Market Reform as a Spontaneous Order


Paul Gregory and Kate Zhou have written an interesting revisionist account of market reforms in China and Russia. Pushing against the idea that "China succeeded because a wise party leadership deliberately chose gradualism, retained the monopoly of the Communist Party after rebuffing democracy at Tiananmen Square, and carefully guided the process over the years," while "Russia failed because the tempestuous Gorbachev ignored the Chinese reform model, moved too quickly, and allowed the party monopoly to fall apart," Gregory and Zhou present a different storyline:

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Throughout the reform process, the Chinese Communist Party simply reacted to (and wisely did not oppose) bottom-up reform initiatives that emanated largely from the rural population. Deng Xiaoping's famous description of Chinese reform as "fording the river by feeling for the stones" is not incorrect, but it was the Chinese people who placed the stones under his feet.

Mikhail Gorbachev became general secretary of his party in March of 1985. By that time, he knew that the Chinese reforms were successful. His reforms, contrary to the popular narrative, closely mimicked China's. He proposed to lease land to peasants, establish free trade zones, promote small cooperative businesses, and set up joint ventures. The difference was that Gorbachev imposed these changes from above, on an urban economy in which virtually all citizens worked for the state. Gorbachev's reforms either were ignored or they were enacted with perverse consequences. Bottom-up reforms worked in China; top-down reforms failed in Russia.

One example the authors offer is the decollectivization of agriculture:

The deal that Gorbachev offered his farmers in 1988 was that they could have their own plots of land with 50-year leases from the state. His offer was a "contracting system" whereby land leasers would deliver quotas to the state but could keep what was left over. He had virtually no takers. Russian farmers were embedded in state agriculture, from which they could "take" seed, fertilizer, and tools under the principle "they belong to everyone and hence to no one." Chinese farmers were not made such a generous offer. Instead they began to quietly distribute the land, with each family delivering production for the state quota. Gorbachev called for decollectivization from above; China's farmers decollectivized spontaneously from below. They created their own "contract responsibility system," initially at risk of severe punishment. There were no leaders; there were no face-to-face confrontations. It just happened. As agricultural production soared, Deng Xiaoping and his party realized they could not resist and could take advantage of something that was working. By 1982, more than 90 percent of rural dwellers were engaged in the household production system.

There are potential problems here (isn't it a little too sweeping to describe the USSR as an "urban economy"?), but the basic narrative is pretty persuasive. The argument has more nuances than I can summarize in a blog post, so I urge you to read the whole thing. I'll just leave you with this pessimistic passage: "Each country seems to have learned the wrong lesson from the other—China that political reform will destroy the Communist Party and Russia that only a strong authoritarian leader can make reform succeed."

Elsewhere in Reason: More Chinablogging here, here, and here.

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  1. The difference was that Gorbachev imposed these changes from above, on an urban economy in which virtually all citizens worked for the state. Gorbachev’s reforms either were ignored or they were enacted with perverse consequences. Bottom-up reforms worked in China; top-down reforms failed in Russia.

    The Chinese leaders simply chose to let people follow their self-interests. Instead, the Russians tried the same command-and-control “solution” to jump-start markets. This was their fatal conceit. The Russians imposed a series of arbitrary rules which could be broken by the unscrupulous. Bottom-up systems take care of such leeches by themselves, through word of mouth, insurance, private-market security systems.

    The answer is to let people make the self-interest-driven market networks – one cannot impose that from above.

  2. I’m no economist, but I was under the impression China’s domestic economy is based on a form of 16th century Mercantilism.

  3. Compared to China, Russian communists had an extra 30 years to crush entrepreneurs and teach everyone the evils of free enterprise. Plus, there are some basic culture differences. On average, the Chinese are known to be comparatively industrious. Russians, not so much.

    1. Hmm, that’s tasty collectivism. And Jews are really good with money! All of them! Let’s not get into the blacks. Or the Irish.

      1. Acknowledging known cultural differences isn’t “collectivism.” On the other hand, denying that there’s any such thing as cultural differences is something collectivists often do.

