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Deng’s Reform Program

What Deng labeled “Reform and Opening Up” was not only an economic but also a spiritual endeavor. It involved, first, the stabilization of a society at the edge of economic collapse and, then, a search for the inner strength to advance by new methods for which there was no precedent in either Communist or Chinese history.

The economic situation inherited by Deng was close to desperate. China’s collectivized agricultural structure was barely keeping pace with the needs of its massive population. Per capita food consumption was roughly the same as it had been in the early Mao period. One Chinese leader was reported to have admitted that 100 million Chinese peasants—the equivalent of nearly half the entire American population in 1980—went without sufficient food.¹⁷ The closing of the school system during the Cultural Revolution had produced calamitous conditions. In 1982, 34 percent of China’s workforce had only a primary school education, and 28 percent were considered “illiterates or semiilliterates”; just 0.87 percent of China’s workforce was college-educated.¹⁸ Deng had called for a period of rapid economic growth; but he faced the challenge of how to transform an uneducated, isolated, and still largely impoverished general population into a workforce able to assume a productive and competitive role in the world economy and to withstand its occasional strains.

The traditional tools available to those undertaking the reform compounded the challenge. Deng’s insistence on modernizing China by opening it to the outside world was the same kind of effort that had thwarted reformers since it was first attempted in the second half of the nineteenth century. Then the obstacle was the reluctance to abandon a way of life Chinese associated with what defined China’s special identity. Now it was how to overturn the practices on which all Communist societies had been operating while maintaining the philosophical principles on which the cohesion of the society had been based since Mao’s time.

At the beginning of the 1980s, central planning was still the operating mode of all Communist societies. Its failures were apparent, but remedies had proved elusive. In its advanced stage, Communism’s incentives were all counterproductive, rewarding stagnation and discouraging initiative. In a centrally planned economy, goods and services are allocated by bureaucratic decision. Over a period of time, prices established by administrative fiat lose their relationship to costs. The pricing system becomes a means of extorting resources from the population and establishing political priorities. As terror by which authority was established eases, prices turn into subsidies and are transformed into a method of gaining public support for the Communist Party.

Reform Communism proved unable to abolish the laws of economics. Somebody had to pay for real costs. The penalty of central planning and subsidized pricing was poor maintenance, lack of innovation, and overemployment—in other words, stagnation and falling per capita income.

Central planning, moreover, provided few incentives to emphasize quality or innovation. Since all a manager produced would be bought by a relevant ministry, quality was not a consideration. And innovation was, in effect, discouraged lest it throw the whole planning edifice out of kilter.

In the absence of markets that balanced preferences, the planner was obliged to impose more or less arbitrary judgments. As a result, the goods that were wanted were not produced, and the goods that were produced were not wanted.

Above all, the centrally planned state, far from creating a classless society, ended up by enshrining class stratification. Where goods were allocated rather than bought, the real rewards were perquisites of office: special stores, hospitals, educational opportunities for cadres. Enormous discretion in the hands of officials inevitably led to corruption. Jobs, education, and most perquisites depended on some kind of personal relationship. It is one of history’s ironies that Communism, advertised as bringing a classless society, tended to breed a privileged class of feudal proportions. It proved impossible to run a modern economy by central planning, but no Communist state had ever been run without central planning.

Deng’s Reform and Opening Up was designed to overcome this built-in stagnation. He and his associates embarked on market economics, decentralized decision making, and opening to the outside world—all unprecedented changes. They based their revolution on releasing the talents of the Chinese people, whose natural economic vitality and entrepreneurial spirit had long been constrained by war, ideological dogma, and severe strictures on private investment.

Deng had two principal collaborators on the reforms—Hu Yaobang and Zhao Ziyang—though he later fell out with both when they attempted to carry the principles of economic reform into the political field.

