Wen Tiejun: China's Ten Economic Crises — Lecture 5 (1978-1980)

Good morning, everybody Now we start our explanation about the fifth cyclical crisis in China We need to have the basic knowledge to notice that this time the fifth economic crisis had a very special character: hard landing When giving a brief account of the other four crises since 1949 to 1974/1975 I indicated that these crises all had achieved soft landing This was not only because the government adopted the right policy but also because the rural society played a very important role to be the base for the city industrial capital’s soft landing When they talk about soft landing or hard landing it is not for people It is for the state capital For an indigenous-population country there is no chance to take overseas resources overseas properties and overseas surplus for your own industrial capital’s soft-landing So you only can make a kind of space to absorb the industrial-capital’s cost when the industrial capital has crisis in the urban sector (city) On average most industrial capital is located in the urban regions, in cities So when there’s an economic crisis if the costs must be taken by the cities there will be a hard landing in the cities If they can transfer out the institutional cost to rural sector if agriculture can be the base for taking the city’s industrial capital cost there can be a soft landing So that may not be very easy to understand but even if you cannot understand now I hope you make a record write it down in your notebooks and then step by step you’ll be able to understand the situation in your own country and to compare it with others You may know that there is a big difference between a hard landing and a soft landing If there’s a hard landing in the cities and the institutional costs cannot be transferred out to the countryside it means that there must be a big change or institutional transition During 1979/1980 when China had a big crisis happening in cities this time there was no way to transfer out the institutional cost and there was a hard landing in the urban sector So that is the big difference When we talk about crises I suppose that people understand there is a kind of cyclical crisis – a kind of economic regularity No doubt it’s easy for people to accept to understand that for any economic system to develop

and people want to set up industrialization cyclical crisis will be bound to happen This cyclical crisis is due to a kind of economic regularity and not by our theoretical creativity Even before Marx there were many scholars who had described such economic regularity Cyclical crisis must happen from time to time when a developing country wants to set up industries because industries need capital-intensive investments If you’re short of capital you must have debts that turn into costs Costs mean that you have to pay it somehow That is the reason for the economic crisis But few people talk about how the institutional costs of the economic crisis are being transferred out from the urban sector where industries are located to the rural sector So the Chinese economy is characterized by a dual system The urban and the rural do not have the same institutions they do not have the same culture They are not even the same society So in China before the 1980s most of the institutional costs of the crises could be transferred out For an example of a very critical case the crisis in the 1960s involved the transfer out of the unemployed population especially the young unemployed population, to countryside And then in 1968, when the second industrial crisis happened China also could transfer out the unemployed youth from the urban to rural regions And also in 1974 So these three are very typical examples of the transfer out of unemployed youth which reduced the potential risk of social chaos happening in the cities You know, that is a kind of regularity that every political system or regime having a very big number of unemployed youth there must be potential social conflicts that may lead to social chaos happening in the economic crisis zone, in the cities Because China could transfer out its unemployed youth from the cities to the countryside each time they could achieve soft landing No social chaos or social conflicts in the city means that you reduce the institutional cost in the cities So modernization -modern political superstructure – is mainly set up in cities And all modernized political superstructure is of high cost For example, you need the police as a big force, which involves a big cost When you use them to suppress social conflicts on the street there is a much higher cost I think most people can understand this But this time from 1978 to the 1980s when the crisis happened why could the Chinese government not transfer out the institutional costs caused by the economic crisis to the rural sector? The cost of crises was transferred out three times before but why not this time? I should give an explanation As they were not able to transfer out the crisis and there was a hard landing in cities what followed? What happened? The fifth cyclical crisis happened and ended with a hard landing leading to the so-called reform that is, the economic transition or institutional transition Whatever we call it and whenever we talk about such a transition we must know where did such institutional transition come from

This also means that you should know where you are and where you came from and then you may know further where you are going to So let’s come to the explanation first, also the background We will need to do analysis of the international environment and then domestic issues So, about the international environment since 1971, China regained full diplomatic relations with the UN and the United States and so on and so forth China regained formal diplomatic relations with different kinds of countries because the UN accepted People’s Republic of China You can see that at the beginning of the 1970s China regained its seat in the UN Then in 1974 Chinese leaders announced the Three Worlds Theory created by Mao Zedong That is Deng Xiaoping Later, that changed In the 1970s Mao’s Three Worlds theory was very influential in the Third World countries The geopolitical environment of the regions around China changed more and more for better At the time many of the geo-political conflicts mainly happened in South Asia, the Middle East in Africa and the Latin American countries far from China And the North East Asia had settled down Japan came to establish friendship with China in the 1970s and 1980s These two countries had been major enemies since the 19th century,they fought many times but they were reconciled in the 1970s Japan started providing very low interest-rate loans to China Every year a large amount on average about 80 billion yen per year (1979-1983) were given to China for industrial construction These loans were combined with the selling of machines and production facilities China got a lot of facilities especially for petrochemical and machinery industries many of which came from Japan So the Northeast Asia had settled down, becoming a peaceful region And China did have a chance to develop “state-industrialization” I should emphasize that it was “state-capitalist industry” Chinese state-capitalist industry expanded thanks to the peaceful environment The state took this opportunity to develop state-capitalist industries I just give you a second to think about this argument Inside of China there was also big change In 1976, Zhou Enlai, Zhu De and Mao Zedong three big men of the revolutionary period very important leaders, passed away, one after the other Mao had appointed Hua Guofeng to be the new leader

