Teng’s Reforms, Neither Market Nor Socialism

Against the Current No. 22, September/October 1989

Richard Smith

CHINA’S STUDENT-LED movement for democracy, and its savage suppression, represented an all-too-logical outcome of a decade of economic reforms. The implementation of capitalist methods within China’s system of bureaucratic property and bureaucratic class domination is hopelessly contradictory, and led inevitably to the economic crisis that lay behind last spring’s Chinese revolt.

By 1976, the year Mao Xedong and Thou Enlai died, the Chinese economy was in shambles. After three decades of “socialist construction” under Mao, the country could barely, and sometimes not quite, feed itself. Industrial productivity and living standards were stagnant, even falling, and the economy was kept in motion only by holding down consumption and pumping ever more back into accumulation. The Chinese Communist Party (CCP) was heavily discredited and, in the wake of the Cultural Revolution, China’s workers were profoundly alienated from Maoism and the party. On Thou’s Enlai’s death in April 1976—in premonition of things to come–100,000 people demonstrated in Tiananmen Square against the Gang of Four.

A “Capitalist Restoration”?

Under the circumstances, Deng and the “pragmatists” saw little choice but to jump ship, jettison Maoism, and in hopes of saving the economy, bring about reform. The Dengists and their Western ideologists celebrated their plan for market socialism as “the best of both worlds”: In the pragmatists’ vision, China would incorporate the best aspects of capitalism (competition-induced efficiency, specialization, reward to performance), but still retain the best features of China’s “social-1st” economy (state ownership and planned national development). The market would rationalize the plan.

Competition would break the managers’ “big pot” (guaranteed state subsidies) and labor’s “iron rice bowl” (lifetime job security). Workers would work or be penalized industrial managers would be held “responsible for profits and losses,” forced to compete, forced to turn themselves into “socialist entrepreneurs” or face the threat of failure and bankruptcy. Meanwhile, multinationals would be invited in to hasten technological acquisition and development, lured by the promise of cheap wages in the “Special Economic Zones.”

Now some—like William Hinton and the Guardian newspaper—maintain that Deng’s market reforms were in fact leading to the “restoration of capitalism.” Yet by no stretch of the imagination did these reforms lead toward a restoration of capitalism. To understand why, it is crucial to pay as much attention to the fundamental relationships in the economy that were not reformed as to the elements of market economy that were installed.

In 1978 the Dengists broke up the rural communes and decollectivized agriculture, restoring the family farm as the primary unit of agriculture. While the state retained juridical ownership of the land, in fact by the early- to mid-‘80s much farmland had become commoditized through the development of a lively market in private leases.

The remaining means of production—tools, animals, and the like—were divided among the peasants. The state still imposed quotas for farm output through controlled sales of necessary inputs like fertilizer and fuel. But, instead of being ordered about by the cadres as in the past, peasant families were increasingly left to manage production for themselves. Equally important, the reformers reopened rural and urban free markets. After meeting the quotas, peasants were allowed to sell their output at these markets and pocket the profits.

In industry, starting also in 1978, the reformers carried out a parallel decentralization and marketization. On the theory that enterprise directors and local governments were better placed to “know the market” than the remote central ministries in Beijing, Deng initiated a vast decentralization of fiscal authority. Most importantly, state firms were granted the right to retain a share of their profits and dispose these funds as they saw fit. In the past, the state had disbursed all necessary funds as grants, and by the same token, had taxed away all profits. But, by the early 1980s, industrial managers could retain a growing portion of these monies. They assumed considerable autonomy over investments in plant and equipment as well as expenditures for bonuses, collective facilities (including housing), and amenities.

Furthermore, as part of the reformers’ expansion of foreign trade, local governments and firm managers were given a relatively free hand with overseas sales and purchases. Having granted the units of the economy this autonomy, the Dengist reformers urged them to adopt the logic of the market—to rationalize production by specializing, cutting costs, shedding excess stocks, reinvesting in innovative technology—to raise productivity and be in a stronger position to compete.

Reformers Against Reform

Yet, paradoxically, having allowed the farmers and the industrial enterprises such independence, and having urged them to adopt a capitalist rationality, these same reformers then threw massive, often insurmountable, barriers in the way of reform. That is, they refused to enact the necessary concomitant measures without which no market logic could possibly prevail.

