2

China in Transition

Mao’s death on September 9th, 1976 pitched China into a bitter and uncertain struggle over succession.1 On the one side was the circle around Hua Guofeng, whom Mao had picked as First Vice Chairman of the Central Committee of the Chinese Communist Party and made acting premier in February 1976 after the death of Zhou Enlai, China’s long-time premier. On the other stood the Gang of Four, including Mao’s widow, Jiang Qing, and her three recruits from Shanghai, who had climbed up to the top of the Chinese political hierarchy during the Cultural Revolution. In addition, Chinese politics was deeply divided along an ideological line. The above two rival groups were joined together on one side as beneficiaries and supporters of the Cultural Revolution. On the opposite side was a large and loose group of senior Party and military veterans around Marshal Ye Jianying, including Deng Xiaoping, Chen Yun, and Hu Yaobang, who were either reluctant partners in, or explicit opponents of, the Cultural Revolution. Just before his death, Mao was deeply worried that the transfer of power would be rocky and that the Cultural Revolution might be abandoned. Together with the defeat of Chiang Kai-shek and the Nationalist government, he deemed it one of his most important and lasting achievements.2

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Two days after Mao’s death, on September 11th, Hua made a bold move. He informed Li Xiannian, then Vice Premier in charge of economic affairs, of his determination to arrest the Gang of Four and asked Li to contact Marshall Ye as soon as possible. At the time, Ye was Vice Chairman of the Central Committee of the Party, Vice Chairman of the Central Military Committee, and Minister of Defense. On September 13th Li visited Ye in secret, and conveyed Hua’s urgent message. Long disgruntled with the Gang of Four, Marshall Ye wholeheartedly supported Hua’s decision. With Ye’s active participation, a secret plan was made on September 26th to depose the Gang of Four. Ten days later, on October 6th, the Gang of Four were arrested, without a single shot being fired. With the strong backing of Party veterans, Hua consolidated his power and seized the leadership position immediately afterwards. The People’s Republic’s first transfer of power turned out to be far less tumultuous than Mao had feared, if more dramatic.3

I

At a testing moment for the People’s Republic, Hua managed to avoid a potentially devastating power struggle that could have wrecked the whole nation. To his credit, Hua was able to unite disparate forces behind him, at least for a short time, to depose the Gang of Four, and fill the power vacuum left by Mao’s departure. In addition, during his brief tenure, Hua managed to turn China away from Mao’s radical ideology and preoccupation with class struggle and lead the country to socialist modernization. But Hua was caught in a political dilemma. On the one hand, Hua and the Chinese government remained committed to socialism and ideologically loyal to Mao. The disappointing performance of socialism and Mao’s deplorable economic record had not totally destroyed the ideological legitimacy of socialism nor broken down the cult of personality around Mao. Even after his death, Mao was still widely respected as a great leader by both the political elites and the common people. Even the arrest of the Gang of Four was legitimized by their supposed betrayal of Mao, and attributed to Mao’s foresight – he had picked Hua as First Vice Chairman in 1975 rather than Wang Hongwen, a member of the Gang of Four. The legitimacy of Hua’s leadership was therefore believed to depend on continued deference to Mao’s teachings. On the other hand, Hua realized that he could not let some of Mao’s decisions remain unchanged, in particular the ongoing Cultural Revolution and Mao’s 1975 decision to depose Deng again for his reluctance to endorse the Cultural Revolution. Deng’s political courage in disagreeing with Mao and his effective premiership from 1974 to 1975 helped to win the trust of many Party veterans and the support of the general public. Both groups looked up to him as a strong candidate to lead China in the post-Mao era.

Trapped by this ideological quandary, Hua allowed a new cult of personality to develop around him, hoping to firm up his legitimacy as Mao’s successor. But this resort to a personality cult estranged Hua from Marshall Ye and other veterans, whose support was indispensable to Hua’s leadership. As victims of Mao’s purges, these veterans had deplored Mao’s hubris, seeing it as a root cause of the Cultural Revolution and Mao’s other disastrous policies since the Anti-Rightist Movement. With the return to power of Deng Xiaoping and Chen Yun at the end of 1978, the only two surviving members of the pre-Cultural Revolution Politburo Standing Committee, Hua stood little chance of retaining power in a political system where seniority was a critical asset. Hua gave up the Premiership in 1980 to Zhao Ziyang, and Party Chairmanship in 1981 to Hu Yaobang, the two protégés of Deng Xiaoping. Hua was criticized, and deservedly so, as being ineffective in loosening, let alone shaking free from, the stifling ideological monopolization that had suppressed free thought and human creativity during Mao’s time. But this challenge Hua’s successors would later find far more difficult and enduring than they had first thought.