and concentrated all the power to him But only three years later he was replaced by a group of collective leadership This means that a single leader was changed into a group of politicians including Chen Yun, Deng Xiaoping, Li Xiannian, Peng Zhen and Deng Yingchao At that time since the late 1970s it was a transition period from 1976 to early 1980s until 1989 We had at least 12 years in which the political leadership changed from one extremely important man to a group of important men making decisions So that was an internal change – few people understand what that means That means China has a leadership structure the decision making of which is not determined by one person this is structural decision-making It means they can represent different interest groups and express what they want to involve in the decision-making After they took power in the late 70s the Third Plenary of the Eleventh Central Committee an important meeting of the Party made in 1978 an important decision to want to change A lot of people think that this was the important starting-point of Chinese economic reforms but that is not exactly right That meeting was mainly criticizing Mao’s Cultural Revolution because it went against many highly-positioned leaders Now that they had regained their positions and power they expressed their ‘feedback’ and criticized Mao’s policies and thoughts So, that was an anti-Mao political meeting and de-Maoist thought now became an important instructional ideology But while this ideology could satisfy the high-ranking political leaders it could not satisfy the lower class So, the lower class was short of political mobilization Originally when Mao set up “class-struggle” theory and “continuous class-struggle” etc it was sort of workable and effective to mobilize the lower class to join the state construction because at the time there was no capital You had to make the people as manpower devoted to the state construction So at that time the Western media presented a lot of photos to show China’s so-called people mountain people sea which suggested that “you are very foolish, you only use manpower and you are very backward” And, yes when western societies have a lot of colonies they can take the surplus from other people They don’t need to use themselves to invest their labor So they stand from a high position and then look down at you and say “You are foolish. You can only use your own people. This violates human rights” and whatever They can give many criticisms But this practice is very workable if you have zero capital When you need to repay debt your capital stock is actually minus So, originally, by Mao’s thoughts the state could use class struggle as a kind of theory

as an ideology to mobilize the lower class to volunteer themselves with little or even no pay You just gave them food and they organized themselves as a sub-military organization taking part into reservoir construction, irrigation construction and even the Three Defense Lines Construction That was for the state-capitalist industry not for people’s livelihood not for the infrastructure in the countryside for higher yields It’s for the state capital And the people volunteered to contribute because they thought that they now joined in the worldwide class struggle to help poor countries, the colonized countries in anti-colonization and anti-imperialism So there were many things that made them believe that whatever they did was right But later, in the 1970s in 1978 when the economic crisis hadn’t happened yet and when the political leadership was changed followed by a change of ideology that gave many critical comments on the 1960s and 1970s they weren’t aware that they had lost their “hands” to mobilize the lower class So that was a potential risk for a hard landing of economic crisis That is very important And also in 1978 the state started to rehabilitate the “rightist” intellectuals and party cadres This was a kind of political movement to right their political wrong to allow them to resume their positions This took place from 1978 At that time I was a member of a team to recheck the personnel documents We took out all these “bad” documents and to clean up all the bad records in these documents to turn an intellectual or cadres into a man with everything right I was at the time a team member to do such kind of document record cleaning work There was an anti-Rightist movement in the 1950s…starting from 1957 Around a million of intellectuals were labeled as the Rightists at the time But not all of them were actually ‘rightists’ There were some mistakes Some were misdeemed as rightists and got penalties or mistreatment The total number of rightists was around half-million the other half-million were mistakes involved in the anti-Rightist movement We cleaned up the records of this million so they had nothing wrong from the 1950s If you made them carry their mistakes from 1957 until 1978 – 20 years they would have a very heavy political burden on their shoulders They would not be able to go about as regular people which would even affect their children So that was a big political movement in 1978 The shangshanxiaxiang (going to countryside and mountains) movement involved first the children of these politically-tarnished people

Their children were among the first to be sent to the countryside And if there was some opportunity to be a worker in a county or in some factory or some mine certainly these young people the young generation with “bad” family backgrounds, would not have a chance So at that time when you gave those millions of older generation a chance the records of their younger family members needed to be cleaned up again This was related to the educated youth movement In 1979 the educated youth came back to the cities It was a big movement There were more than 10 million, maybe 20 million, educated youth who came back to live with their families in cities I cannot remember the exact number But it is big The economic crisis happened in 1979 And this time there was no possibility to send the unemployed youth from the cities to the countryside On the contrary there was the need to absorb the more than 10 million educated youth from the countryside back into the cities That’s why there was a hard landing because unemployment became more severe than at any time in the past So this time they needed to have a lot of measures to deal with this hard landing crisis All of these measures were renamed as “economic reforms” So the reform started from late 1970s exactly from 1979 not from 1978 which saw political vindication and rehabilitation happening And in 1979 the economic crisis broke out and then they started to deal with the economic crisis with measures in the name of “economic reform” So that is the Chinese story I just give you one second to put this explanation into your mind And starting from this point you can have many explanations about modern China since the 1980s There’s another thing that is also very important There was the border war between China and Vietnam When Vietnam won the Vietnam War they wanted to reshape the Indochina peninsula And there were three countries involved: Cambodia, Laos and Vietnam When the French colonized this region they wanted to set up a Union – the south-east Asian Union in the peninsula When the Vietnamese communist regime took power from the French colonial system they were trying to take up the historical heritage to establish this Union So after Vietnam was unified they were going to expand to take others So why was there a border war Few people understand that China sent a lot of troops to attack the north Vietnam territory and then retreated Why should China do that and also keep the heavy pressure at the border One reason was to make the Vietnamese withdraw from Laos and Cambodia

