Deng Xiaoping and the Transformation of China (86 page)

In China's effort to study foreign economic experiences, no institution played a role that could compare in importance with that played by the World Bank, and in no other country did the World Bank play a role as large as it did in China.
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In 1980, when mainland China replaced Taiwan as the Chinese member of the World Bank, the president of the bank, Robert McNamara, visited Beijing to pave the way in developing the new relationship. McNamara, declaring that the World Bank would not be a truly World Bank without China, resisted pressures from the U.S. government to slow the entry of China into the bank. This independence on McNamara's part gave Chinese officials, who at the time were still worried about nations using China for their own purposes, more confidence that the World Bank did not represent the interests of any single country.

When McNamara met Deng, Deng told him that in its future dealings with the World Bank, ideas would be much more important for China than money. He said that modernization in China was inevitable, but with the cooperation of the World Bank, China could grow faster. And when McNamara and Deng went on to discuss the selection of the chief representative for the bank in China, Deng stated that he didn't care where that person was from; he simply wanted the best person for the job.
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After Deng's meeting with McNamara, China's relations with the World
Bank moved ahead quickly; just one month later, on May 15, 1980, China was formally voted into member status. Most member countries of the World Bank had joined in 1945 when the bank was founded, and the World Bank's knowledge of each member country had developed gradually. But because China was such a large country with no previous relationship with the bank until it replaced Taiwan, to make loans to China the bank first needed a much better understanding of the Chinese economy. In October 1980, the World Bank did something it had never done for any other country: it assembled and dispatched to China for a three-month study tour a team of thirty experts composed of many of the world's leading specialists on the Chinese economy, as well as agronomists, engineers, and specialists on health and education. A counterpart team of Chinese experts worked with them; one on the Chinese team was Zhu Rongji (later, premier), who volunteered to accompany them because he saw it as a learning opportunity.

Deng's personal endorsement helped overcome the fear among Chinese team members that they might later be accused of passing on secrets to foreigners. To enhance trust and reduce suspicions of hidden motives, the World Bank team while in China held no meetings to which the Chinese counterpart members were not invited. These Chinese team members, along with their superiors in Beijing, were entrusted with the daunting task of opening up their country; they were eager to think through the unique issues that China needed to face. The World Bank team, aware of its historic role in the opening of China and its special opportunity to learn about China, sought to establish a good long-term professional relationship. This was by far the largest country study the World Bank had ever undertaken. The bank, not then yet as large and bureaucratic as it later became, provided great leeway for its team to adapt to local needs. Edwin Lim, a Mandarin-speaking Philippine-Chinese with a Harvard Ph.D. in economics and World Bank experience in Southeast Asia and Africa, was appointed the bank's chief economist on China shortly after McNamara's visit. He served as the de facto head of the World Bank team on the ground in 1980; beginning in 1985, when the bank opened its Beijing office, and until 1990 he was the first head (“Resident Representative”) of the World Bank in China. Lim described the special relationship between China and the World Bank in the 1980s as “made in heaven.”
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During the three months in late 1980 when World Bank team members were in China, they talked with Chinese officials in charge of the economy and visited local sites. Team members, although hosted by the Ministry of
Finance, met officials in all major economic ministries, including both the “builders” and the “balancers.” Officials from the State Planning Commission and State Statistical Bureau played important leadership roles on the Chinese team. The Chinese team had not been trained in Western economic theory, but its members all had experience in managing planned development. The Western specialists, many of whom had worked in other developing countries, tended, like their Chinese hosts, to pay more attention to what was happening on the ground in the institutional settings than to the theoretical explanations offered by academic economists.

Upon its return, the World Bank team, drawing on the joint study in China, wrote a report on the history of the Chinese economy since 1949, describing Chinese policies and endeavoring to distinguish which areas would and would not be amenable to policy changes. The three-volume report was discussed with the Chinese as soon as it was completed in March 1981, and in June, it was presented to the board of the World Bank to provide perspective as the bank made decisions about its first loan to China. The report was read by Zhao Ziyang and other high-level party officials, as well as by Chinese specialists—after approval by the Chinese authorities, it was published for general circulation.

A central issue from the beginning was how to keep the Chinese economy functioning while making the transition to a more open system that had fewer controls. The bank report suggested that more attention should be paid to the use of prices to promote both more efficient investment decisions and greater flexibility in promoting foreign trade. It recommended allowing more internal migration to make possible greater efficiency in the use of labor. But it also advocated that changes in prices and other reforms should not be made too quickly; the team did not recommend comprehensive rapid market liberalization or privatization. For the Chinese, participation in the study gave them an opportunity to understand the perspective of economics professionals with development experience from around the world and to look at the Chinese structure afresh.

Given Deng's emphasis on training, it is not surprising that the first grant China negotiated with the World Bank after becoming a member was for assistance in higher education. In addition, the World Bank set up specific programs to help train Chinese specialists who would work on various economic issues. In this, China cooperated with the bank's Economic Development Institute, which sponsored courses each year to train personnel. The bank also helped establish, with funding by UNDP (United Nations Development
Programme) and later the Ford Foundation, a program to train Chinese economists for one year at Oxford University. Between 1985 and 1995 nearly seventy economists were trained in the program, most of whom later held key positions guiding the Chinese economy; the Ford Foundation also supported study in the United States by Chinese economists. As a further aid to China, the World Bank used its incomparable network of contacts with economists around the world to respond to Chinese requests to meet with specialists in various areas.

