In recent years, the debate regarding the Chinese economic miracle has been very much alive. Overall, criticism has outweighed praise, confirming how difficult it is for Westerners to separate Chinese economics from communist ideology. A modern way to approach the rapid modernization of China is to draw a parallel with the Industrial Revolution and to closely revisit the policies Deng Xiaoping implemented after the death of Mao in order to trigger a similar revolution. Indeed, as we shall see in this article, the similarities between China at the end of the 20th Century and England at the end of the 17th Century are many. Chinese economics is, therefore, not so far from Western capitalism.
Although twenty years of Maoism produced an annual growth rate of 4.4 percent and quadrupled China’s GDP1, at the end of the 1970s the Chinese economy was in chaos. State-owned enterprises had failed to absorb over 100 million young people entering the job market every year, and the agricultural sector struggled to feed the population.2
Mao’s paradoxical legacy was that Chinese socialism threatened to burst under the pressure of poverty and hunger because there were so many Chinese, perhaps too many. In other words: economic growth had been insufficient. Therefore, if the Marxist economic model was to survive, it needed to modernize. The question was: how?
During the same period, in the Eastern Bloc, real socialism had encountered similar limitations and was struggling to survive. Both systems, the Chinese and the Soviet, could not avoid looking westward, to the nations where the postwar economic miracle had brought peace and prosperity. Capitalism seemed to be synonymous with economic growth. However, in the following decade, the 1980s, only Chinese communism would show the intrinsic dynamism necessary to apply some of the principles of capitalism as a cure for the poor socialist growth performance. The doctor who prescribed such radical therapy was Deng Xiaoping.3
Deng, who took over the reins of China after the death of Mao, was an astute and pragmatic politician; already at the beginning of the 1970s he had sensed that foreign capital represented the only hope for the survival of Chinese socialism. He also understood that, to attract it, China had to offer something special in exchange: cheap labor.
On paper, this approach, which eventually gave birth to a hybrid economic system, capi-communism, seemed paradoxical: to create in China the conditions to enable foreign industrialists to exploit Chinese workers. The justification of this carefully tailored strategy sounded even more absurd: the only way to save the socialist system was to apply in communist China the most basic capitalist principle: exploitation of resources. But economic history is full of paradoxes— and this one worked.
Deng’s plan succeeded, and also, one must add, because of exceptional international circumstances: delocalization had made off-shoring and out-sourcing much easier and profitable. Thus, foreign industrialists could easily move factories to China and quickly realized that by doing so they could drive down both labor and manufacturing costs. Profits rose in consequence. Thus began the race to the East.
Globalization was, for the Chinese miracle, the equivalent of the invention of the spinning jenny for the Industrial Revolution, a radical change. And as had happened in England two centuries before, initially the biggest winner was capital, which in China was of foreign origin. From 1995 to 2003, Chinese exports increased from 121 to 365 billion dollars, of which more than 65 percent came from the Chinese subsidiaries of foreign companies. Foreign businesses, which included big names such as Apple Computers, therefore, drove the tremendous growth of the “Made in China”. And the profits ended up swelling the GDP of rich nations.4
Dismantling the Collective Farms
In the eighteenth and nineteenth centuries, a combination of factors – not just the invention of the spinning jenny – created a new balance of trade, which projected England at the center of a new industrial world. These factors were the advent of the steam engine and the Enclosure Acts which forced thousands of farmers to abandon their fields and seek work in the factories. At the end of the twentieth century, an analogous cocktail of extraordinary events revolutionized the global manufacturing system, putting China at the core of a new globalized industrial world. The ingredients were: the crisis of the Chinese agrarian economy – which forced China’s government to introduce internal labor mobility in the country, in turn giving rise to large-scale migration; international deregulation – which after the fall of the Berlin Wall liberalized world markets; and a long period of low oil prices – which during the 1990’s lowered the cost of transporting goods. It is the first of these phenomena that interests us here.
In 1958, the Chinese government had established a registry that divided citizens into urban and rural residents. This status was permanent; that is, it was forbidden to move between countryside and city or vice versa. This division reflected the so-called “Maoist economic order”. In the country, production was centered on the collective farms; in the city, on state-owned industry. These two systems ran on parallel tracks and never crossed.5
Built along Marxist-Leninist lines, this paradigm failed to lift China from the poverty into which it had plunged during the colonization of the preceding century. Although after the revolution, in the 1950s, Maoist economic policy did boost GDP, communism, and in particular collective farming, lacked the incentives necessary to make the great leap and lift China out of the subsistence economy in which it had been stuck since colonization. By the end of the 1970s the situation had degenerated and agricultural and industrial production could not any longer even provide for a sustenance economy.