Nonetheless, Hua acted swiftly to move China forward. The Cultural Revolution was brought to a close immediately after the arrest of the Gang of Four, even though Hua was unwilling or unable to censure what scholars would later call “Mao’s last revolution.”4 Amid the political campaign of denouncing the Gang of Four as “rightists” and for practicing capitalism, Hua brought the economy to the forefront of policy, replacing ideology as the primary focus of the Chinese government. As early as December 1976, making his first public appearance as the new leader of China, Hua stressed economic development and the improvement of living conditions as the priority for the new Chinese government.5

At the tactical level, Hua followed an old Chinese practice: every new emperor brings his own courtiers. He quickly placed his choices in a few key positions to make sure that his new policies would be implemented. For example, Hu Yaobang was picked as the Deputy Principal of the Central Party School in March 1977 (Hua himself was the Principal), and Hu Jiwei as chief editor of the People’s Daily in October. Both had been purged during the Cultural Revolution.6 At the end of the year, Hu Yaobang was to lead the powerful Organization Department of the Central Committee of the Chinese Communist Party, which was in charge of the placement of Party and government officials. Upon taking the position at the Organization Department in mid-December 1977, Hu led a great and courageous campaign to rehabilitate Party and government officials as well as various “rightists,” “capitalist roaders,” and “anti-socialist elements” who had been persecuted during Mao’s time, giving proper recognition to the dead and bringing back to work those who had survived.7 By 1982, more than 3 million people had been rehabilitated, and many former “rightists” or “capitalist roaders” came back to government. This resulted in a huge leadership reshuffle in both central and provincial government.8 Of the 201 members of the 11th Session of the Central Committee of the Party (August 1977), more than half were replaced in the next Session (September 1982). From 1977 to 1980, all but three provincial heads were replaced. Among the new generation of provincial leaders, two stood out: Ren Zhongyi of Guangdong and Xiang Nan of Fujian, two pioneers in pushing forward economic reform, making these two provinces among the first to experiment with a market economy in the early 1980s.

II

Concurrent with the change of personnel in 1977–1978 was a shift in ideological and political attitudes. After Mao’s death China did not allow a political campaign directly repudiating him. While the Soviet Union was quick to denounce Stalin after his death, Mao still commanded enormous respect in China; his teachings were still held as the final judgment of political truth. This was partly due to the post-Mao government’s strategy of keeping Mao’s horrendous deeds secret, and a detailed assessment of Mao was left for later generations.9 How to interpret Mao thus became a critical struggle for ideological control, with immediate political consequences. On one side stood Hua, who remained faithful to Mao’s teachings and tried to prevent any criticism being leveled against Mao, even against the Culture Revolution. He believed that to protect Mao’s reputation would assure political continuity and thus bolster his political legitimacy. The extremists on his side proclaimed that all Mao’s words and policies had to be strictly followed, which, paradoxically, would have undermined and contradicted Hua’s own policy changes. Opposed to this approach were the vast majority of Party veterans, who had suffered during the Cultural Revolution and were eager to repudiate it. But by and large even this group was not ready, either psychologically or politically, to completely refute Mao’s legacy. Despite these attitudes, Hu Yaobang was able to use the Central Party School as a platform to promote political reform.10 In June 1977, Hu founded a new journal, Theoretical Trends, which would solicit articles to question and criticize the ossified socialist doctrines and Mao’s radical policies, which still had a firm grip on the minds of the people.

On May 10th, 1978, the sixtieth issue of Theoretical Trends published an article, “Practice is the Only Criterion for Testing Truth,” that directly challenged the official Party adherence to Mao’s ideology. Rejecting Maoism or Marxism, or any other ideology, as a measure of truth was mind-liberating for the Chinese people long accustomed to treating Mao’s little red book as the ultimate judge of truth. Many officials and intellectuals were particularly enthusiastic; they had been attacked as “rightists” or “capitalist roaders” in Mao’s time because of their criticism of Mao’s policies. Since Mao himself had endorsed, and indeed popularized, the old Chinese saying, “seeking truth from facts,” as a guiding principle for the Party in Yan’an, supporters of the use of social practice defended their position as a genuine development of Maoism. From their point of view, they had rescued Mao’s thought from the errors of his own actions.

This debate held center stage in Chinese politics throughout 1978–1979. At the beginning, Hua’s unflinching loyalty to Mao cost him political capital. Nonetheless, Hua allowed the debate to continue and ultimately altered his position, demonstrating rare qualities of political leadership and tolerance.11 This debate, and the resounding triumph of pragmatism, watered down the ideological monopoly of radical Maoism pursued during the Cultural Revolution. Thus, without repudiating Mao or renouncing its own ideological base of legitimacy, the Chinese Communist Party opened the door for reform.

Immediately after the death of Mao, Chinese politics witnessed swift and significant changes in both personnel and ideology. Without these, the later market reforms would have been unthinkable. The conventional wisdom in the academic literature states that Chinese economic reform proceeded without political reform, and was therefore fundamentally different from the economies in the former Soviet bloc when they made their transition to capitalism. But this view does not stand up to scrutiny. While China certainly did not follow the prescription of democratization, political reform in other forms took place after Mao’s death. In the late 1970s and early 1980s when Deng repeatedly mentioned political democracy as an element of Chinese political reform, he meant to allow different voices inside the Party rather than multi-party competition. During the long history of China, there has rarely been a precedent for democracy in the sense of multi-party contest for political power. Nonetheless, China’s economic reforms began with a major change of personnel and political ideology, which filled leading government positions with officials who were open-minded and eager for, or at least sympathetic to, reform.12

III

In tandem with the political transition, there was also a rapid economic transition.13 On December 10th, 1976, at the Second National Agricultural Conference on “Learning from Dazhai” – a socialist model village that had gained its fame for hard work and collective spirit during the Cultural Revolution – Hua underscored economic development as a prerequisite for successful socialism. This was a significant departure from the ideology of the previous decade when poverty and a hard life had been praised as glorious features of socialism. Even though politically loyal to Mao, Hua rejected Mao’s policy of treating politics in general, and class struggle in particular, as a priority for the government. Hua was keenly interested in reviving the stagnant economy and intended to project himself as an economic modernizer. Compared with Deng and other veterans who had indisputable revolutionary credentials, military expertise, and strong personal networks developed over decades of revolution, Hua was almost a novice and an outsider to Beijing politics. Not surprisingly, after taking power at the end of 1976, Hua wasted no time in building up his résumé in economic statecraft, reviving the project of “four modernizations,” an economic program with a history all of its own.14

