and well-rounded human development are responses to Marx’s thought on the alienation of human beings and their free, comprehensive development. Marx believes that alienation is a common phenomenon under capitalist conditions—the alienation between human beings and the products of their labor, between humans and other humans, and between humans and their species-essence. He also proposes that, in future communist societies, “the condition for the free development of each is the free development of all.” The people-centered development philosophy seeks to restore humans to the center of development by adjusting the relations between people and capital as well as between people and the material. This is a corollary to Marx’s thought on free, well-rounded human development. • Ideas on a community with a shared future for mankind is a development of Marx’s thought on the world system. Capitalism divides the globe into the center and the periphery. The center has surplus capital and commodities but lacks outlets for them as periphery countries had been deprived of their capacity for development, which leads to imbalances in the global economy. China has proposed the building of a community with a shared future for mankind and the Belt and Road Initiative to remedy the inequitable and imbalanced development in the capitalist world system by protecting global equity and justice and jointly building a global order different from the past. This will be a new model and new era of globalization. • Socialism with Chinese Characteristics for a New Era is a realization of Marxist thought on transcending the Caudine Forks. Marx once argued that Eastern countries could skip over the Caudine Forks of capitalism, but realities have yet to validate his prediction. Meanwhile, China’s experience demonstrates that latecomer undeveloped countries can draw lessons from the material wealth of Western countries while avoiding the fundamental flaws of their capitalist development paths and the immense costs of capitalist development through institutional innovation. This has paved a new path to modernization for developing countries.

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10.2.3 The Logic Behind the Modernization The logic behind the Modernization of human society is the third layer of logic needed to understand the new era. Since the Age of Discovery in the fifteenth century, modernization has become a goal pursued by most nations. However, only a few dozen countries have actually overcome the many traps on their way to high-quality modernization. After the global financial crisis, the world ran into new development challenges that affected developed and undeveloped countries alike. • Poverty traps. As defined by World Bank standards, there are approximately 30 low-income countries today. Effective investment and consumption are difficult in these countries due to their low levels of economic development, human resources and state governance capacities. • The middle-income trap. The capitalist Industrial Revolution solved the problem of development for one-sixth of the global population. However, the remaining five-sixths no longer have the means to use global resources to alleviate the tensions brought about by capitalist development. Strong countries also seek to sustain an unfair political-economic order to keep themselves at the top of the global pyramid. The consequence is that some countries are ensnared in the middle-income trap. • The high-income trap. Since the Second World War, the prosperity and stability of Western capitalist countries were sustained by the exhaustion of natural resources and costly welfare states. Once the laws of capitalist economic cycles begin to work, all sorts of tensions would come out into the open. The sharp class tensions, government failures and social antagonisms in the West today are manifestations of these contradictions—which can be called the “high-income trap.” Since the founding of the People’s Republic of China, the country has drawn upon the advantages of socialism in pooling resources for major endeavors, avoiding the poverty trap that has snared developing countries in general. Since the reform and opening up, China has avoided the isolated ossification or regime change that befell some other socialist states. China’s GDP per capita has reached over USD 12,000, the gate of high-income country. In the new era, China will continue to explore ways to transcend the middle-income trap and avoid the high-income trap. These efforts aim to overcome the development dilemma facing human society and find a more inclusive path to modernization.

10.3 People-Centered Development A review of history shows that the greatest driver of China as well as the world’s economic growth will be a people-centered return that serves the purpose of prosperity for all and meets the people’s needs for a better life.

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10.3.1 From “Capital-Centered” to “People-Centered” Capitalist production and socialist production serve different goals. The former aims to generate profits for capital, which (along with its personified representatives, capitalists) dominates society. The latter aims to meet the needs of the people, who occupy the principal status in social production. In Marx’s era, liberal capitalism led to laborcapital contradictions, wealth disparities, overproduction and insufficient demand. These were reflections of how “production for the sake of profit” had deviated from societal needs. On the one hand, capitalists continually expanded investment and production in their quest for profit. On the other hand, relative impoverishment befell the proletariat, who could no longer afford basic necessities, the consequence of the misallocation of social resources due to the contradictions between capitalist private ownership and large-scale socialized production. Today, in the world as to some extent in China, it is still common for the purpose of production to be misaligned with actual societal needs. Aside from the overproduction mentioned above, this also manifests in at least the following aspects. First, the alienation of public services. Take healthcare as an example. Behind the present crisis of rapidly rising healthcare costs in Western countries is the capitalist mode of production, where the profit motive runs contrary to the true purpose of healthcare—the sustainment of health. For the sake of profits, commercial insurers prefer “quality customers” with high incomes and in good health to the detriment of the elderly, vulnerable, ill and poor, groups that have a real need for health insurance. For the sake of profits, healthcare providers prefer to allocate resources to latestage treatments and specialized therapies that are highly profitable but have little social benefits. They even provide excessive treatments detrimental to patients’ health through means such as fraud. Second, property and financial bubbles. Speculative property demand is essentially “buying for the sake of selling” rather than for residential purposes, turning housing and land into financial tools. On the one hand, capital continually drives up the prices of empty housing, leading to idle resources. On the other, many in need of better homes are unable to afford them. In its drive for profits, financial capital is diverted from serving the real economy, causing bubbles and triggering financial crises. Third, consumerism. Originally a means for people to meet their needs, consumption has also been alienated in capitalist societies. After crises of overcapacity emerge, capital and capitalist countries will generally create a culture of consumerism. Many forms of consumption serve to satisfy desires triggered by the societal climate rather than actual needs. Instead of leading to greater happiness, consumption intensified the alienation of man, rendering people slaves to money and consumption. Fourth, destruction of ecological environments. In recent years, environmental degradation has become a common challenge for humankind. Marx and Engels once wrote that capitalist modes of production are a cause of environmental destruction. Global environmental degradation has its roots in the impulse of capital to expand infinitely as well as the global production system; hence, the onslaught of capitalism

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is not only a global arrogation by capital but also a global raid upon the ecological environment.1 How might the contradiction between the aims of capitalist production and the real needs of society be resolved? Given the state of existing productive forces, it is not yet possible to eliminate commodity production nor completely eliminate the resultant drawbacks. However, history has shown that socialist countries can, to some degree, limit the downsides of capitalist modes of production and better align production and actual societal needs by regulating income distributions, producing more public goods, limiting the privileges of capital and implementing macroeconomic regulations and industrial policies.

10.3.2 Revisiting the Purposes of Socialist Production In early 2016, during a study session on implementing the decisions of the Fifth Plenary Session of the 18th CPC Central Committee, attended by officials at the provincial/ministerial level, Xi Jinping stated that the fundamental goal of supplyside structural reform is to “improve the country’s supply capacity, so as to meet the people’s material, cultural, and ecological needs, which are becoming more extensive, more sophisticated, and more individualized, and ultimately realize the purpose of socialist production.”2 The 19th CPC National Congress revised the expression of the principal contradiction facing Chinese society: “the principal contradiction facing Chinese society has evolved. What we now face is the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life.”3 The proposal of the concept of “the purpose of socialist production” and the revision to the expression of the principal contradiction facing Chinese society during the 19th CPC National Congress was a new discussion of these major issues since they were last debated and clarified during the early stages of reform and opening up. The last discussion of the purposes of socialist production took place concurrently with the large debates on the criterion for truth during the early stages of reform and opening up. Those debates chiefly revolved around the misalignment between the consumption needs of the people and the priority on heavy industry under the planned economy system. World economic crisis originates when the production deviates from the real needs of its people in several aspects. The present misalignment is caused by production 1

Pan Yue, “Makesizhuyi Shengtaiguan yu Shengtai Wenming” [Marxist ecological view and ecological civilization], Study Times, July 14, 2015. 2 Speech by Xi Jinping at a study session on implementing the decisions of the Fifth Plenary Session of the 18th CPC Central Committee, attended by officials at the provincial/ministerial level. http:// cpc.people.com.cn/n1/2016/0510/c64094-28337020-2.html. 3 Report by Xi Jinping at the Nineteenth CPC National Congress. From Xinhua News Agency, October 28, 2017.

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that focuses on GDP and capital profits. Problems previously discussed in this book, including excess capacity in the production of certain goods, the inadequate supply of public services, growing regional disparities, eco-environmental degradation and property and financial bubbles, are essentially the consequences of the one-sided pursuit of GDP and capital profits—a model that deviates from the real needs of society and the people. After reaching a certain point, this deviation would cause an imbalance between supply and demand, which drains energy from economic growth. Under such circumstances, sustaining the drive and vitality of economic development would require the realization of the purposes of socialist production and bring social production back unto the track of satisfying the actual needs of the majority. Ultimately, addressing these problems requires that the state, society and markets come together to restore the purposes of socialist production—especially with respect to shortcomings in strategic investment, public consumer goods, human capital and the real economy. Remedying these shortcomings will require adjustments to the relations of production to better align production with actual societal needs.

10.3.3 A New Development Paradigm: Concretization of the Purposes of Socialist Production In that case, how should the purposes of socialist production be attained? An innovative, coordinated, green, open, and mutually beneficial development paradigm is the concretization of the purposes of socialist production. In October 2015, during the Fifth Plenary Session of the 18th CPC Central Committee, Xi Jinping put forward the development concept of innovation, coordination, green, openness and sharing, emphasizing that innovative development focuses on solving the problem of development power, coordinated development focuses on solving the problem of unbalanced development, green development focuses on solving the problem of harmony between man and nature, open development focuses on solving the problem of internal and external linkage of development, and shared development focuses on solving the problem of social fairness and justice. Xi has also emphasized that the new development concept signifies a profound change relevant to the overall development of our country. Innovation, coordination, eco-friendliness, openness and mutual benefits have long been pursued by human society. Yet, humankind has yet to find solutions to these problems. Since the Industrial Revolution, capitalism has created enormous wealth and splendid culture. However, it has failed to fundamentally address problems relating to coordination, the environment and common benefits. Western culture and capitalist modes of production have levied excessive demands on nature. Developed countries have achieved a higher degree of innovative, coordinated, green, and shared development, albeit at the expense of global inequity and incoordination. It would be a significant contribution to humanity if China could truly realize these five great ideals.

