All Commentary
Friday, December 1, 1989

Chinas Great Leap Backward



Some analysts base their positive projections regarding Chinese modernization on the presumption that Deng Xiaoping and his colleagues are moving China away from socialist central planning and toward something that looks like a market economy. The conclusion of these analysts is that if it looks like capitalism it will surely work well for the Chinese, and all that is really required to transform a socialist, centrally planned less developed country is the introduction of a system of reliably price-cued transactions among entities that look like autonomous producing and consuming units . . . . It is inconsistent with almost everything we know about the requirements for and the course of economic development . . . . Whether or not China can modernize economically is an interesting and debatable question. But the answer is certainly not as simple as Deng Xiaoping and his colleagues turning a “capitalist” face to the outside world.[11]

The Chinese people have proved that they can make the free market work if they are unhampered by government controls. In the months since I left China, I have thought about the lesson that China offers for other nations, as well as for individuals who feel they can turn economic and political freedom on and off like water from a spigot. The lessons of the free market work well for all people, but centralized control can retard even the most promising prosperity and bring a nation back to economic bankruptcy.


1.   Immanuel C. Y. Hsu, China Without Man: The Search for a New Order (Oxford and New York: Oxford University Press, 1983), pp. 91-118; Donald J, Senese, Sweet and Sour Capitalism: An Analysis of “Socialism with Chinese Characteristics,” (Washington, D.C.: The Council for Social and Economic Studies, 1985).

2.   Michael Weisskopf, “Chinese Entrepreneurs Expect Customers to Return,” The Washington Post, June 18,1989.

3.   Louise do Rosario, “Asia’s Fifth Dragon,” Far Eastern Economic Review, December 8, 1988, p. 62; Daniel Southerland, “In South China, Profits Keep Their Lure,” The Washington Post, June 29,1989.

4.   Robert Dells, “County Capitalism,” Far Eastern Economic Review, April 27, 1989, pp. 27-28.

5.   Robert Dells, “Property to the People,” Far Eastern Economic Review, December 20,1988, pp. 12-13.

6.   Daniel Southerland, “China Seeks To Rein in Economy,” The Washington Post, March 22,1989.

7.   Louise do Rosario, “Business as Usual,” Far Eastern Economic Review, December 8, 1988, pp. 60-61; Southerland, “In South China, Profits Keep Their Lure.”

8.   John Burgess, “China’s Economic Zone Innovators Reassess After Beijing Turmoil,” The Washington Post, June 29,1989.

9.   Arch Puddington, Failed Utopia,: Methods of Coercion in Communist Regimes (San Francisco: ICS Press, 1988), p. 15.

10.   “Friedman Says Mainland Needs Freedom,” Ching Ming Monthly (Hong Kong), February 1989, p. 42; reprinted in Inside China Mainland, April 1989, p. 24.

11.   James T. Myers and Donald I. Puchala, “Some Demographic Constraints on Chinese Economic Modernization.” Paler presented at the. Seventeenth Sino-American Conference on Mainland China, June 5-11, 1988, Institute of International Relations, National Chengchi University, Taipei, Republic of China on Taiwan, p. 2.


Some analysts base their positive projections regarding Chinese modernization on the presumption that Deng Xiaoping and his colleagues are moving China away from socialist central planning and toward something that looks like a market economy. The conclusion of these analysts is that if it looks like capitalism it will surely work well for the Chinese, and all that is really required to transform a socialist, centrally planned less developed country is the introduction of a system of reliably price-cued transactions among entities that look like autonomous producing and consuming units . . . . It is inconsistent with almost everything we know about the requirements for and the course of economic development . . . . Whether or not China can modernize economically is an interesting and debatable question. But the answer is certainly not as simple as Deng Xiaoping and his colleagues turning a “capitalist” face to the outside world.[11]

The Chinese people have proved that they can make the free market work if they are unhampered by government controls. In the months since I left China, I have thought about the lesson that China offers for other nations, as well as for individuals who feel they can turn economic and political freedom on and off like water from a spigot. The lessons of the free market work well for all people, but centralized control can retard even the most promising prosperity and bring a nation back to economic bankruptcy.


1.   Immanuel C. Y. Hsu, China Without Man: The Search for a New Order (Oxford and New York: Oxford University Press, 1983), pp. 91-118; Donald J, Senese, Sweet and Sour Capitalism: An Analysis of “Socialism with Chinese Characteristics,” (Washington, D.C.: The Council for Social and Economic Studies, 1985).

