Reexamining Chinese economic reform from the 1980s to present

Domestic News

A new book by Isabella Weber, “How China Escaped Shock Therapy: The Market Reform Debate,” challenges conventional wisdom about China’s crucial decade of economic reforms.

Shock therapy and China's economy in the 1980s
Illustration by Derek Zheng

China’s successful transition away from an inefficient centrally planned economy built on state-owned enterprise to a fast-growing hybrid market economy that now accounts for one-fifth of global GDP has been the subject of many works by economists, but simple narratives pitting Chinese “conservatives” against “reformers” have too often obscured the real dynamic at play in crucial debates.

Isabella Weber’s new book, How China Escaped Shock Therapy: The Market Reform Debate, is an engaging and deeply informed account of the debates that determined China’s course, shedding light on how advocates of sweeping price liberalization — a “big bang” or “package reform” — were tamed by fears of inflation and proponents of “crossing the river by feeling for stones” at a critical juncture. The book also makes vital contributions to our understanding of the events leading up to the student-led demonstrations of 1989, and how the causes of inflation in 1988, widely believed to have been an important factor in sparking the demonstrations, remain a hotly contested issue.

I spoke to Isabella Weber, who is assistant professor of economics at UMass Amherst, on the most recent episode of the Sinica Podcast.

Listen to the episode or read the full transcript here.

The following has been edited for brevity and clarity. The full transcript appears on the episode page in the link above.

Kaiser Kuo: Let’s start, Isabella, with a very simple question, and a big one. What is “shock therapy,” and who were the economists behind the idea of shock therapy?

Isabella: Shock therapy really is a policy package that in its most standard articulation was composed of four elements. Price liberalization that was meant to be as fast as possible, aided by macroeconomic austerity — that is, tight monetary policy and fiscal restraint. And then followed up with trade liberalization and privatization.

The shocking element in shock therapy was really the big bang in price liberalization, the setting free of prices, more or less overnight. It was very much acknowledged that this initial shock would be painful. But the idea was that this would be necessary in order to lay the foundations for a future better system.

Kaiser: Was there a conventional wisdom about China’s economic reforms that you were seeking to displace, or to force a reconsideration of, when you began your work?

Isabella: I think that very broadly speaking, a lot of the thinking about the 1980s has been framed in terms of the transition from socialism to capitalism, and in terms of a struggle between conservatives and reformers. What I’m trying to show in the book is that beneath this big binary, there was a struggle within the market reform camp that might be just as consequential. Because if we look at the different outcomes of transition across countries, we find that the ways in which countries have transitioned to the market actually matters.

Within China in the ’80s, as it so happens, those who were arguing against shock therapy actually ended up losing out in ’89. So, in the ’90s, and in the ways in which this history has been written, their side generally has not been portrayed as prominently as I think it should have been. At the same time, for those who stood at the more radical side of market reforms, it was of course also quite convenient to own the 1980s, and to own the legacy of successful reforms. So therefore, this very severe split of the 1980s, I think, has been studied much less than its importance would imply.

Kaiser: You use the word “escaped” in the title of your book, How China Escaped Shock Therapy. It’s a normative word. There are implications in there, of course, that shock therapy would have been bad. Can you talk about your choice of this word, escape?

Isabella: In the title, there are two terms that need explanation. We have already talked about shock therapy. I have used shock therapy as the reference, even though in the 1980s the term shock therapy was not yet dominant, or prominent, in China’s own debates.

Kaiser: They call it “package reform” — pèitào gǎigé 配套改革 — right?

Isabella: Yes. “Package reform is creating a blueprint for reform and then implementing that blueprint in a more or less planned fashion, and as fast as possible.

In the interviews that I’ve led, many people have correlated this peitao gaige, the idea of a package reform, to shock therapy. So there is a link from the perspective of those who were involved, retrospectively. But I think there’s also a very clear logical link between the policy measures being debated in China and the same kind of logic — shock therapy — as it was implemented in other socialist countries shortly after.

In particular, the book is really focused on price reform, and the question of whether or not to implement a big bang in price reform. This was thought of as the critical first shocking element in shock therapy — it would shock an old, undesirable system into a new kind of system, a market system, a market equilibrium.

