The Fat Years

These policies were extremely effective. In a short time, it looked like everyone in China was in business. Everybody was talking business regardless of age, sex, location, or trade; everybody was trying to make money, looking for talented employees, or being sought out themselves, searching for raw materials or for people to buy or sell some resource. The Chinese people, you know-just give them a chance to do something and they can make a great success of it.

It was almost a miracle how quickly Guangdong, Jiangsu, and Zhejiang’s underused industrial capacity was changed over from manufacture for export to production for the domestic market. New products and new services flooded the market in the space of a couple of months. In six months, China successfully transformed itself from an economy dependent on investment and exports to one driven by domestic demand.

How successful were these policies? asked He Dongsheng rhetorically.

Then he continued: The target for the first phase was to return to the situation of the 1980s, when domestic demand made up half of the GDP, and this goal was accomplished. The optimum target, however, was to equal the situation of the United States before the 1970s, when internal consumption was 60 percent of their GDP, ideal for a large country. After that the Americans went overboard by relying too much on domestic consumption. They let it go over 70 percent of the GDP, they had insufficient investments and exports, debt was excessive, and private individuals had no savings-all this leading to big trouble.

In many areas China can be self-sufficient and doesn’t need to rely too much on exports to foreign countries; in other words, from now on China does not have to be overly influenced by the fluctuations of the U.S. dollar. China’s domestic demand has so far been raised from 35 percent of its GDP only to close to 50 percent. Investment and foreign trade still account for more than 50 percent, and China is still investing too much in capital construction and real estate. Also, after the world economy recovers, the foreign-trade proportion of GDP will still increase slightly, but in general terms the domestic-demand proportion has been significantly readjusted upward. As people’s wages are raised and with good returns on business investments, taxes will also be increased accordingly. China will have successfully eliminated the threat of a domestic economic recession that existed before these policies, and also rectified the most serious structural bias in the economy since the beginning of Reform and Openness.

And the policies killed two birds with one stone because with the rise and expansion of new businesses everywhere the unemployment problem in both urban and rural areas was solved.

Number Three: During this period many peasants returned to the cities and, taking advantage of the labor shortage, moved into well-paid jobs. But what did the peasants who stayed behind do? They, too, were busy taking care of their own property.

The third set of policies enhanced peasants’ property rights to their farmland. This move had been discussed for years. One of the chief motives behind this policy was to divert the peasants’ attention from any grievances and maintain social stability in a time of economic crisis. And, as expected, the peasants all got busy taking care of their private property.

“What about privatization?” Little Xi asked with accusation in her voice.

He Dongsheng himself was not exactly certain whether the farmland should have been privatized. The privatization experiences of other countries had not been completely positive, but he could not change anybody else’s opinion on the matter. One thing was certain and it left him without an argument: the peasants fully supported the privatization policy. “After this China can never go back again,” he said rather wistfully.

Number Four: This was a period of great enthusiasm throughout the country. It looked like it was pretty chaotic, but it was a necessary and constructive chaos.

What this chaos meant, though, was that having liberated the nation’s forces of production and activated people’s economic enthusiasm, the leadership’s next most important task was to guard rigorously against fraud and the sabotage of government policies by corrupt officials. The “severe and rapid” crackdown of three weeks earlier had first neutralized the power of many criminal elements, including gangsters, hooligans, human traffickers, and gangs of pickpockets and beggars. While the memory of the early crackdown was still fresh, three new targets were announced: crackdowns on graft and corruption, on manufacturing fake products, and on spreading misinformation. This announcement put the fear of death into everybody.

The Communist Party is most proficient at swatting flies. Rounding up a few usual suspects and summarily executing them does a lot to intimidate the local officials; it makes them toe the line and thus achieves the desired goal. As long as the local administrations improve somewhat, officials will not dare conspire to defraud the government. With that, the first three sets of new economic policies had comparatively better odds for success.

Number Five: He Dongsheng was in favor of a market economy, but he didn’t believe the market was infallible, and he certainly didn’t believe in laissez-faire economics. He knew that at certain points the government had to step in. The above four sets of policies created real aggregate demand and stimulated a corresponding level of production to meet it. There was a great increase in the circulation of money and in the amount of credit available in the market, and there were temporary shortfalls in some commodities and services. Even if there was no wild speculation, simply letting the market regulate itself was bound to give rise to inflation. Commodity prices would experience irregular upward swings, and if this developed into hyperinflation, it would put enormous pressure on this stage of economic reform, perhaps even bringing it to a halt. So the government had to implement price controls.

“I believe that this was the most controversial aspect of the ‘Prosperity amid Crisis’ plan,” said He Dongsheng. It was also the policy that required the greatest amount of technical expertise to implement. Those scholars who had been brainwashed by Western economic ideas would probably have a negative conditioned reflex when they heard the dreaded words “price control.” He Dongsheng was self-taught in economics, and he had originally had the same reaction to the idea of price control. It was not until recent years, after he’d immersed himself in the study of Western economic history, that he discovered that in the last century developed Western countries had on several occasions successfully implemented large-scale price-control policies; and these were all capitalist countries. His eyes were certainly opened when he read how Walther Rathenau had successfully managed the economic plan of the German Empire during the First World War period. During the Second World War, the Third Reich had also successfully combined aspects of capitalism and a planned economy.

“Most encouraging,” said He Dongsheng, “were President Franklin Roosevelt’s Second World War economic policies, including price controls, that not only supported an enormous military expenditure but also allowed the United States to free itself from the Great Depression that had bedeviled the nation for twelve years.”

The economist John Kenneth Galbraith served at the time as deputy head of the Office of Price Administration with a staff of some sixteen thousand employees. Before becoming president of the American Economic Association in 1972, Galbraith wrote a book on price-control policies, and in the 1970s during a period of economic stagflation, he again advocated them. All Western economists are not, then, opposed to price-control policies. It is just that in the last forty years, the ideas of the Chicago School of market fundamentalists had so much influence that no one remembered that price control is a good strategy for regulating a market economy. In France right up to the 1980s, 40 percent of economic activity was still regulated by price controls.

This was the breakthrough He Dongsheng had made in his understanding of economics. After that, he combined his new knowledge with China’s actual circumstances and tried to sell his ideas to his other comrades. Fortunately, many Chinese officials had just emerged from the socialist command economy, and were willing, on the surface at least, to accept a market economy. In their heart of hearts, however, they were elated to hear about price-control policies. In a period of economic transition, price controls were actually a necessity; they would assist the market, and save this newly emerged market from self-destruction, but would not usurp the functions of a mature market economy.

None of the officials in He Dongsheng’s Price Control Group were dyed-in-the-wool ideologues. The core members of the group were technocrats in their fifties who had accumulated the price-control experience of thirty years of Reform and Openness. They had recruited a large number of the best students of statistics and econometrics from China’s premier universities to set up a database and develop software for a nationwide network of a kind not available in an earlier age of planned economy. This made it possible for producers and consumers throughout the world to go online and locate the most up-to-date price-control information.

Price controls make real prices transparent. They are intended to allow businesspeople to make money and encourage them to produce, but prevent them from entertaining ideas of speculation, hoarding, and profiteering.

What should be regulated, what should not be regulated, and what is the influence on supply and demand?