2.   Michael Weisskopf, “Chinese Entrepreneurs Expect Customers to Return,” The Washington Post, June 18,1989.

3.   Louise do Rosario, “Asia’s Fifth Dragon,” Far Eastern Economic Review, December 8, 1988, p. 62; Daniel Southerland, “In South China, Profits Keep Their Lure,” The Washington Post, June 29,1989.

4.   Robert Dells, “County Capitalism,” Far Eastern Economic Review, April 27, 1989, pp. 27-28.

5.   Robert Dells, “Property to the People,” Far Eastern Economic Review, December 20,1988, pp. 12-13.

6.   Daniel Southerland, “China Seeks To Rein in Economy,” The Washington Post, March 22,1989.

7.   Louise do Rosario, “Business as Usual,” Far Eastern Economic Review, December 8, 1988, pp. 60-61; Southerland, “In South China, Profits Keep Their Lure.”

8.   John Burgess, “China’s Economic Zone Innovators Reassess After Beijing Turmoil,” The Washington Post, June 29,1989.

9.   Arch Puddington, Failed Utopia,: Methods of Coercion in Communist Regimes (San Francisco: ICS Press, 1988), p. 15.

10.   “Friedman Says Mainland Needs Freedom,” Ching Ming Monthly (Hong Kong), February 1989, p. 42; reprinted in Inside China Mainland, April 1989, p. 24.

11.   James T. Myers and Donald I. Puchala, “Some Demographic Constraints on Chinese Economic Modernization.” Paler presented at the. Seventeenth Sino-American Conference on Mainland China, June 5-11, 1988, Institute of International Relations, National Chengchi University, Taipei, Republic of China on Taiwan, p. 2.

Dr. Diane D. Pikcunas is Principal of Komensky Elementary School in Berwyn, Illinois, and adjunct professor of education at the National College of Education in Lombard, Illinois.

China is a fascinating country, and many remnants of the age-old Chinese civilization still remain despite 40 years of Communist control. I visited this land in December 1988, six months before the Tiananmen Square massacre.

As I walked along the streets of Beijing and Shanghai, I noticed the many shops—ranging from noodle stands to bicycle parts shops to camera stores—lining the streets with entrepreneurs busily selling their wares. Deng Xiaoping’s “Four Modernizations,” aimed at improving agriculture, industry, the military, and science and technology, had clearly helped propel the Chinese people toward a market economy.

The taste of economic freedom, however, whetted the Chinese appetite for political free-dom-the right to speak out against individuals and programs hampering China’s development. In 1988 the central bureaucracy began limiting the market incentives, with resulting backlogs, shortages of raw materials, unemployment, and inflation. The link between economic and political freedom was becoming dear.

New Economic Policy

The shift in China’s economic policy is a major turning point in the country’s recent history.

When Mao Zedong’s troops conquered China in 1949, he set about to build a Marxist-Leninist society. One of his first priorities was to eliminate all opposition. Chinese by the thousands were arrested, subjected to public trials, jailed, and some were executed. Businessmen and large landowners were particular targets for persecution. The government took over businesses and land, and abolished the right of private ownership.

Mao aimed to transform China into an industrial nation overnight, despite the human costs. In the “Great Leap Forward,” begun in 1958, he pushed for rapid development, and encouraged Chinese citizens to make steel in backyard furnaces. After a few years, it became clear that this policy was a failure, and China’s industrial pro duction fell. Mao’s agricultural communes also failed to increase output. The centralized economy helped Mao gain absolute control over the populace, but brought disaster to the Chinese people and crippled the nation’s economy.

Mao’s death in 1976 led to a struggle for succession that brought Deng Xiaoping to power. Though a Marxist-Leninist, Deng witnessed the failures of Mao’s centralized economy and saw the need for economic revitalization. Even Lenin had recognized the failure of War Communism (1918-1921) and initiated some market incentives in his New Economic Policy of 1921-1928. Deng tried a similar approach, introducing some market incentives as part of his Four Modernizations, which were designed to make China a great economic power by the early 21st century.

