- 1 year ago
- #woosays
Mini-Series: Lessons from Economic Transitions
[In this three-part arc of #WooSays we revisit some of the most consequential economic transformations of the 20th century: Poland, Russia, and China, to understand what went right, what went wrong, and what we can still learn today about the shift from central planning to market economies.]
How did China achieve explosive economic growth without collapsing like other post-Communist economies? In the final episode of our #WooSays trilogy on economic transitions, Professor Emeritus Datuk Woo Wing Thye and Melisa Idris explore China’s unique, gradualist approach to market reform, in a stark contrast to Poland’s shock therapy or Russia’s failed big bang. What made China’s path so different and so successful?
[In this three-part arc of #WooSays we revisit some of the most consequential economic transformations of the 20th century: Poland, Russia, and China, to understand what went right, what went wrong, and what we can still learn today about the shift from central planning to market economies.]
How did China achieve explosive economic growth without collapsing like other post-Communist economies? In the final episode of our #WooSays trilogy on economic transitions, Professor Emeritus Datuk Woo Wing Thye and Melisa Idris explore China’s unique, gradualist approach to market reform, in a stark contrast to Poland’s shock therapy or Russia’s failed big bang. What made China’s path so different and so successful?
Category
🗞
NewsTranscript
00:00Hi, welcome back to another episode of Wu Says.
00:13This is where we get real about the US, China, everywhere and everything in between.
00:18I'm Melissa Idris, with me is Professor Wu Wingtai,
00:21who has been studying US-China relations long before tariffs became headline news.
00:26Now, the past couple of episodes, we've been talking about how post-communist countries have rebuilt their economies
00:33from essentially one ideology, one market structure to a free market structure.
00:40Let's now zoom in on China, which can be argued as a communist country
00:45who has probably had the most successful reform of its economy.
00:50And what makes China so successful? What makes China such a success story?
00:55Let's dive deeper into that.
00:57Brafu, I'm going to cite a date that you've mentioned a couple of times in previous episodes,
01:03June 4th, 1989.
01:05And I wanted to ask you about that date because when we look at that date for China,
01:11it's a pivotal date for China.
01:13And also in previous episodes, you've talked about how it's a pivotal date for Poland as well.
01:19Two countries, one led to elections, the other led to a crackdown.
01:27But both post-communist countries now are seen as economic success stories.
01:33Let's juxtapose the two.
01:35Talk to me about China's journey.
01:37China's turning point had occurred at the end of 1978 when Tang Xiaoping initiated the process of economic reform.
01:53Economic reform was seen as achieving the economic prosperity of Japan and Korea
02:02because Singapore and Hong Kong were good examples, but they were too small to really inspire much confidence.
02:10But the fact that Japan was able to rose from the ashes of the wall to become a global leader
02:17really makes a strong impact.
02:20So the direction was set in 1978
02:24and Tang Xiaoping recognized that central planning would not work.
02:32You need to have free prices.
02:34You need to have a private sector.
02:38You need to have integrate into a global economy.
02:43And you've got to keep inflation under control.
02:46So the direction was clear and he decided to pursue it through his policy.
02:57Like Shenzhen was opened up to engage, to be freely, to make, buy things, make things so freely to the rest of the world.
03:09And foreign investments could come in.
03:13So internationalization began.
03:15But only in some parts of China.
03:19And then prices were, market track was introduced alongside the central plan track.
03:30In other words, if you produce above the quota, you can sell it at the market price.
03:36So there was elements of free prices.
03:44And at the same time, they allowed the rural communities to start up factories.
03:53Because there was such a shortage of consumer goods in the country.
03:58Making shirts, making shoes, you don't need huge sophisticated factory.
04:03All you need is a workshop.
04:04But, and the rural area, because of the agricultural reforms, so prosperity came to the agricultural sector first.
04:14So they had money.
04:15And they had money and so they could start open factories to cater to it.
04:19And those were all registered as state, as village-owned factory.
04:24Because private enterprise was still illegal.
04:27But it was no longer owned by the country.
04:30It was owned by the local community.
04:33So it's localized socialism instead of centralized socialism.
04:39And at the same time, he kept good control on the money supply.
04:46So that inflation was under control.
04:48The economy boomed.
04:49From 78 to 1984, the life in the agricultural sector, income went up by at least a factor of three per person.