Because there was a tense situation at the north of Vietnam territory so they needed to deploy the troops to the north to protect the border The north border is adjacent to two provinces in China So China deployed troops at the border Putting pressure on Vietnam meant that the Vietnamese had to relieve military assault in Cambodia and Laos That was to make their attack weaker and these countries in this region could still maintain their sovereignty Nowadays you can see it’s important In ASEAN + 1 some ASEAN countries are close to China Cambodia is one Laos is another So when these countries play a role in ASEAN they have a country vote that is geopolitically close to China That result is from 1979 Because of the border war with Vietnam there was a big cost of the military expense estimated to be almost half a billion which was not included into the budget plan but then turned into budget deficit This means that one-third of the annual budget deficit came from the China-Vietnam border war So that’s why in 1979 the budget deficit crisis happened It was not only caused by the foreign debts but also caused by the budget deficit So the title of this lecture is the crisis caused by the foreign debts and the budget deficit The budget deficit came partially from the war that happened in the China-Vietnam border So that is why I put some pictures here to make people understand But mainly, the reason for this crisis was yangyaojin the great leap of foreign capital investments The new leader Hua Guofeng, when taking power in 1976 needed to show that his performance was much better So he made a decision not only himself but also his staff including Chen Yun and Li Xiannian these senior persons of old time so they made a decision wanting to have an eight-year project to introduce US$ 8.2 billion of foreign facilities and machines in order to systematically adjust the industrial structure coming from Russian aid USSR-style industry was heavy and military industry By that time it comprised seventy percent of the total industries in China Mao changed a part of it Now Hua Guofeng wanted to keep going to change the structure of heavy & military industries towards mainly meeting domestic demand, people’s livelihoods They also wanted to have chemicals, fertilizer, textiles and automobiles Nowadays these cadres resuming their positions wanted to enjoy cars and consumer goods imported from Japan, Korea and also from Europe In the late 1970s China started to take automobile plants from Brazil And Brazil took these plants from Germany meaning it’s second hand

but somehow not cheap because China didn’t have it So at that time Santana, originally a German brand was transferred as secondhand to Brazil Then Brazil sold it to China as third-hand It was set up in Shanghai at a high-cost because it passed through the Latin America But at that time it’s also considered very advanced in China because we didn’t have one Previously there were only automobile models from Russia (the USSR) Now China had Western European style automobiles This started from the late 1970s and had to be repaid by foreign exchange reserves At that time, the same as in the 1960s and 1970s China could only sell agricultural products,textile, clothes and shoes these very low-profits products to earn hard currency to pay for these high-priced machines, facilities and also high-paid technicians So that was unfair trade with low-price agriculture products which China only had And another thing: even Brazil didn’t need your Santana cars Certainly, China could not sell them to Europe because it’s a very old brand which they had given up If China did want to sell these cars they had to be at a very low-price as second-hand products So it means that China could not sell high-priced industrial products to other countries This was similar as in the 1950s with Russia China could only sell them minerals and agricultural products China was at that time a developing country at a low position So when China wanted to have foreign investment and foreign machines they had to be paid at very high cost So this is the so-called “great leap with foreign capital” That was the plan when the new leaders wanted to set up an 8-year plan to introduce these foreign investments But in the first year in 1977 and the second year in 1978 they introduced much greater amount of foreign machines much more than the total amount of eight years as planned In the first year it was worth four billion dollars almost half of the plan And because China did not have much hard currency they needed to arrange a long-term payment which meant debt 40% debt, so 60% paid in hard currency As a result almost 80% of the total foreign exchange reserves had been paid out Another 40% – debt – had to be repaid later But later China didn’t have enough ability to increase foreign exchange reserve Just in two years China had bought more than 10 billion dollars worth of foreign machines and facilities from western countries That immediately turned into the foreign debt These foreign debts had to be paid back by the central government budget then turning into budget deficit So in 1979 the budget deficit was nearly 30 billion Chinese yuan whereas the total budget revenues in 1978 were just 100 billion

