The Making of an Economic Superpower: How China Escaped Shock Therapy

In 'How China Escaped Shock Therapy', Isabella Weber provides a detailed study of China’s economic miracle, whatever its pitfalls and ensuing inequalities.

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How did China become a global economic superpower? How did it avoid the economic and social catastrophes inaugurated by the ‘shock therapy’ of Big Bang market fundamentalism in eastern and central Europe and in Russia after the disintegration of the Soviet Union? And why didn’t those former eastern bloc ‘socialist’ states look east to China and follow its lead, and avoid the devastating hardships that ensued for their peoples? Having consciously avoided the disasters of shock therapy, what might China have to teach the world about building and managing spectacular economic growth? And what does the model of a socialist market economy with Chinese characteristics, and the attendant cultural, material and military power that accrues, mean for world politics, especially to the Western world system of power, led by the US? And more unusually, what has China’s capitalist world integration meant for its Mao-era championing of Third Worldism – anti-colonial national liberation struggles across the world? 

Isabella M. Weber
How China Escaped Shock Therapy: The Market Reform Debate
London and New York: Routledge, 2021

These are among the questions directly addressed or raised by Isabella Weber’s enlightening and detailed study of China’s economic miracle, whatever its pitfalls and ensuing inequalities. Weber lays bare in great depth the vigorous debates in China about how to think about and reform its economy from the late 1970s and into the 1980s. The issue at that time was not whether China’s economy needed reform in capitalist directions and towards market relations, it was how that should be done so as to minimise political instability and mass unrest, maximise regime legitimacy, develop the economy and lift millions out of poverty and hunger, especially in the countryside.

A few facts: While Russia’s economy shrank from a 4% share of global GDP in 1990 to around 2% in 2017, China’s increased from just 2% to over 12%. For 99% of Russian people, the average real income in 2015 was lower than it had been in 1990; in China, 99% of the people saw a quadrupling of real income. US share of world GDP has fluctuated in between but was 26% in 1990 and stands at around 24% today. It wasn’t all roses for China, however – inequality became rampant and remains a core source of political and economic discontent.

This is not the ‘China’ of Western mythology

Weber’s study is essential reading. Professor Kerry Brown of the Lau Institute at King’s College London is surely right when he argues that over the past couple of years, so many of us seem to ‘know’ China and what it is and what it stands for, all too frequently without bothering to look for hard evidence. As Mobo Gao argues so persuasively, the West is busy “constructing China” – a China that is legible and useful for western purposes, not necessarily the real-world China that actually exists. China, once again, is being ‘othered’, the new-old ‘Yellow peril’, ready to take over the world.  After all, as a leading thinker in former US president Donald Trump’s state department noted, China is not a Caucasian power, making it incomprehensible to the West, unknowable, unpredictable, inscrutable, suspicious.

The short answer to the question of China’s remarkable economic development, for Weber, is that China was economically transformed by a conscious state strategy of “crossing the river by groping for the stones”. As Weber so elegantly puts it, China made “the path while walking.” This is not just quintessentially Chinese idiom but almost a philosophy. Pragmatism and experimentation, small changes in limited areas, gathering data and results, constantly recalibrating, feeling their way in the dark towards gradual change. Making sure of your footing before taking the next small step to your destination. The Long March also started with a single step, no? This is also how Chinese guerrilla warfare worked during the civil war, Weber points out.

Markets are made by people, states, not nature

Weber shows that the state decided that markets don’t happen naturally, should be carefully constructed and managed, and should be a tool of the state to develop a modern economy and meet popular needs. Market as instrument of the state, not as the driver of state strategies. The visible hand of government orchestrating the invisible hand of the market, and trying to maintain popular legitimacy and authority. While this is a major step towards the restoration of capitalism, it retains a level of state power that acts as insulation against global economic and financial crises and turbulence. China, to be sure, is integrated into global capitalism but not in the ways preferred by Western neoliberals. China’s retort to the Thatcherite “there is no alternative” (Tina) is that there is, and it can work quite well.    