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Innovation is a mandate for socialism; the socialist system is the greatest and most successful institutional innovation in human history. There have been two changes in the innovation trends faced by contemporary China. First, modern science increasingly requires coordination on a gargantuan scale. Decentralized, fragmented approaches to innovation are costly and inefficient, whereas socialist countries have an advantage in collaborative research on a grand scale. Second, since Western countries are at the technological frontier and dominate the technological discourse, China, as a developing country, has to break through the monopolization of the technology sectors and establish strong confidence in its innovation capabilities. Under socialist modes of production, the goal of innovation is to satisfy the real needs of the greatest majority. This would effectively coalesce resources for innovation so that it can acquire the greatest social benefits. Coordination encompasses coordination between urban and rural areas, different regions, the economy and society, as well as material and spiritual civilization. A capital-driven development model cannot achieve coordinated development because the latter is essentially the allocation of resources between the powerful and the disadvantaged. Domination by capital inevitably leads to antagonism between labor and capital, which then translates into disparities between urban and rural areas, different regions and different social groups, along with uncoordinated socioeconomic development. The implementation of strategies for coordinated development was an indispensable factor in China’s ability to maintain faster and more sustained growth than other developing countries. Green development, in essence, is to alter the antagonistic relationship between man and nature. Developed Western countries have been the chief polluters in the past. Today, despite being the greatest energy consumers in the world, they call upon developing countries to join them in cutting emissions and even impose more stringent emissions standards on these countries—use of their “first-mover” position to curb competition from latecomer countries. The key to solving environmental problems is to find new modes of production and lifestyles and reverse the alienation of production and living. Essentially, this means curbing current investment and consumption to leave more wealth for future generations. This requires harnessing the strengths of the socialist system, for the sake of the long-term welfare of all peoples, to avert the unfettered exploitation and destruction of nature caused by the profiteering of capital. Through its opening-up and development, China aims to participate in the international system on an equal footing. Capitalist global crises are essentially cyclical capitalist crises on a global scale. Coping with these crises requires socialist countries and Third World nations to unite and strengthen themselves, improve their development capacities in terms of infrastructure and human capital, and fight for fairer international trade rules. Only through this process can China develop itself. Therefore, equal and open development can be realized only by socialism. Mutually beneficial development is a basic principle of socialism. The root causes of the present global crisis and inadequate domestic demand in China are the low levels of mutually beneficial development, the global North–South disparities, and

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China’s class divides. Under such circumstances, the paramount task for the realization of mutually beneficial development is to achieve sharing between capital and labor and raise workers’ status. Based on the above analysis, we contend that new drivers of economic growth in the new era will come from greater adherence to people-centered development philosophies, a stronger commitment to the purposes of socialist production, and the satisfaction of the people’s true needs for a better life. The subsequent sections of this chapter will discuss how these drivers of growth can be realized. Since the 18th National Congress of the Communist Party of China, the Party has adhered to the ideal of common prosperity and to the people-centered development thought, according to which development is for the people, by the people, while its achievement should be shared by the people. Take healthcare as an example, from 2010 to 2019, life expectancy per capita increased from 74.8 years to 77.3 years. The maternal mortality rate, infant mortality rate and mortality rate of children under 5 years old decreased from 30.0/100000, 13.1 ‰ and 16.4 ‰ in 2010 to 16.9/100000, 5.4 ‰ and 7.5 ‰ respectively. The main health indicators are better than the average level of middle and high-income countries. The reform of the universal medical security system continued. We will improve the universal medical insurance system and build the world’s largest basic medical security network. In 2020, the insured population reached 1.361 billion, and the coverage rate continued to exceed 95%. We will establish a unified medical insurance and serious illness insurance system for urban and rural residents, and the subsidy standard for medical insurance for residents by governments at all levels will increase from 120 yuan per capita in 2010 to 580 yuan in 2021. Medical assistance has been continuously improved, the scope of assistance objects has been expanded, and commercial health insurance has developed rapidly. With the continuous increase of health investment, the expense on medical treatment has been significantly reduced. The level of medical security has been gradually improved, and the proportion of overall fund payment of hospitalization expenses within the scope of medical insurance policies for urban workers and urban and rural residents has reached about 85% and 70% respectively. The proportion of personal health expenditure in total health expenditure has been declining, from 35.29% in 2010 to 27.65% in 2020. As the payment reform continues, the proportion of reimbursement shall increase and the scope of reimbursement shall expand, so that the problem of medical reimbursement in various places can be soon alleviated.

10.4 High Quality Development Although China has become the world’s second-largest economy, a considerable portion of its economic activities are driven by expansions in scale and quantity, leaving many industries at the middle and low tiers of the global division of labor. With evolving domestic and international market environments, this path of development reliant on cheap labor and expansion in scale has become increasingly untenable.

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Hence, China must be more vigilant, seize the opportunities presented by the new scientific and technological revolution and industrial transformation, and embrace the path of innovation-driven development. In addition, China must gain an edge in industrial sectors and gain a greater say in global trade and technology sectors.

10.4.1 Strengthening Basic Industries Emphasis on the development of basic industries and strategic industries is one of the experiences acquired over the course of economic development since the founding of the People’s Republic of China. The economic fluctuations in 1958 were triggered by the overly rapid decentralization of authority that led to irrational competition between localities, an irrational competition that would have taken place whether in a planned or market economy. The economic fluctuations since the reform and opening up were caused by similar reasons. Competition between different localities and enterprises does enhance the dynamism of the economy, but it also leads to inadequacies in foundation industries and national public goods, as well as affects collaboration between enterprises. Thus, China has regarded the fortification of basic industries as an important tool for managing economic downturns. Basic industries generally refer to industries with long development cycles, large investment scales, as well as strong externalities and spillover effects. Inadequate development of these industries will hold back the development of the national economy. At present, redundant construction is still a serious problem despite inadequate development in energy, raw materials and transportation. Meanwhile, inadequacies in foundation industries and infrastructure such as basic research, general technologies, information interconnectivity, social credit systems and unified quality standards have severely constrained economic transformation and upgrading. Internationally, the US has regarded the building of “industrial commons” as a key measure in the process of “re-industrialization.”4 Germany’s “Industry 4.0” initiative, in essence, seeks to harness the strengths of interconnected information systems to achieve the development of a characteristic nature by promoting integration and coordination across design, research, production and sales. The relationship between consolidation and decentralization in industrial structures should be viewed dialectically. While business competition should be encouraged through market mechanisms, necessary industrial integration and consolidation should also be promoted so that large corporations and industry associations could play an even more important role to enhance industrial collaboration.

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Hou Yongzhi, “Tisheng Chanye Fazhan Zhiliang yu Jingzhengli shi Guanjian” [Improving the quality and competitiveness of industrial development is key], China Economic Times, March 7, 2015.

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10.4.2 Innovation-Driven Development Innovation-driven development is a global trend. Those who make the “first move” in innovation will hold the initiative. The several technological revolutions since the Industrial Revolution have greatly boosted the level of global economic and social development. Humankind has created vastly greater material and cultural wealth than traditional societies over the past few centuries, while the rise of emerging major countries has also benefited from scientific and technological revolutions. Since the global financial crisis of 2008, countries have been engaged in a race to secure an edge in science and technology. The world is on the verge of an era of unprecedented innovation intensity and industrial rejuvenation. Countries and regions such as the US, EU and Japan have greatly increased outlays on scientific research in an effort to retain their position as global technological leaders. The implementation of innovation-driven development strategies requires the courage to “switch lanes and overtake,” change the habitual practice of emulating others, establish strong confidence in one’s own innovation, and insist on self-reliance and independent innovation. Science and technology do not progress in a linear fashion at an even pace. Despite trailing developed countries in general technological expertise, China can leapfrog and rapidly catch up with or even surpass developed countries as long as it achieves major breakthroughs in key theories and technologies. As a major country, China needs to make its own technological innovations. The gap will never be narrowed if China merely emulates others. China needs to bring in and learn from advanced foreign scientific and technological achievements; more importantly, China needs to constantly strive for excellence while overcoming challenges by taking fresh approaches, daring to question existing theories, and having the courage to blaze new trails.

10.4.3 Forging a New Working Class Wholehearted reliance on the working class is not only mandated by China’s national conditions and the nature of its society. It is also necessary if China is to gain an edge in the industry. China is a socialist state under the people’s democratic dictatorship led by the working class and based on the alliance of workers and peasants. This not only guarantees the country’s long-term stability but is also the engine for its modernization and pursuit of industrial superiority. Internationally, China was able to outperform other developing countries in industrialization and sustain comparatively rapid economic growth for more than 30 years. One reason was that China gave the working class greater social status and relatively stable social security during the early stages of its modernization. After reaching the innovation-driven phase, many other developing countries also regarded higher social status for workers and stable labor relations as important drivers of innovation. For instance, after the Second World War, Japan

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was able to rapidly revive its economy and prosper thanks to the adoption of a “Japanese capitalism” different from the capitalism of the past. This style of capitalism was primarily distinguished by economic development enabled by government support for national industries, protection of domestic markets, and implementation of industrial policies. At the same time, Japan created labor-capital coordination mechanisms characterized by lifetime employment, the seniority-wage system and “enterprise unions.” These provided workers with stable and generous welfare as well as fostered cohesion, team spirit and a sense of community within enterprises. China instituted SOE policies such as cadres’ participation in labor, workers’ participation in management, and the establishment of democratic systems after the founding of the People’s Republic of China. Practice has shown that these have had a positive impact on enterprise cohesion and workers’ motivation. Human beings are the most dynamic factor in productivity. Industrial upgrading certainly relies on capital investment and technological progress, but it is more important and urgent to improve the quality of the workforce. Currently, many enterprises possess financial resources and technologies but lack staff with technological skills. In the four decades since reform and opening up, many industries have relied on a development model of quantitative expansion supported by cheap labor, leading to deficits in vocational education, employee incomes, social security and workers’ safety. These problems have turned cheap labor from an advantage into a disadvantage. Wholehearted reliance on the working class, first and foremost, takes the form of stringent compliance with laws and regulations, genuine application of the Labor Law and Labor Contract Law, and strict enforcement of the minimum wage system and various safety guarantees and social security systems, so as to ensure that workers have stable jobs and incomes. These would address problems of overly long working hours and wage arrears that remain common in some industries, giving workers the money and means for consumption. At the same time, China needs to greatly increase investment in vocational education and utilize periods of economic fluctuation to organize the migrant workers by getting them enrolled in “migrant workers’ universities” so that the deficits in vocational and academic education could be compensated within a concentrated period of time. Only then can China boost domestic demand and enhance the efficiency of human resources. This would rebalance the economy by restoring its reliance on domestic demand and higher workforce quality. Wholehearted reliance on the working class, more importantly, requires the development of socialist economic democracy under new economic and technological conditions so that workers can have a genuine say in corporate management and national economic life, whereby their dominant status could be manifested. This is not only a political requirement, but also necessary for industrial transformation and upgrading. At present, for China to reach a phase where development relies on scientific and technological innovation and a skilled workforce, corporations must promote the flattening of corporate management through greater internal democracy as well as enhance the stability of technical job positions. This ensures that their employees have more stable prospects and engenders a sense of pride and honor towards the company and their vocations, thereby motivating them to enhance their skill levels

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and long-term dedication. In the early years of the People’s Republic of China, the state carried out democratic reforms with respect to private companies, boosting workers’ initiative. SOEs established employees’ congresses, Party group meetings, pre-work meetings, and democratic consultations. These integrated the CPC’s political strengths and corporations’ democratic management into an organic system. Presently, most Chinese businesses, particularly those in the private sector, have low levels of internal economic democracy, which creates obstacles for raising long-term competitiveness and workers’ enthusiasm. Greater internal economic democracy is an important means for strengthening corporate competitiveness. China should aid enterprises in enhancing their management with Party committees playing the core role and unions as the backing, establish employees’ congresses and various democratic systems, truly enhance industrial workers’ enthusiasm and ingenuity, and rebuild a vast industrial workforce.