It meant an almost 30 percent deficit It was a terrible situation Originally one third of the central budget was for maintaining the social management national defense, government expenses Another one third was for social welfares pensions for aging people, medical services, education and such sort of public needs So, management took up one third, social needs took up another one third And another one third of the budget was taken up by infrastructure construction, for factory construction, etc Before the 1980s every penny paid in China was from the budget If one third of the budget was deficit the state needed first to cut the construction expenses If there were not enough construction expenses there was no room for expanding employment This is the crisis that happened in late 1979 and early 1980 It was caused by the huge deficit of about 30 billion almost one third of the budget China had no ability to invest into infrastructure construction and therefore no room for new employment At that time there was nobody no politician having charismatic power like Mao before to mobilize the young unemployed people to go to the countryside In the late 1990s the premiere Zhu Rongji could enforce the lay-off of more than 40 million state-owned enterprise workers But in the late 1970s nobody could do that because at that time the working class was proletarian They occupied, nominally, the whole of the political superstructure In the late 1970s the Chinese system hadn’t totally changed its political superstructure At that time it was illegal to lay off workers of the SOEs just like that It was no good and politically incorrect In the late 1990s it was politically correct but in late 1970s it was politically incorrect So that is the difference Let’s see the crisis here This was budget revenues down to -20 percent and the budget expense was up to 40 percent This gap was big and turned into budget deficit It is like you had no ability to earn income but you invested too much This gap turned into budget deficit and they also turned into foreign debts So that was the late 1970s And foreign investment turned into the crisis and hard landing turned into economic reform We also need to notice that at that time social instability

social contradictions became potentially intensified This was triggered in 1976 by Mao’s and Zhou’s death The lower class and middle class also thought that the death of these figures was a kind of chance to show that they were dissatisfied That was 1979 when we saw the criticism of Mao’s thought Sending the educated youth to the countryside was deemed politically incorrect and they wanted to come back to cities And that was their petition So they dropped to their knees to show that if they weren’t given the right to going back to their original cities they would keep kneeling down, and also stop eating The central government had to send high-ranking cadres to Yunnan to this farm trying to solve the problems and finally allowed them to go back Millions of educated youth came back to cities in 1979 and made the situation more severe The cities at that time had an economic crisis they had to reduce investments in construction There were no enough rooms for these returning youth so they became jobless and roomless They had families but their homes didn’t have enough rooms for them I remember in 1978 all of my family members, one after another, came back to Beijing Originally we had a three-bedroom apartment before we were sent to the countryside So my parents, my sisters and I and my younger brother once had a three bedroom just enough for our six-member family But when we came back we only had a two bedroom apartment But we were at that time more than 18-years-old so we could not hustle into two bedrooms And also my mother’s father lived with us so we had three generations and two bedrooms which was a very difficult situation At the universities they divided the classrooms to accommodate many families They had only a curtain to block different families So at that time the situation was very difficult If you had no bed room you could not have a wife They were around twenty years old There was not only a surplus labor force but also surplus of energies These young people had big energy but nowhere to go so they might fight in the street, for a young girl, maybe, or for whatever At that time they all liked to have a military cap, or a dress or even a belt, or a bicycle, whatever If they like, they wanted to take and then they fought At that time street violence, street fighting, was everywhere So when these millions of young people came back to cities there was no room for their lives When the economic crisis broke out, they ended up in jail

Look at these young people in jail They had to learn some skill in jails or correction centers These were young people captured by policemen There were two kinds of the so-called criminals One was economic criminal another was xingshifanzui those committing criminal cases, like violence Anyway, if you were involved in street-fight, you became a criminal If you became an individual dealer, buying and selling something that was also a crime At that time there was no free market So young people easily became jobless then they might fight in the street and end up in jail That was what happened in the crisis with a hard landing in the cities turning into social disorder So the state got to use the police to suppress street violence And the government got to take measures one was to suppress crimes another was to open the market to allow individual to do private business which solved the problem of young people having no job And another important policy the government gave orders to almost all universities government departments and state-owned enterprises to open door to absorb these young people This meant five people got to share three portions of food and then going further five portions of food needed to be shared by ten people Now state-owned enterprises needed to absorb unemployed youth Even if they had little duty you needed to give them salary But then one result was important the enterprises became economically inefficient Ten people share five people’s work Even if you could feed them with very low salary, the productivity per capita became lower But that was also the reason to reform the state-owned enterprises You have no efficiency so we need to reform you to make you private I’ll stop for a second to give you room and you can think about that what is the further reform They ordered you to open the door to absorb these unemployed youth and finally, they said that you have no efficiency What made you to become inefficient The crisis You helped the government to solve the problem of unemployment but then you became inefficient Then you needed to reform yourself Is it logical or not Nobody is so foolish So you can think about what this further reform was That is very important When we talked about China’s reform we said it started from rural society Why? As seen here they put into the museum this kind of hand-written document There were eighteen households which wanted to re-distribute arable land among themselves in the name of dabaogan Bao means contract Not exactly contract, but redistributing land equally to every household So that is the so-called start of the reform from the countryside These pictures show that once the Chinese government gave the rights

