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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

TO GET RICH IS GLORIOUS

With those words, Deng Xiaoping ignited China's boom,
but it is an even greater achievement that reform can continue without him

By Tim Healy and David Hsieh / Beijing


THAT DENG XIAOPING WROUGHT his monumental economic legacy by dint of ruthless power plays underlines one big worry after his death: Will reform continue now that its wily advocate and defender is gone? After all, Deng could liberalize the economy only after bringing down the Gang of Four and neutralizing tens of thousands of leftist cadres across China who abhorred capitalism. He also had to jawbone the bureaucracy into gradually giving up power over economic matters, even as he convinced the People's Liberation Army that it was all right to do business with the hostile West. Deng's success in advancing reform owes much more to combat training under Mao Zedong than efficiency lessons from Zhou Enlai.

Optimists have pointed out that the hundreds of millions of Chinese who have never had it so good thanks to reform would not stand by idly if anyone tried to reverse it. But what about the PLA? Can't it direct its guns against free enterprise despite the people's objections? No doubt it could. But why should it when its 50 conglomerates and some 20,000 companies generate possibly $2 billion a year from China's boom? While Deng's reforms initially came out of the barrel of a gun, the benefits they have showered on the country's power wielders may well have ensured their permanence.

And then some. Today, reform faces a different threat than a Maoist backlash: its own explosive success. China's long-time paramount leader undoubtedly got the economic plane moving. But once it was headed down the runway at breakneck speed, he really didn't have the flying skill to keep it from crashing. Fortunately, Deng knew his own limits and had the wisdom to pick the right technocrats to pilot the economy after take-off. Led by Vice-Premier Zhu Rongji, these policymakers now have to address the strains of an economy running ever more freely each day: overheating, infrastructure bottlenecks, income disparities, corruption. And there are sectors, like the state-owned enterprises, that have yet to be reformed.

Deng met Zhu around the time the first reforms were launched in 1978. That same year Deng named the one-time economics professor to a high post in Shanghai, along with a fast-rising, English-speaking cadre named Jiang Zemin. Both would later rise to top positions in the metropolis and, eventually, the nation. During the 1980s, Zhu advised Deng on economic matters. The top leader brought Zhu to the capital permanently in 1991 to help revive the economy and tackle one of its most pressing and perplexing problems: the dismal performance of state-owned enterprises (SOEs).

Zhu eventually took over the economic reins under Jiang in 1994, amid 22% inflation triggered by a new surge of liberalization. Two years before, Deng had hit the road in an effort to jump-start reform after austerity measures and the trauma of Tiananmen had hobbled the economy. Growth between 1992 and 1994 averaged nearly 13%, but the overheating set in. Other leaders in Beijing applied the brakes, clamping down on food prices and restricting credit. Last year, while growth fell to its slowest rate in years, it was still a robust 9.6%. The government would like to moderate even more -- to 8% average growth until 2000. More important, inflation calmed to 14.8% in 1995 and then 6% last year, according to government figures.

Grappling with such problems requires far more expertise than simply releasing economic sectors from a communist straitjacket, as Deng did in 1978. At first he went slowly. He introduced agricultural reforms that effectively disbanded collective farming. Under the "household responsibility system," individual farmers got small plots. They still had quotas of produce to sell to the state at unenticing prices. But they could dispose of any surplus for profit -- and that spurred vigorous cultivation. Productivity and rural incomes soared, igniting a spending boom. China reported that farm output grew almost 10% a year from 1979 to 1984.

By the mid-1980s, Deng turned his attention to industry. Initial changes were cautious: with roughly two-thirds of the manufacturing sector still owned by the state, Beijing was wary about making substantial changes to what was no less than the focal point of urban society. Reforms were instituted on a spot basis: a textile plant might be permitted to tie pay raises to profits, or a soap factory could reduce the influence of party cadres.

Meanwhile, Deng slowly opened the economy to the world. It was a tricky move politically to allow foreign involvement, often from the West, after decades of Maoist ideology which excoriated the West for its decadence and exploitation. And it could be equally problematic for the first companies who wanted in to China. Charoen Pokphand, a Thai agribusiness conglomerate, first entered the mainland in 1979 under its founding family's Chinese name, Chia Tai. According to CP's top executive for China, Taiwan-born Chen Ting-ko, the name was originally adopted to avoid antagonizing China's neighbors who were still wary of Beijing. The name has become widely recognized in China.

Another Dengist reform had a huge impact on both the performance of China's economy and the mindset of its people. The nation's first four special economic zones -- Zhuhai, Shenzhen, Xiamen and Shantou SEZs -- were created in 1979 as labs for industrial reform. Then in 1984, Beijing extended to 14 coastal cities, including Shanghai and Tianjin, many of the same liberal, open policies reserved for SEZs. The economy responded and, despite booms and busts, climbed toward runaway inflation, which was behind much of the popular discontent in 1989.

A post-Tiananmen pall stalled liberalization. Many foreign companies, especially from the U.S., reconsidered their involvement in China. But Deng's southern tour in January 1992 not only invigorated Beijing's own commitment to economic reform, but persuaded many foreign firms to re-enlist or commit for the first time. Fast-food giant McDonald's has gone from zero restaurants in Beijing before Deng's southern swing to 35 today. Another U.S. multinational, Avon, which sells beauty products door-to-door across the globe, negotiated for seven years before ringing the right bell. It now has 150,000 "Avon ladies" in China and aims to double the number in the near future.