10.5 Set “Traffic Lights” for Capital Giving full play to the positive role of capital in promoting productive forces, preventing the disorderly expansion of capital and limiting its negative role is not only an important advantage of China’s socialist system, but also a major issue in upholding and developing socialism with Chinese characteristics.

10.5.1 What is Disorderly Expansion of Capital Some people think that capital is not capital, plant, equipment and other investment goods or means of production? Why prevents its expansion? This is a one-sided understanding. It is the view of western economics that capital is only a means of production. Marxist political economics holds that capital is not only a means of production, but also a social relationship. Some people occupy the surplus value of workers free of charge by occupying the means of production. The constant pursuit of proliferation and expansion is the nature of capital, otherwise it will be eliminated, which has nothing to do with the subjective will of capitalists. Marxism treats capital with the dialectical view of dividing one into two. On the one hand, it affirms the historical progress of capitalism and holds that “the productive forces created by the bourgeoisie in its class rule of less than 100 years are more and greater than all the productive forces created by all previous generations”.5 Unlike western economics, Marxist political economics does not regard capitalism as an eternal thing, but believes that all social systems are historical. Unrestricted capital expansion will lead to capital agglomeration, anarchic expansion of production, relative poverty of the proletariat, and finally lead to economic crisis. Capital 5

Collected works of Marx and Engels, vol. 2 (Beijing: People’s Publishing House„ 2009), 36.

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enjoys the privilege of being unrestricted, turning everything into commodities and all human relations into the relationship between commodities and transactions. With the deepening of this mode of production, social production will increasingly deviate from its purpose. The purpose of production is no longer to meet people’s real needs, but to meet the needs of capital proliferation. Developed countries will continue to transfer the crisis to backward countries. When capitalism itself can not solve this crisis, it is the end of capitalism. At the same time, Marx also pointed out that the way to solve this problem in the future is to establish real social ownership and let workers jointly master the means of production. Building a socialist society on the basis of a backward agricultural country, China must first experience a primary stage of socialism with underdeveloped productive forces and commodity economy. At this stage, we also need to give full play to the positive role of capital in promoting the development of productive forces and optimizing the allocation of resources. At the same time, we should restrict the negative effects of capital. As early as the 1950s, Mao Zedong put forward important views such as “commodity production depends on what economic system it is connected with, capitalist commodity production is connected with the capitalist system, and socialist commodity production is connected with the socialist system” (Volume VI, page 61 of Mao Zedong’s Anthology). Since the reform and opening up, especially since the 18th CPC National Congress, CPC has gradually formed the practice of giving full play to the positive role of capital, limiting the blindness and negative role of capital and preventing the disorderly expansion of capital. The main basis is that in the primary stage of socialism, capital should play a role in promoting productivity. However, unlike western countries, in China, the role of capital has a bottom line. Although the disorderly expansion of capital is manifested in the increase of quantity, it is fundamentally manifested in the change of quality. As long as the behavior of capital does not exceed the above bottom line, it can fully flow and play a positive role in promoting productivity under the condition of socialist market economy, and it can also develop healthily. For example, in some industries with sufficient competition, the share of private capital has exceeded that of state-owned capital. However, as long as state-owned capital controls the links and fields related to the national economy and the people’s livelihood, private capital adheres to the basic economic system with public ownership as the main body and the common development of multiple ownership, operates in accordance with the law and standards, and does not endanger the national economy and the people’s livelihood, it is a qualified builder of socialism with Chinese characteristics.

10.5.2 The Harm of Disorderly Expansion of Capital The root of the international financial crisis since 2008 is the disorderly expansion of capital. Since China’s reform and opening up, the non-public economy has developed rapidly and played an indispensable role in promoting economic growth

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and improving people’s lives. However, due to various reasons, there is also the phenomenon of disorderly expansion of capital in some fields, resulting in some negative consequences. In economic sector, the disorderly expansion of capital affects both efficiency and fairness. The root cause of the global financial crisis triggered by western countries is the expansion of capital liberalization led by the United States and other countries in the 1980s. Under the guidance of capital, a series of measures to narrow government regulation, expand capital power and reduce workers’ interests have been implemented. In the short run, capital gains more profits. But in the long run, it has aggravated the basic contradiction of capitalism and brought about financial bubbles, polarization between the rich and the poor. People’s livelihood crisis, ecological deterioration and other problems eventually led to the financial crisis. The emergence of real estate and financial bubbles in many countries is essentially the motive of capital’s pursuit of proliferation, which is contrary to the real needs of society. Investment and speculative real estate demand is essentially “buy for sale” rather than “buy for living”. The disorderly expansion of individual financial enterprises and real estate enterprises in China leads to the diffusion of huge risks to the society. Individual platforms rely on the monopoly position to “eat at both ends”, infringe on the interests of ordinary operators and consumers, affect the optimal allocation of resources through manipulation algorithms, embezzle the welfare of producers and consumers, so as to grab the maximum profits and suppress the innovation of small and medium-sized enterprises. These are the consequences of the disorderly expansion of capital. Politically, the disorderly expansion of capital affects the party and the government to practice the people-centered development thought. After obtaining economic benefits, capital infiltrates individual government workers, and even indirectly affects the operation of political power through bribery and interest alliance. This is a challenge to the fundamental system of China’s Party leadership, the people’s Congress system, socialist democracy, national law and Party discipline, Touched the bottom line of the socialist system with Chinese characteristics and the ruling bottom line of the Communist Party of China (Wang bixue: “the Standing Committee of the National People’s Congress determined that 45 deputies to the National People’s Congress in Liaoning were elected invalid due to vote solicitation and bribery”, people’s daily, September 14, 2016). This ruling bottom line is that the Communist Party of China can only represent the interests of the people, not turn capital into power. In terms of people’s livelihood, the disorderly expansion of capital puts a heavy burden on the people. Medical care, education and pension are special commodities related to the basic people’s livelihood and social equity. We must adhere to the direction of public welfare. The monopoly of some platforms, the heavy burden of extracurricular education and training, and the difficulty and cost of seeing a doctor, which are deeply hated by the people, are in the final analysis the motivation of capital to pursue profits, which alienates the production purpose of these fields. A large number of residents buy houses with loans, resulting in serious overdraft of purchasing power, a large number of families become “house slaves” and the real economy is squeezed. The capital profit seeking nature of the medical system

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leads to large prescriptions, excessive services and falsely high drug prices, which aggravate the difficulty and high cost of seeing a doctor. The commercialization and marketization of after-school training institutions create panic demand, violate the laws of education and increase the burden on families.

10.5.3 Control the Capital in Socialist Scheme How to control capital in socialist countries is a new topic in human history, which still needs to be explored. But one thing is certain: the nature of capital determines that its adherence to the bottom line cannot be realized spontaneously and consciously, but must rely on strong leadership and restraint. Adhering to the party’s leadership is the fundamental political guarantee to limit the disorderly expansion of capital. Capital is an “overall power”, which can penetrate into any field of social life after becoming bigger. Only a strong and powerful proletarian party can restrain and control the “overall power” of capital. Therefore, adhering to the party’s leadership over all work is a strong political guarantee to prevent the disorderly expansion of capital. Under the leadership of the party, we should not only give full play to the positive role of capital in economic development and guide capital to serve the cause of socialism with Chinese characteristics, but also draw strict boundaries for capital through political leadership, laws and regulations to avoid excessive expansion of capital. China has a series of institutional advantages to control the capital. For example, the party has a perfect cadre system, which can prevent agents of capital from easily mastering power; the party has strict discipline and prohibits the combination of Party members and cadres with capital interests; Party committees, governments, people’s congresses and CPPCC committees at all levels should establish relevant systems, regularly listen to the opinions of the masses, and avoid being captured by capital interests. These are things that capitalist countries cannot do. They are our institutional advantages. Since the 18th National Congress of the Communist Party of China, China has adhered to the direction of socialist market economy reform with Chinese characteristics, emphasized the decisive role of the market in resource allocation and better played the role of the government, clearly proposed to limit the excessive expansion of capital, regulated the capital expansion that damages social interests to a certain extent, and cracked down on illegal acts. All these have won the support of the people.

10.6 Enhance Common Persperity One view holds that excessive welfare was a cause of financial crises in the West. The “welfare trap” in Western countries is something to be wary of. However, the welfare trap in the West emerged because of the social foundations of private ownership that

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led to antagonism between capital and workers. Costs spiraled up as governments lacked the ability to design social welfare systems from the top-down, reasonably control costs or ensure fairness. Since the 1980s, Western polarization has expanded incessantly due to the impact of neoliberal policies. The so-called welfare trap was not the fault of welfare. Chinese history shows that the establishment of a fair, appropriate basic social welfare system boosts economic development. It is also China’s development goal as a socialist country.

10.6.1 Socialism Can Prevent “Welfare Dependency” Since China is still a developing country, some people worry about whether social welfare leads to welfare dependency and greater government burdens. These worries are justified. However, avoidance of the welfare trap does not mean abolition or lowering of existing social welfare standards. Rather, it requires harnessing the strengths of the socialist system to carry out the overall design of social welfare and develop a system that balances costs and equity. Since the financial crisis, the welfare trap has emerged in some Western countries. Although China needs to remain vigilant against the welfare trap, it would be wrong to assert on this basis that China should not improve social welfare. The emergence of the welfare trap in the West was not caused by excessive social welfare, but rather private ownership. First, under conditions of private ownership, their governments lacked the ability to fund social programs through taxes. Consequently, they had to rely on currency issuance or public debt to support social programs, which led to government debt. By contrast, socialist states are based on public ownership, while their governments are also more able to collect taxes. This allows socialist states to directly fund social welfare through taxation and returns on state-owned assets. Second, the privatization and marketization reforms of social programs in Western countries after the 1980s made social welfare more expensive. Thus, the welfare trap was caused by capital’s excessive profiteering from social programs rather than excessive benefits flowing to ordinary folk. The solution, therefore, should be to reverse the commercialization and marketization of social programs rather than slashing benefits for the man on the street. In the case of healthcare, high costs sapped the US economy of its competitiveness prior to health reforms. Health insurance and hospitals in the US are dominated by private corporations. Despite spending 18% of GDP on healthcare, there are over 40 million uninsured Americans. By contrast, the UK, France and Germany, countries where public hospitals dominate the health system, spend merely 10–12% of GDP on healthcare. Despite that, these countries have achieved universal coverage while also outperforming the US in health outcomes and equity. Thus, the welfare trap does not imply that the development of social welfare is not needed. Under a capitalist political-economic system, welfare can be dispensed to the public to maintain social stability only through these costly and inefficient means. Why is it that socialism can create a true welfare state?

