Deng Xiaoping and the Transformation of China (87 page)

Since inflation had become severe by the time of the conference, the Chinese quickly worked to apply the main lesson learned from the conference: how to use macroeconomic controls to tame it. Premier Zhao Ziyang read the conference report, accepted the conclusions, and was in charge of implementing them, with Deng's blessing.

In the early 1980s, while Chinese leaders were exploring the experiences of Eastern Europe and making use of World Bank advisers, they were also studying Japanese experiences. Although Japan was a member of World Bank, Japanese efforts to work with China were generally done bilaterally and were
conducted on a larger scale than China's relations with any other country. Although China was also interested in the Taiwan and South Korea experiences in modernization, mainland China did not have direct relations with them until the late 1980s so their experiences in the early 1980s did not play a major role in shaping Chinese views.

Following Deng's visit to Japan in October 1978, Okita Saburo, who was also an economic planner experienced in helping Asian countries with their economic development, arrived in China in January 1979 to discuss with Gu Mu plans to set up a Japanese advisory group and, more broadly, to consider the role that Japan might play in China's development. Okita, born in Dalian, Liaoning province, had studied engineering and had played a central role in Japan's Economic Stabilization Board, which had guided the Japanese economy after World War II as the country moved away from wartime economic controls and struggled with severe shortages. After 1955 the Economic Stabilization Board was absorbed into the Japanese Economic Planning Agency, which provided indicative planning for the Japanese economy. Okita arranged with Gu Mu that he would lead a Japanese team of experienced bureaucrats to hold a series of annual meetings with Chinese officials, led by Ma Hong, as Chinese officials were making the transition away from tighter controls over the economy. When Prime Minister Ohira visited China in December 1979, Okita, then foreign minister, accompanied him. Deng jokingly asked Okita if he could still continue as an adviser to China even though he was foreign minister. Indeed, the joint meetings did end briefly while Okita was foreign minister, but they resumed in July 1980 after he left office. The Japanese advisory team that joined Okita included Shimok
be Atsushi, former leader of the National Land Agency, who told the Chinese how the Japanese government had helped promote regional expansion in a balanced, sustainable way by building institutions and ensuring that necessary resources were available.
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The advisory group continued to meet with Chinese economic officials until 1992.

The two Chinese organizations built on the Japanese model in early 1979 were a Quality Control Association and an Enterprise Management Association. They established training programs in Beijing for regional officials, who in turn set up training programs for factory managers in their respective regions on industrial management, introducing ideas they had learned from Japan.
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It is difficult, of course, to measure the effect of such training programs, but for factory managers and workers who had been operating at a very slow pace, these models and Chinese officials' strong encouragement
that they follow them did stimulate greater efficiency and the improvement of quality controls.

In the 1980s, Japanese gave more aid and built more industrial plants in China than did citizens from any other country. The Japanese factories built in China set standards by which China measured its progress in achieving efficient industrial production. For the study of modern science, the Chinese looked overwhelmingly to the United States. But more new machinery to build assembly lines in Chinese factories came from Japan than from anywhere else. Prime Minister Ikeda's income-doubling plan for the 1960s became the inspiration for Deng's goal of quadrupling the gross value of industrial and agricultural output in the 1980s and 1990s. And from 1974 on, Deng met more delegations from Japan than from any other nation.

Delegations of Chinese economic officials visiting Japan also had been impressed with how consumer demand had become the driver of factory production, leading to a reduced role for state wholesalers as distributors of industrial products. As a result, Chinese factories producing consumer goods were directed to consult directly with local commercial outlets about which products consumers wanted to buy.
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Chinese officials were especially impressed with how Japan's Ministry of International Trade and Industry (MITI) analyzed what was needed in each sector for Japanese firms to have the resources and technology to compete in world markets—and then let the firms themselves lead the way in creating the products that would lead to rapid growth for the country as a whole. During his visit to Japan, Deng had marveled at not only the amount of planning that goes on within Japanese enterprises, but also how the planning was much more flexible and responsive to market changes than was the planning in China. MITI gave encouragement and support to leading companies, which then competed fiercely for market share.

China's readjustment policy of 1980–1981, which resulted in the cancellation of many contracts with Japanese companies, had slowed down cooperation between Japanese companies and their Chinese counterparts (see
Chapter 15
). But by 1982 when the most difficult readjustment steps had been completed, Sino-Japanese relations had revived. In late May and early June 1982, Zhao Ziyang visited Japan not only to seek further Japanese investment and technological advice, but also to restore Japanese interest in the Chinese economy.
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The Japan External Trade Organization (JETRO) under MITI had several offices in China that conducted research on the Chinese economy, helped Japanese companies locate sectors where there were business
opportunities, and provided training to Chinese managers and technicians in various industrial sectors.

By the mid-1980s huge changes were occurring because of the introduction of imported machinery. What might be called “handicraft heavy industry,” with bare-backed men throwing coal into steel furnaces and other men with heavy hammers pounding into shape the molten metal, was replaced by the Baoshan modern oxygen furnace with continuous casting and electronic controls. When modern assembly lines replaced men using lathes to shape machinery parts one by one, overall industrial output took off. Midlevel Chinese managers in joint-venture firms with foreign partners also contributed to the surge, by learning how to use modern electronic controls and by implementing the latest management techniques. Some of these managers used the skills they learned in foreign firms to start Chinese firms. And as computers were introduced in the West in the 1980s, they spread quickly to Chinese firms.