First, despite perennial pledges to “resolutely” carry out price reform “next year” (never this year), the reformers refused to abandon price controls and let supply and demand determine prices and the allocation that follows (except at the very periphery of the economy).

Secondly, despite ceaseless talk about giving free markets a greater role in the industrial economy, there-formers have steadfastly refused to abandon using state monopolies as a key factor of production. Despite the considerable growth of a free market in industrial inputs, three-fourths of raw materials and machinery inputs are still monopolized by government-planning agencies. State banks still monopolize nearly all industrial credit. Thus, even if the government were actually to adopt a policy of market pricing, the policy would be meaningless for the huge sector in which monopolies prevail.

Nor has there been any significant privatization of state industrial property. Ten years after Deng’s “bourgeois revolution,” nearly all significant industrial means of production remain the property of the state.

After a decade of reform, and despite the discretionary authority nominally granted to industrial managers, the government still refuses to let the managers hire and fire labor at will, even in the Free Enterprise Zones—as capitalists there regularly complain.

Why, then, despite the apparent intent to bring in “capitalist reforms” do the reformers persist in maintaining the reality of the state-controlled economy? Briefly, the answer lies in the fact that they are not capitalists but bureaucrats. For this reason, their own reproduction both as a dominant class and as individuals depends upon the state’s control of the economy and their control, in turn, of the state.

The bureaucrats who rule in China do not own the means of production individually as capitalists, but collectively, through their collective “ownership” of the state. In order to maintain themselves economically, they do not have to go through the market—to sell in order to buy, to buy in order to sell and reenter production—as do capitalists. Instead, they take what they require for their maintenance directly out of the economy, basically by “requisitioning.” In this system, an individual bureaucrat’s share of the social surplus is determined not by his firm’s or his stock’s performance on the market, but by his position in the bureaucracy—which in turn is determined by the higher-ups via the nomenklatura.

Since the bureaucrats maintain themselves through distributing among themselves a part of the total surplus of the state economy—and not through controlling the profits from individual firms—they have nothing to gain by letting firms go out of business. For them, this just means idle resources.

Furthermore, they cannot let firms have much control over their own surpluses—to invest these and to distribute them as wages and profits to their owners and workers. If they did so, they would lose control over the firms. For, firms which live and die by market mechanisms would be beyond the control of the bureaucrats. Additionally, and again unlike capitalists, the Chinese ruling class has long sought to achieve national self-sufficiency and self-industrialization as a bulwark against real and perceived threats from the West (and also from the USSR).

Sincere in their wish to use market pressures to discipline firms and workers, the reformers were nevertheless hampered in carrying out their wishes because they could not really let the market prevail. That would have meant, literally, economic anarchy and the end of their own rule. The reformers faced what is an impossible taste to attempt to enforce the plan and at the same time to use market forces to “correct” it Such a contradictory strategy could not but set the plan and the market on a collision course, producing massive contradictions throughout the economy—and that is precisely what happened.

The Gains of Reform 1978-84

Initially, the reforms were a spectacular success. Stimulated by increases in state procurement prices for agricultural goods and by the resumption of free markets, agricultural production shot up. Between 1978 and 1984 grain output increased by one-third, cotton production tripled, and the output of many sideline products multiplied several fold. These gains far exceeded the expectations of the reformers and eased food supplies. Peasant incomes also jumped sharply. On the average between 1978-1982 peasant incomes doubled.

To reactivate industrial production, the reformers raised urban wages substantially. Between 1978-1985 industrial wages grew 34%. During the same years, the state shifted investment to light industry and the production of consumer goods escalated. The reopening of urban market stalls and private restaurants gave the workers something to spend their increased wages on. Imported commodities became available through the vast expansion of foreign trade. All this came as a welcome relief after the ration cards and blue uniforms of the Mao era.

The End of the Boom. 1985-89

By the mid-1980s the problems inherent in the contradictory strategy of decentralizing production and enhancing the role of the market within the continuing framework of bureaucratic state control became increasingly apparent. While the government granted peasants some significant price increases for state-procured produce during the first years of the reform, the prices the state paid remained far below market prices. In recent years, the state procurement prices for most grains are less than half of the free market prices. To make matters worse for the farmers, sharp inflation caused the prices for agricultural inputs (fuel, fertilizers, plastic sheeting) to rise even as procurement prices have been held down.

