China in 1983 Jude Wanniski June 10, 2004

Memo To: SSU Students
From: Jude Wanniski
Re: My Trip to Russia and China

Last week I ran the first part of my October 1983 client letter, covering the first leg of my 18-day trip to Russia and China with members of the Independent Petroleum Association of America, the oil "wildcatters." Part One ended with our group leaving Moscow on a flight to Beijing, with spontaneous applause bursting out in the cabin when the airplane wheels left the ground. It was that awful an experience, where we felt we were not visiting a country, but a national penitentiary. We we all braced for more of the same in Communist China and were astonished to find exactly the opposite, a nation bursting with excitement, as if it had just been freed from a national penitentiary!!

This portion of my client letter was seen by Max Frankel, editorial page editor of The New York Times, and he asked if he could condense it as an op-ed, which he did later that month. The op-ed was met with ridicule by liberals and conservatives, who insisted I must have been taken in by propagandists. The liberals were unhappy because they wanted China's "socialist" experiment to succeed. The conservatives simply refused to believe a Commie country would on its own volition, without being conquered, turn toward capitalism and a measure of freedom. It was another two years before there was grudging acceptance that I was accurate in my assessment. That alone should tell you how difficult it is for the national news media to report developments under their noses when the news is inconvenient to the national political establishment.

* * * * *

PEOPLE'S REPUBLIC OF CHINA

On the main street of Shanghai, the most populous city in the word at 12 million, there is a theatre built for the exclusive use of world renowned acrobatic performers. As you file into the theatre, which holds about 1,200 people, an usher hands out brochures and programs, which begin by telling us: "Founded in 1951, the Shanghai Acrobatic Troupe (formerly named the Shanghai People's Acrobatic Troupe) is one of the famous big acrobatic troupes in China..."

"What's this?" I asked Mr. Soong, our government tour guide. "What's this 'formerly named Shanghai People's Acrobatic Troupe'?" He caught the look in my eye and grinned, and I continued: "Mr. Soong, I expect to come back here in two or three years, and when I do, I expect to be greeted at the airport with a banner that says, 'Welcome to the Republic of China (formerly the People's Republic of China)'." Mr. Soong laughed heartily at my little political joke. But the next day, having thought this over, he approached me and said he did not think they would ever change the name of the People's Republic of China. I said perhaps they would. "Only," he said, "for purposes of shortening." Nothing political.

In fact, a visit to China in September 1983 is an exhilarating experience because the environment crackles with the dynamics of change, change that is every moment taking China further and further in the direction of shortening its name. Already there is a sense in which the name has been changed, de facto, to simply China. After eight days in Beijing and Shanghai I can't say I once felt that I was in a "Communist" country. The experiments with individual enterprise and capitalism are so thoroughly underway, with such great success, that Mao Tse-tung and his experiment with manic egalitarianism, the "Cultural Revolution," is rapidly becoming a national memory.

· In the Soviet Union, everywhere you turn there are gigantic posters and billboards of Lenin, Marx and Engels, with socialist slogans decorating the tops of the public buildings. In China, we saw portraits of Marx, Engels and Stalin only in the Beijing museum. In Beijing, there is only one outdoor portrait of Mao that we saw. It faces Tian An Men Square across Changan Boulevard, facing the Chairman Mao Memorial Hall. The portrait is so small that from the far end of the square it isn't possible to tell whose portrait it is. A quarter mile down Changan Boulevard, near the Peking Hotel, there is a SONY billboard half again as big as the Mao portrait. There are no socialist slogans in sight on the buildings; billboards advertising toothpaste and wristwatches have sprung up.

· The first time we hear the name "Mao" is when one of our government guides asks us, from the front of the bus as we head to the Great Wall, if we've ever heard of Chairman Mao. A young man (60 percent of Chinese are under 30), he volunteers that Mao "made mistakes in his old age." At the moment, he is venerated at about the level of Lincoln in the U.S., wart and all, his name brought up only in historical context. For China, the current epoch began in 1978 when Deng Xiaoping began the new economic incentive experiments and loosened up on political freedoms.

