• OPINION
• DECEMBER 16, 2008 The Wall Street Journal WSJ.com
  

The Lessons From 30 Years of Chinese Reform

One of the greatest economic booms in history, but an emerging turn back to the left.

• Article

more in Opinion »

• Email
• Printer Friendly
• Share:
  • Yahoo Buzz
  • facebook
  • MySpace
  • LinkedIn
  • Digg
  • del.icio.us
  • NewsVine
  • StumbleUpon
  • Mixx
• Text Size

By HUGO RESTALL

Thirty years ago this week, Deng Xiaoping and the Chinese Communist Party turned their backs on Maoism and embarked on a reform program that led to the most remarkable period of wealth creation the world has ever seen. From today's vantage point this process appears surprisingly smooth. But it hasn't been, and still isn't.

AP

Deng Xiaoping, 1978.

Above all, there has never been total agreement in Beijing about the wisdom or course of reform. Nor has there been a clear road map. Rather, especially under Deng, it was a fairly personal process. He could launch reform because in 1978 China was in a state of ideological and economic exhaustion, and internal opposition to "following the capitalist road" was weak. The adoption of pragmatism as a guiding principle was popular because people were so fed up with political campaigns and class struggle.

Deng also played a crucial role as "paramount leader" at key moments in the 1980s and early '90s, pushing through changes using his personal prestige when reform seemed to founder. In the early stages, economic reforms created many winners and very few losers, as private enterprises started small, coexisting with the state-owned industrial dinosaurs.

In Deng's famous phrase, China's policy makers adopted a gradualist approach, "crossing the river by feeling for the stones." Small-scale experiments often led to success on a national scale, such as allowing farmers to keep what they produced from private plots and the establishment of special economic zones along the coast. The major involvement of foreign enterprises in the Chinese economy was never planned. It simply evolved. But the lack of a reform blueprint also led to some notable failures. China's stock market remains dysfunctional because it started as a no-cost source of money for state-owned enterprises. Allowing the market to become a viable source of capital for entrepreneurs would hurt these companies and those who own their overpriced shares.

This gradualist approach, and the underlying lack of consensus, had political consequences. During the 1980s, reformist and hard-line forces within the Communist Party still fought over the pace of reform, and intellectuals had a modicum of freedom to debate. The crackdown after the 1989 Tiananmen Square massacre sharply reined in that debate, but within a few years economic reform and growth were back on track. By the mid-'90s, the party successfully recast itself as a collection of society's elites from all backgrounds, including entrepreneurs. The only competition over policy was between technocratic elites and leaders of patronage networks, while the government bought the allegiance of intellectuals with improvements in their lifestyles.

China became a remarkably laissez-faire economy in the late 1990s and early 2000s. The government's revenues as a share of GDP shrank to around 11%, from 31% in 1978. At the same time, Beijing unilaterally cut tariffs and joined the World Trade Organization, while shrinking the public sector. In the space of a few years starting in the 1990s, inefficient, state-owned enterprises shed about one-third of their workforce, by some estimates 60 million jobs. As a result, for about three decades the "socialist market economy" churned out double-digit growth year after year.

Unfortunately this run is coming to an end, and not just because of the global financial crisis. Today the pendulum is swinging back toward ideological competition and big government. With the country still without a true consensus on the virtues of free-market reform, the communists-turned-capitalists are morphing into European-style social democrats.

In the late 1990s, the bureaucrats set out to re-establish their power. Beijing fixed a target of restoring national revenue to 20% of GDP by improving the tax collection system. Last year, revenue hit 20.8% of GDP, growing by 32.4%, far ahead of economic growth of 11.4%.

Spending has risen just as fast, and this is now part of an ideological shift back toward statism. Government leaders portray themselves as the answer to every problem, expressing their willingness to use public resources to help those left behind by the new prosperity, rather than counting on new businesses to create jobs. While China's social safety net remains small in comparison to European countries, it is expanding rapidly. Given that China remains a poor country and has a rapidly aging population, this may not be sustainable.

Meanwhile, after welcoming foreign trade and investment to a degree seldom seen in a developing country, Beijing is quietly shifting tack to impose some nontariff barriers to foreign products and investment. The state is pushing the creation of new national champions, enterprises that are tied to the government by various ownership structures and enjoy generous financing from the state-owned banks. A new labor law goes far beyond basic workplace protections, incentivizing workers to organize and instigate disputes with management.

Today in Opinion Journal

REVIEW & OUTLOOK

• Barack Obama-san
• Condi's Korean Failure
• The Sole of Liberation

TODAY'S COLUMNISTS

• Global View: Let's Buy Pakistan's Nukes
  – Bret Stephens
• Main Street: Gitmo Lawyers Are the Latest in Radical Chic
  – William McGurn

COMMENTARY

• The Return of Realpolitik in Arabia
  – Fouad Ajami
• The Lessons From 30 Years of Chinese Reform
  – Hugo Restall
• How Blackwater Serves America
  – Erik D. Prince
• Bankruptcy Is the Perfect Remedy for Detroit
  – Todd J. Zywicki

All of this is reducing the opportunities open to the true private sector, which has been the engine of China's rapid growth. As growth slows and the politically well-connected cadre managers enjoy the lion's share of opportunities, inequality and resentment grow. If this prompts the government to expand spending further to buy off the discontented, the virtuous cycle of economic reform could turn into a vicious cycle of ever greater government intervention.

In the political sphere, the close alignment of government and business elites means that any emerging opposition to the Communist Party will likely be antibusiness. We already see evidence of this. Among intellectuals, a nationalist movement advocating greater government control of the economy -- known as the "new left" -- is the hottest trend.

None of this means that China is necessarily going to reverse course after 30 years of reform. But the straight-line projections some have drawn of the country's growth are too optimistic. The drawbacks of the Communist Party's monopoly on power are becoming more evident, as vested interests protect their control of the economy by holding back development of the banking system and stock market.

The coming year is expected to be critical, both economically and politically. China's export-dependent economy is especially vulnerable to a global slowdown. But the Communist Party has shown itself adept at adjusting to new challenges. We can expect that the feeling for the stones will continue, even as the pace of reform slows.

Mr. Restall is the editor of the Far Eastern Economic Review.