It is a question of debate whether in the 1980s shock therapy — or to be more precise, a big bang in price reform — would have been problematic for the further success of reform. And on some level, by using “escape” in the title, I imply that implementing shock therapy in the 1980s would have had negative economic consequences, or would have been likely to produce negative economic outcomes. In particular, it probably would have resulted in quite rapid inflation that would have had the potential to undermine the reform project.

In some sense, I think that the events of 1988 and 1989 provide some proof in that direction. But more fundamentally, it seems to me that most cases that we can study where such rapid price liberalizations were implemented, the outcomes were quite negative. And in fact, this even applies to the West German case that has been heralded by the shock therapists as this miraculous, instantaneous success of the creation of a free-market economy.

Kaiser: What I find really interesting is that conventional wisdom said in the early ’80s, you had these reformers pitted against these conservatives, people who didn’t want to change. But I think in your interviews with the actual economists and the officials, you find that the sense of urgency, of a need for reform, was pretty universal. It wasn’t just the result of ideological battles or theoretical insights, but it was just plain old imperative. It was not a matter of whether to implement reforms, but what kinds of reforms to implement.

Isabella: I, of course, interview the reform economists, so I do have a biased sample. But within this camp of reform economists, there were very different views about how to reform, and there was consensus about the need for reform. Material progress and improving the lives of the masses had always been part of the ambition of the revolution. So someone like Chén Yún 陈云 at the CCP Work Conference of 1978, in the pivotal year of 1978, is quoted to have said that if we don’t resolve the problem of clothing and feeding the still-large numbers of peasants that are underfed and not well-clothed, we will face a situation where local cadres will be leading the peasants to the gates of the cities, demanding food and better living conditions.

Kaiser: A theme that you sound again and again in your book is how the CCP leadership really understood all too well how hyperinflation in the waning years of KMT rule eroded KMT legitimacy. Even the very ardent liberalizers, like Zhào Zǐyáng 赵紫阳, feared inflation as a result of price liberalization. How deep was this fear?

Isabella: I think on the part of officials and the leadership in particular, there was an acute awareness of the importance of prices for political and social stability. There was also an acute awareness around the changes in prices of so-called “heavy goods.” And the important goods could be quite small goods, indeed. For example, there was a debate around changing the price for matches. Now, if we think about matches, we think, Oh, this is an extremely cheap good. And one that we really don’t care much about, whether the price of matches goes up 10% or 20% or not, right?

But we have to remember that in China, in the early ’80s, people were still predominantly cooking, and also the country had heating with wood stoves and fire. So matches were an absolute staple in the consumption basket. And given just how poor the country still was, the price of matches would actually have aroused quite a lot of resistance. So again, to illustrate, to quote from one of the World Bank notes, there’s one person who, after a number of days of meetings and discussions, noted that the communist dictator could not change the price of matches by two cents.

Kaiser: In your book, there are these battle lines that are drawn. And it’s this battle of 1986, which you detail in chapter seven of your book, which I think is one of the big moments of drama.

The character that emerges as the most difficult to read is Zhao Ziyang, who was at the time the premier. What role does he play in these debates? Because it’s very contested. The accounts in his own memoir, Prisoner of the State, do not square with what many of your interview subjects say. And those interview subjects don’t necessarily agree with one another, either. How do you approach this contested legacy, and how do you come out of it? What’s your read on this mysterious figure of Zhao Ziyang?

Isabella: Zhao Ziyang is an incredibly important figure of the 1980s, and is probably a somewhat conflicted figure. I mean, he seems to be taking these questions extraordinarily seriously, but as one of his secretaries was saying in an interview, he would be approaching these discussions in the fashion in which he had later experienced graduate seminars at an American university. So there was always an openness to discuss both sides and to very seriously consider both sides, and to really engage with the arguments that both sides were presenting.

And I think this was sometimes his strength and his weakness in that it probably would have been very hard to carve out that very distinct approach to reform that emerged in China without a leader that had that open-mindedness. At the same time, this resulted in him being torn between different approaches again and again, and also kind of moving from one side to the other, and thereby creating a certain tension.

