China's Great Leap Backward; D. Pikcunas

The taste of economic freedom, however, whetted the Chinese appetite for political free dom-the right to speak out against individuals and programs hampering China's development. In 1988 the central bureaucracy began limiting the market incentives, with resulting backlogs, shortages of raw materials, unemployment, and inflation. The link between economic and politi cal freedom was becoming clear. New EconomicPolicy The shift in China's economic policy is a major turningpointin the country'srecenthistory. When Mao Zedong's troops conquered China in 1949, he set about to build a Marxist-Leninist society.One of his first priorities was to eliminate Dr. Diane D. Pikcunas is Principal of Komensky Ele mentary School in Berwyn, Illinois, and adjunct profes sor of education. at the National College of Education in Lombard, Illinois. all opposition. Chinese by the thousands were ar rested, subjected to public trials, jailed, and some were executed. Businessmen and large landown ers were particular targets for persecution. The government took over businesses and land, and abolished the right of private ownership.

Mao aimed to transform China into an indus trial nation overnight, despite the human costs.In the "Great Leap Forward," begun in 1958, he pushed for rapid development, and encouraged Chinese citizens to make steel in backyard fur naces. After a few years, it became clear that this policy was a failure, and China's industrial pro duction fell. Mao's agricultural communes also failed to increase output. The centralized econo my helped Mao gain absolute control over the populace, but brought disaster to the Chinese people and crippled the nation's economy. Mao's death in 1976 led to a struggle for suc cession that brought Deng Xiaoping to power. Though a Marxist-Leninist, Deng witnessed the failures of Mao's centralized economy and saw the need for economic revitalization. Even Lenin had recognized the failure of War Communism (1918-1921)and initiated some market incentives in his New Economic Policy of 1921-1928.Deng tried a similar 'approach, introducing some mar ket incentives as part of his Four Modernizations, which were designedto make China a great eco nomic power by the early 21st century.

Mao's Great Leap Forward proved a disaster for China, and Deng now envisioned a Great Leap Outward. While Mao had shut out foreign influences, Deng opened China's doors to coop eration with capitalist nations, welcoming joint ventures and foreign investment. Tourism was 478 THE FREEMAN • DECEMBER 1989 Dr. Diane Pikcunas visited Tiananmen Square in December of 1988, six months before the brutal suppression of Chinese students by the Chinese Communist military forces. encouraged. Economic incentives were added to attract foreign capital. Industrial decision-making was decentralized, giving a reduced role to Bei jing bureaucrats and more autonomy to provin cial and local officials. Farmers were allowed to cultivate "sideline" plots and to sell their crops for their own profit. So successful was this latter experiment that, despite the small amount of land involved, the sideline plots were soon ac counting for 25 percent of agricultural produc tion.l FreeMarketBringsProsperity Deng's reforms brought prosperity for both ru ral and urban Chinese. One of his most successful reforms made businesses responsible for their own profits and losses. The result is a familiar one in all free market economies-production of more goods and services.

Throughout history, the Chinese have been great entrepreneurs, and Deng's market reforms allowed Chinese merchants and shopkeepers once again to demonstrate their skills. Prior to Deng, state-run shops offered limited variety, poor quality, and government employees who took a hostile attitude toward customers- "buy it or leave it." The private businesses encouraged under the Four Modernizations, in contrast, have to compete for consumers. Their owners operate as their own bosses freed from the "work unit" which dominates almost every aspect of Chinese life. Under Deng's rule, the number of indepen dent Chinese businesses has risen from 1 million in 1980to almost 15 million in 1989.2 The free market brought prosperity to rural ar eas as well. Guangdong Province in southern China registered an economic growth between 1984-1987of 23.5 percent while the rest of China recorded an impressive national average of 16.8 percent. Guangdong freed 80 percent of its com modities from central government control. New markets were created in labor, real estate, and a large number of commodities. Hundreds of new factories were built in the Pearl River Delta, the heart of the province's economic boom. An im portant link has been made to a neighbor and model of free enterprise-Hong Kong. Hong Kong investors account for 90 percent of the for eign investment in Guangdong Province and re ceive60 percent of its exports.3 Even in rural and isolated areas such as CHINA'S GREAT LEAP BACKWARD 479 Zhuozi, located in Inner Mongolia, the free mar ket has operated successfully, as the economic role of the central government has been reduced.