Mao’s Great Leap Forward proved a disaster for China, and Deng now envisioned a Great Leap Outward. While Mao had shut out foreign influences, Dang opened China’s doors to cooperation with capitalist nations, welcoming joint ventures and foreign investment. Tourism was encouraged. Economic incentives were added to attract foreign capital. Industrial decision-making was decentralized, giving a reduced role to Beijing bureaucrats and more autonomy to provincial and local officials. Farmers were allowed to cultivate “side-line” plots and to sell their crops for their own profit. So successful was this latter experiment that, despite the small amount of land involved, the side-line plots were soon accounting for 25 percent of agricultural production.[1]

Free Market Brings Prosperity

Deng’s reforms brought prosperity for both rural and urban Chinese. One of his most successful reforms made businesses responsible for their own profits and losses. The result is a familiar one in all free market economies—production of more goods and services.

Throughout history, the Chinese have been great entrepreneurs, and Deng’s market reforms allowed Chinese merchants and shopkeepers once again to demonstrate their skills. Prior to Deng, state-run shops offered limited variety, poor quality, and government employees who took a hostile attitude toward customers—“buy it or leave it.” The private businesses encouraged under the Four Modernizations, in contrast, have to compete for consumers. Their owners operate as their own bosses freed from the “work unit” which dominates almost every aspect of Chinese life. Under Deng’s rule, the number of independent Chinese businesses has risen from 1 million in 1980 to almost 15 million in 1989.[2]

The free market brought prosperity to rural areas as well. Guangdong Province in southern China registered an economic growth between 1984-1987 of 23.5 percent while the rest of China recorded an impressive national average of 16.8 percent. Guangdong freed 80 percent of its commodities from central government control. New markets were created in labor, real estate, and a large number of commodities. Hundreds of new factories were built in the Pearl River Delta, the heart of the province’s economic boom. An important link has been made to a neighbor and model of free enterprise—Hong Kong. Hong Kong investors account for 90 percent of the foreign investment in Guangdong Province and receive 60 percent of its exports.[3]

Even in rural and isolated areas such as Zhuozi, located in Inner Mongolia, the free market has operated successfully, as the economic role of the central government has been reduced. Commodity prices were freed from government control. The economic commission that controlled investment was abolished. All urban housing was privatized, and most state enterprises were dismantled. The farmers experienced a new prosperity, as they no longer were required to sell their grain and oilseed to the state at a fixed price. Zhuozi has become a model of the success of free enterprise. While much of the attention on economic reform in China has focused on coastal and suburban areas, the impressive nature of the success in Zhuozi is that the free market has proved an amazing success in an area considered poor in a poor region.[4]

This remarkable success encouraged Chinese economists to take a closer look at what was happening. They were able to report their findings in a political atmosphere freer than in the days of Mao. For example, three young economists—Hua Sheng, Zhang Xuejun, and Luo Xiao-ping—have urged a major restructuring of the Chinese economy with an emphasis on individual property rights rather than on collective ownership. They have criticized policies such as the government’s “price reform” which leave in place many of the elements of a centralized economy. They also have advocated a dismantling of the state-controlled assets, and charge that the reforms have been so limited that the preconditions for truly independent profit-maximizing enterprises have not been created. They have pointed to the success of the rural enterprises which have operated outside the government’s economic plan and have consistently outperformed the state-owned enterprises. The enlargement of the private sector, they have stressed, will enable China’s economic growth to continue.[5]

Economic Retrenchment

The economic crisis in China came before the political crisis. Partial repeal of the economic reforms under the name of an “austerity program” appeared in September 1988 and were officially confirmed at the meeting of the National People’s Congress in March and April of 1989.

The leadership struggle has taken its toll on economic reforms. Zhao Ziyang served as Premier and later as the Communist Party Secretary and was architect of much of Deng’s economic reform. He pointed to Guangdong Province as a model area and urged more economic and political liberalization. Li Peng, who succeeded him as Premier, was trained in the Soviet Union and is viewed as a technocrat; he has been less enthusiastic about these reforms and favors more centralization. In the political crisis in June, Zhao lost power and was purged; Li emerged in a stronger position.

In light of these events, Li Peng’s report to the National People’s Congress in the spring of 1989 takes on a greater importance.

The “austerity program” Li announced gave a greater role to central planning and imposed new taxes on the more productive sectors of the Chinese economy. Chief among the new program’s victims are the rural enterprises which have demonstrated the success of decentralization. The new budget placed a tight squeeze on these enterprises. While the rural enterprises have been growing at an annual rate of 30 percent, the new program limited annual growth to 15 percent.

The new tax program was designed also to target the farmers who proved the success of the free market—farmers who raised fruit and vegetables and sold them for profit would now have to pay new taxes ranging from 5 to 15 percent.