to all the rural people to take part of the land from the collective system the people were very active to join this movement dividing land from the collective especially in poor regions When they had the land they needed to sign the contract so contract was a document at that time And that also means that in the 1950s China had for the first land reform In 1980 we had the second round of land reform The land reforms were the same to re-distribute land to every rural household In the 1950s in the name of the land revolution land was taken as a property right from the landlord, the kulak But this time (from 1980) land was taken from the collective The measures were the same equal distribution depending on how many family members you have So what was the reason of the second land distribution In late 1979 the politicians in the central government thought about not having fiscal ability to invest into the countryside Originally the highest percentage of the budget invested into the countryside was 17% meaning that 17% of the budget investments going down to the countryside Even though small but still there But when they had the budget crisis they said “reduce the investment into countryside” Then they said, “give land to these peasants these households, and they can feed their own stomachs.” So baoduzi means peasants’ self-reliance to fill their stomachs by contracting the land Interesting? This was a crisis and these were measures to deal with the budget crisis To deal with the budget crisis they had to give up some economic field covered by the budget the first of which was rural sector, agriculture They were trying to protect the urban industries because urban industries are State Capitalism Rural sector was to contribute surplus to urban sector But now more than 85% of the budget revenues came from urban industries The rural sector could only contribute less than 15% But agriculture still needed more than 15% of the budget so they were trying to give up rural sector to reduce budget expenses So after this contract system the peasants have to take care of their stomachs The budget only paid less than 3% to whole of the countryside construction Even the salaries of local party cadres had to come from the land from agriculture at that time Another intrinsic reason of the rural reform was that the production teams in the natural villages had practices similar to contract system for a long time A team leader might come to a plot of arable land and said Ok, you two contract the land and in three days you finish your work and I’ll give you some labor credit points Previously they only had 10 credits per day but the team leader said, “I give you 12 credit points.” But the two close friends said, “We need 15” Then the team leader said, “OK, give you 13.” And they eventually got 13.5 So that was this sort of negotiation within the collective system Now they got a contract of a plot of land and the two close friends worked together to finish this work and then earned the credits When you had more credit, you could have more income Many things had happened in the countryside now they said it’s a contract system everybody understood that Then they said dabaogan (comprehensive contracted responsibility)

It meant you took all care of your stomach with the land you contracted It meant the government stopped giving you subsidies stopped investing into countryside Now the peasants took care of everything for themselves including township and village administration expenses So that was the contract system happening in China that was later renamed as “rural reform” But everything needs to pay the institutional costs Here the rural reform also entailed very big cost Because the collective system was disbanded and abandoned one fourth of public properties were lost Hillside forestry used to belong to the collective system was also contracted to households All these households wanted to cash these resources to buy consumption goods So they cut down a lot of trees The hillside land was ruined Also at the county levels and township levels the collectives used to set up a lot of factories to produce agriculture machines even little tractors Now more than two thousands of these county tractor factories were bankrupted Large number of the industrial properties at county levels were lost or privatized This was a big loss in agriculture It was not until late 1990s when the governments again subsidized to regenerate the agriculture machinery factories at county level or city level but never down to the township level Originally, almost every people’s commune would have five small factories When the government set up 90,000 townships to replace people’s communes almost all of these people’s commune factories were closed down more than 90,000 small factories Some parts of the coastal regions like Jiangsu, Zhejiang, Shandong, Liaoning, Guangdong these coastal provinces had people’s communes nearby the cities that could still maintain their factories Totally 25,000 people’s communes were still keeping their original system because their factories could somehow contribute a lot to the people’s communes So they could subsist But most of the people’s communes were dismissed A big institutional return of the rural reform was rural industrialization Because land was re-distributed to every household the surplus labor force could be liberated Peasant households didn’t need so many laborers working in very limited land resources so a lot of young laborers were liberated from farming and joined the village factories These factories had very simple production facilities They were just families putting together tools as a kind of workshop That was rural industry It was labor intensive The rural industry had no technicians, no engineers But they had weekend (Sunday) technicians from cities They paid the technicians double price An engineer was free on Sunday So he or she could come down to a village to help the peasant household workshop to solve technical problem So this guy was a Sunday engineer who came from the city to the countryside to facilitate the technical issues in township and village enterprises The total amount of rural labor was almost hundred million One hundred million laborers, especially young laborers were liberated from agriculture to join the rural industrialization making rural income go up very fast

faster than urban income growth So when the rural people had more incomes rural consumption index was more than seventy percent while the urban index was less than fifty percent It means when urban citizens had one yuan as income they used only half for their family consumption But rural people used seventy percent of income for consumption That enlarged local and domestic demands and helped to solve the economic crisis Now I’m going to talk about the macro-economic measures the government adopted The government issued forty billion worth of bank notes That should have caused high inflation but why was there no high inflation Because rural people’s income went up and absorbed these cashes newly added into circulation So at that time there was not very serious inflation This was similar to 1950 when China’s new authority issued a lot of paper currency trying to solve the problem of budget deficit With how much deficit, they printed how much cash They were also absorbed by rural people because in 1950 the state started to distribute land to every household in the countryside These people wanted to sell their products and take cash to buy land or other facilities to increase their agricultural production So they were all active to take the cash That was the same situation as in the 1980s when the central governments issued a large amount of currency 14 billion to solve the problem of budget deficit They succeeded By what? Not by the politicians but by rural people So it was a very interesting phenomenon that happened in the 1980s So that’s why I said that the real reform happened in the countryside because they did the same as in the 1950s in Mao’s time Unlike the urban reform measures, in rural area it’s the second land reform, the second land redistribution And it happened to drive these young laborers into rural industrialization and also rural townization Many, many rural towns thus grew up These rural factories were located in towns So this was a kind of townization, local industrialization all turned towards localization So localization is alternative, it’s not the mainstream Think about these rural industrialization and rural townization was there any relation with state capitalism No. It’s people’s, it’s local, it’s peasants They belonged to local people So their returns also belonged to local people That’s why the rural income the peasant incomes increased mush faster in the 1980s faster than the urban citizens So the rural-urban income gap (Gini coefficient) went from 3 down to 2.3 or 2.4 Anyway it decreased So that was the institutional return in the rural reform We need to know that the rural reform contributed a lot for the relief of the hard landing crisis in cities Here, because the people’s communes were dismissed the rural governance system got to be changed Rural governance system had more and more expenses which needed to be taken by the rural people and became the peasants’ burden Since they changed the governance system