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First, from the standpoint of welfare provision, the state owns the means of production on behalf of society as well as the immense profits generated by public-sector corporations. These states can use part of the returns from the public sector to provide citizens with more services such as healthcare and education. This rapidly improves their level of science and culture, which then advances their productivity, forming a virtuous circle. Second, the governments and peoples of socialist states share common long-term interests. That avoids unrealistically high promises of welfare during competitive elections as well as the populism that results. Lastly, the public service systems and social welfare services in socialist states are primarily run by nonprofit public bodies. Through planning and guidance, the state can direct these public organizations to provide universal basic services on an equitable basis. This prevents the costs of services from spiraling due to profiteering. Spiraling costs are ultimately passed on to the public through taxes.

10.6.2 Social Welfare and Economic Growth The relationship between the market economy and social programs is akin to the relationships between humans and air, fish and water. Humans might be unaware of the existence of air during daily life, but they acutely experience the agony in case of its absence. If the social progress has fallen behind its economic development, it would become a bottleneck for the transformation and upgrading of the economy. Large income gaps lead to a stronger reliance on non-intensive growth models. Some local governments and enterprises rely on extending working hours and suppressing wages to sustain the rate of profit. While this appears to cut costs, it inhibits consumer demand as well as makes it harder for workers to invest in education and enhance the level of human resources. Given excessively large income gaps, local governments have been forced to expand investment and exacerbate overcapacity to ensure employment and stability for the sake of protecting basic living standards. These measures have caused the economy to be increasingly reliant on low-quality, repetitive investments and exports. The marketization of public services makes them more expensive and suppresses domestic demand. Inequities in education and exam-oriented competition are growing ever more intense, indirectly increasing household expenditures. Speculative demand for housing has led to rising property prices. These factors have exacerbated household burdens and uncertainties, leading to large precautionary savings, rising labor costs and the suppression of domestic demand. Deficits in social sectors are impediments to the building of a country of innovators. On the one hand, the disintegration of social security discourages innovation by businesses and individuals. Firms and individuals engage in entrepreneurship and innovation only in societies with an adequate safety net. In societies with higher levels of uncertainty, “quick profits” are preferred. Northern European countries have the highest levels of income equality and the best safety nets. They also happen to be one

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of the most innovative regions in the world. On the other hand, a country of innovators also requires a highly-skilled workforce. China’s workforce is poorly educated. Income disparities and poor social security have also caused firms to overly rely on cheap labor, which stifles innovation. Stable social security and fair income distribution enable stable expectations, boost consumption and reduce overcapacity. The development of social undertakings, such as education and healthcare, facilitates improvements in the level of human resources and provides a reserve of talent for building a country of innovators. At present, China should accelerate relevant efforts. China’s education system has already achieved a considerable degree of coverage. However, this mainly addresses issues of educational equity and teaching methods. Greater educational equity is the most direct and fundamental means for promoting social mobility. But educational equity is also affected by other forms of social equity, and strong measures must be adopted to reverse the uneven allocation of educational resources caused by inequities in other areas (such as incomes, regions, family backgrounds, social networks, and housing). First, a more distinctive remuneration system should be implemented for teachers. China should go beyond the public-institution remuneration system and implement a special remuneration system for basic education teachers, so that the salaries of teachers in the countryside as well as the central and western regions could be significantly increased to the levels close to, or higher than, the developed eastern regions. This would promote a “reverse” flow of talent to grassroots education. Second, China should narrow the gaps between its types of schools. Teachers should be periodically rotated between schools while students’ enrolment should be based on their residential address. “Key schools” should be abolished so that quality teachers are evenly distributed across schools in the same area. Mechanisms to assess educational equity should be established. Performance indicators used by education authorities should incorporate disparities between schools in terms of educational advancement and admission into key universities. This would provide incentives for schools while avoiding excessive disparities. Third, China should make educational enrolment at all levels fairer. Enrolment in higher education institutes should be fairer and more objective. These institutions should also recruit more students from underdeveloped areas, while autonomous admissions decisions and other such highly subjective enrolment channels should be comprehensively scrutinized and carefully applied. The goal is to reduce and eventually eliminate the impact of economic, regional and family factors on student admissions. In the healthcare sector, the key lies in reversing the trends of marketization and commercialization. In recent years, although government spending on the healthcare sector has increased, operating mechanisms remain marketized and commercialized. Healthcare institutions remain profit-oriented; excessive treatments and pharmaceutical kickbacks remain on the rise. A thorough solution to these problems can greatly benefit the people while maintaining (or even decreasing) fiscal expenditures. At the same time, actions can be taken to curb commercial graft in pharmaceutical procurement and distribution. China should crack down on commercial bribery in

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pharmaceutical purchase and sales, stop hospitals from financing their operations through pharmaceutical revenues, accelerate the reform of public hospitals, increase the level of universal health insurance, and truly allow the people to feel that their financial burdens have lightened.

10.7 Modernization of National Governance A state that represents the fundamental interests of the people and strongly regulates economic development signifies an institutional strength for the development of socialist countries,; it is also a guarantee that China’s economy can amass new growth drivers. From the perspective of world history, governments have played a strong organizing and leading role in the rise of developed countries. This role is even more prominent during key stages in economic transformation. China faces the task of improving its state governance system. In the new historical era, the role of government differs from both the omnipotent government of the planned economy era as well as the GDP-oriented developmentalist government that took form since reform and opening up. More importantly, China’s government should not become the sort of “small government” advocated by neoliberalism. At present, it should represent the common interests of the people—the fundamental nature of a socialist government. Guided by the purposes of socialist production, China’s government should take the lead in improving the country’s industries, providing public goods, remedying market failures, and promoting common prosperity. To shoulder these duties, apart from eradicating blind faith in “small government,” the imperative is to improve the government’s ability to manage the economy, promote its own transformation, and reconstruct the relationship between central and local authorities. It requires stronger centralization as well as a local initiative to change the goals and behaviors in inter-regional competition. At the same time, the people’s orderly participation in economic governance should also be promoted in order to build stable and dynamic urban–rural grassroots organizations.

10.7.1 Stronger Centralization Since the founding of the People’s Republic of China, there have been several rounds of evolution in the economic relationship between the central and local governments. During the First Five-Year Plan, China formed a highly centralized planned economy. Thereafter, the country went through two rounds of decentralization, the first in the late 1950s and the second in the early 1970s, which promoted the development of local industries and rural areas. During the early stages of market-oriented reforms, China bolstered inter-regional competition and development vitality through decentralization. The tax assignment system reforms during the 1990s strengthened the

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fiscal powers of the central government, but economic work remained highly decentralized. The result was a pattern of competition between local governments, with GDP figures and fiscal revenues as the main objectives. Practice has shown that interregional competition under a centralized government enables local initiative as well as policy comparison and experimentation. Since the 18th CPC National Congress, new trends in China’s economy have led to new adjustments in the relationship between the central and local governments, requiring greater adherence to central directives and a stronger awareness of the importance of coordinated national economic policy. This is not only a political requirement but also related to changes in the historical conditions of economic development. GDP competition between local governments might have been the driver of economic growth in the dozen years or so since the turn of the century. However, this mechanism has since been weakened. To some extent, it has become resistance in terms of consolidating old growth models and created problems such as overcapacity and environmental pollution. As a major developing country, China has to maintain a certain pace of development. However, the desired pace is one with quality, efficiency and sustainability as well as respect for the laws of economic growth, while the desired growth is the type more efficient, more equitable and more sustainable. Some localities place too much store on GDP growth, prioritizing efficiency over social equity and leading to a great number of cases which violate justice and equality. This sort of development generates short-term economic growth and greater fiscal revenues at the expense of the foundations for sustainable development. Addressing these problems first requires stronger centralization. China should strengthen coordination in national policy in aspects such as reducing overcapacity, the overall layout of productive forces, basic scientific research, industrial policies, the supply of basic public services and progress in reforms. The coordinated national policy enables China to capitalize upon its institutional advantages to absorb surplus production capacity and capital. The several efforts to reduce surplus capacity and capital since the reform and opening up have been relatively successful as most enterprises were state-owned at the time. Assets and employment were ultimately under state control. Cuts in investment and production could be ordered if an industry became overheated and afflicted by overcapacity, and their assets and employees transferred to new sectors. Today, with the promotion of mixed ownership structures, it has become more difficult to reduce overcapacity. One measure requires the government to force the “withdrawal” of existing production capacity through strict environmental, planning, safety and labor protection standards. That, however, inevitably entails problems relating to debt and employment. To prevent these problems from affecting social stability and basic living standards, the government should first oversee strict corporate compliance with labor laws and compensate for past deficits in social responsibilities. If that still fails to compensate the losses suffered by workers, the government should ensure the availability of new job opportunities by improving the social safety net and creating new employment channels. All of these measures require strong governmental action.

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Meanwhile, new growth drivers require stronger centralization. Presently, many important foundations for industrial upgrading are national public goods, including efforts to develop major strategic technologies, expanding equitable access to basic public services and other corresponding fiscal policies, as well as spreading out major production facilities to avoid new overcapacity. For instance, excessive fragmentation, precedence of local interests over conservation, and inadequate coordination of industrial policies in China’s rare earth industry have led to excessive mining and cutthroat international competition that resulted in the sale of valuable resources at low prices. Despite attempts by the state to consolidate the industry, the sector remains fragmented due to challenges in coordinating local interests. In another example, despite rapidly rising healthcare costs across the country, some provinces continue to expand their pharmaceutical industries for the sake of economic growth, creating greater risks for future development. Solving these problems will require China to rely on the advantages of centralization to prioritize the greater good over local interests and long-term benefits over short-term gain. Only then can China slash inefficient supply and boost efficient supply.

10.7.2 Rebuilding Local Dynamism Of course, emphasis on centralization does not imply stifling local initiative. Centralization and local initiative are dialectically interlinked. Fragmentation and disorderly competition do not equate to proactive initiative. It is only through centralization and the setting of proper rules and guidance that local initiatives can be better promoted. The inter-regional competition that spawns initiative is one of China’s institutional strengths that must be sustained. Problems emerged in the past because localities were parochially focused on GDP numbers and fiscal revenue, leading to overcapacity and environmental degradation. The solution lies in the government’s adjustment of the targets of competition. In fact, China’s healthcare, education, environmental and innovation reforms have shown that the “local pilot, central promotion; local competition, central oversight” model can be applied to economic development as well as other policy areas. The next step would be to adjust the orientation of local competition. First would be adjustments to the fiscal system that ensure adequate allocations for basic public services. Under China’s present fiscal and governance systems, extensive autonomy over social programs falls under local purview while fiscal powers lie with the central government. As such, local governments have to chase GDP to sustain necessary expenditures. Furthermore, fiscal expenditures are always inclined towards spending in areas that boost GDP at the expense of others, consequently reinforcing a development model oriented towards GDP and profits. In order to adjust this incentive, fiscal and tax systems must modified so that fiscal powers and administrative authority relating to basic public services could be aligned, while the responsibilities of the central and local governments pertaining to public services should be clarified, with the central government assuming fiscal powers.