After 1992, Deng pretty much left the economy to his chosen successors, who, like Zhu in 1994, actually tried to reverse some of the excesses triggered by the elder's grand gestures. Moreover, many reforms remain to be done. Agriculture liberalization, largely ignored since the mid-1980s, needs to be reinvigorated. Grain output has drastically slowed from the rapid pace between 1979 and 1984. To boost economies of scale and promote agricultural technology, Beijing has tried to promote bigger farms. In many regions of China's eastern coastal provinces, tiny plots are being pieced together. Some experts think a system will ultimately emerge in which groups of farm entrepreneurs buy their neighbors' tilling rights, start large-scale, mechanized cultivation and employ surplus labor.

An even more vexing economic problem for Beijing is what to do about the growing number of bankrupt and money-losing state-owned enterprises. For a long time, China has tried to simply grow out of the SOE problem, letting overall GDP expansion reduce the state sector to an insignificant part of the economy. From 77% in 1978, state firms now account for little more than a third of industrial output.

Taking up much of the slack has been a different type of government-owned entity. Township and village enterprises expanded their share of industrial output from 22.4% in 1978 to 34% in 1994. That year nearly 25 million TVEs employed about 120 million people, many of them former farmers put out of work by earlier reforms. A recent Labor Ministry survey of 4,000 rural households in eight provinces found that 45% of these families have partly or completely retreated from cultivation. TVEs have an average of about five workers each, a size nimble enough to respond to market changes the way their SOE cousins can't. Many thousands of private companies and joint ventures have also sprung up -- they now account for nearly a third of industrial output.

But with a third of national production, SOEs remain a make-or-break segment of the economy. Indeed, in many areas they are the sole employers and providers of social services, from housing and transport to health care and education. Thus, even if sustaining the lossmakers among them with loans is inflationary and wasteful, the alternative of mass shutdown is a recipe for mass unrest. There is a middle ground: to "grasp the large and sacrifice the small" has become reform gospel, at least in academic circles. Sun Shuyi, assistant director of the China Economic Development Research Society, explains the three-pronged approach: "Lease and sell small failing companies, reorganize the robust ones, and foster the largest."

This middle way doesn't make things any easier or less urgent. The anti-inflation campaign, for one, has made it more expensive in real terms to keep channeling credit to unprofitable enterprises. The burden of "triangular debts," which describes how SOEs, the government and the banks owe money to each other, worsened as austerity measures reduced earnings even as interest charges rose. By mid-1994, economists Dong Fureng and Xiao Zuoji estimate SOEs had accumulated over $40 billion in debt, up four-fifths over the previous year. As many as 90% of SOEs also face ruinous overstaffing, according to one survey. The average level of excess workers was 25%, with more than one in 10 firms having over 30% redundancy.

Beijing has long said it will begin letting the worst SOEs go bankrupt. Not long ago in Wuhan, an industrial city along the Yangzi River in central China, local authorities announced that 38 smaller enterprises with cumulative debts of more than $100 million would be allowed to fail. In Deyang, a city in Sichuan province, west of Wuhan, officials have been merging plants under their jurisdiction since 1989. While more such actions may be taken, especially with smaller firms, sweeping restructuring is unlikely in the year of Deng's death and the 15th party plenum.

One new strategy is foisting some of the worst SOEs upon would-be joint-venture partners. A Hong Kong management consultant cites the case of a sickly enterprise being brought in as a partner just before a joint-venture deal is to be signed. There are also "transfer-operate-transfer" schemes: investors run an SOE for a time, making money while returning it to profitability. State firms are looking to cut back their costly social commitments. The nation is trying to privatize housing and insurance, eliminate perks like SOE libraries and bath houses, and reconstruct pension systems so the state isn't solely liable.

Complicating the SOE dilemma are two other pressures mounting on Beijing, one inside China, the other from outside. Growing income disparities between social strata and geographical regions threaten to fuel unrest. Many of the loss-making government enterprises are in the poor areas; closing them would only exacerbate the gap between haves and have-nots. At the same time, China's trading partners are demanding greater access to its markets as the price for its long-delayed entry into the WTO. But the increased competition that would generate may prove fatal to inefficient, capital- and technology-short SOEs and even some of the profitable ones.

In a Salomon Brothers report, University of Pittsburgh economist Thomas Rawski cited industries in which China could nurture world-class players, including steel, textile equipment, machine tools, petrochemicals and commodity electronics. Allowing in foreign business -- both as rivals and partners -- is clearly what China needs to elevate industry to an internationally competitive level.

As always, however, economic change takes second place to social and political stability in Beijing's priorities. While the world may worry that reform is too slow, Deng's heirs want to ensure it doesn't go so fast as to endanger social order. Fortunately, Zhu Rongji's success in engineering a "soft landing" -- as inflation fell to single digits while GDP growth stayed at nearly 10% -- shows the sophistication in economic management needed to undertake the more complex reforms ahead.

At the same time, the way Zhu went about tightening the growth spigot despite Deng's exhortation to further expansion shows that Beijing's economic policies have gone beyond the kind driven mainly by one powerful leader's immutable directive. That triumph of pragmatism over personality, which the patriarch himself advocated, is perhaps the most hopeful sign for reform in the post-Deng era.


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