05:01And because of the success, they said, why can't we do this same dual track system in the industrial sector?
05:11And, and they opened up and boom, it starts going up.
05:16What was wrong with this gradual price reform was that there was still the state prices, which means that whoever who had special access to buying the state prices could resell it in the market for, and that is inflation.
05:33In any reforms, corruption is, undermines the legitimacy of the performance.
05:44And people saw this corruption of the dual track price system.
05:49The demonstrations that began in Tiananmen in 1989 did not begin as demonstrations against the government.
05:58It was not demonstration against the Communist Party.
06:00It was a demonstration against inflation and the corruption that people thought was responsible for the inflation.
06:10That was how the student riots began.
06:13It was about economics and corruption.
06:16It was only much later, several months later, when the government did not respond, that the movement morphed into demands for other things.
06:28So, it started out as a kind of cost of living.
06:32And the corruption, protest.
06:35Okay.
06:35Oh, wow.
06:36That's how it started.
06:38And it, unfortunately, it, it then morphed into demands for political changes.
06:46Yeah, yeah.
06:47And at that point in time, the students were advised to go back to campus, but that did not happen.
06:58And there was some division at the uppermost level of the party, of which direction they should go,
07:06what kind of political reforms should they really think about.
07:10And the people who decided that the political system is fine the way it is prevailed.
07:17And so, that's when the decision was made to scatter the students from the square and led to some unhappy consequences.
07:26So, that, that was followed immediately by a rollback in reforms, a reimposition of state control on the economy.
07:38Basically, that was, you could say, the end of the 1978 turning point.
07:45So, the question was, would June 4th, 1989 be the ending of the turning points?
07:52That would not be a turning point.
07:54Well, what happened was, in August, 1991, the Sowep Union had an internal coup in which Gorbachev was overthrown.
08:08And Yat-xin came to power.
08:10And Yat-xin banned the Communist Party of the Sowep Union by January 1st, 1992.
08:18So, Teng Xiaoping said, if we do not reform, what has happened in Russia will happen to us.
08:30So, in early 1992, Teng Xiaoping went to southern China and he said very clearly,
08:39if we do not undertake, if we do not continue on the path we had set up in 1978, we will become like Russia today.
08:53And China, that argument left the people who had thought everything was fine the way it was.
09:02Because, as I say, reform is self-revolution.
09:06So, there were always people who thought central planning would have worked.
09:11And central planning, do you know why central planning didn't work?
09:14Because I was not totally in charge then.
09:17It was Mao who was in charge.
09:18It's just like the usual thing you hear among many authoritarians.
09:23Do you know why Rome wasn't built in one day?
09:25Because I was not in charge then.
09:28Always blame it on the previous guy.
09:30It's like, why didn't central planning succeed?
09:32Because I was not in charge.
09:33Now we are a new group.
09:34We will work harder.
09:35We will make it work.
09:36But these people basically had lost their credibility with the collapse of the Sowep Union.
09:42So, the faction that say the direction that Tang Xiaoping has initiated should be continued.
09:50So, what happened is China immediately allowed private and legalized private enterprises across the board.
10:01Oh, wow.
10:02So, all these village registered enterprises basically turned in new registration because they all were private overnight.
10:13Yes.
10:13But what happened was it's important to realize that in the initial stage, certain institutional forms that appeared would disappear because they were there because of political reasons.
10:29Just like the dual-track price system I talked about.
10:33So, Tang Xiaoping realized the problem was corruption.
10:39So, how could we get rid of the corruption?
10:41We stopped the dual-track price system.
10:43We have only one price.
10:44And everybody recognized that this particular system was dangerous to the regime.
10:54So, total price liberalization came after 1989 because they recognized that this slow approach was going to lead to more problems.
11:09So, the important thing is you have to eliminate corruption.
11:13That is what the big lesson there was.
11:17But the other important difference why China could grow so much was of that.
11:23China was a backward country that was not yet industrialized.
11:27In 1978, only 18% of the population are not farmers.
11:37The rest, only 18% are factory workers and government workers.
11:42So, 82% were all farmers.
11:46Look at that in Russia.
11:48Russia, less than 7% were farmers.
11:52They were all factory workers.
11:55And what was the problem?
11:57So, farming was 8%.
12:0092% are factory workers.