Commodity prices were freed from government control. The economic commission that con trolled investment was abolished. All urban housing was privatized, and most state enterpris es were dismantled. The farmers experienced a new prosperity, as they no longer were required to sell their grain and oilseed to the state at a fixed price. Zhuozi has become a model of the success of free enterprise. While much of the at tention on economic reform in China has focused on coastal and suburban areas, the impressive na ture of the success in Zhuozi is that the free mar ket has proved an amazing success in an area considered poor in a poor region.4 This remarkable success encouraged Chinese economists to take a closer look at what was hap pening. They were able to report their findings in a political atmosphere freer than in the days of Mao. For example, three young economists -Hua Sheng, Zhang Xuejun, and Luo Xiao ping-have urged a major restructuring of the Chinese economy with an emphasis on individual property rights rather than on collective owner ship. They have criticized policies such as the government's "price reform" which leave in place many of the elements of a centralized economy.

They also have advocated a dismantling of the state-controlled assets, and charge that the re forms have been so limited that the preconditions for truly independent profit-maximizing enter prises have not been created. They have pointed to the success of the rural enterprises which have operated outside the government's economic plan and have consistently outperformed the state-owned enterprises. The enlargement of the private sector, they have stressed, will enable China's economic growth to continue.5 EconomicRetrenchment The economic crisis in China came before the political crisis. Partial repeal of the economic re forms under the name of an "austerity program" appeared in September 1988 and were officially confirmed at the meeting of the National Peo ple's Congress in March and April of 1989. The leadership struggle has taken its toll on economic reforms. Zhao Ziyang served as Premier and later as the Communist Party Secretary and was architect of much of Deng's economic re form. He pointed to Guangdong Province as a model area and urged more economic and politi cal liberalization. Li Peng, who succeeded him as Premier, was trained in the Soviet Union and is viewed as a technocrat; he has been less enthusi astic about these reforms and favors more cen tralization. In the political crisis in June, Zhao lost power and was purged; Li emerged in a stronger position.

In light of these events, Li Peng's report to the National People's Congress in the spring of 1989 takes on a greater importance. The "austerity program" Li announced gave a greater role to central planning and imposed new taxes on the more productive sectors of the Chi nese economy. Chief among the new program's victims are the rural enterprises which have demonstrated the success of decentralization. The new budget placed a tight squeeze on these enter prises. While the rural enterprises have been growing at an annual rate of 30 percent, the new program limited annual growth to 15 percent. The new tax program was designed also to tar get the farmers who proved the success of the free market-farmers who raised fruit and veg etables and sold them for profit would now have to pay new taxes ranging from 5 to 15 percent. And in a reverse of incentives, the proposed national budget would increase the salaries of government workers and employees in the less productive, state-owned enterprises. A surcharge would be levied on those enterprises that were not state-owned-those owned privately or by collectives.6 The increased centralization is sure to hurt the economic performance of the model province for economic development-Guangdong Province, China's biggest exporter. The cutback on con sumer goods nationwide especially hits this province whose prosperity has been largely built on the production of these goods. The move to ward centralization of raw materials also will deal a blow to Guangdong's economy, which will have greater difficulty purchasing the coal needed to keep its factories running.7 The political crackdown in June has made for eign investors wary of the Chinese government's promises and its commitment to further reforms.