And in a reverse of incentives, the proposed national budget would increase the salaries of government workers and employees in the less-productive, state-owned enterprises. A surcharge would be levied on those enterprises that were not state-owned—those owned privately or by collectives.[6]

The increased centralization is sure to hurt the economic performance of the model province for economic development—Guangdong Province, China’s biggest exporter. The cutback on consumer goods nationwide especially hits this province whose prosperity has been largely built on the production of these goods. The move toward centralization of raw materials also will deal a blow to Guangdong’s economy, which will have greater difficulty purchasing the coal needed to keep its factories running.[7]

The political crackdown in June has made foreign investors wary of the Chinese government’s promises and its commitment to further reforms. The Special Economic Zones, which China creat ed to attract foreign investment, are especially vulnerable as foreign businesses withdraw and other nations consider a cutoff of trade or sanctions against China. In an economic zone such as Shenzhen, which during the past decade has seen an enormous growth in the value of the goods and services it has processed, the government’s alteration of foreign exchange rules in late 1988 has created particularly vexing problems, cutting exports and reducing 1989 investment by as much as 30 percent. The uncertain investment climate will create additional difficulties. The Special Economic Zones, where the Chinese have developed model arrangements for the operation of free enterprise companies, may soon experience a serious decline.[8]

Conclusion

The Chinese free market experiment has suffered an enormous setback since late 1988. And the experience serves to remind us of the dangers of political power exercised over an economy, for great economic benefits may fail victim to political considerations. A number of experts have warned us of such developments. Arch Pudding-ton notes that even when they experiment with free market mechanisms, Communist nations are usually drawn to restrict entrepreneurial activity, since capitalism represents a humiliating refutation of the promise of abundance made by Communist officials.[9]

The Chinese economy is proving that political power can defeat even the most spectacular advances of an economy based on free market principles. In 1988, Milton Friedman warned then Party Secretary Zhao that China would not continue to succeed economically if it attempted to organize its economy from the top down. He stressed to Zhao that government is organized from the top down, while the free market is organized from the bottom up.[10]

And perhaps one of the more perceptive observations came from political scientists James T. Myers and Donald J. Puchala, who assessed economic development in China and concluded:


Some analysts base their positive projections regarding Chinese modernization on the presumption that Deng Xiaoping and his colleagues are moving China away from socialist central planning and toward something that looks like a market economy. The conclusion of these analysts is that if it looks like capitalism it will surely work well for the Chinese, and all that is really required to transform a socialist, centrally planned less developed country is the introduction of a system of reliably price-cued transactions among entities that look like autonomous producing and consuming units . . . . It is inconsistent with almost everything we know about the requirements for and the course of economic development . . . . Whether or not China can modernize economically is an interesting and debatable question. But the answer is certainly not as simple as Deng Xiaoping and his colleagues turning a “capitalist” face to the outside world.[11]

The Chinese people have proved that they can make the free market work if they are unhampered by government controls. In the months since I left China, I have thought about the lesson that China offers for other nations, as well as for individuals who feel they can turn economic and political freedom on and off like water from a spigot. The lessons of the free market work well for all people, but centralized control can retard even the most promising prosperity and bring a nation back to economic bankruptcy.


1.   Immanuel C. Y. Hsu, China Without Man: The Search for a New Order (Oxford and New York: Oxford University Press, 1983), pp. 91-118; Donald J, Senese, Sweet and Sour Capitalism: An Analysis of “Socialism with Chinese Characteristics,” (Washington, D.C.: The Council for Social and Economic Studies, 1985).

2.   Michael Weisskopf, “Chinese Entrepreneurs Expect Customers to Return,” The Washington Post, June 18,1989.

3.   Louise do Rosario, “Asia’s Fifth Dragon,” Far Eastern Economic Review, December 8, 1988, p. 62; Daniel Southerland, “In South China, Profits Keep Their Lure,” The Washington Post, June 29,1989.

4.   Robert Dells, “County Capitalism,” Far Eastern Economic Review, April 27, 1989, pp. 27-28.

5.   Robert Dells, “Property to the People,” Far Eastern Economic Review, December 20,1988, pp. 12-13.

6.   Daniel Southerland, “China Seeks To Rein in Economy,” The Washington Post, March 22,1989.

7.   Louise do Rosario, “Business as Usual,” Far Eastern Economic Review, December 8, 1988, pp. 60-61; Southerland, “In South China, Profits Keep Their Lure.”