The “four modernizations” program – the modernization of agriculture, industry, defense, and science and technology – was first proposed by Premier Zhou Enlai in December 1964 at the Third National People’s Congress before the drafting of the third Five Year Economic Plan (1966–1970).15 It was meant to serve as a long-term economic development goal, to be achieved by the end of the twentieth century. But since the degree of modernization was never clearly specified, “four modernizations” was more of a battle call than an economic program. In addition, Zhou’s proposal had barely left his desk before Mao threw China into the turmoil of the Cultural Revolution. But it later gained a distinctive political significance, serving as a broad banner to counterbalance Mao’s radical ideology of class struggle and continuous revolution under the Dictatorship of the Proletariat.

Hua’s endeavor to revitalize the program of “four modernizations” in 1976 was preceded by a similar attempt by Deng Xiaoping.16 In January 1975, with the Cultural Revolution still ongoing, Deng re-endorsed “four modernizations” at the Fourth National People’s Congress. Though Deng would lose his position at the end of that year, he would later present his short-lived effort of economic restructuring as a harbinger of post-Mao economic reform.17

IV

Amid the decade-long Cultural Revolution, 1971 was a turning point when Lin Biao died in a plane crash on September 13th.18 Lin had been designated as Mao’s successor in 1969 after the purge of Liu Shaoqi. Though Mao’s faithful ally since the 1930s and a Marshal, Lin rose to political power only after the Lushan Meeting in 1959 when he led the attack on Peng Dehuai, who had dared to criticize the Great Leap Forward. It is unclear whether Peng was mainly a victim of Mao’s arrogance and self-conceit, as commonly portrayed, or of a power struggle beneath Mao between Liu Shaoqi, then designated successor of Mao, and other ambitious officials, such as Lin Biao himself. Peng, in the end, lost his position as Minister of Defense to Lin; this was a position Peng had held after leading the Chinese army in the Korean War. During the first few years of the Cultural Revolution, with Mao’s full support, Lin managed to remove all his opponents during his rise to become Mao’s designated successor. But Lin’s pursuit of power ended suddenly and dramatically. After a failed attempt by his son to assassinate Mao, Lin tried to fly out of China, but the plane crashed in Mongolia, with his wife, son, and two other staff members on board.19

Lin’s betrayal was a big blow to Mao’s health, from which he never recovered.20 Mao had picked Lin as his deputy and tasked him with executing the Cultural Revolution, against the opposition of many of his marshals and generals, only to discover that he was plotting a coup. However, Lin’s death created opportunities for change in both policy and personnel. Though not ready to end it entirely, Mao now allowed the Cultural Revolution to taper off. In March 1973, the disgraced Deng Xiaoping was called back to Beijing and appointed Vice Premier. A year later, Mao promoted Deng to First Vice Premier, against the wishes of his wife, Jiang Qing.21

After losing his official positions at the beginning of the Cultural Revolution, Deng had spent several years as a worker in a tractor factory in rural Jiangxi province. Away from Beijing and able to reflect on the political turmoil created by the Cultural Revolution, Deng had become more and more convinced of the absurdity of ideological radicalism. Upon his return to Beijing, Deng began a full campaign of rectification, striving to rid the economy of ideological radicalism and class struggle, and re-endorsing the “four modernizations” as the goal for the Chinese government.

Deng’s economic rectification of 1974–1975 had several features.22 First and foremost, it was a brief triumph of economic pragmatism over radical ideology. During those two years, a wide range of practical policies were put into place. Education and technology were eagerly embraced as indispensable tools for economic development. The establishment of private lots and other economic practices that improved incentives were revived or, at the least, restrictions on them were relaxed; previously they had been denounced as “capitalist tails.” Against the wishes of the Gang of Four, Deng supported continuing the foreign trade that had begun in 1972 with the visit of Nixon to Beijing. The second feature of Deng’s rectification was his recognition of political stability as a precondition for economic development. Deng believed that the political turmoil created by the Cultural Revolution had to be brought under control. Unlike Mao, Deng did not accept class struggle and political campaigns as the best way to preserve socialism. While living in the countryside for several years, Deng had realized that starvation and poverty not capitalism were the biggest challenges that China faced. But this basic economic problem had been ignored during the Cultural Revolution. Political campaigns had to be stopped and order restored, so Deng thought, to allow the government to concentrate on economic development. Political stability was seen as a necessity without which China could not focus on, let alone resolve, its basic economic problems. Third, while Deng rejected Mao’s radical political ideology of class struggle, he shared Mao’s mistrust of administrative centralization and wholeheartedly embraced the solutions Mao had set out in “On the Ten Major Relationships.” This article reflected what Mao had learned from the Chinese experience of moving to a socialist system. It was the theoretical foundation for Mao’s attempts to decentralize the Chinese economy and government administration. But even within the Party the article was not circulated until 1975, when Deng decided to promulgate it to legitimize his economic policy. But Mao refused to let the article go public, probably due to the danger it would pose to the ongoing Cultural Revolution.23