12:03And most of the factory workers are making cement and iron.
12:08Not making textile, shoes, or cars.
12:12So, to reform means we want to follow the market.
12:18We have to make consumer sovereignty to be the guiding force.
12:22To make consumer sovereignty to be the guiding force.
12:26Consumers want textiles, shoes, cars, washing machine.
12:32They don't want to have iron and steel that they cannot eat and basically useless goods.
12:41So, you have to move workers from heavy production to light production.
12:48How do you move people?
12:51You let their factories collapse.
12:53Then the factories release people.
12:56And they move on to the new industries.
12:58That's why it's very painful.
12:59Because people lose their job.
13:01And then new light industry starts appearing.
13:06And then they hire them in gradually.
13:08So, that's a painful process.
13:09That is a very painful reform.
13:11Yes.
13:12Same thing in Poland.
13:13Same thing in Ukraine, where I worked.
13:16Basically, all these urbanized countries,
13:20regardless of whether they reform quickly, like in Poland,
13:25or glazially, like Ukraine,
13:30they all collapsed once they marketized.
13:34Because they had to move people out from the iron, steel, chemical industry
13:39to the light industry.
13:41Is the lesson here that there is no reform without the pain?
13:49No.
13:50Depends on the condition in which you start.
13:53If things were so bad, then you can only go upwards.
13:58Russia and Ukraine were not so bad.
14:02In the case of China,
14:04you have, in the agriculture side,
14:09there were too many workers.
14:11Okay.
14:1180%.
14:1282% were farmers.
14:15And many of them were underemployed.
14:17You could safely take them out,
14:19and the output would not have been declined.
14:23Okay.
14:23But you don't see them.
14:25Because China has the Hukou system.
14:29They cannot go and live in the urban areas and be bad.
14:32So there was no kind of urbanization migration at that point in time.
14:36So what happened was when China integrated the global economy,
14:43the world wants cheap shoes, the world wants cheap textiles.
14:47So China opened new factories,
14:49and workers came from the countryside to work in these factories.
14:53And because these were surplus workers,
14:58agriculture output was not compromised.
15:01So you only had growth.
15:03Wow.
15:04There was no need to close any heavy industry,
15:07to release workers.
15:08Okay.
15:09There was no need to reform the state enterprises,
15:12because the state enterprises only employ 18% of the population.
15:17Whereas the huge growth of the industrial labor force
15:20did not come from the state-owned enterprises.
15:24They came from the countryside.
15:27That's amazing.
15:28So that's the great boom.
15:31They had got all this excess labor that were underemployed.
15:36In fact, there was this famous story when they did the census.
15:41They go to a rural household,
15:43and they say we're going to count people.
15:47And people from the household said,
15:48please don't come near, we'll come out to you one by one.
15:51And people came out one by one to be counted,
15:54instead of letting them in.
15:57Do you know why?
15:58They noticed that every one of them was wearing the same pair of pants.
16:03So things were very poor.
16:06Oh dear.
16:06Things were very poor.
16:08So when jobs opened up in this coastal factory
16:12started by Hong Kong businessmen,
16:15making goods for the rest of the world,
16:17so that's when China became a big exporter.
16:22And with this export,
16:24they could buy foreign technology,
16:26and foreign technology could upgrade production.
16:30So you said that China's economic reform,
16:35essentially it started in 1975.
16:38Oh, 78.
16:39Right.
16:39So if it started from that point,
16:41and it's gone through what we would consider a success,
16:45the success of these reforms,
16:47has it changed or is it going to change?
16:50Do you see them staying on the same trajectory?
16:54Is Xi Jinping going to have to change his playbook?
16:58Well, one thing for sure is after the restarting of reforms in 1992,
17:09China grew very quickly, as we know.
17:12That's what the China miracle is about.
17:14But unfortunately, so did corruption in China.
17:21So when Xi Jinping came to power,
17:26he saw that ultimately this was a threat
17:29to the continued high growth of China
17:32because people will reject the corruption they see.
17:37And when they reject it,
17:39they will make trouble.
17:40And when they make trouble,
17:41the economy will suffer.
17:43And he's trying to preempt that from happening.
17:48So he has therefore undertook this huge anti-corruption campaign.
17:57Many cynics have said,
18:00this is just to be used against his enemies.