One of the youngest participants in the Long March, Hu Yaobang emerged as a Deng protégé and later fell with Deng in the Cultural Revolution; when Deng returned to power, he elevated Hu to some of the highest leadership posts in the Communist Party, culminating in his appointment as General Secretary. During his tenure, Hu was associated with relatively liberal stances on political and economic issues. With his forthright manner, he consistently pushed the limits of what his party and society were willing to accept. He was the first Communist Party leader to appear regularly in Western suits and provoked controversy by suggesting that Chinese abandon chopsticks for knives and forks.¹⁹

Zhao Ziyang, appointed Premier in 1980 and General Secretary of the Communist Party in January 1987, had pioneered agricultural decollectivization while Party Secretary in Sichuan. His success in producing a significant rise in living standards earned him the approbation of rural Chinese, as expressed in a pithy pun on his last name (a near homonym for the Chinese word “look for”): “If you want to eat grain, Zhao (look for) Ziyang.” Like Hu Yaobang, he was politically unorthodox. He was ultimately removed as General Secretary by Deng at the height of the Tiananmen crisis.

Deng and his colleagues were impelled, above all, by the shared rejection of the Cultural Revolution. All the leaders who governed China had survived degradation, and many of them physical abuse. The experiences of the Cultural Revolution permeated the conversation of Chinese leaders. I had a wistful conversation with Deng in September 1982 when I was in China on a private visit:

KISSINGER: I met you in April 1974 when you came to the 6th Special [U.N. General] Assembly and then with Mao and you did not speak a word.

DENG: Then in November of 1974 [in Beijing] we were the two persons who talked the most because that time Zhou was sick and I was in charge of the State Council, and in 1975 I was in charge of the workings of the Party and the government. Only for one year I was struck down. When we look back to this period of history it was very interesting. It was such setbacks which enlightened us. . . . Our experience from 1979 to 1981 proved that our policies are correct. You have not been here for 3½ years. Do you see any changes?

KISSINGER: When I was here last time—it may be due to my ignorance—I had the sense that the Chairman of the Advisory Commission [Deng] had many opponents in high position. . . .

DENG: . . . People abroad often wonder if there is political stability in China. To judge if there is political stability in China one must see if there is stability in areas where 800 million Chinese live. Today the peasants are most happy. There are also some changes in the cities but not as much as in the countryside. . . . [People] have greater confidence in the socialist economic institutions and greater trust in the Party and government. This is of far reaching significance. Before the Cultural Revolution the Party and the government had high prestige but the prestige was destroyed in the Cultural Revolution.

There was little experience on which to draw for the reform effort. When I returned in 1987, Zhao Ziyang gave me an advance explanation of a program to be submitted to the Party Congress that October. He emphasized that China was on a complicated and very long course of meshing capitalism with socialism:

A key question being addressed is how to rationalize the relationship between socialism and market forces. The report will state that planning for socialism should include use of market forces and not exclude them. Since [John Maynard] Keynes all countries, including capitalist ones, have practiced some degree of government interference in economic activities. The U.S. and South Korea are examples. Governments regulate either through planning or the market; China will use both methods. Enterprises will make full use of market forces and the State will guide the economy through macroeconomic policies. There also will be planning where necessary, but future regulation by planning will be one means and will not be viewed as the very nature of socialism.

In pursuing these objectives, Deng would move gradually. In Chinese terms, the leadership would “cross the river by feeling the stones,” charting a path in part on the basis of what worked. Mao’s continuous revolution was, in effect, jettisoned together with visions of utopian transformation. The Chinese leadership would not let ideology constrain their reforms; they would instead redefine “socialism with Chinese characteristics” so that “Chinese characteristics” were whatever brought greater prosperity to China.

To facilitate the process, China welcomed foreign investment, in part through Special Economic Zones on the coast, where enterprises were given wider latitude and investors were granted special conditions. Given China’s previous negative experience with “foreign investors” on its coast in the nineteenth century—and the prominent role this experience played in the Chinese nationalist narrative—this was an act of considerable boldness. It also showed a willingness—to some degree unprecedented—to abandon the centuries-old vision of Chinese economic self-sufficiency by joining an international economic order. By 1980, the People’s Republic of China had joined the IMF and the World Bank, and foreign loans were beginning to flow into the country.

Systematic decentralization followed. Agricultural communes were abandoned by encouraging the so-called responsibility centers, which, in practice, amounted to family farming. For other enterprises, a distinction was elaborated between ownership and management. Ownership would remain in the hands of the state; management would be left largely to managers. Agreements between the authorities and the managers would define the function of each, with substantial latitudes for managers.