8.   John Burgess, “China’s Economic Zone Innovators Reassess After Beijing Turmoil,” The Washington Post, June 29,1989.

9.   Arch Puddington, Failed Utopia,: Methods of Coercion in Communist Regimes (San Francisco: ICS Press, 1988), p. 15.

10.   “Friedman Says Mainland Needs Freedom,” Ching Ming Monthly (Hong Kong), February 1989, p. 42; reprinted in Inside China Mainland, April 1989, p. 24.

11.   James T. Myers and Donald I. Puchala, “Some Demographic Constraints on Chinese Economic Modernization.” Paler presented at the. Seventeenth Sino-American Conference on Mainland China, June 5-11, 1988, Institute of International Relations, National Chengchi University, Taipei, Republic of China on Taiwan, p. 2.

Dr. Diane D. Pikcunas is Principal of Komensky Elementary School in Berwyn, Illinois, and adjunct professor of education at the National College of Education in Lombard, Illinois.

China is a fascinating country, and many remnants of the age-old Chinese civilization still remain despite 40 years of Communist control. I visited this land in December 1988, six months before the Tiananmen Square massacre.

As I walked along the streets of Beijing and Shanghai, I noticed the many shops—ranging from noodle stands to bicycle parts shops to camera stores—lining the streets with entrepreneurs busily selling their wares. Deng Xiaoping’s “Four Modernizations,” aimed at improving agriculture, industry, the military, and science and technology, had clearly helped propel the Chinese people toward a market economy.

The taste of economic freedom, however, whetted the Chinese appetite for political free-dom-the right to speak out against individuals and programs hampering China’s development. In 1988 the central bureaucracy began limiting the market incentives, with resulting backlogs, shortages of raw materials, unemployment, and inflation. The link between economic and political freedom was becoming dear.

New Economic Policy

The shift in China’s economic policy is a major turning point in the country’s recent history.

When Mao Zedong’s troops conquered China in 1949, he set about to build a Marxist-Leninist society. One of his first priorities was to eliminate all opposition. Chinese by the thousands were arrested, subjected to public trials, jailed, and some were executed. Businessmen and large landowners were particular targets for persecution. The government took over businesses and land, and abolished the right of private ownership.

Mao aimed to transform China into an industrial nation overnight, despite the human costs. In the “Great Leap Forward,” begun in 1958, he pushed for rapid development, and encouraged Chinese citizens to make steel in backyard furnaces. After a few years, it became clear that this policy was a failure, and China’s industrial pro duction fell. Mao’s agricultural communes also failed to increase output. The centralized economy helped Mao gain absolute control over the populace, but brought disaster to the Chinese people and crippled the nation’s economy.

Mao’s death in 1976 led to a struggle for succession that brought Deng Xiaoping to power. Though a Marxist-Leninist, Deng witnessed the failures of Mao’s centralized economy and saw the need for economic revitalization. Even Lenin had recognized the failure of War Communism (1918-1921) and initiated some market incentives in his New Economic Policy of 1921-1928. Deng tried a similar approach, introducing some market incentives as part of his Four Modernizations, which were designed to make China a great economic power by the early 21st century.

Mao’s Great Leap Forward proved a disaster for China, and Deng now envisioned a Great Leap Outward. While Mao had shut out foreign influences, Dang opened China’s doors to cooperation with capitalist nations, welcoming joint ventures and foreign investment. Tourism was encouraged. Economic incentives were added to attract foreign capital. Industrial decision-making was decentralized, giving a reduced role to Beijing bureaucrats and more autonomy to provincial and local officials. Farmers were allowed to cultivate “side-line” plots and to sell their crops for their own profit. So successful was this latter experiment that, despite the small amount of land involved, the side-line plots were soon accounting for 25 percent of agricultural production.[1]

Free Market Brings Prosperity

Deng’s reforms brought prosperity for both rural and urban Chinese. One of his most successful reforms made businesses responsible for their own profits and losses. The result is a familiar one in all free market economies—production of more goods and services.