In great detail and with considerable insight, Weber demonstrates that Reformers made distinctions between state setting prices in the ‘heavy’ or significant sectors of the economy (those that impacted national plans and people’s everyday lives and necessities) and the ‘light’ sectors that were more marginal and could be left to private markets.

But before embarking on their remarkable journey, Chinese political leaders, bureaucratic economy managers and economists scoured the world for ideas and methods. They consulted economists from Japan, Hungary, Yugoslavia, West Germany, the US, the UK, among others. The foreign economists included Milton Friedman and Jeffrey Sachs and others championing massive immediate economic change from a state-managed to a private free-market economy. Foreign economic advisers also included Alec Cairncross and John Kenneth Galbraith who had advised their own governments during and after World War II, helping capitalist economies transition to wartime price and wage controls, and transition more or less quickly after the War to market-led pricing. They too, by sheer necessity, had crossed the river by feeling for the stones. Chinese reformers also looked at the so-called Erhard era economic miracle in West Germany, promoted by Friedman and Sachs as fit for application to 1980s China, debunking the myth in the process. Weber argues that Erhard’s market miracle led to labour strikes and resistance, inflation, and eventually a U-turn. 

China’s reform generation largely rejected market dogma and shock therapy.

Children play next to adults at a park in Beijing, China June 1, 2021. Photo: REUTERS/Tingshu Wang

Drawing on China’s history and experience

But the reformers did much more than look abroad to western and other economists. They drew on their own historic experiences of managing the parts of the Chinese economy they controlled during the war with Japan from 1937 and into the civil war against the forces of Chiang Kai-Shek, and economic management strategies after the 1949 revolution. Plus, in the reform era, China’s economists and others also were aware of, though not necessarily fundamentally influenced by, economic debates in ancient China that at least rhymed with the issues of the late 1970s and 1980s. Weber is referring to China’s leaders from centuries before the Christian era debating how to manage transitioning economies from war to peace, of the problems of regime legitimacy in the eyes of the people, of managing prices of staple goods and services that would enable gradual change versus Big Bang strategies which had caused mayhem in ancient times. 

Chinese economic reformers went shopping in the global market of ideas and methods, sifted, sorted, debated, synthesised, drew on their own experiences, and decided their own path. A remarkable, important story related in depth in Weber’s landmark study. 

Major US institutions also fundamental in Making China

The World Bank played an important role in the process, as did the American Economics Association, and the Ford Foundation. They especially promoted Western economics in China in a wide variety of ways, spending hundreds of millions of dollars in investing in scholarly exchange programmes, setting up undergraduate and postgraduate economics in a wide range of universities, sending US professors from elite universities to teach and train in China, and funding thousands of Chinese professors and students to study and research at American and other universities. A whole network of think tanks was created or strengthened and transformed, helping to inform reform and crystallise elite and attentive public opinion in favour of market socialism with Chinese characteristics. They built in the process solid elite knowledge networks that bled into and out of US and Chinese state strategies and activities. 

By the time Weber attended economics lectures in China just after the 2008 global i.e. Western financial crisis, she was amazed to find the same economic theories and American textbooks with which she was familiar in Berlin. Yet, she notes how different from the US was the Chinese economy itself, despite what professional economists thought and taught. This leaves us puzzled, of course: professional economics appears to have nothing useful to tell us about the actual economy and how it works, or why it frequently doesn’t. 

And this is important. It wasn’t all ancient Chinese wisdom against western ignorance. China had its own market fundamentalists too. There was a massive debate over how to reform the economy or how to set prices. The free market theory basically suggested that virtually immediate abandonment of state ownership and control was essential for transformative and permanent change, regardless of the morality of imposing massive hardships on millions of ordinary working people. And the Chinese leadership was divided, and ideas ebbed and flowed between state-managed prices and free markets. It was not pre-ordained that China would emerge where it did – and anxieties among the Chinese leadership about regime instability and mass uprisings emerged time and again. Is this elite paranoia or a ruling class that knows its own people? 

China has come a long way since 1978, since the time of Mao who, incidentally, as Weber points out, had already embraced the necessity of economic reform before his death, and appointed a successor (Hua Guofeng) who set up the first experimental special economic zone that laid the foundations for Deng Xiaoping’s transformative leadership.