The results of these changes were spectacular. Between 1978—the year the first economic reforms were promulgated—and 1984, the income of Chinese peasants doubled. The private sector, driven by the renewal of individual economic incentives, rose to constitute nearly 50 percent of the gross industrial output in an economy that had been ordered almost entirely by government fiat. China’s Gross Domestic Product grew at an average rate of over 9 percent annually throughout the 1980s—an unprecedented and nearly uninterrupted period of economic growth that continues as of this writing.²⁰

An effort of such scope depended, above all, on the quality of the officials charged with carrying out the reforms. This was the subject of an exchange with Deng in 1982. In response to my question as to whether the rejuvenation of personnel was moving in the desired direction, Deng replied:

DENG: Yes. I think I can say so. But it is not over yet. We have to continue. The agricultural problem has not been solved. We have to be patient. Two years ago we put Premier Zhao Ziyang and Hu Yaobang in jobs of the first line. Perhaps you have noticed that 60% of the members of the Party Committee are below age 60 and many are about 40.

KISSINGER: I have noticed this.

DENG: This is not enough. We have to make arrangements for return of old comrades. That is how we set up the Advisory Commission. I recommended myself to be the Chairman of the Advisory Commission. It means that personally I want to gradually shake off the official positions and put myself in the position of advisor.

KISSINGER: I have noticed some colleagues who are older than the Chairman and they have not joined the Advisory Commission.

DENG: That is because our party is very old. And it is necessary to keep some old people in the first line. But this problem will be gradually solved.

KISSINGER: I was told that the problem of the Cultural Revolution was that many people became cadres who did not have the same high level of education that is customary. Is that a problem and will you be able to deal with it?

DENG: Yes. Our criteria to select those to be responsible cadres are as follows: They must be revolutionaries. They must be younger. Better educated. Professionally competent. As I said, the 12th Party Congress has not only shown the continuity of the new policies but also insured continuity and the personnel arrangements have also assured continuity.

Five years later, Deng was still concerned with how to rejuvenate the Party. In September 1987, he gave me a preview of what he was planning for the upcoming Party Congress scheduled for October. Tanned, rested, and at eighty-three displaying undiminished vigor, Deng said that he would like to entitle the forthcoming congress “A Conference of Reform and Opening to the Outside World.” Zhao Ziyang would be given the key position of General Secretary of the Communist Party, replacing Hu Yaobang and necessitating the selection of a new Premier. Hu Yaobang had “made some errors,” Deng said—presumably in letting a set of 1986 student protests go too far—but he would remain in the Politburo (a distinction from previous periods when individuals removed from high office would also be removed from the policy process). No member of the Standing Committee (the executive committee of the Communist Party) would retain a dual position, speeding up the transition to the next generation of top officials. Other “senior people” would retire.

Deng would, he explained, now move from economic to political structural reforms. It would be much more complicated than economic reform because “it would involve the interests of millions of people.” The divisions of work between the Communist Party and government would change. Many Party members would have to change jobs when professional managers took over for Party Secretaries.

But where was the line that separated policymaking from administration? Deng replied that ideological issues would be for the Party, operational policy for managers. Asked for an example, Deng indicated that a shift of alliance toward the Soviet Union would be clearly an ideological issue. From my many conversations with him, I concluded that this would not be a frequent subject. On further reflection, I wonder whether by merely broaching such a previously unthinkable concept, Deng was not serving notice that China was weighing tacking back to greater freedom of diplomatic maneuver.

What Deng was proposing politically had no precedent in Communist experience. The Communist Party, he seemed to suggest, would maintain an overall supervisory role in the nation’s economy and political structure. But it would steadily withdraw from its previous position of controlling the detailed aspects of Chinese daily life. The initiatives of individual Chinese would be given wide scope. These sweeping reforms, Deng maintained, would be carried out “in an orderly manner.” China was stable now, and “must remain so if it is to develop.” Its government and people “recall [ed] the chaos of the Cultural Revolution,” and they would never allow it to recur. China’s reforms were “unprecedented”; this would inevitably mean that “some mistakes will be made.” The vast majority of people supported the current reforms, he said, but “courage” and “prudence” would be required to ensure their success.