V

When he revived “four modernizations” as a cornerstone of economic policy, Hua decided to let the article “On the Ten Major Relationships” go public, something Deng had tried to do in the previous year, but to no avail. On December 26th, 1976, on the eighty-third anniversary of Mao’s birth, the People’s Daily published “On the Ten Major Relationships.” Hua meant the document to provide both political legitimacy and practical guidance to his economic policy.24 While he could be criticized for the lack of originality, Hua certainly did not let the economy remain at a “standstill,” as is claimed by the official assessments of his economic record.25 In fact, his enthusiasm for “four modernizations” and desire for rapid economic development led economist and veteran official Xue Muqiao to write a letter on April 18th, 1977 to Deng Xiaoping and Li Xiannian, expressing his concern about what had started to look like another leap forward.26 Hua’s economic program would later be disparagingly referred to as “the Leap Outward.” But despite the many shortcomings in his short-lived economic policy, Hua, during the two years up to the Third Plenum of 1978, did manage to lead China away from Mao’s radical ideology and towards renewed economic development. Hua had neither the ambition nor the political clout to carve out his own path, and his economic program failed to deliver on its promises. But to exclude him from the account of the post-Mao Chinese economic reform not only fails to do justice to Hua, but also ignores the early fumbling attempts of the post-Mao Chinese government to stage a state-centered reform.

The “Leap Outward” was officially launched at the end of 1977, and national production increased 7.6 percent in that year. Of eighty primary industrial products, new records were set for fifty-two.27 The state revenue also reached a record high, exceeding the planned figure by 6 percent.28 With this strong economic recovery, and unified by a burning desire to make up for the decade lost to the Cultural Revolution, Hua and his economic team, including Deng and Li Xiannian, decided to revive and revise the Ten Year Plan (1976–1985). This was the plan for economic development that Deng had outlined in 1975, but he had not had a chance to implement it before he was purged by Mao.

A common critique of the Ten Year Plan is that it was too ambitious to be viable, just like the Great Leap Forward. But a casual inspection of the Plan suggests otherwise. For examples, take the two primary products specified in the Plan: grain and steel. Two main targets of the Plan were to produce 400 billion kilograms of grain and 60 million tons of steel annually by 1985. In reality, the grain production reached 379 billion kilograms in 1985, falling short by 5.25 percent, but two years later it surpassed the goal of 400 billion. Steel production reached 46.8 million tons in 1985, falling short by 22 percent; it took another four years to reach 61.6 million tons.29 The goals were not conservative, but unlike those of the Great Leap Forward, they were not completely detached from reality either. The Plan’s fatal flaw lay elsewhere.

The Plan prescribed some 120 brand new industrial projects, including 30 power stations, 8 coal mining fields, 10 oil and gas fields, 10 chemical fertilizer complexes, 10 iron and steel complexes, 10 petrochemical complexes, 10 nonferrous metal complexes, 6 railroad lines, and several ports, all designed to shore up the planned economy by importing modern technology. The whole reform was state directed, investment driven, and concentrated on heavy industry. It differed little from the first Five Year Plan (1953–1957), which mainly consisted of 156 Soviet-aided industrial projects. Dwight Perkins, in his contribution to the Cambridge History of China, called this policy a “plan of the Soviet type par excellence” – that is an apt description.30

In their forecasts for the Plan, Hua and his economic team dramatically overestimated China’s potential export revenues from raw materials, particularly oil, and underestimated the difficulty of raising money on the global capital market, the two primary sources of funding for the Plan. As a result, the whole program quickly ran into financial difficulties. Among the twenty-two projects launched in 1978 – including one restored from the previous wave of opening up in 1972 – only nine were completed.31 More important, the whole reform was focused almost exclusively on the hardware of industrialization, such as equipment and production facilities. Little attention was paid to the prospective management of these facilities, or to the domestic capacity to absorb all this imported technology. There was also little consideration given to the links between the new industrial facilities, their upstream suppliers and their downstream customers. As a result, even those projects successfully completed were severely underutilized. Isolated from the rest of the economy, these public projects of industrialization also failed to generate any significant technological spillover.32 With the double pressure of financial difficulty and disappointing performance, the “Leap Outward” was called off in April 1979 at a working conference of the Central Committee, organized by Chen Yun. An adamant lifelong critic of any economic “leap,” Chen had lost his position under Mao because of his opposition to the Great Leap Forward. He returned in 1978 as China’s economic czar at the Third Plenum of the Eleventh Central Committee and promoted a readjustment policy, advocating a period of economic retrenchment.

A positive feature of the “Leap Outward,” and one that would set a lasting precedent, was to borrow money from the West to fund the import of new technology and equipment from the capitalist world.33 Even though this policy was not completely new, Hua and his team were credited for pushing forward the idea to an unprecedented degree, specifically in their use of foreign capital.34 Until 1977, China had been completely hostile toward foreign capital.35 An article in People’s Daily on January 2nd, 1977 explicitly prohibited the use of foreign capital.36 This policy did not change until June 1978 when Vice Premier Gu Mu made a compelling case for the selective use of foreign capital in modernizing the Chinese economy. This won the endorsement of both Hua and Deng.37 A month later, when the State Council held a brainstorming meeting in July, the use of foreign capital became a focal issue. A novice in the game, China was only able to take out small, short-term loans. Nonetheless, China was no longer closed to the global capital market. It lasted less than a year, but this attempt to open up the Chinese economy did much to educate the technocrats and government officials involved. It opened their eyes and minds to modern technology as well as to capitalism, and gave them the hands-on experience in working with foreign capital.38

