Escaping Shock Therapy

Gillian Hart in Beijing: Negotiating capitalist models at the World Bank–China nexus

“…Simultaneously, however, the introduction of the contract labor system, management reforms, and the hardening of SOE's budget constraints resulted in the dismantling of Mao-era worker entitlements, including the guarantee of lifelong employment security and protection from management repression. Ambitious rounds of price liberalization stoked heavy inflation, peaking at over 28% in April 1989 (Weber, 2021: 253). The pressures of a declining social wage, the growth of a cadre-capitalist class, and perceived party indifference to drastically changing conditions of livelihood began to spark ideologically diverse student and worker protests in urban areas, reaching crisis proportions in the late 1980s (Wang, 2004).…”

“…In response to these pressures, party conservatives such as Chen Yun, who had previously aligned with Deng and Zhao after Mao's death, perceived local overinvestment and inflation as evidence of waning “national strength” and loss of central control (Fewsmith, 2008: 39; Zhao, 1993). Even pro-reform party factions were divided on whether inflation should be solved by stabilizing aggregate demand (austerity) or by increasing aggregate supply (boosting production; Weber, 2021: 239–243). In response to the emerging crisis, Chinese and World Bank officials worked collaboratively on diagnosing the source of inflation, but reached contending conclusions.…”

“…8 As former Bank economist and China program specialist Shahid Husain recollected, Krueger, who had spent her career theorizing state intervention as a form of rent-seeking, was “very hand-in-glove with the U.S. Treasury,” introducing strong positions against import substitution and state-led industrialization efforts while getting “rid of anybody who had been associated with Hollis Chenery” (Husain, 1994: 31–32). For her part, Krueger directly scrutinized 1985's Long-Term Development Issues and Options report—which took a patient approach to enterprise privatization—but it was the more general problematization of price distortion that marked this period, in part through the influence of Eastern European economists working with the Bank (Lim, 1993: 16; Weber, 2020: 4–5, 2021: 115–151). For the Bank, China's unrest was rooted in the CCP's “partial strategies” of price reform: rationalization of commodity prices prompted surges of local government investment in enterprises, but because SOEs were not incentivized to compete through improving productivity, deregulation without privatization resulted in inflation (World Bank, 1989: 27–29, 127).…”

“…For the Bank, China's unrest was rooted in the CCP's “partial strategies” of price reform: rationalization of commodity prices prompted surges of local government investment in enterprises, but because SOEs were not incentivized to compete through improving productivity, deregulation without privatization resulted in inflation (World Bank, 1989: 27–29, 127). The State Council, on the other hand, viewed inflation as the effect of overheating TVEs and the export-oriented economy, and called for austerity measures (Hung, 2021: 1008; Weber, 2021: 240). The Bank, in contrast to the Chinese state, understood the crisis in terms of the incompleteness rather than the quality of urban market reforms.…”

“…The neoliberal reform paradigm gaining adherents at the time dictated that the entrenched legacy of “central planning” called for “shock therapy.” Buttressed by Washington's foreign policy, this approach was gaining traction as the most theoretically and financially appealing means of post-socialist reform, advocated for the macroeconomically unstable Soviet bloc by economists on the payrolls of the Bank and the IMF (Lipton and Sachs, 1990; Weber, 2021). For them, the low profitability of SOEs was the expected result of inefficient state industries insulated from price signals.…”