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The second would be adjustments to assessment systems. These include, for instance, the incorporation of indicators such as increases in average life expectancy, morbidity rates, medical expenses, education levels, social equity and environmental quality into performance evaluations for local governments. At the same time, since public services are mainly enjoyed by local residents, while many public services and welfare indicators cannot be measured by simple indicators, more weight has to be given to residents’ opinions, so as to build a new pattern of inter-regional competition.

10.7.3 Institutionalizing the Mass Line To achieve people-centered development requires constant adherence to development for the people, by the people and benefiting the people. “People” in this sense refers to the masses based on the alliance between workers and farmers, not minority special interests. Since it was founded, the People’s Republic of China has built a “people’s society” self-organized by the people under Party leadership upon the basis of the bonds between the CPC and the people and the alignment of the interests of the state and the people. China has formed various urban and rural organizations based on stateowned and collective enterprises and people’s communes. Apart from functiong as the channels for messaging from higher authorities and platforms for community participation in public administration, these organizations also unite to conduct various public affairs. In these ways, they ensure the provision of basic public services and the safety, stability and fairness of society even during an era of low economic development. Since the reform and opening up, the Chinese economy has developed rapidly, causing the power of capital to increasingly replace traditional organizational forces in integrating various social resources. Traditional social organizational structures have been weakened to the extent of disintegration. Of course, compared with most developing countries, China still retains the framework of community selfgovernance systems in urban and rural areas. This is one of China’s institutional strengths. This demonstrates that policies are aligned with the fundamental interests of the greatest majority by adherence to the Party’s mass line, relying on the Party’s political strengths to reconnect and organize the grassroots, and giving urban and rural communities formal channels to participate in socioeconomic management so that they can fully express reasonable requests while preventing certain extreme demands from infinite inflation. For example, during rural land acquisition, most relocated households are reasonable and law-abiding. As long as the government stands in the people’s shoes and has the ability to conduct rational consultations through grassroots organizations and provide reasonable compensation, relocation efforts can be carried out smoothly. However, tensions erupt because some local governments are overly partial towards the interests of developers and offer too little

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compensation to displaced households. On the other hand, tensions erupt because of the weakening of rural grassroots organizations, resulting in the lack of platforms for rational and fair negotiations. Therefore, China has to build an orderly and dynamic people’s society so that the mass line and consultative democracy remain effective, allowing for the greatest possible alignment between the interests of the state, the collective and the individual. Building a true people’s society first requires breaking with the mentality of leaving everything to the market. Rather than organizing the people, market will only leave them disunited, unprotected and disempowered. Organizing the people requires the resources and influence of Party organizations to give more organizational resources and capabilities to the grassroots. New forms of media should be used to establish various channels for the public to express their views and enable dialogue. Matters involving the interests of local residents should be fully discussed with them. Therefore, on the one hand, China has to ensure that reforms are in the right direction and decisions are representative of the fundamental interests of the masses. On the other hand, China has to prevent the kidnapping of policy by minority populist views. The only solution is to allow the majority to participate in the consultation. One specific measure can be to establish mechanisms for connecting Party members with members of the public, with each party member reaching out to a certain number of people. In all public sectors, such as public hospitals and public schools, committees made up of the people they serve should be established to exercise oversight. People’s congresses and political consultative conferences at all levels, in addition to their current daily routine, should establish special committees composed of representatives of the public to periodically carry out consultations on specific issues related to the people’s livelihoods. At the same time, the membership of Party representatives, people’s congress deputies and political consultative conference members should be adjusted so that the occupational and income structure of these groups can accurately correspond to that of general society. As long as we continue to practice consultative democracy and the mass line, economic development will truly reflect the will of the people, and boundless vitality will be generated.

10.7.4 New Forms of Rural Collectivization Adherence to collective land ownership and organization of the countryside were important experiences of the triumph of the Chinese revolution and modernization. These are necessary to address the three rural issues and achieve coordinated urban– rural development. Economically, China’s agricultural development has progressed from the simple pursuit of yield to the pursuit of quality, efficiency and brand influence. Given changes in the stage and goals of development, the requirements of the agricultural organization have inevitably changed. On the one hand, smallholder farming by individual

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households is not conducive to the pursuit of quality, efficiency and brand influence. Thus, China must take the path of large-scale agriculture. On the other hand, China’s population and land endowment have decided that, for a long time to come, there will be at least 500 million rural laborers. Thus, large family farms like those in the US are impossible. The limited land in the countryside must be able to accommodate a huge rural population. Large-scale agriculture based on collective ownership is the only way to achieve these two goals simultaneously as it will provide ample jobs while also creating within the collective economy space for the intensive cultivation, an advantage provided by traditional Chinese farming. That will allow for the full utilization of resources and allow most farmers to share in the fruits of development. At the same time, the collective economy will allow for the development of various forms of businesses, as well as the secondary and tertiary sectors, through economies of scale in sales, branding, and technology. From a socio-political angle, the current de-organization of rural areas has created hidden perils for rural governance and social sustainability. The poor social governance in the countryside caused by de-organization has damaged rural social ecosystems, created challenges for traditional family culture and made life in the country unappealing. There is a lack of endogenous impetus for the development of public programs such as basic education, basic healthcare, sanitation, science and technology and culture, while support from the cities alone, mainly in the form of officials, experts, doctors and teachers that stay only for short stints, makes it difficult to form a virtuous cycle. Rural population structures, composed primarily of “leftbehind children,” the elderly and women, are not conducive to family building and family stability. Such population structures also undermine the physical and mental health of younger generations as well as future rural development. The exodus of talent from rural areas has led to a resurgence of landlords and local despots in some localities, while secret societies, corrosive cultures, and unlawful religions and cults are affecting the preservation of rural culture. An important reason behind these problems is the ineffectiveness of formal organizations for rural self-governance. These problems cannot be remedied if rural residents are disorganized and influential rural governance institutions are lacking. Reorganization in the countryside is a strategy for rural development, prosperity and stability. Based on the experience of China’s victorious revolution as well as the positive and negative lessons learned since the founding of the People’s Republic of China, two problems must be addressed for an effective rural organization. First, organizational resources in the countryside must be strengthened. Organization is a capacity that cannot be exercised without certain resources and human talent. Traditional organizational resources in rural China rely primarily on clan lineages. Meanwhile, the CPC-led land revolution injected the Party’s organizational resources into the countryside and fused them with the positive elements of traditional clan lineages. These became a main organizational component of the people’s communes during the early years of the People’s Republic of China. After reform and opening up, capital entered the countryside and also became an organizational force. Today, rural reorganization must rely primarily on the Party and the government, supplemented by the organizational capabilities of rural clan lineages

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and capital. Otherwise, there would be deviations in the objectives of reorganization efforts. China should encourage a greater flow of talent from its cities to the countryside as well as the return of rural elites. These people will become the backbone of rural organizations. Second, China has to solve problems relating to the distribution of benefits from the organization. The key to solving these problems lies in strengthening the collective land ownership system under market economy conditions. The people’s communes failed to appeal to some farmers in some part due to the large transfer of rural surplus to the cities under the industrialization policies during that era. The government is currently devoting considerable organizational resources to the countryside in the hope of re-organizing rural areas. The impact of these efforts, however, has been lackluster chiefly because these organizations lack any significant influence on rural economies, whose economic dynamics and distribution models remain dominated by external capital. If this problem, which pertains to the economic foundations, remains unsolved, true organization of the countryside will be impossible. Solutions will require adherence to collective rural ownership and genuine protection of rural residents’ interests so that grassroots organizations have effective means at their disposal for the conduct of public administration and provision of social services. Since 2017, the Organization Department of the CPC Yantai Municipal Committee in Shandong Province, under the suggestion by Yu Tao, then the head of the organization department, has resolutely implemented the important instructions on “the party’s management of rural work is our tradition”. With the support of the CPC Yantai Municipal Committee, it has taken the initiative to embark on the main battlefield of rural revitalization, creatively put forward the “Party branch leading cooperatives”, took the lead in exploring the development and expansion of rural collective economy in the whole Prefecture and city, and walked out a road of relying on the leadership of the party to promote rural revitalization and common prosperity. By the end of the 2020, the model has covered 3045 villages, which accounted for 47.3%. According to incomplete statistics, the “Party branch led cooperative” has driven the city’s village level collective income to increase by 390 million yuan and the people’s income to increase by more than 500 million yuan, which has brought huge benefits to the majority of farmers, especially poor households. “Unlike the cooperatives in the 1950s and 1960s, the cooperatives led by the Party branch gathered scattered elements such as land and labor force and reconfigured them by means of market, which not only realized the double benefits of collectives and individuals, but also further enhanced the service function of grass-roots party organizations,” said Lv Yongjie, full-time Deputy Secretary of the Yantai municipal Party committee’s “two new” organization working committee.

10.8 E-Socialism Information technology is the most salient of contemporary productive forces. Its progress and expansion will give better planning to production and consumption,

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facilitate direct public participation in social and political life, make the division of labor more flexible, and provide channels for the people to share in the fruits of what they have built. Together, these will create a new path towards the attainment of socialist ideals. The development of socialist information civilization and the leapfrog development in information technology represent historic opportunities for socialism with Chinese characteristics. On July 17, 2015, The Guardian published an article titled “The end of capitalism has begun,” followed by the caption: “Without us noticing, we are entering the postcapitalist era. At the heart of further change to come is information technology, new ways of working and the sharing economy. The old ways will take a long while to disappear, but it’s time to be utopian.” According to the article, information technology made the postcapitalist era possible in three ways. First, it has reduced the need for work, blurred the boundaries between work and leisure and loosened the relationship between work and wages. Second, information will weaken the role of market price mechanisms. Since the production of basic necessities is already adequate for human needs, big data and information technology can be used to provide some basic necessities for free—in other words, the “sharing economy.” Finally, information technology will lead to the spontaneous emergence of collaborative production—goods, services and organizations that no longer respond purely to the dictates of the market or the managerial hierarchy. Instead, production and consumption will happen collaboratively on information platforms. For instance, Wikipedia is the largest information platform provided by volunteers for free, a prime example of collaborative production. Information technology will make it possible to achieve ideals that traditional socialists envisioned yet found unattainable. These include distribution based on needs, planned production, universal political participation and pan-society collaborative production. As a late-industrializing country with a huge population, China possesses unique advantages in the development of information technology. The development of information technology will make it possible to achieve many previously unreachable goals, creating room for innovation in institutional mechanisms across the board.