Souvenirs featuring portraits of China’s late Chairman Mao Zedong and China’s President Xi Jinping are seen at a shop near the Forbidden City in Beijing, China, September 9, 2016. Photo: Reuters/Thomas Peter

China’s globally integrated and interdependent, so why’s there a new Cold War? 

That there is a new ‘cold war’ between the US and the West and China is pretty much the conventional wisdom today. And it does feel pretty frosty, no question. Trade tariffs, tit-for-tat sanctions, diplomatic boycotting of the 2022 Chinese Winter Olympics, ramped up arms sales and rhetoric about Taiwan, the South China Sea, Hong Kong, and the human rights of Muslim minorities – this is the stuff of daily news stories. Yes, two decades into the global war on terror and wars leading nowhere in Iraq and Afghanistan, the US worries about the human rights of Muslims. And that’s even without mentioning the ‘Wuhan’ virus

Whatever the truth of the matter, the sheer volume of rhetoric about a new cold war seems to have some of the qualities of a self-fulfilling prophecy. Yet, it remains the case that China’s economy is a state-capitalist one, not communist by any stretch of the imagination, while the Communist Party is dominated by very rich men and women whose children are in droves studying in elite American and other universities. President Xi is a billionaire. China’s economy is interdependent with US and western economies and financial systems, has massive investments in the West and vice versa. China and the US have a vested interest in cooperation on the current and future global pandemics as well as climate change policy. China holds trillions of dollars of US debt, and its post-2008 policies of massive fiscal stimulus aided their and global economic recovery. China does not have a string of communist parties overseas committed to spreading its ideology, unlike the Soviet Union. It does not have anything even remotely resembling the Warsaw Pact. Its military spending is around a third of the US’s. It’s not even the most significant military power in its own region.

And on top of all that, China today is no emancipatory leader of the globally oppressed. It supports no national liberation struggles as it did under Mao. It is very close to Israel diplomatically and economically, not to mention other US allies in the Gulf. There is nothing revolutionary about China, other than its profit-driven hi-tech sector. However flawed the debt-trap diplomacy critique is (and it is surely exaggerated by the anti-China ‘lobby’),  there is the whiff of financial and commercial imperialism in China’s international relationships. It has become more like the West.

More like, but not of the West. Like ‘rising’ Japan in the 1980s and 1990s. It’s an outsider, an interloper, a competitor and a rival. It’s not Caucasian. And does not appear to know its place and is in need of subordination.

Weber hints that China’s state-directed market model of economy is a key source of friction with the US and West. It probably is, especially given the continuing ideological power of neoliberalism. Yet this may not be the whole story.

The racial-civilisational factor is surely a part of the story, as is the sheer strength of China’s hi-tech leadership. Its geopolitical ramifications, however fragmented and ill-thought through the Belt and Road Initiative may be, are potentially revolutionary. The dominance of the Eurasian landmass could spell major diminution of Anglo-American sea power.  

And then there’s the domestic politics of external threat-construction, which goes both ways. The US and the West more broadly are suffering a crisis of authority and legitimacy at home, rising authoritarianism and right-wing and white supremacist populism, including an attempted coup and insurrection in the US. China’s domestic inequality, corruption, and mass protests remain powerful and enduring. Hence, constructing external threats plays well at home, performative politics that distract attention from political elites themselves.  

Weber’s book is well researched, based on Chinese language documents and dozens of interviews with key thinkers and actors in its economic reforms, and is informative and stimulating. It’s an important book that deserves a wide readership. It offers a sober analysis of the intellectual and political struggles – that occurred on an international scale – that transformed China, and are having global repercussions. It provides key insights into ‘how China works’ and subtly demonstrates that neoliberalism is not the only game in town. It is one of the most thought-provoking and illuminating books I have read.   

Inderjeet Parmar is professor of international politics at City, University of London, and visiting professor at LSE IDEAS (the LSE’s foreign policy think tank). He is a columnist at The Wire. His Twitter handle is @USEmpire.