Even though the “Leap Outward” was the most visible economic policy pursued during Hua’s short tenure, other more effective reform policies were also implemented as part of the modernization program.39 First, “commodity production and circulation,” that is, production for exchange, became legal at the end of 1976. In a document issued on December 5th, the State Council allowed private commerce to return, which had previously been denounced as “capitalist” and eradicated from the Chinese economy. “We should boldly and assuredly improve socialist commodity production and circulation,” urged the document.40 Second, monetary incentives were reintroduced. In the previous decade, pecuniary rewards were condemned as a relic of capitalism and rarely used as an instrument to motivate workers and peasants. In August 1977, salaries were raised for the majority of workers. Bonus and piece-rate payments were reinstalled in May 1978. The price mechanism gradually returned in labor management, though labor mobility was still strictly controlled. Third, after a decade of political chaos, urban factories were the first target of “readjustment.” Workplace disciplines, abolished in the previous decade, were reintroduced and ordered production was restored. Under the reign of Hua, socialist modernization came to replace class struggle as the main goal of the Chinese government.

VI

A crucial aspect of socialist modernization was to open up China to modern science, culture, and technology. Hua made this goal clear in his speech at the Fifth National People’s Congress on February 26th, 1978: “to accelerate the development of socialist science and culture we must stick to the policy of ‘making the past serve the present’ and ‘making things foreign serve China’. We must conscientiously try to study the advanced science and technology of all countries and turn them to our account.”41 During the Cultural Revolution, China pursued a policy of self-isolation in diplomacy and self-sufficiency in the economy. At the same time, ideological monopolization in the name of pursuing pure socialism led to the stifling of intellectual development. Even Marxism was held to be a finished theory rather than a developing school of thought. As a result, Chinese knowledge of market principles was almost nil, and what little did exist was often erroneous. In 1980 Milton Friedman visited China and gave a week-long intensive course in price theory to the brightest Chinese bureaucrats. One day, at lunch after the lecture, a minister from the Ministry of Materials Distribution and his chief associate, who were to form part of a Chinese delegation to the United States, wanted to know who they should talk to in the United States. The first question they asked was, “Tell us, who in the United States is responsible for the distribution of materials?”42

This intellectual isolation and closure would soon disappear. The post-Mao government quickly put an end to Mao’s foreign policy of exporting revolution, and at the same time began to cultivate relations with its Asian neighbors and the developed world. The year 1978 became “the year of foreign diplomacy” for China. Official delegations headed by vice premiers and accompanied by central government officials, top provincial level officials, and managers of big state-owned enterprises made more than twenty visits to more than fifty countries all over the world, including Japan, Thailand, Malaysia, Singapore, the United States, Canada, Yugoslavia, Romania, France, Germany, Switzerland, Denmark, and Belgium. At the same time, China also hosted approximately thirty state visits.43

Hong Kong and Macau were among the first capitalist economies visited by Chinese officials in 1978. Gu Mu, Vice Premier in charge of economic planning, sent a delegation of officials from the Economic Planning Council and Ministry of Foreign Trade to Hong Kong and Macau to observe how capitalism operated. The idea of setting up special trade zones was suggested to the Chinese officials by their hosts there. As China’s neighbor and the most developed economy in Asia, Japan hosted several Chinese delegations in 1978. The Chinese delegations were interested in Japan’s agricultural development, modern industries, management, and international trade. The two countries signed a long-term trade agreement on February 26th, 1978.44

As the two leading exporters of agricultural products in the world, the United States and Canada also attracted Chinese officials. On July 25th, 1978, officials from Heilongjiang, Shaanxi, Shanxi, Shandong, and Tianjin as well as the Ministry of Agriculture and Forestry visited the United States. Over the next forty days, the delegation was much impressed with how the United States used modern technology to develop agriculture. In August, officials from the Ministry of Agriculture and Forestry and several state farms made a visit to Canada. They were particularly interested in Canada’s dairy and poultry farms, as well as its agricultural colleges and research institutes.45

As an early reformer and critic of the Soviet economic model, Yugoslavia was another nation of great interest to Chinese visitors. Several Chinese delegations visited Yugoslavia in 1978, including Hua Gofeng himself in August of that year. In April, a delegation of the Chinese Communist Party headed by Li Yimeng, Yu Guanyuan, and Qiao Shi visited Yugoslavia to learn how its economy was managed. Yugoslavia’s adamant rejection of Stalinism and successful experiment with the socialism of self-management convinced the Chinese visitors that the Soviet model did not represent the full potential of socialism and that a socialist economy could take different forms.46 Soon after the visit, the Chinese Communist Party resumed its official relations with the League of Communists of Yugoslavia, officially recognizing Yugoslavia as a variant of socialism. In 1979 and 1980, visits were also paid to Poland, Hungary, and other Eastern European socialist countries. This exposure to different socialist economies opened up the minds of the Chinese leaders, whose knowledge of socialism had hitherto been limited to Stalinism and Maoism. After these visits, a number of economists from Eastern Europe, including Wlodzimierz Brus from Poland and Ota Sik from Czechoslovakia, were invited to visit China and give lectures to Chinese government officials and economists.