10.8.1 Market Economy + Internet First, information technology has greatly expanded the connotations and boundaries of the market. The core of market mechanism is fair competition, and the foundation of fair competition rests on the full disclosure of the information. Information technology has reduced transaction costs and broadened market boundaries to a global scale, allowing for wider and better allocation of resources. Market players such as firms can be compared, screened and evaluated by consumers and government regulators at very low costs. Many industries and firms are spontaneously developing e-commerce and online market platforms. As online market platforms have

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the attributes of public goods, the next step will require governments or industry associations to integrate these platforms, enact standards and expand their coverage. Second, information technology has reduced the information barriers between government organs and market entities, providing a powerful new means for strengthening and improving macroeconomic regulation. Information technology makes it easier for the government to collect information, review and compare the behavior of entities subject to oversight, and enhance the efficiency of government regulation. These are new mechanisms for macroeconomic regulation and market oversight. China’s socialist market economy is not yet perfect, but the development of information technology will allow China to transcend the Western path, or even traditional capitalist and socialist economic models, and allow for better integration of the “hands” of the market and the government. Although free-market mechanisms allow resources to be more efficiently allocated, the adjustment process is haphazard and involves lags. By contrast, a planned economic system can comprehensively balance the national economy. Sound plans were impossible in the past as technological conditions did not allow planners to collect and timely process information on every individual microeconomic entity. However, progress in information technology has made it possible to cheaply collect such information; the more advanced the information technology is, the more opportunity it offers to integrate the advantages of the market economy and government planning. Developments in information technology have enriched the forms of the market as well as blurred the boundaries between markets and governments, rendering the traditional dichotomy between planned and market economies obsolete. China needs to use information technology to deepen its understanding of market mechanisms and government functions and create a new socialist market economy model.

10.8.2 Consultative Democracy + Internet Progress in democratic politics has become a pragmatic and urgent task for China. Unchanging models of democracy do not exist anywhere in today’s world; every form of democracy has its own strengths and weaknesses. China needs to learn from advanced human civilizations in seeking a model that fits its national conditions. Information technology provides new means for these efforts. As with the construction of its market economy, it is likely that the development of democracy in China will make a great leap forward by transcending traditional Western development models. Information technology has narrowed information gaps between the government and the public, reduced the costs of civic participation in societal organization and management, as well as expanded channels for citizens’ orderly participation in politics. Information technology has formed new internet-based communities, where the internet allows the public to more easily access government information and evaluate government performance. Similarly, the internet makes it easier for the government to gather unfiltered public opinion.

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Information systems will enable greater reform of administrative management systems. Information linkage and transparency between government organs facilitate the elimination of departmental interests, promotes inter-departmental coordination and enhance administrative efficiency. Information transparency by government departments and institutions facilitates performance evaluations of government departments and their staff. Information linkage and transparency between all levels of governments will also facilitate the establishment of new indicator systems for performance evaluation. China’s government is rapidly making progress in information technology. The use of information technology to transform traditional industries enables firms to enhance their competitiveness and achieve industrial upgrading, thereby improving China’s currently unfavorable position in the division of labor in international trade. Information technology allows the flow of information to replace the flow of people, goods and resources. That alleviates pressures on China’s resources, environment and transportation, and enables China to utilize resources more intensively while also protecting the environment. These are of strategic significance for China given its large population. Information technology also aids reforms to administrative systems and the reform and development of social programs.

10.9 Building a just New World As the international economy enters a recessionary cycle and China enters a new normal, China’s management of its relationship with the rest of the world has reached a historic juncture. Historically, Chinese culture has a tradition of striving for the common good, forming a cultural pattern of universal inclusivity. The Chinese civilization is the most inclusive of all the great early human civilizations. Its capacity for inclusivity and learning from others is one of the key factors that allowed it to endure. At present, the principal challenge facing the world is the inequality between the minority of Western countries and the majority of developing countries with respect to the stages of and right to development. This inequality not only deprives developing countries of the fruits of globalization; it also imbalances the global economy as developed countries wield excessive control over capital and resources, creating financial bubbles, hollowing out industries and intensifying social frictions. Ultimately, that leads to global problems. Hence, the building of a better world requires that such inequalities be narrowed, as well as the establishment of a new international political and economic order that is more equitable, just and inclusive. As a developing and socialist country and the world’s second-largest economy, China’s position in the new global economic landscape has become even more complex. Given the severe challenges to global development, all countries share a common mission of uniting all peoples and finding a new path of development for humankind. This will also be a great contribution by the Chinese nation to humanity.

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China’s short-term mission in the building of a new world is to contribute to restoring balance in the world economy. This is necessary both for the revitalization of the world economy and for China’s own development. The present global economic imbalances are caused by capitalist globalization. Developed Western countries hold reign over most super profits as well as strategic advantages in economic technologies. They stimulate excessive consumption through expansionary fiscal and monetary policies, while developing countries, as exporters of labor and resources, find themselves at a disadvantage in international competition. Developed countries use technology monopolies, trade protections, as well as military and cultural exports to strengthen their dominance. Despite having accumulated a large amount of capital, they lack sufficient investment and consumption demand. Developing countries that have not yet modernized have immense development needs as well as huge potential markets, resources and populations. Yet, they are snared in the poverty trap or the middle-income trap due to the lack of conditions necessary for modernization, such as stable political environments, infrastructure and human resources. Restoring balance to the global economy requires that these inequities be addressed so that developing countries can develop and the unfair international economic order can be changed. Since the 18th CPC National Congress, the Chinese government has proposed initiatives for regional economic cooperation, as represented by the Belt and Road Initiative. China has also proposed the building of new major-country relations with world powers such as the US. These are the specific steps that China has contributed towards the rebalancing of the world economy. In managing relations with developing countries, China’s primary approach is one of mutually beneficial aid and solidarity for joint progress. China aims to help developing countries enhance their development capacity and create a new international political and economic order more equitable to developing countries. China realizes that its development interests are aligned with the greatest majority of developing countries, and that its right to development can be ensured only when the common development rights and interests of developing countries are safeguarded. The Belt and Road Initiative is a starting point for China’s contributions to the rebalancing of the world economy as well as an embodiment of the traditional Chinese culture of altruistic aid in the new era. This also enables China to balance and coordinate its own development. From a geopolitical standpoint, since reform and opening up, China has taken great strides in integrating into the world economy, primarily through exports to Western developed countries through maritime routes. Although that had contributed to the boom of its economy, the saturation of international markets has weakened the drivers of China’s growth as its industries are overly concentrated in its coastal east and causing regional imbalances in its development. The Belt and Road Initiative aims to extend China’s trade cooperation to countries along the Belt and Road and aid in boosting their growth through cooperation in infrastructure and industrial capacity. In addition, the Belt and Road Initiative aims to help them transition from mere exporters of energy and raw materials under the conditions of capitalist globalization into huge consumer markets by stimulating their effective demand and consequently expanding global aggregate demand.

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World harmony and equality are a common desire of the benevolent. The people of the world have never been as closely connected as they are today. However, the contemporary world is rife with inequality and strife. History has shown that the dominance of capitalism had not achieved universal harmony and equality. Rather, it gave rise to, and expanded, an unjust world order that China itself was once a victim of. This unfair international order hurts not only developing countries but also the interests of developed countries. If the world economy can be rebalanced, it would mean that humanity has found a path of globalization that surpasses that of capitalism. Building a community with a shared future for mankind is essentially to find a path that allows all nations to develop. This is also the only way for China to achieve its own development. World peace and common prosperity are the aspirations of many nations, and they are also the aspirations that mankind has never really realized. Since ancient times, the Chinese nation has the mind of helping the world by extending the feelings of “beauty and common prosperity” of family, nation and country to the whole world. Western led globalization has led to the rapid development of productive forces, but it has also resulted in global polarization. A large number of developing countries lack the necessary infrastructure, human resources and governance capacity. Hegemonic acts are still widening this gap. Ever since its modernity, the Chinese nation has been invaded and bullied by foreign powers for a long time, but what the Chinese people have learned is not the law of the jungle; instead, they have acquired a firmer determination to maintain peace. The development of new China has neither plundered other countries nor exported pollution and contradictions. Instead, it has embarked on a new endogenous road of modernization. The party insists on valuing justice and putting justice before interests. It has long provided support and assistance to developing countries and regions in Asia, Africa and Latin America in the fields of infrastructure, education, health and agriculture with no political conditions attached and no interference in the internal affairs of recipient countries. It has always respected each other, treated them equally and abided by its commitments, a feat of foreign assistance in human history. Since the 18th National Congress of the Communist Party of China, China has held high the banner of “a community with a shared future for mankind”, worked with other countries in the world to solve the problem of global development imbalances and find a more equitable development model for mankind. The Communist Party of China takes “seeking great harmony for mankind” as a higher-level mission. The civilization featuring “world harmony” is a powerful driving force to solve the current world “peace deficit”, “development deficit”, “governance deficit” and “trust deficit”.

10.10 Socialism as a New Civilization China has set the goal of building a socialist modern country in an all-round way in two steps.

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In the first stage, from 2020 to 2035, on the basis of building a well-off society in an all-round way, we will strive for another 15 years to basically realize socialist modernization. By then, China’s economic strength and scientific and technological strength will soar to the forefront of innovative countries. People’s right to equal participation and equal development will have been fully guaranteed, a country, government and society under the rule of law will have been basically completed, systems in all aspects will have been further improved, and the modernization of the country’s governance system and governance capacity will have been basically realized. The level of social civilization shall reach a new level, the country’s cultural soft power will increase significantly, and the influence of Chinese culture will become more thorough and extensive. Life will become more affluent, the proportion of middle-income groups will increase significantly, the gap between urban and rural development and the gap in residents’ living standards will be significantly narrowed, the equalization of basic public services will be basically realized, and solid steps shall be taken towards the common prosperity of all people. The governance pattern of modern society will have taken shape, and the society will become one of vitality, harmony and order. The ecological environment will be fundamentally improved and the goal of a beautiful China shall be basically achieved. In the second stage, from 2035 to the middle of this century, as modernation has been basically realized, we will strive for another 15 years to turn China into a prosperous, strong, democratic, civilized, harmonious and beautiful modern socialist power. By then, China’s material civilization, political civilization, spiritual civilization, social civilization and ecological civilization will be comprehensively improved, the national governance system and governance capacity will be modernized, China will become a country with leading comprehensive national strength and international influence, the common prosperity of all people will be basically realized, the Chinese people will enjoy a happier and healthier life, and the Chinese nation will stand tall among the nations of the world with a higher attitude. The advent of the twenty-first century has made it necessary to provide new answers to the following questions. What is socialism? How to build socialism? What does socialism mean for China and the world?