Deng decided to change Mao’s economic order starting with the countryside. Between 1979 and 1981 he dismantled the collective farms, the old warhorse of Maoist Marxism. Farmers were permitted to raise pigs and poultry privately. It was the first step toward the institution of private property. Immediately afterward, Chinese farmers started to rent small plots of land and to cultivate what they wanted to, i.e. products that they would then sell directly at the markets.6
Everybody welcomed these changes, which in only two years shattered one of the cornerstones of Maoism: the collective farms. No one bent down to gather the shards; even the ultra-conservative wing of the Party was happy with the results obtained.
The dismantling of collective farms, in fact, immediately triggered an increase in agricultural production, making more goods available in a country plagued by chronic food shortages.7 It was at this point in time that the mobility of labor entered the scene. Farmers were permitted to travel between villages and towns to sell their crops. Soon it became possible to work outside of one’s own village. And for those unfortunate enough to have been born in the countryside, a new series of opportunities opened up – they could become mangliu or migrant workers and sell their labor in factories owned by foreign capitalists.
Labor migrations changed China’s future, just as centuries ago the Enclosures had radically transformed England’s.
While collative farming was being dismantled, Deng introduced a series of reforms to modernize the industrial sector. In 1978 he created the first Special Economic Zone in Shenzhen to attract foreign investors. Here the rules of production imposed by Chinese communism, and therefore also by state-owned enterprise, melted away, leaving space for a capitalist-style industrial system, with considerable incentives for outside entrepreneurs. Among them was an endless cheap labor force originating from the Chinese rural reality. Thus the migrant workers became the backbone of the industrial reforms.8
In the initial phase, migrations were tightly regulated. In the early 1980s, anyone wishing to try their luck in the Special Economic Zones had to apply for a permit in their own village and specify the destination. It was only in the second half of the 1980s that the situation changed, making it easier and easier for migrants to move and obtain authorizations. Thus a new season began: in 1990, there were already six million Chinese migrants; in 2003, when the government abolished the temporary identity cards, the numbers grew further; in 2008 there were over 200 million laborers on the move. What the world has witnessed in three decades is the largest migration in human history.9
Naturally Deng had to fight to implement all these reforms. The violent debate inside the Chinese communist party about the creation of the first Special Economic Zone in Shenzhen well illustrates the tension between futurists (Deng’s supporters) and dogmatists (those who remained bound to Marxism-Leninism).10
Though there was plenty of cheap labor available, Shenzhen lacked the infrastructure needed to conduct this experiment in “market Marxism.” The state did not have the money to finance its construction. So Deng proposed an alternative: license the land to foreign industrialists and use these proceeds to fund the creation of infrastructures.
The dogmatic wing violently opposed the idea by using the example of Macao. Licensed to Portugal in the sixteenth century as a place for fishermen to dry out their nets, the island was transformed into a Portuguese colony. It is one thing to reduce one’s labor force to a commodity, another to “mortgage” the land, even if only for a limited period:
this was the main opposition’s message. It took Deng months to put down the revolts inside the CCP and to defend himself against those who called for his resignation. The opposition was as intense on the Right, among the conservatives, as on the Left among the Marxist-Leninists. The idea of leasing Chinese land was as shocking to the Left as it was to the Right.
In the end, as often happens in China, common sense won out; given that the country lacked the economic and financial muscle to modernize on its own, there was no alternative but to make use of foreign capital. Thus the land was licensed to foreigners.11
Despite the fierce opposition, Deng’s vision of the future and policy was accepted because ultimately he was able to change the Party and restructure it according to new principles. One could say that he was able to set in motion an ideological earthquake in the minds of CCP members.
In the 1980s the ruling Chinese class embraced the economic problems of communism, a remarkable decision especially given that during the same decade the Soviet Nomenclature became more and more detached from reality. Chinese men and women born during the century of foreign humiliation, who had seen the country rise again after the shameful experience of colonialism thanks to Marxism, people such as Deng who had been ousted from power during the Cultural Revolution, reinvented themselves using as a tool the principles of the market economy. Deng suggested that they should study the example of the Asian Tigers: Singapore, Hong Kong, South Korea and Taiwan, who had for more than thirty years been a real thorn in China’s side.
This might not seem like much, but we should ask ourselves whether Western democracy today would be willing, for the good of the country, to so completely question itself, and what government would have the courage to distance itself politically to such an extent, not just from a precedent of the same political stripe, but from its core beliefs and principles. When Deng proposed abolishing the collective farms, the cornerstone of Maoism, and rent out Chinese land to foreigners, this is precisely what he did.
The Chinese Diaspora Returns Home
Winning the party support was hard, equally difficult was attracting foreign capital. At the end of the 1970s Mao still cast a shadow over every sector of the economy and the wounds of the Cultural Revolution remained open. What’s more, China was a mystery for the West, which remained unsure of where or how to situate it in terms of the bipolarity of the Cold War. Nixon and Kissinger’s 1972 diplomatic opening notwithstanding, the country was still a source of fear, and no one felt up to doing business with the Maoists.