Probably the most influential and certainly the most eye-opening foreign visit was the one led by Gu Mu.47 From May 2nd to June 6th, 1978, Gu Mu led a delegation of more than twenty officials, including several ministers and provincial officials from Beijing, Guangdong, and Shandong to visit France, Germany, Switzerland, Denmark, and Belgium. This was the first visit by Chinese government officials to Western Europe since 1949. They visited twenty-five cities, and more than eighty companies including mines, ports, farms, universities, and research institutes. Deng met Gu and other members before the trip, asking them to see as much as they could and to ask questions about how the host countries managed their economies. After the trip, Gu reported to the Politburo, as well as to Deng, Hua, and other senior leaders. He was also asked to make several presentations on their visits at various meetings, including one organized by the State Council on “four modernizations.”

Deng himself visited Burma and Nepal early in 1978, North Korea in September, Japan in October, Thailand, Malaysia and Singapore in November 1978, and the United States in January 1979. Deng was deeply impressed by the modern technology and efficient management he saw in Japan. After his tour at Nissan, Deng told his host, “now I understand what modernization means.”48

There is no doubt that such intensive exposure to the outside world, particularly to the West, served as a powerful catalyst for changes in Chinese attitudes to the market, to capitalism, and to economic development. For example, when visiting Singapore in November 1978, Deng inquired in detail about the working of foreign direct investment and its contribution to the rise of Singapore’s economy. To the surprise of his host, Deng openly admitted mistakes the Communist government had made and earnestly sought advice from Lee Kuan Yew, Singapore’s founding and long-serving Prime Minister, on how to improve the Chinese economy. More than a decade later, Lee still remembered his meeting with Deng.

I had told Deng over dinner in 1978 in Singapore that we, the Singapore Chinese, were the descendants of illiterate landless peasants from Guangdong and Fujian in South China, whereas the scholars, mandarins, and literati had stayed and left their progeny in China. There was nothing that Singapore had done that China could not do, and do better. He stayed silent then. When I read that he had told the Chinese people to do better than Singapore, I knew he had taken up the challenge I quietly tossed to him that night fourteen years earlier.49

 

This exposure to the outside world was not limited to those privileged government officials who actually made the visits. Delegations would write a report after their visit, which would later be circulated within the Party and even to the general public. A good example is a report written by Deng Liquan, Ma Hong, Sun Shangqing, and Wu Jiajun.50 In a trip organized by the Economic Committee of the State Council, a group of twenty-three visited Japan for more than a month at the end of 1978, visiting forty-three companies in several cities, as well as households and schools in urban and rural areas. In their report, two recurring themes were prominent: economic failure was admitted but confidence in socialism remained high. The following quotes are characteristic:

In line with Marxism, distribution according to need is impossible without an extreme expansion in commodity production. This is not beyond our reach, as seen from Japan. Capitalist Japan produced commodities in much more quantities and varieties than us. We are a socialist country. It is highly likely that we can reach their level of development and move beyond.
(ibid., p. 4)

 

We are a socialist society. Our institution is much better than capitalism. But due to the lack of experience, we made mistakes in constructing socialism. As a result, the superiority of socialism has yet to be fully realized. The recent Third Plenary Session of the Eleventh Central Committee of CPC had summed up the basic lessons of building socialism in the past three decades, and at the same time called for learning from exemplary practices from abroad. We will certainly fulfill the goal of Four Modernizations by the end of this century as long as we follow the basic roadmap pointed out by the Party, work diligently, and utilize the advanced technology and managerial know-how to serve the purpose of socialism.
(ibid., p. 53)

 

During most of Mao’s time, and particularly since the mid-1950s, capitalism had been condemned as evil and decadent, forever contrasted with progressive and superior socialism and its supposedly shining future. Due to strict media control and self-isolation, the ability of the Chinese people, even its leaders, to access information about the realities of capitalism was very limited. These visits to capitalist economies exposed Chinese leaders to capitalism for the first time and, as Deng Xiaoping admitted, revealed “what modernization means.” Having seen that the workers and farmers in Japan seemed to enjoy a standard of living much higher than they themselves had, Chinese visitors could not possibly return to China believing the old official propaganda against capitalism. Shocked by the creativity and energy of capitalism, the Chinese visitors were ashamed of China’s economic stagnation and depressing technological backwardness. The gap was simply too wide and the contrast too great for the visitors to deny their past failures.

Moreover, these visits provided the Chinese visitors with some clues about how they could escape from poverty and catch up with the capitalist world. For example, as Deng learnt from Singapore, foreign direct investment could help China to tap into the technological expertise and managerial know-how of capitalist institutions, and push China up the ladder of industrialization. That Japan and Western Europe had been able to recover so quickly from the devastation of the Second World War convinced the Chinese visitors that China could catch up if they could open up trade with the West and import modern science and technology.

VII

As China reopened its doors to the outside world, foreign trade grew quickly. In 1977, China’s foreign trade (imports plus exports) was barely 14 billion USD. By way of comparison, Taiwan’s trade was then 18 billion USD, South Korea’s 21 billion USD, and Japan’s 141 billion USD. In 1978, China increased its trade by 50 percent. In this progress, the role of Hong Kong was of great importance. According to Richard Wong, Hong Kong has served as “an agent of China’s opening to the world.”51 On August 31st, 1978 the Hong Kong businessman

K. P. Chao signed a contract to open a manufacturing plant in Zhuhai county, Guangdong province.52 It was reported in headlines in Hong Kong newspapers and was the first such instance of foreign investment in post-Mao China. Two years later, the opening of the four Special Economic Zones in Guangdong and Fujian created more opportunities for overseas Chinese and foreigners in Hong Kong, Macau, Taiwan, and elsewhere to do business in China, bringing in capital, modern technologies, and access to the world market.