The results were predictable. As grain and cotton growing became less profitable, peasants directed their investments elsewhere. They grew more profitable cash crops such as tobacco and fruit, they redirected investment funds into trading; and, perhaps most of all, they simply put their money into consumption—housebuilding and purchases of consumer goods.

As peasant investment in the land and production declined, output peaked in 1q84. In 1985 the output of grain and cotton—the most important food and industrial crop—plummeted in the biggest one-year fall since the Great Leap Forward. Output has yet to reach the level of 1985. Whereas for a time in the early 1980s China was a grain exporter, today China is one of the world’s biggest grain importers.

The low return on farming has forced millions of peasants to flee the land in recent years. This flight was accelerated by reforms loosening restrictions on peasant mobility—intended to facilitate a more rational deployment of resources. But because the government refused to let state-set prices climb to market levels, peasants naturally (and rationally) responded by getting out of agriculture, even though their production is desperately needed.

More than two and one-half million rural migrants have poured into Guangdong and millions more have gone to Shanghai, Beijing, and other cities in search of jobs. For many, there are no jobs, and so another unexpected outcome of the reforms has been a vast growth of the unemployed. This, in turn, has led to urban homelessness, a reappearance in the streets of beggars, prostitution, child labor, and other features of bourgeois society that were once all but abolished in the People’s Republic.
Rationally Managing an Irrational System

In industry, unlike agriculture, the contradictions of the reform strategy were evident right from the beginning. In response to the reformers’ call to “quadruple output by the year 2000,” every firm, it seemed, sought to meet this “glorious goal” through a massive investment binge. Deng’s “socialist entrepreneurs” happily went out and squandered their retained profits, even falling into debt, on equipment and technology. They also built company housing and collective facilities (dining halls, recreation facilities, guest houses, etc.).

The reformers hoped that the enterprise managers, once released from the grip of the central planners, would adopt a “rational” capitalist approach to production: cut costs, conserve investments, specialize by comparative advantage, boost productivity, innovate. Instead, the managers did the opposite.

Rather than seeking to maximize their rate of profit, the managers pursued policies of “blind expansion” and “blind production.” They sought to maximize growth by maximizing all inputs including raw materials, labor and capital—with no regard for efficiency (productivity) or demand (the market). Instead of cutting costs they splurged on huge imports of unneeded goods, machinery, even whole factories. Instead of shedding redundant facilities, stocks and labor, they used their capital (including borrowed funds) to amass still greater hordes of raw materials. They built up their capacity for self-sufficiency and took on additional labor Instead of abolishing egalitarianism by tying their workers’ pay to performance, they distributed bonuses indiscriminately and massively overspent on the wage bill, even hiking wages in factories that were effectively bankrupt By Spring 1989, the government termed the agricultural situation “grim.”

As a result of all of this expansion, industrial output has grown rapidly—but the wage bill and investments in fixed capital grew even faster Consequently, industrial productivity has stagnated, and by some indices actually fallen, since 1978. To get the same output as before, more input has been required. The hoped-for shift from an extensive to an intensive mode of economic development has not been achieved.

Now the pursuit of such “irrational” strategies by the enterprise managers has naturally been viewed by government reformers with abhorrence. But why shouldn’t the managers have pursued such strategies and what else, really, could they have been expected to do? Since there is no real market to discipline them, what is to prevent them from behaving in ways that respond to the social pressures upon them and to their own individual self-interest? Given the incentives and sanctions established by the introduction of decentralizing and market reforms within the context of continued government ownership and control, the managers’ non-capitalist “bureaucratic” behavior turns out to be rational in its own terms.

Shouldn’t we expect managers to seek to maximize growth and investments given the incentives to do so and the costs of not so doing? In reality, the rational “socialist entrepreneur” must seek to maximize growth and investments (rather than profits) because in this reformed part-market-part-bureaucratic system, the great bulk of resources—funds for investment, wages, raw and semi-finished material inputs, machinery, etc.—are still allocated to the firms through state banks and state distribution agencies, not through profits from sales and purchases on the market.