the peasant’s burden started to become heavier This was even heavier in the 1990s but in the 1980s it just started So, let’s talk about Part 4, the crisis in urban sector The crisis originally happened in the urban sector- hard landing in the urban What were the measures the government adopted to deal with the hard landing crisis From 1979 to 1980 there was a big fiscal deficit almost 30 billion It’s much bigger than that in 1960 when the second crisis hit China It was also very much bigger than in 1974 when the deficit was 10 billion In late 1970s just five years later the deficit became 30 billion three times bigger than Mao’s time So, the government started to issue government bonds It’s not exactly treasury bond the guokuquan means the bill of the budget reserve Indeed, it was treasury bond So the issuance of treasury bonds started from the 1980s At the same time the state issued paper currency worth of 40 billion They wanted to issue 4 billion RMB of treasury bonds combining with 40 billion of additional money to solve the budget crisis This was more than 50 percent of the budget deficit because they needed to keep investing into state-capital industries It means that they adopted “going long” not “going short” measures And because of the agricultural growth, of rural people’s income growth these measures were not so bad because there was no inflation And they were trying to open more to foreign investment so the open up policy also started from 1979 Originally, during Mao’s time the state could only use the hard currency reserves to purchase foreign facilities and machines Foreign investment in any form and joint ventures were not allowed in China Transnational companies had no room in China But since 1979, it was opened They said whatever the international society can do we must do This started from 1979 This was the first joint-venture with foreign capital A joint-venture company was set up In 1981 they set up the Special Economic Zone for openness to foreign capital These were step-by-step In the late 1970s, early 1980s they allowed transnational companies in the Special Economic Zone but not in inland China That was the beginning Finally, they were allowed go to everywhere in China That is openness And that’s the state-owned enterprises reform That one: they were trying to learn some so-called experience from rural China They allowed the enterprises to expand their self-management rights And then, going further allowed the manager or the CEO to contract the whole factory

It meant you got a contract and managed this factory by yourself or by your staff and contributed profits to the government departments So they said the contract system was workable in the rural regions However, indeed, in rural regions land was redistributed to peasant households It was not exactly but nominally contract system So in the urban reform they duplicated the nominal reform from the countryside but they didn’t re-distribute the state-owned properties to workers That’s the so-called privatization They contracted the factory to the factory leader the official, the manager, especially the CEO that means they did something like semi-privatization When the managers took the power the management of the factory they required to change the internal management mechanism They were given the rights to have the salary and income difference Step-by-step they changed the management system of the state owned-enterprises And then going further the government allowed the private sector, starting from the 1980s In 1981, the managers were allowed to contract the big factory And then in 1983 private sector was allowed to run business and industry One person could contract the whole factory So these were the enterprises contracted by individuals Combining such kind of policy they had a new policy to allow private business Originally they were not allowed to have employee You could individually run your business That was in 1979 But just two or three years later it was very common for these businessmen to have their own employees and laborers And then in 1984 I remember there was a serious discussion about the Capitalism in China State capital controlled factory was okay because it’s state capitalism still belonging to the whole people ownership It’s politically correct But if you allow private managers, private businessmen to have laborers working for him it means they exploit the surplus from the workers That is not socialism it’s capitalism It means that you re-set up the capitalism in China This was a serious discussion Finally they found some texts from Marx saying that if there are less than eight workers this is a small workshop Small workshop is not capitalism, just pre-capitalism So they got the evidence to show that is okay The government therefore allowed private business to hire less than eight workers Nobody could block them So the private sector grew up very fast So since the 1980s beginning in 1979 the state allowed only individual business only run by one person But very soon they found all the family and the relatives They said that’s my nephew

