Capitalism Comes to the City

By Picolyer

Deng extends economic reform from the farm to the factory

Something was obviously afoot. China's leader, Deng Xiaoping, 80, who usually chooses to operate behind the scenes, uncharacteristically commanded center stage at National Day celebrations three weeks ago. Then, for an unprecedented nine days in a row, the low-profile leader appeared on the front page of People's Daily. In most of the articles quoting him, he pointedly asserted that his "open-door" policy on foreign trade would continue and that the capitalist system in Hong Kong would be preserved for at least 50 years after China reassumes control of the British colony in 1997. Finally and most dramatically, Deng grandly declared a fortnight ago that he was planning "a kind of revolution" in his country's economy.

All the curious portents were explained last Saturday as officials unveiled one of the most radical schemes for economic growth in the 35-year history of the People's Republic. After 618 delegates had gathered behind closed doors for seven days during what was officially known as the Third Plenum of the Twelfth Central Committee, Chinese leaders released a 16,000-word resolution outlining a complex package of new economic reforms. The program consolidated Deng's five-year attempt to promote a free-market system in the countryside. More important, the new scheme extended those reforms to the long-stagnant cities, thereby promising the "invigoration" of notoriously sluggish industries and offering 200 million urban workers a chance to catch up with some of the 800 million peasants who have been enjoying the fruits of free enterprise for half a decade now. With startling candor, the document conceded that although socialism is superior to capitalism, "this superiority has yet to be brought into full play."

The improvements were made necessary by the success of the reforms initiated during the Third Plenum of the Eleventh Central Committee, in 1978. At that meeting Deng effectively consolidated his power over China and set about rebuilding an economy laid waste by 20 years of Maoist experimentation. The new leader's major innovation was the "contract responsibility system" that permitted peasants, once they had turned over a relatively modest quota of their crops to the government, to sell the rest on the open market. The results have been stunning: record harvests in almost every crop since 1979, and agricultural output growing an astonishing 7.9% a year.

But as newly prosperous peasants began streaming into the cities to buy trucks, cars and consumer luxuries, their urban counterparts, whose wages remained fixed, grew jealous. Although agriculture has boomed, much of Chinese industry has continued to stagnate. Unemployment in the cities is higher than 10%, while poor planning has, the resolution acknowledges, "seriously dampened the enthusiasm, initiative and creativeness of enterprises." Shortages of electrical power have idled about 20% of industry. Scarcity of steel and cement has brought construction projects to a halt for months on end. Meanwhile, more than 40% of the government's budget has gone to subsidizing inefficient industries and basic commodity prices.

The costliest flaw in the system has been the absence of incentives. Industrial workers are virtually guaranteed employment for life. More than that, rewarding merit is considered dangerously unsocialist. When the government allocated money for merit bonuses five years ago, most managers chose to hand out across the-board wage hikes to hard worker and laggard alike.

Deng is determined to change all that. Just last week, the authoritative Economic Daily announced that the number of commodities subject to planned output targets would be slashed from 120 to 60 in the industrial economy, and from 29 to ten in the agricultural sector. Thus many more goods can now fluctuate according to the law of supply and demand. Until this month, state-owned factories were forced to hand over all their profits to the state. Now the plants simply pay a progressive tax on profits and then use the remainder for incentive and welfare schemes or direct reinvestment. Managers will also, it seems, be allowed to hire and fire as they choose, as well as to set wage differentials among employees.

The most fundamental of the newly announced economic changes, and the riskiest politically, is price reform. Until last week, consumer prices on such basic items as rice, vegetables and housing were kept artificially low through government subsidies. Now the cost of many items will be allowed to respond to market forces. The government is hoping that a rise in demand will prompt an increase in supply, so that prices that rise sharply at first will eventually be brought down again. Nonetheless, many Chinese fear that their bureaucrats, however liberal-minded, lack the experience to handle the subtleties of the free-market system. Deng has warned his countrymen that for all the success of his agrarian reforms, "urban reforms need greater courage."

The leader will also need considerable public support as he launches his boldest, and perhaps his last, assault upon China's long-held commitment to egalitarianism. Last Saturday's document categorically declared that "socialism does not mean pauperism, for it aims at the elimination of poverty." But many politically "conservative" Chinese, who still believe that penury is a virtue, may feel that the new brand of socialism sounds suspiciously like capitalism. In the highest echelons, Deng has been supported by Premier Zhao Ziyang and General Secretary Hu Yaobang, but has evidently run into some stiff resistance over the pace of his program from the three other members of the influential Politburo Standing Committee: President Li Xiannian, former Planning Czar Chen Yu and Marshal Ye Jianying, a Communist leader for half a century who may be the last party luminary strong enough to question Deng. Ye has been out of public sight for months, and there have been persistent rumors that he died before the plenum began. The party, according to one version, did not wish to announce Ye's death until the meeting was over.

For the moment, nothing seems likely to stop Deng and his reforms. After a People's Daily article last week voiced the widespread fear that his open-door policy admitted all kinds of "dirty things," the ever resourceful leader had a typically pungent response. "It doesn't matter if someone gets dirty," he said, "just so long as he washes himself more often." --ByPicolyer.

Reported by David Aikman/Peking

With reporting by David Aikman/Peking