Given scarcity (sometimes severe) of materials and capital, and given intense competition by other managers for these same scarce resources, the rational manager has little choice but constantly to ask for more, even more than is required, or risk losing it to another.

Plant directors must seek to maximize growth and investments for the further reason that it is mainly by increasing growth that they increase their own and the workers’ consumption. Today state firms do not accrue most consumption funds out of profits from free market sales, but mainly through state allocations. So they must constantly grow if they are to receive more money for wages, for housing, for vehicles, and for collective amenities like recreational facilities.

Similarly, shouldn’t we expect firm managers to find that maximizing all inputs—regardless of cost or need—and striving to be self-sufficient makes more sense, under the circumstances they face, than seeking to maximize their rate of return? There is no significant market for critical inputs such as land, labor, and capital. And while a significant free market in many raw materials, machinery, and the like has emerged, this market is still insufficient and unpredictable for state firms regularly to depend upon it.

Since the free market can’t supply their needs, managers have little choice but to try to manipulate the plan to their individual advantage. Responding to the same pressures to be self-sufficient in an uncertain world of supply, managers sensibly ask for more than they need; they hoard supplies and take on extra labor to meet unforeseen eventualities. In order to be as self-sufficient as possible, rather than to specialize, they add in-house facilities to produce necessary in-puts.

Furthermore, shouldn’t we expect managers to overspend on wages? Since the reformers won’t let the managers hire and fire workers at will, they have to make do with what the state assigns. It is only logical in this situation to raise the workers’ pay, and to distribute bonus funds more or less equally, to hire workers’ relatives (even if they’re superfluous). Without the threat of unemployment, they have no other means to elicit workers’ cooperation—which would be undermined by playing workers off against each other.

No Pain, No Gain

Although these strategies make sense from the standpoint of the immediate interests of the firms, their managers, and their workers, they are incompatible with increasing cost effectiveness. They add inputs without regard for the output they produce—without regard, in other words, for the rate of return. Indeed, these strategies mean lower efficiency and a “lower rate of profit4′ for the firms which adopt them.

We can see why managers would like to follow these strategies, but how can they get away with it?

The answer is simple. For all the talk about promoting competition, Chinese firms are not allowed to live and die by the market Competition was supposed to force inefficient enterprises to improve or go bankrupt, workers to perform or be fired. But in practice inefficient enterprises have not been permitted by the reformers “to fail.” Instead, the number of enterprises running at a loss has grown in recent years. By the end of 1988, the government reported that fully 50% of state-owned firms were effectively broke and operating at a loss. They were kept going only by infusions of state bank loans.

But what else can the government do? Since the state owns virtually all significant industrial enterprises, what would it gain by throwing its inefficient firms out of business? It would merely lose output while factories rusted and workers sat idle. While some of the resulting losses could no doubt be recouped by shifting resources to other, more efficient firms, it is difficult to see how gains could equal losses.

Unlike capitalists, the bureaucracy can’t sell off its inefficient firms. To whom would it sell them? The paradoxical outcome is that the state bureaucracy nearly always has found it in its interest to try to keep all its firms operating because this strategy best maximizes growth.

Similarly, after a decade of reform—despite notoriously low industrial productivity and even declining efficiency—the reformers will still not permit industrial managers to discipline the workforce by firing (or threatening to fire) inefficient workers. Again, why should they? Were the firms to fire inefficient workers, they would reduce their output, and since even in an inefficient industrial setting workers’ output is nearly always greater than their cost of subsistence, this would mean less total output for the economy as a whole. Moreover, unless workers are to be left to starve, the state would still have to support them.

Generally speaking, then, the Chinese bureaucracy has nearly always maintained full employment, not because it operates a “workers’ state” in any meaningful sense of the term, or because of any working-class victory of any sort, but simply its own interest has been to keep all its workers working. This is why despite all their rhetoric, the reformers have permitted the firms to hire unneeded workers and prevented them from firing workers (at least for economic reasons).

Because the bureaucracy will not free individual enterprises from state control and subject them to competition, it cannot create the conditions in which it makes sense for individual enterprises and their directors to strive for maximum efficiency. As a result, the government cannot go very farm making its rewards to managers depend upon economic performance.