and they had many nephews The government could not stop them The private sector thus had room to grow up faster and faster That was a big change This was mainly originated from Wenzhou in southern Zhejiang because they had little land The arable land in Wenzhou was just 0.4 mu (=0.02 hectares) per capita which was not enough to produce basic food it implied hunger The UN gave the standard – if the per capita arable land is less than 0.8 it implies hunger In Wenzhou, southern Zhejiang it was a half of the UN standard meaning they could not produce enough basic food from the land to feed their people Most of these people were going to the private sector They did a lot of business Some business was very bad But anyway people needed to have income so no leader in Wenzhou could stop that We have interviewed many party leaders in Wenzhou asking them why they allowed these bad things to happen They said they could not feed these people They didn’t have state-owned enterprises, no factories because Wenzhou was at that time a frontier facing Taiwan Every day they had to prepare for war so the government did not invest in Wenzhou to set up any state-owned enterprises So they didn’t have factories they only had agriculture When land was contracted to every household they had a large number of surplus labor Where had they gone They got to go to private business So, that was the basic situation in different areas So you needed to allow local people have self-reliance by their resources: labor force So these laborers needed to have a job even if they were given a low salary They got to have income to feed themselves So that was the situation So when the governments had a very big crisis, a hard landing in cities they could not care about everything So they released control and people developed at their own People had different models in different areas That is the truth As we’re going to finish this lecture we may summarize what we’ve talked about: the late 1970s and early 1980s economic crisis You can see that when we do the crisis analysis we first need to know the basic environment: political and economic Political environment in the late 1970s China had started a political transition from Mao’s time to post-Mao’s time It’s not exactly Deng’s time which started from the beginning of the 1980s In 1976, Mao died and Hua Guofeng took power But it was not Hua Guofeng’s time It’s post-Mao’s time for almost five years until early 1980s when Deng took power But it still wasn’t exactly Deng’s time because he was just a group leader until 1989 when the political incident happened in Beijing Tiananmen Square In the early 1990s, in the summer of 1990 Deng said, “I’m the core of the second generation leadership.” That was exactly the point when Deng’s time started Before that he needed to consult Chen, Li

and other senior politicians’ ideas and their suggestions and concerns so not one person could make a decision When Deng said he was the core of the second generation leadership Jiang was the general secretary of the party committee since 1989 So it was not exactly Deng’s time as Jiang also played a very important role in the party It’s very complicated but you can name the time between 1976-1981 as transforming period and post-Mao as no one could claim himself to be the key person in the political leadership As the mainstream politicians regained power they needed to set up their political correctness so they criticized Mao’s time labeling Mao’s time as “extreme left” So when they defined what was “politically incorrect” a lot of effective experiences institutions measures and policies in Mao’s time were all deemed as “extreme left” and “politically incorrect” I’ve discussed the case about 1979 educated youth coming back to cities in large numbers – millions Educated youth going to the countryside was now regarded as “politically incorrect.” It was somehow like a kind of bad treatment Originally, it’s because they believed they joined the world revolution so they had such kind of passion going to countryside Those with the politically worst family backgrounds were active going to countryside I am one of the case At that time I did want to have self-criticism, self-reform I said that “I need to go to the countryside to live with peasants and to change myself” I had such a passion because I thought that my family’s political background was bad my grandparents were from bad family Even my parents joined the revolution but I could not forgive this bad family background of the old generation So I needed to do the self-criticism I needed to change myself I needed to work hard Actually I wanted to do it But when you change the political correctness you change the ideological system That might seem okay I was released from my political burden I became normal as others My brain, my mind, and whatever was liberalized So I could do whatever just by my effort I could join the social competition Maybe previously I did have some emotion or some feelings saying that it was unfair that I did a lot of hard work but did not have the same treatment I thought it’s unfair But it’s clandestine, potential, not obvious But when this ideology was changed I thought that I should have the same position to join the competition with others Certainly, people have different ability and you cannot have exact fairness Finally, I understand But in the late 1970s, for us, it’s a big opportunity especially when the universities were open and the admission no longer depended on one’s class background

Originally, young people like me with bad family background might have no chance But when these chances were reopened for all we stood on the same ground to join the competition We had the chance to join the exams If you passed the exams you had the credit and could go to university, college So, many things happened Some things that changed were very positive but some things negative To be a scholar we need to do the analysis more carefully You cannot think that you can throw out the bathwater with the infant So we need to do more detailed more careful analysis about this change especially in the later 1970s and the beginning of the 1980s This change nowadays became politically correct and nobody can challenge Reform, okay but is there anybody who has challenged reform? No, because the reform has become exactly politically correct But we are now trying to give the objective analysis that is a kind of challenge We said that the reform exactly came from the crisis especially from a hard landing You had big institutional costs and needed to deal with such costs taking such kind of measures and then you coin a comprehensive name That is “reform” We still have some ability to do the reflection to do the analysis That is extremely important So I hope that you people, after listening to my lectures you do have your own thoughts to do your analysis to know what is negative and what is positive During the post Mao time they said the experiences in Mao’s time were not politically correct Then we would be short of a lot of ability to do objective analysis about economic crises The crisis hard-landing was mainly due to the post-Mao collective leadership set up their ideology yet with no ability to mobilize the lower class people So it was no longer possible to mobilize unemployed youth to go down to the countryside The state capital utilized foreign capital to expand industries facing the challenge of debts foreign debts turning into budget deficits This could only result in hard-landing with no chance for a soft-landing So, hard-landing befell not only to economic events but also social and political events When talking about educated youth coming back to cities we need to think about that event together with the re-appraisal of the political movements from 1957 until 1979 twenty-two years of political movements were now all labeled as “politically incorrect” All these people who got punishment even put in jail were all re-liberated re-liberalized after twenty years These events and policies together made people having gone to the countryside now think that they had got a kind of punishment