Throughout history, the Chinese have been great entrepreneurs, and Deng’s market reforms allowed Chinese merchants and shopkeepers once again to demonstrate their skills. Prior to Deng, state-run shops offered limited variety, poor quality, and government employees who took a hostile attitude toward customers—“buy it or leave it.” The private businesses encouraged under the Four Modernizations, in contrast, have to compete for consumers. Their owners operate as their own bosses freed from the “work unit” which dominates almost every aspect of Chinese life. Under Deng’s rule, the number of independent Chinese businesses has risen from 1 million in 1980 to almost 15 million in 1989.[2]

The free market brought prosperity to rural areas as well. Guangdong Province in southern China registered an economic growth between 1984-1987 of 23.5 percent while the rest of China recorded an impressive national average of 16.8 percent. Guangdong freed 80 percent of its commodities from central government control. New markets were created in labor, real estate, and a large number of commodities. Hundreds of new factories were built in the Pearl River Delta, the heart of the province’s economic boom. An important link has been made to a neighbor and model of free enterprise—Hong Kong. Hong Kong investors account for 90 percent of the foreign investment in Guangdong Province and receive 60 percent of its exports.[3]

Even in rural and isolated areas such as Zhuozi, located in Inner Mongolia, the free market has operated successfully, as the economic role of the central government has been reduced. Commodity prices were freed from government control. The economic commission that controlled investment was abolished. All urban housing was privatized, and most state enterprises were dismantled. The farmers experienced a new prosperity, as they no longer were required to sell their grain and oilseed to the state at a fixed price. Zhuozi has become a model of the success of free enterprise. While much of the attention on economic reform in China has focused on coastal and suburban areas, the impressive nature of the success in Zhuozi is that the free market has proved an amazing success in an area considered poor in a poor region.[4]

This remarkable success encouraged Chinese economists to take a closer look at what was happening. They were able to report their findings in a political atmosphere freer than in the days of Mao. For example, three young economists—Hua Sheng, Zhang Xuejun, and Luo Xiao-ping—have urged a major restructuring of the Chinese economy with an emphasis on individual property rights rather than on collective ownership. They have criticized policies such as the government’s “price reform” which leave in place many of the elements of a centralized economy. They also have advocated a dismantling of the state-controlled assets, and charge that the reforms have been so limited that the preconditions for truly independent profit-maximizing enterprises have not been created. They have pointed to the success of the rural enterprises which have operated outside the government’s economic plan and have consistently outperformed the state-owned enterprises. The enlargement of the private sector, they have stressed, will enable China’s economic growth to continue.[5]

Economic Retrenchment

The economic crisis in China came before the political crisis. Partial repeal of the economic reforms under the name of an “austerity program” appeared in September 1988 and were officially confirmed at the meeting of the National People’s Congress in March and April of 1989.

The leadership struggle has taken its toll on economic reforms. Zhao Ziyang served as Premier and later as the Communist Party Secretary and was architect of much of Deng’s economic reform. He pointed to Guangdong Province as a model area and urged more economic and political liberalization. Li Peng, who succeeded him as Premier, was trained in the Soviet Union and is viewed as a technocrat; he has been less enthusiastic about these reforms and favors more centralization. In the political crisis in June, Zhao lost power and was purged; Li emerged in a stronger position.

In light of these events, Li Peng’s report to the National People’s Congress in the spring of 1989 takes on a greater importance.

The “austerity program” Li announced gave a greater role to central planning and imposed new taxes on the more productive sectors of the Chinese economy. Chief among the new program’s victims are the rural enterprises which have demonstrated the success of decentralization. The new budget placed a tight squeeze on these enterprises. While the rural enterprises have been growing at an annual rate of 30 percent, the new program limited annual growth to 15 percent.

The new tax program was designed also to target the farmers who proved the success of the free market—farmers who raised fruit and vegetables and sold them for profit would now have to pay new taxes ranging from 5 to 15 percent.

And in a reverse of incentives, the proposed national budget would increase the salaries of government workers and employees in the less-productive, state-owned enterprises. A surcharge would be levied on those enterprises that were not state-owned—those owned privately or by collectives.[6]

The increased centralization is sure to hurt the economic performance of the model province for economic development—Guangdong Province, China’s biggest exporter. The cutback on consumer goods nationwide especially hits this province whose prosperity has been largely built on the production of these goods. The move toward centralization of raw materials also will deal a blow to Guangdong’s economy, which will have greater difficulty purchasing the coal needed to keep its factories running.[7]