· The pace of change is so great that American tour guides who come through every three or four months say they can see and feel changes even in those brief periods. The most recent book about China written by an American, China, Alive in the Bitter Sea, is already inadequate in giving a sense of the country today. Fox Butterfield of The New York Times covers the several years he was Peking bureau chief, to 1981, but in two years China has galloped far ahead. The women of China, for example, have gotten rid of their Mao tunics and baggy pants and are, in a relative sense, fashion conscious.

· In a relative sense, too, there is an economic boom underway in China. In many ways the standard of living is still below that of the Soviet Union, particularly in housing, but at current construction rates that gap could be closed in several years. And the markets for produce and clothing and consumer durables already put the stores and shops of Moscow to shame. Soviet shoppers would have a field day buying clothing on Nanking Road in Shanghai, the quantity and quality far beyond what we saw in Moscow.

· Through a coincidence, graduate economic students at the University of Beijing learned a supply-sider was visiting the city and sent word inviting me to speak to them informally. They were quick to assure me they were being taught all varieties of economic theory (one was doing her thesis on economic growth in England and Germany in the 19th century), and it became clear they are beyond mere disenchantment with Marxism-Leninism. The failure of the Cultural Revolution was so profound, so intensely imprinted on this young population, that there seemed to be no fears that there could be revival, even should Deng Xiaoping pass away. The economic students are fascinated with Western, particularly American, ideas and are more familiar with U.S. economic policy than I could have imagined, picked up via the Voice of America. The biggest laugh of the afternoon came when I named Marty Feldstein, David Stockman, Beryl Sprinkel and Alan Greenspan as opponents of economic growth in the U.S., names they seemed familiar with, and I called them the Gang of Four.

· The government encourages English as a second language and the language is taught on television. A letter to the editor in the China Daily, a government-published English-language daily with an upbeat, free-enterprise flavor, complains that some managers are not taking English lessons seriously, which could lead to commercial losses. American-style English is preferred, apparently. One young man in Shanghai boasted to me that he'd learned his English from a teacher who has been raised in Wisconsin. A student in Beijing apologized for what she described as her British accent.

* * * *

The driving force behind the economic boom is the surge in agricultural production, the first of the "Four Modernizations" (followed by industry, science and national defense). In five years, per capita income among the 800 million Chinese peasants has doubled, to 260 yuan ($130), and these numbers surely understate the growth in the level of wealth in the countryside. Communes are no longer really communes, now that the "Responsibility System" is in place, whereby families or groups of families can choose to segment themselves within the commune and take responsibility for production on a parcel of the state-owned land. The system involves "Rights, Duties and Benefits," the upshot of which is that the segment gives up a quota that is paid to the state as tax, and surplus is divided among the segment which can discriminate in determining benefits for individual workers. The system has more the feel of a farm co-operative, with co-op surpluses taxed at a flat 25 percent, and elected communal boards deciding what portion of the surplus should go into capital investment. In addition, workers can supplement income on their private plots.

The net effect of this kind of decentralization, which reestablishes effort-reward system within family or clan, is that some farmers are getting "rich", which is how they are described to us by people in the cities. Those who organize themselves most efficiently, choose the right crops at the right time, or successfully invest their savings to raise livestock, can cash in and draw others into a broader responsibility system. The most successful are building bigger brick homes, most countryside homes being privately owned in China. Private vehicles are not permitted inside the major cities, but we hear the government is encouraging farmers to use their savings to acquire trucks and cars that expand productivity. Black and white television sets are now commonplace, with color TV and refrigerators the new wealth symbols. (In one commune of 18,000 people we visited, 12 of the "rich" families had recently acquired refrigerators.)