As it turned out, these were not abstract issues: Deng would soon be forced to confront the tensions inherent in his program of “orderly” reform. While most of the world was marveling at the surging Chinese economic growth rate, the tens of thousands of students being sent abroad, and the changes in the standard of living inside the country, there emerged significant indications that new currents were churning within.

The early stages of the reform process tended to merge the problems of planning with those of the market. The attempt to make prices reflect real costs inevitably led to price increases, at least in the short term. Price reform caused a run on savings to buy up goods before prices went even higher, creating a vicious cycle of hoarding and greater inflation.

In a September 1987 meeting, Zhao Ziyang outlined a shift toward reliance on market forces for about 50 percent of GDP. Beyond the technical economic issues, this required a substantial recasting of the command system. There was to be greater emphasis, as in European states, on indirect control of the economy through manipulation of the money supply and intervention to forestall depression. Many central institutions in China would have to be dismantled and the functions of others redefined. To facilitate this process, a review of Party membership and a streamlining of the bureaucracy was ordered. Since this involved thirty million individuals and was carried out by the very people whose activities needed to be modified, the review faced many obstacles.

The relative success of economic reform produced constituencies at the core of the later discontent. And the government would face declining loyalty from the political cadres whose jobs the reforms threatened.

Administering a two-price system opened many avenues for corruption and nepotism. The shift to market economics actually increased opportunities for corruption, at least for an interim period. The fact that two economic sectors coexisted—a shrinking but still very large public sector and a growing market economy—produced two sets of prices. Unscrupulous bureaucrats and entrepreneurs were thus in a position to shift commodities back and forth between the two sectors for personal gain. Undoubtedly some of the profits in the private sector in China were the result of widespread graft and nepotism.

Nepotism is a special problem, in any event, in a culture as familyoriented as the Chinese. In times of turmoil, Chinese turn to their families. In all Chinese societies—whether it is mainland China, Taiwan, Singapore, or Hong Kong—ultimate reliance is placed on family members, who in turn benefit in ways determined by family criteria rather than abstract market forces.

The marketplace created its own discontent. A market economy will, in time, enhance general well-being, but the essence of competition is that somebody wins and somebody loses. In the early stages of a market economy, the winnings are likely to be disproportionate. The losers are tempted to blame the “system” rather than their own failure. Often they are right.

On the popular level, economic reform had raised Chinese expectations about living standards and personal liberties, while at the same time creating tensions and inequities that many Chinese felt could only be redressed by a more open and participatory political system. The Chinese leadership was also increasingly divided about China’s political and ideological course. The example of Gorbachev’s reforms in the Soviet Union raised the stakes of the debate. To some in the Chinese leadership, glasnost and perestroika were dangerous heresies, akin to Khrushchev’s throwing away the “sword of Stalin.” To others, including many in China’s younger generation of students and Party officials, Gorbachev’s reforms were a possible model for China’s own path.

The economic reforms overseen by Deng, Hu, and Zhao had transformed the face of Chinese daily life. At the same time, the reappearance of phenomena eradicated during the Mao years—income disparities, colorful and even provocative clothing, and an open celebration of “luxury” items—prompted traditional Communist cadres to complain that the People’s Republic was succumbing to the dreaded “peaceful evolution” to capitalism once projected by John Foster Dulles.

While Chinese officials and intellectuals often framed this debate in terms of Marxist dogma—such as a high-profile campaign against the threat of “bourgeois liberalization”—the split ultimately went back to the questions that had divided China since the nineteenth century. By turning outward, was China fulfilling its destiny, or was it compromising its moral essence? What, if anything, should it aim to learn from Western social and political institutions?

In 1988, the debate crystallized around a seemingly esoteric television miniseries. Broadcast on Chinese Central Television, the sixpart documentary River Elegy adopted the metaphor of China’s turbid, slow-moving Yellow River to argue that Chinese civilization itself had grown insular and stagnant. Blending indictments of traditional Confucian culture with a veiled critique of more recent political developments, the film suggested that China needed to renew itself by looking outward to the “blue ocean” of the outside world, including Western culture. The series catalyzed a national debate, including discussion at the highest levels of China’s government. Traditional Communists considered the film “counterrevolutionary” and succeeded in having it banned, albeit after it had first been broadcast.²¹ The generations-long debate over China’s destiny and its relationship with the West was active again.

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Deng’s Reform Program

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