Managers thus achieve success primarily through “politics”—on the basis of their political relations with superiors in the bureaucratic hierarchy. The shrewd “socialist entrepreneur” will tend to discount purely economic goals like increased efficiency, and concentrate on cultivating good connections—guanxi—with superiors, with other firms and bureaucracies, and with subordinates, both to further his own career and to make his firm operate more effectively.

Indeed, it needs to be emphasized that to a very great extent the day-to-day problems of the firm compel the manager to focus on politics. Since a manager cannot be sure that even planned allocations will come through, it makes sense to bribe those local party officials who are in charge of distribution, to insure that they do arrive. In this way, the rigidities of the bureaucratic system are softened by, as the Chinese say, going through the “back door.” Plant directors spend so much time bargaining with, bribing, and trading favors with potential suppliers and government authorities, that their subordinates refer to them as “ministers of foreign affairs.”

From Contradictions to Crisis

The deepening contradictions of market reforms under the continuing rule of the bureaucracy led more or less directly to the economic and social crisis that conditioned last spring’s revolt. At the heart of the protest, aside from the call for democracy, were two central grievances, both which can be traced back more or less directly to the economic reform—runaway inflation and radically increased corruption.

The reforms have not succeeded in reversing the long-term trend of declining productivity. Nevertheless, the reformers have insisted on subsidizing consumer prices. As a result, subsidies swelled to the point that they were draining off close to half the national budget In this situation, the bureaucracy has been able to maintain its industrialization drive, and cover its losses, only by going into debt, both domestically and abroad.

Whereas in 1980 China had virtually no foreign debt, over the last eight years China has accumulated a total foreign debt of some $40 billion. It roughly equals Poland’s debt. By 1990, when repayment on the debts peaks, these payments will consume 10-20% of state revenue, further reducing the funds available for investment and posing a major barrier to continued growth.

Since 1979 the central government has run a deficit every year (except 1985, when it managed to curtail spending by massive cutbacks). It has funded this debt primarily by printing money. With more money chasing fewer goods, it is not surprising that by 1988 inflation was running an estimated 50% a year.

Since urban workers typically spend about 50-60% of their income on food (housing costs being nominal), many have seen the gains of the early eighties wiped out by rising food costs alone. This is also the case for people living on fixed incomes.

To compound problem in the industrial sector, the reformers now face an agricultural crisis of staggering proportions. Between 1984-1988, when the population grew by 61.4 million, grain output fell by 13.3 billion kg. While grain and cotton production slumped, peasants also cut back on pig and poultry production, preferring to slaughter their animals rather than hand them over to the government at the low state procurement prices. By the end of 1988, grain and other food shortages were causing free market agricultural prices to soar.

Political degeneration, loss of revolutionary discipline, and corruption of the party bureaucracy was a growing problem under Mao. For his part, Deng not only repudiated Maoist asceticism, but, by suggesting that “Marxism didn’t have all the answers,” sanctioned the cadres’ interest in increased consumption. The leadership’s emulation of Western bourgeois lifestyle and its promotion of economic egoism with the slogan “getting rich is glorious” gave the cadres the ideological go-ahead for self-enrichment Simultaneously, Deng’s “Open Door” to the West spread before the cadres the prospect of a hitherto undreamed-of new world of consumption.

With the relaxation of central controls, much of the party bureaucracy launched into a veritable orgy of corruption and nepotism—with the children of Deng Xiaoping, Zhao Ziyang and other top cadres leading the way. Innumerable cadres used their position to travel, sightsee, and feast at state expense. Many used their position and influence to go on junkets abroad, and to the Independent Workers Union smuggle televisions, cars, and other consumer goods back into the country.

Others, especially those in power in the distribution network, turned their authority to advantage to extort bribes and demand favors under the threat that they could “make things difficult” As one purchasing agent complained, today “nothing can get done without bribes. Not only do we have to try the backdoor for commodifies regulated through the market mechanism, but some planned materials also cannot be obtained if we don’t send presents or bribes.”