10.10.1 New Civilization Since the birth of mankind, the pursuit of civilization and progress has been the mainstream of human society. In the long-term exploration, mankind has formed some common values, such as peace, development, equity, justice, democracy, freedom, happiness, human rights, unity, dignity, health, wisdom, etc. Since ancient times, many nationalities have pursued these common values in their own way, forming a rich and colorful pedigree of civilization. Chinese civilization, Greek civilization, Roman civilization, Indian civilization, Egyptian Nile civilization, West Asian and Indian civilization are bright stars in the history of human civilization. Since modern times, the western industrial revolution has transformed the history of all ethnic

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groups into world history, and mankind has entered an irreversible process of globalization. After a few Western powers became world hegemony, they extended their values and civilization to the whole world. Secular society, free economy, democratic politics and multiculturalism once became the “standard template” of western modern civilization and was called “universal value”. Modern western civilization has made great progress in history. However, practice has increasingly proved that the “universal value” exported by western countries is not worthy of the name. It is not the common value of human society or the only way for mankind to move towards civilization. The reasons can be found in two aspects. On the one hand, it is “not worthy of the name”: the West has created abundant material wealth, but fairness, coordination and sustainability are facing challenges. The capital led and materialistic development model leads to social problems such as moral anomie and polarization. The democratic system is controlled by capital and deviates from the principle that “the people are the masters of the country”. Equality, freedom and human rights in the West also have one defect or another. On the other hand, it is “acclimatized”: Although the prosperity and development of the West benefits from its system being more progressive than that in the middle ages, it is also inseparable from its special resource endowment, its leading position in globalization and its plundering and possession of other countries. The leading position in economy, culture and military formed by historical accumulation has covered up the defects of its system and civilization. Therefore, after the western system is extended to the majority of developing countries, it is often acclimatized, resulting in problems such as economic dependence, political tear and social collapse, which are marginalized in globalization. The practice of modern China has proved that “wholesale Westernization” is impossible. After a hundred years of struggle, China has attained achievements comparable to those of the West, broke the “Western centrism”, and found a more universal way to realize the values that mankind has pursued for thousands of years. Fairness. Fairness is the eternal pursuit of mankind. Capitalism has freed people from the personal attachment under the feudal lord system and realized the formal equality of everyone. However, due to the inequality in the possession of means of production, access to public services and the “Matthew effect” of the market itself, there is no fair development within capitalist countries and among countries all over the world. Marxism not only pays attention to formal fairness, but also gives more attention to substantive fairness. The Party has led the people to carry out a profound social revolution and formed an equal relationship between people. It has implemented a type of ownership in which public ownership is dominant and diverse forms of ownership also develop at the same time; a distribution system in which distribution according to work is dominant while multiple distribution modes coexists, which has laid an institutional foundation for fairness and justice. The party regards “liberating productive forces, developing productive forces, eliminating exploitation, eliminating polarization and finally realizing common prosperity” as the essence of socialism, and strives to narrow the social gap and steadily move towards common prosperity. As an ancient civilization with a long tradition of fairness and

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justice, we have expanded the way for mankind to move towards a more equitable future. Democracy. Democracy is the ancient ideal of mankind and the common value of all mankind. In ancient China, there was a simple democratic thought. Mencius said that “the people are the most precious, the country is the second, and the king is the least”. Mozi advocated the practice of “choosing the sages and elders of the world to be the son of heaven”. The early West also had democratic thought and practice in Athens, Greece and other city states. After the bourgeois revolution, in order to stabilize the ruling order, the meaning of democracy has been transformed from “the people are the masters of the country” to multi-party rotating governance and competitive election, which has deviated from the true meaning of democracy. Western democracy once played a positive historical role, but so far, its disadvantages have become increasingly obvious: it is based on private ownership and can not really represent the interests of the people. Democratic elections are divorced from decisionmaking, management and supervision, and the procedures are incomplete. Interest groups easily affect elections and decision-making. The multi-party system is prone to political polarization, discussion without decision, “veto politics” and short-term behavior. This kind of democracy is an imperfect democracy. Over the past 100 years, the Party has held high the banner of people’s democracy and led the people to truly become the masters of the country, society and their own destiny by implementing the state system of the people’s democratic dictatorship and the regime of the people’s Congress System, adhering to and improving the system of multi-party cooperation and political consultation led by the Communist Party of China, consolidating and developing the broadest patriotic united front, and adhering to and improving the system of regional national autonomy and the system of grass-roots mass autonomy are full chain, all-round and all-round democracy and the broadest, truest and most effective socialist democracy. The Party has no special interests of its own and never represents any interest group, any power group or any privileged class, so as to avoid the influence of interest groups on the democratic process. The democratic centralism of the Communist Party of China, which combines democratic decision-making with scientific decision-making, absorbing public opinions and effective implementation, is an innovation in the history of human political civilization. The whole process democracy led by the Party more fully embodies the essence of democracy than Western democracy and expands the road of mankind to democracy. Freedom. “Freedom guides the people” is the slogan of the bourgeois revolution. Capitalism has made great progress in realizing human freedom, but under the pattern of capital leading and polarization, this freedom is formal rather than substantive, and belongs to the minority rather than the masses. In the Covid-19 epidemic, the ruling authorities of some countries ignore the life and death of the people for their own interests, while “personal freedom without masks,” insisted by a few, embodies a biased concept of freedom. Engels pointed out that “freedom does not lie in getting rid of the laws of nature and being independent in fantasy, but in understanding these laws, so as to make the laws of nature serve a certain purpose in a planned way”. Some scholars also put forward that freedom is not only reflected in the “negative

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freedom” without formal restrictions, but also in the “positive freedom” with the ability to understand and transform the world. In the hundred years of struggle, the Party has led the people to establish a dialectical materialist world outlook and methodology, so that the people can get rid of the shackles of idealistic fatalism, dominate their own destiny and master the historical process. By popularizing basic public services, we will gradually narrow the gap between regions and strata, so that the majority of the people can have land and enjoy opportunities in study and work, increasingly realize the full development of human potential and quality. At the same time, our freedom is unified with national interests and collective interests. We cannot harm the public interests for individual freedom. The Party has led more than 1.4 billion people to enjoy the fullest and most extensive freedom in history and expanded the path of mankind towards freedom. Human rights. Western industrialization has greatly improved people’s living standards and expanded people’s rights. However, due to the limitations of the basic economic and political system, that is still a limited improvement. There are high and frequent problems such as election fraud, unfair education, racial discrimination and hate crimes. The Party led the people in the arduous struggle for the enjoyment of human rights. The founding of new Republic has realized and defended the true and complete national liberation and national independence, and provided a fundamental guarantee for the life, freedom and personal safety of the Chinese people. The Party adheres to the right to survival and development as the primary basic human rights, and strives to promote the well-being of the people through development and achieve fuller protection of human rights. The world’s largest population guarantee system has been established, and a well-off society has been built up. The problem of absolute poverty has been solved historically and the new crown pneumonia has been successfully attacked. As of October 2021, Covid-19 in China had a total of 0.39 deaths per one hundred thousand population, 1/159 of the world average and 1/545 of the United States. These are China’s major contributions to the cause of human rights in the world. The improvement of China’s human rights situation is the fundamental embodiment of idea of the people-centered development. It is the important political advantage of the Party and expands the road for mankind to improve human rights. “People firs”. It is a core value of Chinese political ethics that “the people are the foundation of the country—as longas as the foundation is solid, the country is peaceful”. Marxism turns the theory of serving the interests of the minority into the theory of seeking the interests of the greatest majority. Western civilization has a deep tradition of individualism, which holds that the state and society are the combination of individuals through contract. The Chinese traditional thought of “people-oriented” is of great value, but it is also mainly started unilaterally by the ruling class and scholar bureaucrats. None of these has fully placed the people as the main agents of history. Following the viewpoint of historical materialism, the Party believes that the people are the fundamental driving force to promote history. It organizes the masses and endows them with historical initiative, which is a creative improvement of the traditional “people-oriented” thought and a new form of political civilization. The party comes from and takes root in the people and is the vanguard of the people. The

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people organize themselves into a collective with lofty consciousness and historical initiative, and work together for lofty ideals under the leadership of the Party. This relationship between the Party and the people goes beyond the traditional Chinese style of “being close to the people and loving the people”, and also goes beyond the separation and opposition between the Western ruling class and the people. The Party’s leadership and the organized masses have radiated great spiritual strength and transformed into great material strength, which has become an important driving force for Chinese modernization. Common prosperity. Xi points out that “common prosperity is a basic goal of Marxism and a basic ideal of our people since ancient times. Confucius said: ‘let people not suffer from inequality due to widowhood, and not suffer from insecurity due to poverty.’ Mencius said: ‘respect the old, and care for the young.’ this profoundly reveals that common prosperity is the essential requirement of Chinese civilization and socialism.” Since ancient times, neither China nor Western countries have practiced the goal of “common prosperity” on a large scale. In the long run, the rate of return of capital is higher than that of labor for a long time, and the income gap continues to expand. The Fed report shows that in 2020, the richest 1% and 10% of the population in the United States accounted for 30.5% and 69% of the total household wealth respectively, while the poorest 50% accounted for only 1.9% of the total household wealth, and the gap showed an accelerating trend. A small number of people possess a lot of wealth, which has become an incurable disease in the West and the root of a large number of social problems. After the Party led the Chinese people to build a moderately prosperous society in all respects, we have entered a historical stage of solidly promoting common prosperity. The Party has put forward the grand goal of common prosperity for all the people by the middle of this century. As a country with a large population, we have achieved the pioneering feat of eradicating absolute poverty in human history, and will certainly achieve the feat of basically realizing common prosperity. Dialectics. The Chinese nation has a simple tradition in materialism and pragmatism. It advocates “reforming the old and renewing the new”, believes that “poverty makes change, change makes accommodation, and the general rule lasts for a long time”, and cherishes “self-improvement and moral integrity”. Instead of yielding to fate and reality, it believes that the people can understand and change the world. Because of this, Marxism’s dialectical materialism and historical materialism can easily take root in China, turn the Chinese people from passive to active in spirit, and radiate great historical initiative. The new Rerpublic can stand tall in the East, reform and opening up can create miracles of development, and the new era can achieve historic achievements, all of which are inseparable from the unremitting struggle spirit of hundreds of millions of people. No matter how powerful the enemy are and how dangerous the environment is, the Chinese nation can persevere, rise up and fight, and write a great epic touching the earth. Marxism’s ideal in which “the people educate themselves and liberate themselves” has turned the idea of “everyone becoming Yao and Shun” into reality. On the road of modernization, some nationalities have lost their ideological, spiritual and cultural autonomy and fallen into a marginalized

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dependent position. In the Covid-19 epidemic, individual countries “lie flat” and surrender to fate. The civilization of materialistic dialectics and self-improvement provides philosophical reference and spiritual strength for mankind to deal with various risks and challenges on the way forward. The unity of heaven and man. Environmental problems have become a major challenge for mankind. Chinese culture has long had the idea of fearing nature, advocating the unity of heaven and man, following nature and embracing a life of simplicity. Since modern times, the modernization, industrialization and urbanization led by the West have made mankind more and more separated from nature, and the relationship between mankind and nature has gradually evolved from a community of common destiny to opposition. Western culture emphasizes individual freedom and the struggle between man and nature. Capitalist culture emphasizes the supremacy of capital interests, blindly pursues economic growth and materialism, and forms a lifestyle of high production and high consumption, which has caused the most serious damage to the earth’s ecological environment in history in the past one or two hundred years. The West has made great efforts in environmental protection, but due to the defects of its culture and system, it is difficult to formulate a complete and systematic environmental policy that could resist the influence of interest groups. The civilization of “harmony between man and nature” provides inspiration for mankind to deal with the global challenges of ecological environment. Development, fairness, justice, democracy, freedom and human rights are noble values worth pursuing, but these values should not be monopolized by a few countries and individual civilizations; or should this be regarded as the patent of the West. The Party led the Chinese people to prove to the world through heroic and tenacious struggle that the Chinese nation can not only catch up with the times, but also do better in the pursuit of these values. What is national is also global. “Chinese characteristics” do not deviate from the universal value of human civilization; rather, they point out a bright path to realize the universal value of mankind.