18:03I'm sure if you were corrupt and you were his enemy,
18:06you were the first in line.
18:08You moved up the list.
18:10But basically, it was a very serious effort.
18:13And the second thing was,
18:15he recognized that because of the rapid rise of China,
18:19he could sense insecurity in the US.
18:23In other words,
18:24open markets may not be such a guaranteed article of faith.
18:32In other words,
18:32the survival of the WTO system is not guaranteed.
18:37And what would one do?
18:39One would therefore like to have markets
18:44that are outside of the US
18:46and friends who are outside of the US
18:49because he realizes to be isolated
18:53is to be condemned to stagnation
18:55because good ideas occur everywhere in the world
18:59and you want to be able to access them
19:01when they appear.
19:02That's right.
19:03So he started the One Belt, One Road initiative
19:06to make friends with Southeast Asia and Africa
19:09in case that if the world changed,
19:14he would not,
19:14China would not be isolated.
19:16He did all of this in around 2015 or so
19:21because by that time,
19:24you could already see signs of US discomfort
19:29with the rise of China
19:31because George Bush Jr.,
19:34when he ran for election in 2000,
19:36had promised to confront the Chinese threat.
19:43That was in 2000.
19:45But he did not confront the Chinese threat
19:47because of September 11, 2001.
19:52So he had to postpone confronting China
19:55and he needed China help
19:57when he decided to take down the Taliban government
20:00in Afghanistan.
20:01So that brought China more time to adjust.
20:07And China realizes technology is very important.
20:11The question is
20:12to have technological improvements,
20:18the government has to work with
20:20the universities and the private sector.
20:23The government has to put in the seed money.
20:26So the role of the state
20:29has become important in China
20:32because it's trying to prevent
20:34technological isolation as well.
20:37In this age of terrorists,
20:39and you've said before in previous episodes
20:41that you see this as the end of free trade.
20:47And it's essentially given Trump's decisions
20:51on terrorists for different countries,
20:55it's the closer you are to China,
20:56the more tariffs you have.
20:58How do you think China might adapt
21:01to this landscape
21:03that we're operating in,
21:05this new global economy?
21:08I think that the rest of the world,
21:13like Malaysia, Europe, Japan, Korea,
21:17would like to keep free trade among ourselves.
21:19In other words,
21:20if we have faced all these tariffs with the US,
21:23we deal with those tariffs.
21:24But among ourselves,
21:26we should practice free trade.
21:28The question is,
21:30or are we going to follow the Americans
21:32and say,
21:34anybody who's China's friend,
21:3840% on that,
21:40would the Americans be able
21:42to pressure Malaysia
21:43Malaysia to put tariffs on Chinese goods?
21:48And should Malaysia agree?
21:51Or should all of us collectively say,
21:55yes,
21:55we will pay 19% to the US,
21:58but among ourselves,
22:00we will keep the WTO system.
22:02If that can be achieved,
22:05then we will have
22:08a significant amendment of WTO system,
22:13but not total elimination of it.
22:17What do you think China would do?
22:19China, of course,
22:21would want to be part
22:26of this global free trade system.
22:28Because then,
22:29it would be an undisputed leader.
22:32Because the other leader
22:33doesn't want to be the leader of free trade.
22:35And this is very ironical.
22:38Because China
22:39has been,
22:41in many ways,
22:43not fulfilled
22:44its promises
22:47under WTO.
22:48That is why
22:50it makes the Americans
22:51also so unhappy.
22:53China had promised
22:54to undertake
22:55a whole slew
22:56of market opening
22:57under WTO,
22:59which it has not done.
23:01But now,
23:01it will be willing to do it
23:03in order to become
23:04the leader
23:04of the rest of the world
23:06minus the US.
23:07That's a price
23:08that you will willingly pay.
23:10Wonderful.
23:11Okay.
23:11And that will end
23:12on that note
23:13for our look at China.
23:15Thank you so much,
23:16Profu,
23:16for giving us
23:17some insight
23:18into the Chinese
23:19history of
23:20economic reform.
23:22I appreciate your time.
23:23That's all we have for you
23:24on this episode of
23:25Who Says?
23:25where we get real
23:26about the US,
23:27China,
23:28everywhere and everything
23:29in between.
23:30Join us for another episode
23:31next week.
23:32See you then.
23:32Bye-bye.
Comments