So they did have the right to re-enjoy their life in their original position in the cities This caused confusion in ideology or ideas In their minds they could not figure out which is right or which is wrong This confused thought or feelings in the street or society made people at that time have unnamable emotions They could not be satisfied with anything, dissatisfied with everything So when they could not take the traditional ideology a large number of these people with very confused thought turned towards the western ideology The western ideology is exactly the Cold War ideology So since the 1980s a lot of people in China more easily accept western Cold War ideology until now So even if you’ve succeeded in the economic reform you failed in ideological competition That is until now a big trouble in mainland China Talking about hard-landing we said that the institutional cost in China was not only economic and social but also in the theoretical fields in social sciences in cultural studies It was a potential problem since that time In the 1990s, it became obvious In the scholar circle no one believes that we also have a politically correct tradition including traditional cultures because everything has been criticized Until recently some people start to be aware of the dangers and they stand up but it is not easy to fight with the majority not easy to argue with the mainstream So that’s why I think that hard landing is not only about economy So in conclusion I give a hard landing explanation mainly for the theoretical issues in social science and cultural studies etc as well as ideological issues Regarding the government measures how they dealt with this crisis We see that the government directly used the police system a very strong force to directly deal with the hard-landing crisis Thousands of people were put in jail When they came out of jail what could they do No normal job they could only work in private sector So from late 1980s to 1990s the private sector grew very fast These young people did have the ability and energy but they were put in jail When they came out of jail they could only go to the private sector No SOE, or government departments or university institutes wanted people from jail so the more people you put in jail the more you enlarged the private sector That’s logical The government also required the SOEs and government departments to open door to absorb unemployed youth and that meant that the governments ordered low efficiency in these SOEs and faculties Low efficiency then became the reason for further reform The rural reform

came exactly from the government’s thought “xiuyangshengxi” (recuperation) implying the state would take less from the rural sector Now, 85% of the government’s revenues came from urban sector (industry) The government then released its control over agriculture Gave agriculture to peasants and made peasants enjoy their agricultural life And so the dual system became separated It’s a historical opportunity for the peasants There were industrial models, factories in cities so everyone could learn from it The peasants noticed that if they set up industries, workshop they could have extra income So when the government released control the rural people immediately not only took the agricultural resources but also used their manpower their human resources, for rural industrialization That is why, just ten years later rural industrialization finished primitive accumulation without those kind of dirty things as in western history Yeah, they did have but it’s mainly the destruction of environment, natural resources taking too much from labor as surplus but nobody complained, no social conflicts, no mass movement unlike Western industrialization which exploited large amount of resources from colonies and killed people etc The process was quiet Chinese peasants achieved primitive accumulation setting up a big number of factories almost 27 million rural factories and workshops And they contributed half of the industrial outcome industrial products If you calculate the value you’d find they contributed a half with very little investment No external exploitation but they built a big rural industry That was the outcome of the rural reform So we said the peasants not only took over the agriculture but also turned it into rural industry And then there was the state-owned enterprises reform Individual business and the private sector were growing up fast As the macro-economic measures the government issued the treasury bonds and also greatly enlarged money supply And also set up the open up policies So these were the four measures to deal with the crisis They were working but left a lot of trouble a lot of big issues for further reform One thing also needs to be taken into consideration that is the government allowed the cadres’ children set up companies They could take resources from the government and then sold them to the markets At that time Chinese scholars emphasized shuangguizhi – dual price system One price was controlled by the government at low price while the other was market price which was much higher The more the government controlled the raw materials the higher the price in market Who took these profits The officials’ young offspring who set up these companies to take these big profits And also the government controls the financial sector which means all the banks belong to government, to state capitalism Who could have loan If you were a factory you need to negotiate with the bank There was a big gap between the market interest rate

and the government-controlled interest rate Whoever could make a deal at the government interest rate would take the differential as profits Corruption was caused by such measures as the government departments were given the chance to set up companies run by the officials’ children in the name of tertiary industry in the name of services Yes they did provide service but it was guandao gongsi (bureaucrat speculation company) Corruption came from such kind of measures until the next crisis happened and the inflation went much, much higher The inflation further enlarged the interest gap These companies run by the officials’ young offspring then made even greater profits Their first bucket of gold came from this institutional change that was also the reform So why these scholars when first contributing suggestions to the dual price system said, “okay you need to draw a line” It meant corruption After this line you don’t need corruption but before that I don’t want to criticize you “I don’t want to deal with the problem.” Many new suggestions They are trying to block people from deepening their studies to know the root where it originally came from I said it originally came from here And then you know where is the people’s right The workers also had young offspring but where have they gone? Where are they? So you had a rich company you controlled a large number of properties and then you made the gap between the poor and the rich larger and larger And who is the poor and who is the rich? What is the opportunity the rich take what is the loss the lower class got? How did they lose? You need to know the details about this process and then you may have your own thought, your own analysis So that is why we need to look into these economic crisis one after another to know the details of these crisis and then to know what kind of danger and what kind of opportunity The term “crisis” in Chinese is putting the word “danger” and the word “opportunity” together But crisis to whom, danger to whom and opportunity to whom? We still need further studies And, finally after these things happened the state-owned enterprises became low at efficiency The new company got big properties and so going forward that’s “marketization” And market reform and also “marketization” became a kind of mainstream ideology That’s later So let’s do further studies in the next lecture Thank you