The Special Economic Zones, which China creat480 THE FREEMAN • DECEMBER 1989 ed to attract foreign investment, are especially vulnerable as foreign businesses withdraw and other nations consider a cutoff of trade or sanc tions against China. In an economic zone such as Shenzhen, which during the past decade has seen an enormous growth in the value of the goods and services it has processed, the government's alteration of foreign exchange rules in late 1988 has created particularly vexing problems, cutting exports and reducing 1989investment by as much as 30 percent. The uncertain investment climate will create additional difficulties. The Special Economic Zones, where the Chinese have devel oped model arrangements for the operation of free enterprise companies, may soon experience a serious decline.8 Conclusion The Chinese free market experiment has suf fered an enormous setback since late 1988. And the experience serves to remind us of the dangers of political power exercised over an economy, for great economic benefits may fall victim to politi cal considerations. A number of experts have warned us of such developments. Arch Pudding ton notes that even when they experiment with free market mechanisms, Communist nations are usually drawn to restrict entrepreneurial activity, since capitalism represents a humiliating refuta tion of the promise of abundance made by Com munist officials.9 The Chinese economy is proving that political power can defeat even the most spectacular ad vances of an economy based on free market prin ciples. In 1988, Milton Friedman warned then Party Secretary Zhao that China would not con tinue to succeed economically if it attempted to organize its economy from the top down. He stressed to Zhao that government is organized from the top down, while the free market is orga nized from the bottom up.lo And perhaps one of the more perceptive ob servations came from political scientists James T.

Myers and Donald J. Puchala, who assessed eco nomic development in China and concluded: Some analysts base their positive projections regarding Chinese modernization on the pre sumption that Deng Xiaoping and his col leagues are moving China away from socialist central planning and toward something that looks like a market economy. The conclusion of these analysts is that if it looks like capital ism it will surely work well for the Chinese, and all that is really required to transform a so cialist, centrally planned less developed coun try is the introduction of a system of reliably price-cued transactions among entities that look like autonomous producing and consum ing units.... It is inconsistent with almost ev erything we know about the requirements for and the course of economic development. ... Whether or not China can modernize econom ically is an interesting and debatable question.

But the answer is certainly not as simple as Deng Xiaoping and his colleagues turning a "capitalist" face to the outside world.ll The Chinese people have proved that they can make the free market work if they are unham pered by government controls. In the months since I left China, I have thought about the lesson that China offers for other nations, as well as for individuals who feel they can turn economic and political freedom on and off like water from a spigot. The lessons of the free market work well for all people, but centralized control can retard even the most promising prosperity and bring a nation back to economic bankruptcy. D 1. Immanuel C. Y. Hsu, China WithoutMao: The Searchfor a New Order (Oxford and New York: Oxford University Press, 1983), pp. 91-118; Donald J. Senese, Sweet and Sour Capitalism: An Analysis of "Socialismwith Chinese Characteristics,"(Wash ington,D.C.:The Councilfor Socialand EconomicStudies,1985).

2. Michael Weisskopf, "Chinese Entrepreneurs Expect Cus tomers to Return," The WashingtonPost,June 18, 1989. 3. Louise do Rosario, "Asia's Fifth Dragon," Far Eastern EconomicReview, December 8, 1988, p. 62; Daniel Southerland, "In South China, Profits Keep Their Lure," The Washington Post, June 29,1989. 4. Robert Delfs, "County Capitalism," Far Eastern Economic Review,April 27, 1989,pp. 27-28. 5. Robert Delfs, "Property to the People," Far Eastern Eco nomicReview,December 20,1988,pp.12-13. 6. Daniel Southerland, "China Seeks To Rein in Economy," The WashingtonPost, March22,1989. 7. Louise do Rosario, "Business as Usual," Far Eastern EconomicReview, December 8; 1988, pp. 60-61; Southerland, "In South China, ProfitsKeep Their Lure." 8. John Burgess,"China's Economic Zone Innovators Reassess After BeijingThrmoil," The WashingtonPost,June 29,1989. 9. Arch Puddington, Failed Utopias: Methods of Coercion in CommunistRegimes (San Francisco:ICS Press,1988),p. 15.

10. "Friedman Says Mainland Needs Freedom," Ching Ming Monthly (Hong Kong), February 1989, p. 42; reprinted in Inside ChinaMainland,April 1989,p. 24. 11.James T. Myersand Donald J. Puchala,"Some Demographic Constraintson ChineseEconomicModernization."Paper presented at the SeventeenthSino-AmericanConferenceon MainlandChina, June 5-11, 1988, Institute of International Relations, National ChengchiUniversity,Taipei,Republicof Chinaon Taiwan,p. 2.