Deng Xiaoping, Mao’s successor, announced that China would open up to the world economy and develop an internal market to boost economic growth.
Western leaders saw this as proof that China had “abandoned communism” and that only privatisation and “market forces” could bring prosperity.
Deng quickly became the darling of Western leaders and of institutions such as the IMF and World Bank.
China’s leaders went along with the rhetoric, but what they were really doing was quite different.
Privatisation was an important part of the mix, particularly in the countryside where over 80 percent of the population lived. Peasant families were given their own land and allowed to grow what they liked. After tax, whatever they grew was theirs to eat or sell.
The results were spectacular. In four years output grew by 60 percent, while peasant incomes doubled. The World Bank called the reduction in poverty “unprecedented in world history”.
This increase came from peasants simply working much harder, as they stood to gain. The government also greatly increased the prices it paid to peasants for their produce.
This huge rise in peasant incomes fuelled the growth of “village industries”, producing clothes, industrial components and building materials.
These factories had often been started under Mao as part of a programme of dispersing production in case of war. No one expected them to grow as fast as they did.
By 1985 they were employing 70 million people—one in five of the rural workforce.
Western observers assumed that the village factories were evidence of the growth of private enterprise. In fact, they were almost all owned by local governments.
In the cities, reforms in industry didn’t include privatisation at all.
Local officials and managers were given powers to decide on output and investment. Pay rates were increased and unemployment was cut by allowing workers to retire early.
What the government was doing was essentially using existing capacity more efficiently by giving both peasants and workers incentives to work harder.
In the early 1980s this strategy produced stunning results. But by 1985 the drawbacks were beginning to show. In the countryside, food production peaked and then dropped off as peasants switched to more lucrative commercial crops.
In the cities, state industries were losing money as the village factories undercut them.
One side effect was a sharp rise in inequality.
Because the economic growth didn’t involve any extra investment, the poorer inland areas of China grew slower than the wealthier, more fertile, southern coastal provinces.
But even in areas that generally prospered, the gap between rich and poor grew.
Central government was losing its control over lower level officials. The reform strategy didn’t involve a shift from state to private ownership, but rather a shift in economic power inside the state.
Local officials and managers had been given wide-ranging control over their local economies, in order to make them more dynamic.
This worked, but it meant they made decisions on the basis of what worked best for their bit of the economy, rather than for the ruling class as a whole.
This led to duplication and waste, as well as trading wars between different provinces. And it meant that the government couldn’t rely on local officials to do as they were told.
The more the economy grew, the more it got out of the control of the government. When the government tried to rein in growth, it led to falling production as the economy stalled. The ruling class became split, which only added to the instability.
By 1987 runaway inflation had returned for the first time since 1949, as the growth of the market allowed food sellers to ratchet up prices.
By 1989 China was in the middle of a full blown economic crisis. Rural industries closed, throwing millions out of work, and local governments ran out of money to pay peasants for their produce.
The summer of 1989 saw the biggest protests since 1926, as tens of millions of workers demonstrated their support for student hunger strikers in Beijing.
Deng’s turn to the market had succeeded in making the economy more dynamic, but had also plunged it into chaos. The new strategy was no more capable of solving China’s problems than Mao’s had been.