In the early 1980s, the Chinese officials responsible for adapting their economic system had initially looked to Eastern Europe for reform models. First they fixed their attention on Yugoslavia, but by 1983 their interest had focused on Hungary's “comprehensive reforms” that linked together all the plans in the various sectors. Two Chinese delegations visited Hungary to study its reform programs, and Hungary sent a team to China to explain its reforms. Those familiar with Hungarian issues suggested that China make wider use of economic controls to replace administrative controls, further decentralize authority to the localities, and permit more diverse forms of ownership. Like the Japanese, the Hungarians were using a kind of “indicative planning” in which targets were set; they had stepped away from mandatory planning strategies that required specifying ahead of time precisely which inputs were needed from a broad range of sectors.
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Yet at the same time, some Chinese officials were beginning to have doubts about the applicability of East European models to the complex problems they faced.

In August 1982, in response to a Chinese request, the World Bank assembled at Moganshan (Mount Mogan, in Zhejiang province) leading specialists from Eastern Europe and elsewhere who had the theoretical perspective and practical experience to discuss overall problems in the reform of socialist systems. The Chinese side was headed by Xue Muqiao; leading East European economists from Poland, Czechoslovakia, and Hungary, including Włodzimierz Brus, presented their views. The discussions and post-meeting visits by foreign consultants to local areas in China greatly strengthened doubts about the suitability of the Eastern European reforms as models for China. The Eastern Europeans had concluded that if they only carried out partial reforms it would build up resistance to future reforms; therefore, they had to leap to full-scale reforms all at once. In China the rural reforms were already having a positive, seemingly irreversible effect so it was not necessary to try to leap to full-scale reforms all at once. After the conference, as the Eastern Europeans traveled to various localities in China, they came to agree with their
Chinese hosts that the Eastern European model of introducing bold reforms all at once would not work in China because of its huge size and great variations in conditions. The only realistic way for China to proceed was to open markets and decontrol prices step by step, and then to allow gradual adjustments. The views of the conference participants were passed on to Zhao Ziyang, who agreed with their conclusions, and then on to Deng, who supported Zhao's views about reforming step by step rather than all at once.

When A. W. Clausen, who replaced McNamara as president of the World Bank in 1981, visited Beijing in 1983, Deng told Clausen that he had found the World Bank's 1981 report interesting and useful. He then invited the World Bank to assess the feasibility of his goal of quadrupling output by 2000. The issue of speed seemed central to Deng; he wanted to grow as fast as possible, but to avoid the dangers of the Great Leap and because he was concerned that as before Chinese officials might be excessively optimistic, he wanted to hear outside opinions. Deng expressed his desire for the World Bank to undertake another study, one that would consider alternative options based on global experience to realize this goal over the next two decades. In response to Deng's request, the bank sent a second comprehensive mission to China in 1984, again led by Edwin Lim. On the basis of research by Chinese collaborators, World Bank staff members, and consultants, the World Bank published a report in 1985 that played an important role in shaping the Seventh Five-Year Plan (1986–1990).
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The World Bank study confirming that quadrupling economic output in two decades was feasible undoubtedly reassured Deng. The World Bank concluded that China could reach the goal either by concentrating on industrial production or by promoting more balanced development of other sectors, including services; China chose to concentrate on industry.

In 1984, another Moganshan conference of young and middle-aged economists, but without World Bank participation, considered issues such as price reform. The conference conclusions supported a dual-price system—that is, one set of prices for items on the state plan and another set of prices that would be more responsive to market changes. State-owned enterprises that met their quotas would be allowed to sell whatever other products they could make at market prices. As a result, many enterprises would likely orient their practices to the market, while still relying on set prices to provide some stability during the transition to increased use of markets. Some World Bank officials criticized the dual-price system because it created opportunities for officials at state companies to purchase goods at state prices and then to make
a quick profit by selling them in the market at higher prices. Higher-level Chinese officials, however, felt confident that they could keep the corruption under control with administrative punishments.
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In 1985, following Deng's political successes, Chinese officials again asked the World Bank to assemble experts for some guidance about making the transition from a controlled economy to one where markets played a still larger role. The Chinese and foreign experts assembled for a week on a ship, the
Bashanlun
, where they engaged in intensive formal and private discussions as the vessel passed the Three Gorges on its way from Chongqing to Wuhan. Among the Westerners assembled by the World Bank was Nobel laureate James Tobin, who discussed the possibility of using macroeconomic measures, especially regulating demand, to control markets. Włodzimierz Brus and János Kornai, who was in China for the first time, spoke of Eastern European problems in adapting a central planning system. By the end of the conference, Chinese participants, already doubtful about the appropriateness of Eastern European models for China, were thoroughly convinced that the structural problems in socialist economies—such as the “soft budget constraints” that permitted firms to survive even with low performance and cycles of overproduction—were systemic problems in planning systems. This marked the end of the use of Eastern European reform models and greater acceptance of the role of markets.

The central issue, not well understood by Chinese before the conference, was how to introduce other monetary and fiscal controls that could regulate the markets, avoiding the extremes of cycles that Chinese had previously thought were endemic in capitalist systems. Tobin, in particular, helped convince the Chinese that they could use macroeconomic controls to keep a market system within bounds. The Chinese economists left the meeting with an increased readiness to continue expanding the role of markets in China while introducing macroeconomic controls.