As productivity increases in the countryside, the government seems also to be encouraging people to leave the fields not for the major cities, but for expanding local towns and villages with light industry and commerce. One of the most important "capitalist" reforms initiated in China since 1978 permits individuals to begin their own enterprise and hire as many as 11 employees. The Chinese sent teams to Eastern Europe to study similar reforms that have been underway for a decade (Hungarians can now hire up to 50 people), and decided they were suitable for their current socialist framework. The China Daily reports that 70,000 such businesses were registered in Shanghai alone last year and complains of tax evasion among those who are starting private enterprises and not registering with the government.

We're amazed, too, by the brisk activity of the workers in the state-owned businesses. Shop clerks are eager to serve, and at some tourist gift shops, the managers are at the door handing out Cokes free of charge, to keep customers looking at the goods instead of thinking of a cold drink. It works. Inquiring, I discover a variety of the Responsibility System applies in the state markets. Employees are awarded bonuses out of the stores' profits, and when business is good, the bonus can amount to four to five times the monthly wage. Nevertheless, we hear that the tensions building up in China turn on the developing awareness that country folk are getting richer faster than the urban proletariat. At a Shanghai commune (which has now become more a light industrial co-op than a farm), the young superintendent tells us that the young girls of his commune in the last few years have stopped going to the cities in search of superior mates.

This "tension" is probably a healthy sign, pointing toward eventual industrial reforms of a capitalist nature. The economic-growth forces now in control seem anxious to break the "iron rice bowl" mentality that remains a hangover from the pre-1978 days, the notion that a worker simply can't be fired or disciplined by having his wages reduced. A form of the Responsibility System was tried for a few years in the heavy industries, with plant managers given greater local autonomy over personnel and pricing and given discretion over bonus allocation. The experiment simply did not work and was suspended in 1981.

A steel mill or automobile plant is too vast and complex an organization to respond to the kind of incentive systems that can make a small farm or shop click by linking effort and reward among individuals. To avoid grief, plant managers would simply payout equal bonuses among hundreds or thousands of workers, who wouldn't then work individually or in small units to find more efficient ways to produce. And managers would find themselves subsidizing capital to expand output, adding underutilized machines that would simply add to the drain on the national treasury. A new incentive system was begun, I heard, on June 1, but the nature of the reform could not be described to me, only that it was modest in scope and would take considerable time to prove itself. At least the government is determined to experiment in this area, which must eventually lead it to try greater market disciplines.

The government is eager to expand its oil development, currently at 2 million barrels per day onshore, with offshore fields on the verge of production. In the week we were there, China signed 20 joint-venture agreements with foreign oil companies, expecting about 100 offshore exploratory wells by 1985. First Boston Corp.'s Tom Petrie, one of the financial community's best oil analysts, was along on our tour and was very impressed with China's offshore potential, expecting it wouldn't be long before American oil-service companies would be flocking to the region. They seem to be finding oil and gas everywhere they've been drilling in the six offshore basins.

Onshore, the potential is enormous, but there's an infrastructure problem. Modern drilling equipment is so heavy that it can't be moved into China's interior over the primitive roads and bridges. And if it could be brought in piecemeal, by helicopter perhaps, there's no way of transporting the oil and gas out to the markets. Hence, the emphasis on offshore development at the moment. Fewer than 100,000 wells have been drilled in China, compared to about 2.7 million in the United States. The 100 offshore exploratory wells planned, says Petrie, is a big number, reflecting China's confidence in tests to date.

All of this suggests that Deng Xiaoping's goal of a $1 trillion GNP by the year 2000, from the current $400 billion, is not unrealistic. The goal almost seems too modest, considering the demographic likelihood that there will be 1.25 billion people around in China by 2000, even if the current extremely low birth rate holds up. In the 1950s and '60s, Mao exhorted the people to have babies to build power and production; now, the government has a one-child policy, and couples that have a second child lose state benefits. The sub-zero growth rate aims at a population of 700 million by the year 2025, down from the current 1 billion.