        1. Saying that Russians are lazy and the Chinese are hard workers has no caveat that it’s a cultural difference, dude.

          1. Except that’s not what I wrote. I wrote “on average” and “comparatively industrious.” Chinese industriousness is common knowledge and widely admired, and on average they beat the Russians on that score. Those aren’t iron-clad, brain-dead racial stereotypes, they’re an acknowledgment of cultural reality. Do you deny that, or does the whole idea of cultural differences offend you?

          2. Your foolish if you don’t think that culture has an impact on the success of groups. Mao realized it, that is why he tried to crush traditional Chinese culture. Traditional popular Chinese culture (as opposed to officially sanctioned culture) has always been focused on wealth, success and entrepreneurship, there are hundreds of things I could point to to make the case. Chinese history has been one long story of a large state trying to squash this culture and hold power to the center (and has been why official Chinese top down culture has always been anti-capitalist).

          3. Episiarch,

            Readin the post again, I regret the word “foolish”. I understand what you are getting at (or at at least I think I do) that racial (and even cultural stereotypes) are dangerous and misleading. I agree. My point is only that popular culture can tell us something about outcomes (either because it reflects behavior or affects it).

      2. Don’t forget the Dutch.

  4. TP, the policies being followed by the Chinese government are Mercantilist, but so are those followed by the US government. What is clear is that the freedom [quietly] given to people to pursuit their self-interests and form markets is what’s driving China’s economic growth and not so much the policies of their central banks.

    The US is following the exact contrary policies domestically but still follows the same economic policies when it comes to foreign commerce: The US is strangling the internal market through regulations, taxation and plain-old bureaucratic hurdles, hile still pursuing a mercantilistic policy.

    1. The US government is attempting to maintain a positive balance of trade in order to maximize its holdings of gold and silver bullion?

      To the extent we have protectionist policies, they’re the result of corporatist influence from unions and US businessmen, not attempts to help Washington fill Fort Knox up.

    2. I have no patience for argument that the Chinese are mercantilists. Of course they are, but we fully enable them to be so. The main policy through which they are is keeping the RMB fixed low against the dollar. The main way they have accomplished this is by having bought trillions (literally) of dollars of Treasuries (they could have bought hard US assets, but I guess they saw how well that worked out for the Japanese and have decided to stay liquid). Well, they wouldn’t have that luxury if we weren’t deficit spending ourselves into oblivion. The two are inexorably linked.

  5. Nothing like a ringing endorsement of Dengism. Oddly enough the many of the smaller ideas and theories of how to go about change are good. It’s the over all frame work within which the theories are proposed to be used and the end goal which is bad.

  6. Just Mao it!

  7. “fording the river by feeling for the stones”

    Thanks, the wisdom from the gay community is often underappreciated.

  8. There are potential problems here (isn’t it a little too sweeping to describe the USSR as an “urban economy”?),

    When compared to China, yes. In the era being talked about, you’re looking at a bout a 70-30 urban-rural split for Russia, and those numbers reversed for China.

    1. Using ‘russia’ as a proxy for the USSR, but not a bad one – the Stans are more rural, but baltics and Ukraine relatively more urbanized than Russia proper

  9. I have to say, that this analysis comes closest to the mark of any I’ve seen to date. The one thing that they miss (from the bit I’ve read) is the impact of having the free market economies of Hong Kong and Taiwan, with literally thousands of business people and entrepreneurs forming part of the fabric of business. Russia never had two Russian speaking capitalist dynamos on its borders. Not only did these guys provide capital, expertise and inspiration to mainland Chinese, but also curbed the ability of incompetent technocrats to convert state assets into personal empires with state protection (a la Russia). As a result, you get companies in China like TCL, the largest private TV manufacturer there, started by an ex-engineering professor who spent time in the “countryside” Chinese version of gulags during the Cultural Revolution.

    I’ve seen this first hand (I speak a two dialects of Chinese fluently and have lived and worked there on and off for the last 20 years).

  10. Read Thomas Sowell on the “overseas Chinese” sometime.

    1. Try, also, Amy Chua, on market dominating minorities (e.g. overseas Chinese, Jewish people, etc)

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