Daily Archives: 14 September 2009

Zhao Ziyang on Deficit Financing

From Prisoner of the State: The Secret Journal of Premier Zhao Ziyang, trans. by Bao Pu and Renee Chiang (Simon & Shuster, 2009), Kindle Loc. 2059-88:

After the Third Plenum of the 11th Central Committee, our country’s financial revenue gradually declined in proportion to the gross national product, while expenditures steadily increased, thus resulting in a deficit. This was the price we had to pay; it was normal and solvable. In 1984, I began proposing a gradual raising of the revenue-to-GNP ratio. To reduce the deficit, we temporarily scaled back infrastructure construction and reduced the pace of economic development. There was no other choice.

If we had ignored the situation and launched an “all-out fast-paced campaign,” we would have faced seriously high inflation and put greater strains on farmers and workers. The readjustments in 1979 and 1980 and again in 1981 had been necessary. As a result of the 1981 readjustments, the agricultural sector continued to enjoy big harvests, the market continued to prosper, and the nation’s economy showed no negative growth. On the contrary, the economy grew by an annual rate of 4 percent. And as the readjustment deepened in 1981, growth increased. The growth rate in the first quarter was relatively low, the second quarter was better, the third quarter was higher, and the fourth quarter was significantly higher. This proves the readjustment was good and the economy had recovered.

Here’s how we kept the economy growing: by scaling back infrastructure projects and reducing heavy industry, iron and steel production, and machinery production; by expanding light industries such as consumer products and textiles while allowing and encouraging private businesses; by developing service industries. The cities continued to prosper and living standards continued to rise. Employment rates rose. In the end we achieved a balanced budget and the people were generally more satisfied. That said, the policy had its shortcomings. We still hadn’t entirely corrected the traditional way in which the Planning Commission cut back on infrastructure projects, which was to “cut straight across the board.” With the old system still in place, it was hard not to do so, and so we set quotas for each region.

In order to save projects that really should not be cut, however, I asked the Planning Commission to be flexible with a part of the budget so that we could revive some of these projects. After the general spending reduction, we reviewed which cuts would incur too great a loss, or which projects were so beneficial they should continue. Of course, there could not be a large number of exceptions, but we were able to reduce the negative impact of “cutting straight across the board.”

Still, in retrospect, the readjustment was too severe. We should have made exceptions for all projects where equipment had already been received or was urgently needed and could be installed and put into production quickly. This would have been more cost effective, particularly if you consider the cost of storage. Even though some of these projects resumed a year later, time and money was wasted. Some of the projects took years to recover.

The reason we didn’t take more flexible measures was mainly because we lacked sufficient domestic funds to pay for these projects; the deficit needed to be reduced so that a financial balance could be achieved. It was all too mechanical.

For example, if the deficit had not been eliminated immediately and some of the budget had been spent on worthwhile projects, the investment could have been returned in a year or so. And under the open-door policy, we could have resolved the problem by taking out more foreign loans.

But Chen Yun was concerned and firmly insistent. He was afraid of excessive and overly large projects and insisted on the reductions. At the time, there were things we didn’t clearly understand, since we did not have enough experience.

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Zhao Ziyang on China’s Agricultural Revolution

From Prisoner of the State: The Secret Journal of Premier Zhao Ziyang, trans. by Bao Pu and Renee Chiang (Simon & Shuster, 2009), Kindle Loc. 2040-59:

After the Third Plenum of the 11th Central Committee, there were good harvests several years in a row: 1979, 1980, 1981, 1982, 1983, and 1984. The rural areas experienced a new prosperity, in large part because we resolved the issue of “those who farm will have land” by implementing a “rural land contract” policy. The old situation, where farmers were employees of a production team, had changed; farmers began to plant for themselves.

The rural energy that was unleashed in those years was magical, beyond what anyone could have imagined. A problem thought to be unsolvable had worked itself out in just a few years’ time. The food situation that was once so grave had turned into a situation where, by 1984, farmers actually had more grain than they could sell. The state grain storehouses were stacked full from the annual procurement program.

Two other factors contributed to the change. One was the elevated price of agricultural products. Farmers could make a profit from farming. The other was the reduction in the quotas for mandatory state procurement, which meant taking less food out of the mouths of farmers.

For more than two decades, farmers had not had enough to eat after handing over the grains they had produced to the state after every harvest. Of course, the reason that we were able to introduce this new policy was because the Third Plenum of the 11th Central Committee had decided that China could import grains. Comrade Chen Yun said the imports were allowed so that industrial crops could be preserved, but in fact, the imports fulfilled urban consumption demands, thereby reducing the rural mandatory procurement quota [purchased in part for urban markets]. The quantity of grain imports was huge in those years, between 10 million and 20 million tons. Major grain-producing regions could sell their surplus at a higher price and make a profit. Together, all of this gave rural areas instant prosperity.

These policy implementations came at a cost. While the prices of agricultural products had gone up, urban food prices could not be immediately raised, since urban workers had limited purchasing power. Therefore we had to finance additional subsidies for agricultural and other rural products. At the same time, foreign currency was needed to import grains, which affected the import of machinery. Plus, urban housing needed to be expanded. And since factories now had more autonomy, the wages and bonuses of the workers were raised. All of this involved additional expenditure. But these things all were part of the recovery process, which paved the way for the good situation of later years.

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Zhao Ziyang on the “Birdcage Economic Model”

From Prisoner of the State: The Secret Journal of Premier Zhao Ziyang, trans. by Bao Pu and Renee Chiang (Simon & Shuster, 2009), Kindle Loc. 2442-56:

Comrade Hu Yaobang was similarly unenthusiastic about the planned economy. According to my observations, he believed it was the highly concentrated top-down planning model that had limited people’s motivation and creativity and restricted self-initiative at the enterprise and local levels. He believed that building a socialist society entailed allowing people, enterprises, and local governments to act independently, while the state continued to direct and mobilize them with social campaigns.

Chen Yun and Li Xiannian, however, emphasized the importance of a planned economy, especially Chen Yun, whose views had not changed since the 1950s. He included the phrase “planned economy as primary, market adjustments as auxiliary” in every speech he gave. The tone of his speeches didn’t change even after reforms were well under way. His view was that dealing with the economy was like raising birds: you cannot hold the birds too tightly, or else they will suffocate, but nor can you let them free, since they will fly away, so the best way is to raise them in a cage. This is the basic idea behind his well-known “Birdcage Economic Model.” He not only believed that China’s first Five-Year Plan was a success, but also, until the end of the 1980s, he believed that a planned economy had transformed the Soviet Union in a few decades from an underdeveloped nation into a powerful one, second only to the United States. He saw this as proof that economic planning could be successful. He believed that the reason China had not done well under a planned economy was mainly the disruption caused by Mao’s policies, compounded by the destructive Cultural Revolution. If things had proceeded as they had in the first Five-Year Plan, the results would have been very positive. In terms of foreign affairs, Chen Yun retained a deep-rooted admiration for the Soviet Union and a distrust of the United States. His outlook was very different from that of Deng Xiaoping, and there was friction between the two.

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