Kaiser: We’ll fast forward a little bit through the debate of 1986. The upshot is that the protagonists, if you will, prevail in ’86. And there are all sorts of really interesting reasons why.

The next big battle is 1988. Maybe you can help me understand this better because there’s something that’s always kind of nagged me about ’88. The students and intellectuals who supported package reforms, they were very much in the full-steam-ahead camp. They were able to use inflation as a mobilizational tool for the movement to bring people into the street, when the very policies they had supported — hit the gas, don’t hit the brakes, hit the gas, plow through the barrier — was what was giving rise to inflation.

Isabella: In 1988, it became clear that reform, unlike the first years had suggested, did not stand to benefit everybody; some would not only be benefiting more, but others would actually be losing from reform. And the gradual dismantling of the communes was the first time that urban, rural incomes actually diverted. So a pretty deep tension was building up in the system, where the downsides of marketization and the social harshness of marketization started to become apparent.

To answer your question more directly about 1989, I’m not so sure if it’s so straightforward that the protesters were unanimously in favor of package reform. I think we have to remember that rapid price rises in situations of deep political tensions have unleashed very far-reaching protests in all sorts of contexts. I mean, most prominently in history, of course the French Revolution, but also the Arab Spring, triggered by the rapid rise of the price of bread. The “yellow vests” in France were triggered by the increase of the price for gas.

This pattern of price rises that hit people hard because they affect their consumption patterns being a trigger for much bigger protests is not at all unique to China. I’m not arguing 1989 is just another bread riot. My point is that I don’t think the protesters had some kind of scheme where they were using inflation in order to protest.

Kaiser: I’m not saying it was deliberate. The interesting thing is, you could make the same argument with corruption, that the inherent price disparities in a dual-track system (where households produced for the state and also the market) laid the groundwork for it. And so, I think a lot of people would say that it was these gradualists, in their insistence on maintaining the dual-track system, who made it possible for these levels of corruption, which were then used instrumentally to bring people into the streets.

Isabella: I think that corruption’s extremely important and that the dual-track people probably underestimated just how explosive the corruption tendencies unleashed by that system were.

Kaiser: Did the divisions between the package-reform camp and the gradualists endure, and did they manifest themselves later? It’s tempting for me to draw a line from the package-reform guys to the Shanghai clique during the era of Jiāng Zémín 江泽民 and Zhū Róngjī 朱镕基 because they are still the same: they’re neoliberal, pro-free trade, pro-coastal development, pro-FDI. And then the gradualists, do they kind of evolve into people who were more concerned with rural development, more concerned with unbalanced economic growth, inequality?

Isabella: I’m not sure about the direct mapping, but I think as a general principle, it is the case that a struggle between two different ways of thinking about reform continues throughout the ’90s, even though most of the dual-track reformers of the ’80s disappeared from the scene.

It is not a continuity in terms of the precise persons, but in terms of the struggles that evolved in the ’90s. And in the 1990s, the big struggle is over state-owned enterprise reform. A new struggle emerged over how much privatization, how much of GDP, should be under state ownership.

Kaiser: What you argue in your book is that China not only escaped shock therapy, it also escaped binary thinking on shock therapy, on the kind of thinking that says, “Free market good, planned economy bad.” But this kind of binary thinking still seems to have a grip on many people who study China. There’s this instinct that so many of us have — and I’m sure I’ve been guilty of it too — where we just hear, “Well, this guy is a champion of free market, of market liberalization, therefore I root for him or her.”

What do you say to people who still frame things this way? Because I feel like that’s a pernicious tendency, still.

Isabella: Thanks for this question. I think it’s quite ironic that on the part of those who have been cheering for free markets, China’s reform success is all a miracle of freeing up the market potential. Whereas on the left, those who think that China has gone too far and become too capitalist, they often ironically arrive at a similar conclusion, where they then think that China has become neoliberal, which confirms the idea that it’s all been about free marketism.

What I’m trying to do with this book is to challenge us to see beyond equating neoliberalism with marketization: to see that marketization can take very different forms and that marketization itself — the process of it, the forms — is fiercely contested. China’s process of marketization deserves study in its own right, rather than simply being subsumed under one label or another.

How China escaped shock therapy: Isabella Weber unpacks the debates of the 1980s