Thus, the first investors to venture into the Special Economic Zones came from Taiwan, from Hong Kong, from South Korea. They were Chinese and foreign at the same time. They belonged to the country’s diaspora, but their story was very different from that of the labor-ers they used. They were not communists; they knew the capitalist system and what kinds of products the Western market preferred. For them, the role that China would play in international commerce was that of producing, at rock-bottom prices, the goods that Western consumers sought to buy on a daily basis. In their eyes, the army of Chinese laborers that they “employed” had neither name nor identity; they represented, rather, only one of the means of production, a slightly revised and updated version of the proletariat described by Marx. And the workers knew this too.
Naturally, these entrepreneurs pre-ached and practiced a coarse brand of capitalism, forbidden in their own countries, hearkening back to the cruelties of the Industrial Revolution. Thus, visiting Shenzhen during the 1980’s and 1990’s was like traveling back in time, an economic déjà vu. A canopy of smog covered the Pearl River delta, the tropical region of Guangdong, where the factories spewed poison into the air day and night. The foreign-owned factory-dormitories swallowed up hundreds of millions of farmers, like their English ancestors. They lived there in what were often described as disastrous hygienic conditions, working an average of twelve hours a day.
Off-shoring and out-sourcing to China ensured that the barbaric practices in use in the factories of South Korea, Hong Kong, and Taiwan in the 1960s and 1970s, and since abolished through modern labor legislation in these countries, would in the next two decades be transplanted to China.12 We will find them again in the following decades in Vietnam and Indonesia, wherever the industrial production of globalized capitalism has delocalized in the meantime, pursuing lower and lower wages and more permissive legislation.
This was the price that the Chinese leadership and the migrant workers willingly paid to modernize.
The Asian Tigers
As mentioned, China drew inspiration from the success of the Asian Tigers. These are not democratic countries, but societies in which the rule of law is strong. The Asian Tigers figured out how to create a new type of government, the development state, in which legitimacy is not connected to democratic elections but to the ability of the leadership to sustain uninterrupted economic growth.13
Deng took inspiration from these countries to resolve a key dilemma. At the end of the 1970s, he had realized that the class struggle belonged to the past, to Maoism, which had used it as an instrument to redesign national identity. He didn’t know what to make of this weapon; he needed different instruments to redesign China. He chose the tools of the market economy, which the Asian Tigers had been using for decades. Only in this way could China find the way to bring profit back to the center of the economy. This was not an easy task in a communist country.
The hard-to-swallow consequence of this decision was economic inequality, heresy in a communist society. In order to make it more palatable to the Chinese, Deng coined new mottos, diametrically opposed to the Maoist ones: “Let some people get rich first, so they can help others do the same.”
This formula worked well and the Chinese abandoned the class struggle for that of the market, even at the risk of being discriminated against economi-cally; thanks to the profit motive, everyone hoped to be among the first to enrich themselves.
But the success of Deng’s formula rested upon the eagerness of the population to achieve a radical change, one able to destroy the rigidity of the Maoist system, and upon the endemic pragmatism of the Chinese culture. “Planning and market forces are both ways of controlling economic activity,” Deng affirmed in the phrase that sums up his highly pragmatic philosophy.14 But they are not opposing theories: socialism does not exclude the market economy because “whatever promotes the socialist economy is socialist.”15 This is the motto that allowed the Chinese Communist Party to survive the disintegration of the ideology defeated with the collapse of the Berlin Wall.
History proved Deng right. Economic theory only provides instruments with which to guide the economy, politics has to use them; the tools of Marxism do not exclude those of the free market, and vice-versa. The error of the USSR was precisely their dogmatic interpretations of Stalin and Marxism-Leninism, a rigidity then exported everywhere under the banner of the hammer and sickle.
The remarkable modernization of China seems intimately linked to Deng Xiaoping’s vision of the future. Although officially China is still a communist country, its modernization took place following a well-known script. Capi-communism, a hybrid system in which a communist economy becomes capitalist by introducing into the equation a profit motive, is emerging as the most recent and modern version of capitalism. But it would be wrong to look at the last three decades of reform in China as a separate model from the one studied by the Classical economists. Deng did not reform capitalism, he adapted communism to it. Western capitalism should not look at China as something foreign but as an evolved version mutant of itself. This could help us to isolate our mistakes by using as a benchmark the success of Chinese economic innovation.
About the Author
Loretta Napoleoni is a leading eco-nomist and bestselling author of Rogue Economics and Terror Incorporated. Her new book, Maonomics – Why Chinese Com-munists Make Better Capitalists than We Do, is out now.