This fine book is quite unusual in one respect. It begins an investigation of the 1980s debate over China's economic reforms with a chapter-long dip into the Spring and Autumn and Warring States periods, centuries before the dawn of the Common Era, as well as the Guanzi, “a core text in ancient Chinese economic thought on price stabilization” (p. 18). The point of this is to establish China's very long experience of markets and prices and of state–market relations. That history extended right up to the 1930s war with Japan and the Civil War that followed, during which the Communists held extensive liberated areas in which they had to work with markets. In the early 1950s, they did so again in the course of extinguishing the great hyperinflation inherited from the Kuomintang. This past history fills the early chapters of How China Escaped Shock Therapy. When Mao Zedong's death in 1976 finally ended two calamitous decades of market suppression, the government did not have to rely on Western doctrine in restoring and managing markets. There was a wealth of Chinese experience to consult.
Of course, Chinese economists in the late 1970s and 1980s were also eager to understand Western experience and thus studied how the US, Britain and Germany transitioned from wartime-controlled prices back to free markets after World War II. Eastern European dissident economists (Janos Kornai, Wlodzimierz Brus, Ota Sik et al.) were also consulted, as were American economists, such as J. K. Galbraith, James Tobin and Milton Friedman. All this is clearly laid out in the first part of the book.
The core of How China Escaped Shock Therapy, however, is contained in chapters five through eight, which chronicle the intensifying debate over how to implement the transition from a central planning regime to a market economy. Weber not only has read widely and deeply in the literature about this debate, but she also interviewed many of the surviving participants. As her title suggests, the main issue at stake was whether China should undergo “shock therapy,” meaning a combination of rapid liberalization of prices (“big bang”), privatization, liberalization of trade, and price stabilization via tight fiscal and monetary policies. This was the “Washington consensus” approach favoured by the IMF and the World Bank, and which was to prove disastrous when applied in the former Soviet Union and much of Eastern Europe. It was also favoured by a group of economists in China who were captivated by modern Western economic theory and thought it offered a “scientific” answer to the transition problem.
Twice, in 1986 and again in 1988, China came close to administering a “big bang.” The second time, pushed by Deng Xiaoping and then loyally promoted by now General Secretary Zhao Ziyang, it was so close to full adoption that the public panicked. People rushed to take their money from the banks and buy whatever assets might hold value in the inflation that had already begun. That reaction, plus dire warnings from respected economists both in China (notably Li Yining) and out (notably Jenö Fock, former premier of Hungary), cut short the “bang” before it became “big,” amidst what was nevertheless the highest inflation China had experienced since the early 1950s. Moreover, both the inflation and the repressive policies adopted to quench it inflicted pain and together created an image of government incompetence that helped propel the student occupation of Tiananmen Square in April 1989 and ultimately destroyed Zhao Ziyang's career.
Fear of social unrest and political turbulence was a decisive factor in the government's ultimate retreat from shock therapy. Conversely, some of its proponents, both Chinese and foreign, favoured regime change, believing that political reform was the sine qua non of genuine economic reform. Milton Friedman, who was brought back to China in October 1988 to lobby Zhao, was no doubt among these. The intensity of the debate probably owed much to the sense on both sides that the fate of the Communist government was in play.
Weber presents an exceedingly thorough, nuanced and even exciting account of the debate, which was fluid and constantly changing. The reader feels immersed in its day-to-day flow and even though the outcome is known, Weber instils a sense of suspense about what would happen in the end. That outcome, of course, was China's final rejection of “shock therapy” and continued adherence to the more gradualist, market-creating dual track system in the spirit of “crossing the river by groping for stones.” That decision sustained high growth rates for another two decades, while steadily expanding the market and changing but not eliminating the state's role. Ironically, several principal supporters of the winning side, such as Chen Yizi, disappeared from the scene, having been arrested or exiled for their support of the young occupiers of Tiananmen in 1989. Conversely, major supporters of shock therapy, such as Wu Jinglian, remained in China and continued successful careers.
Weber presents the two sides of the debate fully and fairly but does not quite hide her own disdain for the shock therapy position, with its implicit assumption that markets are autonomous things that can thrive despite a vacuum of concurrent economic, political and social institutions – a view that would have shocked Adam Smith.
True to its title, this book does not go on to examine the nature of the growth to which the debate's outcome led, with its vanishing rate of extreme poverty but disequalizing impact on income distribution, or its severe consequences for China's natural environment and global climate change. Nor does it consider the ramifications of an approach that brought economic but not political reform. However, one cannot expect a single book, which cogently analyses the great struggle behind China's transition path, also to deal with the myriad results of that path. How China Escaped Shock Therapy constitutes an impressive work of intellectual history.