Immediately after the open-door policy, many consumer products made in Hong Kong, Taiwan, Japan, and elsewhere started to flow into China and became available to Chinese consumers for the first time. Economists use two names to distinguish this phase of China’s open-door policy from the one pursued under Hua a few years earlier, export promotion versus import substitution. This new approach was to form a core component of economic reform in the decades to come. It differed from the “Leap Outward” policy pursued under Hua which was to import western technology and improve China’s domestic industrial capacity so that China could produce a whole range of modern capital and consumer goods. But this conventional contrast between export promotion and import substitution tends to overshadow rather than highlight a critical difference. Under the “Leap Outward” policy, imported western technology was confined to a few selected state-owned enterprises; under trade promotion, modern science and technology as embodied in imported capital and consumer goods was available to virtually the whole of society.

It was this diffusion of knowledge under a trade-promotion policy, and its absence under the “Leap Outward” policy, that determined the different outcomes of the two economic policies. That the export promotion policy also capitalized on China’s comparative advantage was not in doubt. But the ultimate advantage of the export promotion policy was its long-term impact on the diffusion and accumulation of knowledge, particularly of modern science and technology, which goes beyond the rather static logic of comparative advantage.

When China opened up to the world in the late 1970s, it lagged far behind the West in technology. Once the Chinese people became free to catch up, they quickly exploited the huge gains in economic efficiency created by the technological gap between China and the West. China was bound to become capitalist, as rightly predicted by Steven Cheung.53 But the nature of that process was not something anyone could have predicted.

VIII

Few would have predicted that a communist party would embrace the market. But it is now widely accepted that the Chinese government has masterminded China’s shift to a capitalist economy. What exactly did the Chinese government do to bring about such an extraordinary transformation?

There is no better place to look for the answer than the 1978 Communiqué, which was issued on the last day of an historic five-day meeting, the Third Plenum of the Eleventh Central Committee of the Chinese Communist Party held in Beijing from December 18th to 22nd. This meeting is now widely recognized as a watershed in the history of the People’s Republic of China and the beginning of China’s post-Mao economic reform. This document, while evasive when it came to Mao’s mistakes, was unusually explicit in admitting the past failures of the Party, and candid in stating the goals of economic reform.54

The Communiqué made it clear that it was imperative to “shift the emphasis of our Party’s work and the attention of the people of the whole country to socialist modernization.”55 This implied a break with the doctrine of class struggle, which had been pursued by Mao for decades and resulted in the persecution of millions of Party and government officials and intellectuals. The Communiqué recognized that Maoist policy had resulted in “a series of problems left hanging for years as regards the people’s livelihood in town and country.”56 Accompanying the shift in focus from class struggle to socialist modernization was the acceptance of material remuneration. Rejecting Mao’s dependence on revolutionary zeal as the workers’ and peasants’ primary motivation, the Communiqué sanctioned and promoted material interests. “It is imperative to improve the livelihood of the people in town and country step by step on the basis of the growth of production. The bureaucratic attitude of paying no attention at all to urgent problems in the people’s livelihood must be resolutely opposed.”57 If it were not for this change in attitude, Deng’s famous mantra, “let some people get rich first,” would have been unthinkable.

The Communiqué also stressed an underlying flaw of the existing economic system, the over-centralization of power. This echoed the central point that Mao made in “On the Ten Major Relationships.” As the Communiqué put it, “The fundamental policy put forth in the report On the Ten Major Relationships which Comrade Mao Zedong made in 1956 is an objective reflection of economic law and also an important guarantee for the political stability of society.”58 Not surprisingly, the prescription given in the Communiqué also followed Mao’s example. It stated that

one of the serious shortcomings in the structure of economic management in our country is the over-concentration of authority, and it is necessary boldly to shift it under guidance from the leadership to lower levels so that the local authorities and industrial and agricultural enterprises will have greater power of decision in management under the guidance of unified state planning; big efforts should be made to simplify bodies at various levels charged with economic administration and transfer most of their functions to such enterprises as specialized companies or complexes; it is necessary to act firmly in line with economic law, . . . it is necessary, under the centralized leadership of the Party, to tackle conscientiously the failure to make a distinction between the Party, the government and the enterprise and to put a stop to the substitution of Party for government and the substitution of government for enterprise administration, to institute a division of responsibilities among different levels, types of work and individuals, increase the authority and responsibility of administrative bodies and managerial personnel, reduce the number of meetings and amount of paper work to raise work efficiency, and conscientiously adopt the practice of examination, reward and punishment, promotion and demotion. These measures will bring into full play the initiative, enthusiasm and creativeness of four levels, the central departments, the local authorities, the enterprises and the workers, and invigorate all branches and links of the socialist economy.59

 

The Communiqué specifically singled out agriculture as the weakest link in the chain. “The whole Party should concentrate its main energy and efforts on advancing agriculture as fast as possible because agriculture, the foundation of the national economy, has been seriously damaged in recent years and remains very weak on the whole.”60 However, the remedy it proposed was nothing more than a modification of price control:

the State Council make a decision to raise the grain purchase price by twenty percent, starting in 1979 when the summer grain is marketed, and the price of the amount purchased above the quota by an additional fifty percent, and also raise the purchase price for cotton, oil-bearing and sugar crops, animal by-products, aquatic and forestry products and other farm and side-line products step by step, depending on the concrete conditions. The factory price and the market price of farm machinery, chemical fertilizer, insecticides, plastics goods and other manufactured goods for farm use will be cut by ten to fifteen percent in 1979 and 1980 on the basis of reduced cost of production.61

 

The Chinese government expected socialist modernization to be a “new Long March” and “a profound and extensive revolution,” which would call for concerted and continuous efforts. To achieve the goal, the basic approach recommended in the Communiqué was clear enough to be instructive, but left sufficient room to accommodate local initiatives.