The cumulative effect of the new machinery and the new systems introduced by firms based in Japan, Europe, Hong Kong, and (beginning in the late 1980s) Taiwan had at least as much of an influence on economic growth as the system reforms introduced by Beijing officials. The new opening had, in effect, brought about an imported industrial revolution, information revolution, and consumer revolution.

Deng's Economic Offensive, 1984

When the economy was doing well, Deng had the political support needed to speed up reform and opening. But when the economy encountered problems such as inflation, Chen Yun and his cautious balancers gained the political leverage to enable them to tighten the reins on planning and inflationary pressures. In 1982 and 1983 as the economy began to grow more rapidly, and inflation was under control, the atmosphere favored Deng. Not only was grain production going up, but textile production, an important part of consumer industry, increased so markedly that cloth rationing was ended. Per capita rural incomes, according to official figures, rose from 134 yuan in 1978 to 355 yuan in 1984.
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At a Central Party Work Conference, held June 26 to June 30, 1983, Deng spoke out strongly in favor of increasing rates of investment more than the rates advocated by Chen Yun and the State Planning Commission.
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In December 1983, impatient with the cautious planners, Deng said that one cannot
anticipate scientifically exactly what will happen. If one thought only about stability, it would be hard to make progress. That is, if the Chinese did not have the spirit to break new paths
(chuangjin)
, then they would not be able to quadruple the output of the economy.
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In the favorable atmosphere, Deng was ready to expand the opening of other coastal areas. In January 1984 he traveled to Guangdong and Fujian, where he announced that the policy supporting special economic zones (SEZs) had proved a success (see
Chapter 14
). The TV cameras conveying the impressive construction that was taking place in Shenzhen to the rest of China laid the basis for public acceptance of the opening of other coastal areas later in the year.

In May 1984, the State Council issued the official document “On Regulations for Further Expanding the Autonomy of State-Owned Enterprises.” The development of plans to grant more autonomy to state enterprises was done largely by Zhao's staff at the think tanks. The document advanced the use of macroeconomic controls, including prices and taxes, to control economic activities. Zhao, a longtime advocate of granting greater flexibility to enterprises, also expanded further their freedom to engage in the markets once their official quotas were met.

In June 1984 Deng began using the term “socialism with Chinese characteristics,” a grand but marvelously vague expression that perfectly fit Deng's basic approach: stretch the acceptable ideological framework to allow the country to pursue policies that worked. Deng used the term to promote his goal of expanding markets and launching comprehensive reforms in the areas of industry, commerce, science, and education.
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Following the 1984 Moganshan conference of economists (held September 3 to September 10), the state enterprises, using the dual-track price system, were allowed to expand the use of market prices. Consequently executives increasingly focused their energies on markets, which offered their firms more profits, and in this way learned about markets even while the planning system still provided a measure of stable output for the economy.
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In the ongoing tug-of-war between reformers and conservatives, the reformers who wanted to expand the role of the market were making progress.

In the entire Deng era, the peak of popular support for Deng was reached on National Day, October 1, 1984, when Peking University students lined the streets and unfurled a banner that read, “Xiaoping, ni hao” (hello, Xiaoping), an informal, friendly greeting. The crowds lining the streets spontaneously joined in with “Xiaoping, ni hao.” These words and this scene were in
sharp contrast to the orchestrated reverential “Long live Chairman Mao” slogans that the Red Guards had shouted seventeen years earlier in response to orders from above. Instead, these students were spontaneously expressing the sentiments of people throughout the country who felt grateful to Deng for ending the disorder of the Cultural Revolution, for solving the grain shortage, for improving their lives, and for providing leadership that at last put China on the right path. Just a week earlier, Deng had concluded an agreement for the peaceful return of Hong Kong.

Less than three weeks after National Day, Deng, taking advantage of the momentum, was able to get approval at the Third Plenum of the 12th Party Congress to pass the “Decision on the Reform of the Economic Structure,” the most comprehensive statement of Chinese economic reform to date. The declaration included a broad theoretical explanation as well as an outline of the measures that would pave the way for an overall expansion of markets. The decision incorporated Deng's term “socialism with Chinese characteristics” and stated that the fundamental difference between socialism and capitalism is not whether the economy is planned or unplanned but whether there is public ownership. The goal of socialism is not egalitarianism but common prosperity. Zhao, who had guided the drafting of this document, achieved what Deng was seeking, a clear explanation of why socialism could encompass market reforms.

The “Decision on the Reform of the Economic Structure” announced that pricing by the state would gradually be reduced and the role of the market in pricing would be increased.
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The document gave a great boost to officials in various ministries who wanted greater flexibility. In his speech to the plenum in support of the document, Deng admitted that others had done the hard work in preparing the document and refining the wording, but that he approved of all parts of the final document. Deng said that the most important statement in the document was the phrase “respecting knowledge and talented people.” He repeated the basic argument for opening, saying that Chinese history shows that it makes great progress only when the country is open (a statement that became the basis for a television series that had an extraordinary, though controversial, effect when it appeared in June 1988: River Elegy
(Heshang).
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Deng then acknowledged that some problems inevitably arise from opening, but he expressed confidence that they could be solved.
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