10.10.2 Humanity Refocuses on Socialism A chapter in the Book of Rites, an ancient Chinese Confucian classic, describes an ideal society in these terms: “When the Grand course was pursued, a public and common spirit ruled all under the sky; they chose men of talents, virtue, and ability; their words were sincere, and what they cultivated was harmony. Thus men did not love their parents only, nor treat as children only their own sons. A competent provision was secured for the aged till their death, employment for the able-bodied, and the means of growing up to the young. They showed kindness and compassion to widows, orphans, childless men, and those who were disabled by disease, so that they were all sufficiently maintained. Males had their proper work, and females had their homes. (They accumulated) articles (of value), disliking that they should be thrown away upon the ground, but not wishing to keep them for their own gratification. (They

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laboured) with their strength, disliking that it should not be exerted, but not exerting it (only) with a view to their own advantage. In this way (selfish) schemings were repressed and found no development. Robbers, filchers, and rebellious traitors did not show themselves, and hence the outer doors remained open, and were not shut. This was (the period of) what we call the Grand Union.” Socialist elements featured strongly in the ideal societies envisioned by early thinkers, whether in China or in the West. However, none of them identified how these goals might be achieved. The emergence of scientific socialism laid out a path to the realization of socialism. Scientific socialism had its roots in critiques of capitalism, which created immense material wealth and laid the material foundations for socialism. At the same time, however, capitalism had also intensified the polarization, environmental degradation and moral crises in human society, spurring those seeking social progress to find answers to these problems. In a broad sense, all critiques of capitalism that sought to correct its defects were socialist movements. After the global financial crisis of 2008, a re-perception of socialism swept across the globe, an inevitable rumination on capitalist financial crises. The financial crisis showed that history has not ended, nor will it ever end. Historical dialectics tell us that the path to socialism can be paved only when the contradictions of capitalism are fully exposed and intensified to the point of irreconcilability. Hence, socialism is a protracted historical process. However, as long as the contradictions of capitalist society exist, there will be socialist movements and a universal human endeavor for a better societal system.

10.10.3 The Consistencies Between National Rejuvenation and Socialist Development With the advent of the twenty-first century, China faces a twofold task. The first is the great rejuvenation of the Chinese nation. The second is to consolidate and improve the system of socialism with Chinese characteristics. There has long been a misconception that China took the path of socialist development not because it sought to achieve modernization and national rejuvenation, but because of the faith in textbook communism or the emulation of the USSR. This view, which regards communist ideals as antithetical to the goal of modernization, is wrong. China’s history demonstrates that the CPC’s pursuit of communist ideals is consistent and complementary with the goal of national rejuvenation. In 2016, Xi Jinping reiterated this view during his July 1 address: “History has told us that, without the guidance of advanced theories, and without the leadership of an advanced political party that was equipped with these advanced theories, and prepared to follow the tide of history, assume its historical mission, and make enormous sacrifices, the Chinese people would have been powerless to fight the various reactionary cliques that held

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them down; the Chinese nation would have been powerless to free itself from oppression and enslavement; and our country would have been powerless to unite and seek prosperity and strength on the path of socialism.”6 The consistency between the ideals of communism and national rejuvenation is reflected in the development path chosen by the People’s Republic of China. The choice of socialism when the new state was founded was, in itself, the only way to ensure the survival of the nation. China had previously been unable to modernize despite several arduous attempts because it could not overcome the internal constraints imposed by its old feudal land system and smallholder economy; nor was it able to smash the external world system dominated by the capitalist powers. These constraints were overcome only through the CPC-led land reform and socialist revolution, the staunch commitment to independence, and the implementation of the heavy-industry-first strategy. That allowed China to rapidly consolidate its scattered capital, resources and economic forces despite its low level of industrialization and hold its own against economically powerful and technologically advanced international monopoly capital in the global market. Since reform and opening up, China has boldly adopted the market economy and private economy. Yet, its basic economic system has transcended the capitalist mode of production, upheld CPC leadership and the dominance of public ownership, harnessed the advantages of the socialist system to compensate for market failures and competed in the international arena. Because China did not turn its back on the superiority of socialism in pooling resources for mighty endeavors, the country made huge leaps in industrialization and modernization and strongly boosted its comprehensive national strength. On the contrary, the Soviet Union and Eastern Europe, which rashly followed the so-called historical trends, fell into repeated crises and decline. This contrast shows that socialism and the rejuvenation of the Chinese nation are two sides of the same coin. In a capitalist world system, a large developing country can consolidate its resources and unite its people internally and secure the right to independent development externally only by taking the socialist path. History has shown that the great rejuvenation of the Chinese nation and the great rejuvenation of socialism are one and the same. Only through consolidation and development of the socialist system will the Chinese nation be able to achieve rejuvenation. The great rejuvenation of the Chinese nation will then bring strong vitality and persuasiveness to the socialist system.

10.10.4 Socialism 3.0 In 1956, Mao Zedong wrote in In Commemoration of Dr. Sun Yat-sen: “China is a land with an area of 9,600,000 km2 and a population of 600 million, and it ought to make a greater contribution to humanity. But for a long time in the past its contribution 6

Speech by Xi Jinping in commemoration of the 95th anniversary of the founding of the CPC. http://www.xinhuanet.com/politics/2016-07/01/c_1119150660.htm.

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was far too small. For this we are regretful.”7 Deng Xiaoping pointed out during a conversation in May 1977 that “The Meiji Restoration was a kind of modernization drive undertaken by the emerging Japanese bourgeoisie. As proletarians, we should, and can, do better.”8 Deng also pointed out during a conversation with foreign visitors in April 1985 that “we are doing something that China has never done before, not in thousands of years. The current reform will have an impact not only domestically but also internationally.”9 History tells us that China’s rejuvenation is not for the sake of surpassing the West nor for hegemony. Rather, it is rooted in China’s own needs for development and the nation’s conscious effort to make greater contributions to the human race. Standing at the dawn of the post-financial crisis era, the Chinese nation and the Communist Party of China brim with unprecedented self-confidence. Their selfconfidence stems from the practice of socialist reform and development as well as a strong historical self-consciousness. While its basic principles have remained unchanged, socialism will continue to acquire new epochal connotations as the productive forces develop. In this century, China has stronger foundations and greater possibilities for realizing socialist ideals. According to German scholar Michael Brie, there have been three waves since the birth of socialism: The first wave of socialism occurred between 1789 and 1917. The Revolutions of 1848–1849 in Europe were the first revolutions in which socialists and communists played a political role. In 1871, the Paris Commune marked the first, though short, instance in which workers established their own regime. During this period, the socialist movement was a banner for improving social justice in capitalist countries and how their workers were treated. The second wave took place from 1917 to 1991. The Soviet Union was led onto the path of industrial modernization, the People’s Republic of China was founded, and the era of imperialist rule and civil war in China came to an end. Thereafter, China gradually embarked on a Chinese path distinct from Soviet socialism. Northern and Western Europe realized social-democratic reforms and established social welfare states, constraining and weakening capitalism. After the financial crisis, the profound crisis of contemporary capitalist civilization amply demonstrated that the question of socialism has only become more relevant to the world. The dissolution of the USSR was the beginning of the third wave of socialism, “Socialism 3.0.” China, as its most important birthplace, will have a significant impact on the world socialist movement.10 7

Mao Zedong, “In Commemoration of Dr. Sun Yat-sen”, Collected Works, vol. 7. http://cpc.peo ple.com.cn/GB/64184/64185/189967/11568211.html. 8 Deng Xiaoping, Selected Works, vol. 2. http://cpc.people.com.cn/GB/64184/64185/66611/448 8675.html. 9 Deng Xiaoping, Selected Works, vol. 3. http://cpc.people.com.cn/GB/64184/64185/66612/448 8769.html. 10 Zhang Wenhong, “Deguo Zuoyi Zhengdang Renwei Zhongguo Shi “Shehuizhuyi 3.0” Zui Zhongyao de Danshengdi” [German left-wing party believes China is the most important birthplace of “Socialism 3.0], Red Flag Manuscript, no. 16 (2016): 34–35.

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Why is it that China might be the most important birthplace of Socialism 3.0? We believe that there are at least three reasons. First, Chinese traditional culture has socialist elements. Since the twenty-first century, traditional Chinese culture has been rejuvenated, both at home and abroad, as China’s composite national strength grows. How should traditional culture be regarded? How might it be preserved and developed? Just as the old saying goes, the innovative application of old things appear in new times. Traditional Chinese culture has both good and bad elements, and its positive aspects are compatible with socialism. The ideas of universal harmony and equality, social justice, harmony between man and nature, and humanism can all be applied to socialism, which is also why the socialist system was able to set roots in China and cater to the country’s realities. However, traditional Chinese culture also has negative aspects and can only be revitalized through a socialist transformation. Chinese traditions of clan culture and hierarchies had become obstacles to China’s modernization. It was only after a thorough social revolution that their positive elements could serve socialism. Second, after more than 70 years of socialist revolution and progress, China now has some material foundations. More importantly, it has experimented with all the main models of socialist development. The failure of the Soviet Union proved that building socialism in a capitalist world system puts socialist countries in what physics calls an “unstable equilibrium”—a system that can sustain itself but will tend to deviate ever further from equilibrium upon external disturbance. In other words, the twentieth century solved the problem of socialism’s ability to compete with capitalism, but it did not solve the problem of sustaining socialist systems over the long run. China’s experiences demonstrated that the only forces that can sustain the stability of a socialist state are the state itself and its citizenry. External forces cannot perform this role. This is as Mao Zedong repeatedly stressed: “We must have faith in the masses and we must have faith in the Party. These are two cardinal principles. If we doubt these principles, we shall accomplish nothing.”11 The Party unites the people under its leadership to realize the purpose of socialist production, so that the objectives of all economic and social activities meet the real needs of the people, achieve common prosperity, and ultimately attain free all-round personal development for all. Finally, after more than 70 years of development, this round of globalization has reached a point where contradictions have been amassed. The search for a new social system has yet no end in sight. History has not ended; neither will it ever end. Under such circumstances, China’s adherence to the socialist path is not only opportune; for the world, it is an experiment in and contribution to the search for a new development path for humankind. In today’s world, socialism is no longer an ideology but the right choice for solving the challenges we now face. Although the superiority of socialism was demonstrated by China’s rapid economic growth when it first began its socialist journey, the country’s low starting point and limited national resources obscured that fact. Now, as China grows stronger, it has the means to give fuller play to the superiority of socialism. As long as China remains committed to 11

Mao Zedong, Collected Works, vol. 6 (Beijing: People’s Publishing House, 1999), 423.

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the direction of its ideals and continues to explore new paths ahead, its socialist path will continue to widen. China’s new socialist path will benefit the Chinese people as well as contribute more to the human quest for a better society.