The heads of enterprises, sometimes in collusion with local tax officials, “cooked” the books, inflated production costs, evaded taxes, and misappropriated funds to build private luxury housing for themselves and other cadres, to set up “small treasuries” for the use of individuals and firms, even to set up foreign bank accounts. Others, particularly children of high-ranking officials (like Deng’s son, Deng Pufang) used their influence and access to state funds to setup their own private businesses (his in Hong Kong).

The reform of prices opened a particularly fruitful method of enrichment to well-placed cadres. In the view of China’s reformers, any wholesale freeing up of prices would have caused disastrous shocks to the economy by rapidly driving up prices. To bring in market prices more gradually, therefore, the reformers instituted a “two-tiered” system, in which state-set prices were retained for most goods, but in which supply and demand was allowed to determine parallel (usually much higher) market prices for the same items. Since free market prices often were double or several times their counterparts in the state sector, cadres who controlled the allocation of goods could make a fortune reselling state goods on the free market.

It is hardly surprising that workers and peasants, already hard hit by inflation, have been further angered by the additional burden of having to pay bribes to get better housing, or jobs, or get their children in school.

The End of the Capitalist Road

Some of China’s more extreme Friedmanite economists have recommended that the reformers should just go ahead and fully marketize the economy: sell off state industry, or large shares of it, to private owners, completely abandon price controls and abandon all state controls on allocation, investment funds, and let supply and demand determine production. They should, in short, create the conditions for the “market rationality” they have been preaching about by actually restoring capitalist property and class relations.

But this is not the path the reformers have chosen. From the very beginning of the reforms in 1978-1979, and at every point when the economy has threatened to get “out of hand”—that is, when market forces began to override the plan in 1979-81 and again in 198546–the leading reformers, and not just the so-called “conservatives,” stepped in to recentralize the economy.

In the fall of 1988, with inflation skyrocketing and the economy careening out of control, the reformers, headed by “liberal” Zhao Ziyang, cracked down on economic liberalization with the most severe economic anti-market recentralization to date. The central government imposed ceilings on all investment projects, postponed numerous joint ventures, recentralized foreign trade, sharply restricted free markets, and abolished some two-tiered prices.

But in the short run, retrenchment made things even worse. With investments cut back and projects called to a halt, the evil of accelerating unemployment was added to those of inflation and corruption. Instead of freeing up prices to spur the peasants’ to produce, the liberals revived the old Maoist stratagem of requisitioning grain. According to the government’s own reports, since most peasants were resistant to delivering grain to the state at low state-set prices, “cadres at various levels adopted a variety of coercive means to collect grain and fulfill their tasks,” forcing peasants to accept IOU’s or breaking into houses and seizing grain.

Not surprisingly, the peasants responded in kind when they could, hiding their grain, posting lookouts for grain-collecting cadres, beating up and even killing some tax collectors. This, then, is the prelude to China’s spring revolt.


Recentralization of the economy, repression of the students and the workers’ unions, and coercion of the peasants has, temporarily, saved the day for the bureaucratic ruling class. But recourse to these methods can hardly pose a long-term solution to the crisis. Regardless of what the current leadership says, and regardless of what the next crop of “moderate reformers” may say, market socialism is dead in China. Market reform turned out to be incompatible with the bureaucracy’s need to control the economy and, as a result, has been overridden.

Given the central government’s massive fiscal crisis, there is virtually no hope of reviving farm output through increased government economic incentives. The likely prospect for the near future is growing food shortages, quite possibly triple-digit inflation and, in the event of more state grain seizures, intensified peasant resistance. Likewise, given the fiscal crisis, the reformers have no hope of reviving flagging worker morale and productivity by hiking wages, as they did in the early-’80s.

The reformers will undoubtedly have to impose stringent austerity measures, and these will no doubt provoke increased worker resistance, strikes, and almost certainly, new efforts to form independent trade unions. Almost certainly, therefore, Deng (or whoever) will be forced to turn to the Western banks for a bailout, as did Jaruzelski.

And no doubt, the banks—after a decent interval—will, as in the Polish case, be forthcoming with new loans, rationalized of course “to help the Chinese workers.” But further debt will, as has been seen in the 1k1ish case, only deepen the crisis, because the problems are, in the last analysis, systemic, intractable and irresolvable within the existing system of property and class relations.

September-October 1989, ATC 22