* * * *

"I hope Deng Xiaoping lives for another 15 years, even though he is a dictator." This one-sentence observation from a 21-year-old Shanghai history student sums up the dilemma facing the whole country. The 79-year-old Deng is a hero whose economic reforms have brought relative prosperity and the promise of even better times to a people that had recently been locked in their own national penitentiary. But he's still a dictator who has not really followed up with any attempts to liberalize political institutions. There was Democracy Wall in 1979, which took a fling at untrammeled free expression of ideas. But Deng shut it down a year later, and not only have there been no further experiments with political freedom, but there have also been persistent reports of heavy-handed repressions. Reports of forced abortions and even infanticides in connection with the birth-control regimen haven't been traced directly to the central government. But recent reports of dragnets that have rounded up thousands of suspected criminals, resulting in drumhead trials and summary executions of at least hundreds, have not been denied. One suspects that the Old Guard communist cadres and functionaries still around have insinuated that the capitalist-road economic forms spawned heightened criminal activity in the cities, and the government reacted as it did.

Still, there really isn't the kind of repressive atmosphere one smells in the Soviet Union. While there are no posters on Democracy Wall, complaints about the government are voiced casually and nobody seems to be looking over the shoulder. Deng is said to be surrounded by liberal advisers, aides who are political as well as economic liberal -- "liberal" being used here in the 19th century manner. Thus, the wish that he live another 15 years even through he is a dictator. The people have a Napoleon problem in Deng, in that the forces of history have thrown up the right man at the right time, but what comes after?

Without democratic institutions, the chance that Deng will be succeeded after a power struggle by another liberal as wise as he, is as small as the chance that Napoleon II would have filled the bill. And unless there are political channels that permit the masses of people to determine policy through their leaders, there's only so far the economic reforms can go before a new stagnation sets in. The old Maoist reactionaries are waiting around for just such a moment to say we told you so, to reassert their views through a power elite. Which is why, until Deng is prepared to gamble on democracy again, the young people we met have every right to be skeptical of their futures, as delighted as everyone we met seemed to be with the present. Happiness is always a relative thing. China these days has the happiest people anywhere, considering the nightmare they've come through. When Ronald Reagan visits Beijing next spring, maybe he can give them a few political tips on how to make it last.

* * * *

China in a boom, Russia in a Depression. The United States being pulled toward a foreign-policy crisis by the juxtaposition of these historic forces. The Soviets are well aware the United States is in a bull market, an economic recovery likely to give Ronald Reagan four more years. They're aware that Western Europe and Japan are being pulled along in this general advance, and the democratic leaders of these nations will be around for quite awhile, shoulder-to-shoulder with President Reagan. They know Eastern Europe, too, is making headway, especially those of the satellite states that are furthest along the capitalist road in economic reforms. They're aware that Hungary is even engaged in competitive elections almost to the top of its Communist Party, the kind of political reform that when merely implied brought Soviet tanks into Czechoslovakia. The Soviets are aware of the reforms and the boom in China, although the masses of Soviets are not yet quite informed about this progress.

Andropov, we keep hearing, would like to introduce the kind of reforms that would break the Soviet stagnation. But it now appears that is going to be a very slow process, at best. Where Deng Xiaoping succeeded in winning the support of the Chinese defense establishment for his Four Modernizations, which put the military in fourth place, Yuri Andropov seems to have lost out to a solid coalition of Old Guard egalitarian ideologues and the Red Army, the former supporting the latter's insatiable demands for weaponry, the latter supporting the former's resistance to meaningful reforms.

Surrounded by signs of economic growth, the coalition surely feels more paranoid than ever about the external threat. Thirty-six hours out of Moscow when I heard about Flight 007, it seemed entirely logical that the Soviets would have acted as they did, not as a nation but as a national penitentiary. Nor did it surprise me when the Soviet military leaders came forward to rationalize an act that is uncivilized, but not quite unmilitarized. What did surprise me is when Andropov himself came forward to speak on behalf of the reactionary coalition I'd thought he could now more easily oppose. The world is suddenly a more dangerous place, and for the time being, even sound economics won't help much. East and West have to come up with some bright ideas on how to get the Soviets out of their corner. Until we do, this growing tension will dominate the political world.