The political crackdown in June has made foreign investors wary of the Chinese government’s promises and its commitment to further reforms. The Special Economic Zones, which China creat ed to attract foreign investment, are especially vulnerable as foreign businesses withdraw and other nations consider a cutoff of trade or sanctions against China. In an economic zone such as Shenzhen, which during the past decade has seen an enormous growth in the value of the goods and services it has processed, the government’s alteration of foreign exchange rules in late 1988 has created particularly vexing problems, cutting exports and reducing 1989 investment by as much as 30 percent. The uncertain investment climate will create additional difficulties. The Special Economic Zones, where the Chinese have developed model arrangements for the operation of free enterprise companies, may soon experience a serious decline.[8]

Conclusion

The Chinese free market experiment has suffered an enormous setback since late 1988. And the experience serves to remind us of the dangers of political power exercised over an economy, for great economic benefits may fail victim to political considerations. A number of experts have warned us of such developments. Arch Pudding-ton notes that even when they experiment with free market mechanisms, Communist nations are usually drawn to restrict entrepreneurial activity, since capitalism represents a humiliating refutation of the promise of abundance made by Communist officials.[9]

The Chinese economy is proving that political power can defeat even the most spectacular advances of an economy based on free market principles. In 1988, Milton Friedman warned then Party Secretary Zhao that China would not continue to succeed economically if it attempted to organize its economy from the top down. He stressed to Zhao that government is organized from the top down, while the free market is organized from the bottom up.[10]

And perhaps one of the more perceptive observations came from political scientists James T. Myers and Donald J. Puchala, who assessed economic development in China and concluded:


Some analysts base their positive projections regarding Chinese modernization on the presumption that Deng Xiaoping and his colleagues are moving China away from socialist central planning and toward something that looks like a market economy. The conclusion of these analysts is that if it looks like capitalism it will surely work well for the Chinese, and all that is really required to transform a socialist, centrally planned less developed country is the introduction of a system of reliably price-cued transactions among entities that look like autonomous producing and consuming units . . . . It is inconsistent with almost everything we know about the requirements for and the course of economic development . . . . Whether or not China can modernize economically is an interesting and debatable question. But the answer is certainly not as simple as Deng Xiaoping and his colleagues turning a “capitalist” face to the outside world.[11]

The Chinese people have proved that they can make the free market work if they are unhampered by government controls. In the months since I left China, I have thought about the lesson that China offers for other nations, as well as for individuals who feel they can turn economic and political freedom on and off like water from a spigot. The lessons of the free market work well for all people, but centralized control can retard even the most promising prosperity and bring a nation back to economic bankruptcy.


1.   Immanuel C. Y. Hsu, China Without Man: The Search for a New Order (Oxford and New York: Oxford University Press, 1983), pp. 91-118; Donald J, Senese, Sweet and Sour Capitalism: An Analysis of “Socialism with Chinese Characteristics,” (Washington, D.C.: The Council for Social and Economic Studies, 1985).

2.   Michael Weisskopf, “Chinese Entrepreneurs Expect Customers to Return,” The Washington Post, June 18,1989.

3.   Louise do Rosario, “Asia’s Fifth Dragon,” Far Eastern Economic Review, December 8, 1988, p. 62; Daniel Southerland, “In South China, Profits Keep Their Lure,” The Washington Post, June 29,1989.

4.   Robert Dells, “County Capitalism,” Far Eastern Economic Review, April 27, 1989, pp. 27-28.

5.   Robert Dells, “Property to the People,” Far Eastern Economic Review, December 20,1988, pp. 12-13.

6.   Daniel Southerland, “China Seeks To Rein in Economy,” The Washington Post, March 22,1989.

7.   Louise do Rosario, “Business as Usual,” Far Eastern Economic Review, December 8, 1988, pp. 60-61; Southerland, “In South China, Profits Keep Their Lure.”

8.   John Burgess, “China’s Economic Zone Innovators Reassess After Beijing Turmoil,” The Washington Post, June 29,1989.

9.   Arch Puddington, Failed Utopia,: Methods of Coercion in Communist Regimes (San Francisco: ICS Press, 1988), p. 15.

10.   “Friedman Says Mainland Needs Freedom,” Ching Ming Monthly (Hong Kong), February 1989, p. 42; reprinted in Inside China Mainland, April 1989, p. 24.

11.   James T. Myers and Donald I. Puchala, “Some Demographic Constraints on Chinese Economic Modernization.” Paler presented at the. Seventeenth Sino-American Conference on Mainland China, June 5-11, 1988, Institute of International Relations, National Chengchi University, Taipei, Republic of China on Taiwan, p. 2.