Carrying out the four modernizations requires great growth in the productive forces, which in turn requires diverse changes in those aspects of the relations of production and the superstructure not in harmony with the growth of the productive forces, and requires changes in all methods of management, actions and thinking which stand in the way of such growth. Socialist modernization is therefore a profound and extensive revolution.62

 

It is also worthwhile to note that, according to the Communiqué, “changes in all methods of management, actions and thinking” should serve only “the growth of the productive forces.”63 In later years, the effect on “the growth in the productive forces” would be used as the primary criterion by which to judge a reform policy or practice.

While the long-term goal of reform was clearly articulated – “to make ours [China] a modern, powerful socialist country before the end of this century”64 – there was no grand strategy or blueprint in the Communiqué. Knowing almost nothing about the markets or the market economy, the Chinese government never used the term at all in the Communiqué.65 It has now become common practice to take the Third Plenum of the Eleventh Central Committee of the Chinese Communist Party as the starting point of Chinese market transformation. Without denying the historical significance of this meeting and the 1978 Communiqué, it is important to realize that the Chinese leaders did not even contemplate a market economy at that time. But their minds were open. They were prepared to try anything that would help “the growth of productive forces,” and subject everything to the test of practice, or so they claimed.

To put the 1978 Communiqué in historical context, we must be clear that China’s post-Mao economic reform was not the first effort of the Chinese Communist Party to reorganize the socialist economy. Mao’s two campaigns of decentralization, the first launched in the mid-1950s and the second during the Cultural Revolution, failed to rejuvenate the socialist economy. In the aftermath of the Cultural Revolution, Mao’s reliance on class conflict and continuous revolution to preserve socialism had proved quixotic and ruinous. While his solution to the embattled state of China’s socialism – decentralization – might still remain ambiguous, the Chinese economy became far less centralized than other socialist economies. Moreover, Mao’s diagnosis of the root problem facing the socialist Chinese economy was endorsed as one of the lasting legacies of the Communiqué.

As an economic strategy, the Communiqué did not go much beyond what Mao had proposed in “On the Ten Major Relationships.” It agreed with Mao fully in his diagnosis of the most serious problem facing a socialist economy: over-centralization. In contrast to Mao’s thinking, however, the Communiqué’s first priority was “the growth of productive forces,” or, in non-Marxian terms, economic development. But even this emphasis on economic development, or the pursuit of “four modernizations,” merely revived an economic program first proposed by Zhou Enlai in 1964. Another way in which the Communiqué differed from Mao’s thinking was the new solution it proposed to resolve the problem of over-centralization: devolving authority to enterprises in addition to local governments.

As a political strategy, the Communiqué was a work of genius. It began by praising Mao as “a great Marxist” and urged that the whole nation should “rally even more closely under the banner of Mao Zedong thought,” only to turn the focus of the Party away from his doctrine of class struggle toward socialist modernization as the unifying mission for the whole country. Its stated goal was to make China “a great, modern, socialist power”66 by the end of the twentieth century, which no one could possibly object to. The continuing commitment to Marxism-Leninism-Mao Zedong Thought helped to avoid ideological chaos and maintain the political stability necessary for economic reform. Given the enduring respect for Mao within the Party, the military, and the general public, a total repudiation and rejection of Mao would have undermined the legitimacy of the post-Mao government and sown the seeds for political disorder. In a calculated maneuver, the post-Mao Chinese leadership praised Mao so that they could quickly bury Mao’s radical policies and move on to economic development. By re-stressing Mao’s forgotten principle of “seeking truth from facts” and embracing practice as the sole criterion for testing truth, the Chinese government freed itself from the shackles of his ideology.

IX

In the two years between Mao’s death and the Third Plenum, China made a decisive move away from Mao’s radicalism. The death of Mao threw China into crisis, clouded by political uncertainty. With the support of Ye and other military veterans, Hua brought down the Gang of Four, ended the Cultural Revolution, and quickly restored political order. More importantly, China reopened itself to the outside world, welcoming technology, capital, and the ideas and practices of the market. At the same time, Hua gradually but decisively shifted the focus of the government away from the radical ideology of continuous revolution towards socialist modernization. This shift was further consolidated at the Third Plenum with the return of Deng Xiaoping to the Party leadership. Although the Communiqué did not contain an economic blueprint for the pursuit of socialist modernization, it manifested political wisdom in marshaling all social groups to stand beneath the banner of Mao Zedong Thought to enable China to embark on the course of socialist modernization. It was actually quite fortunate that the Communiqué did not prescribe any specific measures, with the exception of agriculture. Given how poorly informed the Chinese leaders were at the time, any prescriptions would probably have done more harm than good. But now the Chinese government was committed to a pragmatic approach, willing to subject everything to the test of practice, and eager to try anything that facilitated “the growth of productive forces.” China may have been poorly equipped for a market revolution, but it was certainly mentally prepared.