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With Nobody Looking, China Drops Economic Reform for Economic Drift

March 19, 1989|Edward A. Gargan | Edward A. Gargan, the New York Times bureau chief in Beijing from 1986 to 1988, is now working on a book about China

NEW YORK — China's economic reform program collapsed last month. Remarkably, no one seems to have noticed.

This collapse, coming in the wake of virulent debates within China's senior leadership, has stripped the country of any coherent overall policy for guiding its economy. Now, instead of proceeding forcefully toward reordering a heavily controlled and irrationally structured economy, Chinese leaders are floundering, plugging multiplying leaks in the economic dike with metaphorical thumbs of condemnation and exhortation.

Since 1979, at the direction of the country's senior leader, Deng Xiaoping, China has made dramatic progress in climbing from the self-inflicted wreckage of the Cultural Revolution. Farmers till their own land and, for the most part, sell their produce at reasonable prices, whether to the state or private marketeers. Entrepreneurial spirit has blossomed in many cities and towns, resulting in a welter of private businesses, from factories to banks. And the sluggish state industrial sector has been prodded into reforming its management style.

All this has resulted in the rapid growth in rural personal incomes, an almost astronomic industrial growth rate and the creation of a vigorous market for consumer goods in urban areas--the greatest improvement in the living standards of China's people in the country's history.

But by 1987, there was, among key economic advisers, concern that reforms instigated since 1979, while producing phenomenal progress, had begun to reach their limits. Further economic growth, these advisers realized, required movement to a radically new stage.

Even as the need to move decisively loomed, China's leadership remained embroiled in serious internal struggles, the dimensions of which are still not clear. What is certain, though, is that the debate revolved around the country's future economic direction.

Two proposals, far-reaching in scope, were put forward by the most senior economic theorists as twin pillars of the country's new economic policies. For a time, both were adopted by the leadership. Both went a considerable distance in sweeping away the last vestiges of anything that could be called socialism.

The first called for an admission that China's policy of setting prices was fundamentally irrational--a central planning apparatus could not determine how much a ton of coal or a kilogram of silkworms should cost. Without a market system--an economy that rationed goods, services and labor according to laws of supply and demand--China would never lay the foundation for real growth. Only a market-based economy, these economists contended, would ensure the country's climb from underdevelopment to reasonable prosperity.

Wu Jinglian, an executive director of the Economic, Technological and Social Development Research Center of the State Council, the country's Cabinet, is the foremost exponent of this approach. "The most backward aspect of the reform is the building of the market system," he told me late last year. "We have to speed up price reform. To improve the economic system, you have to make the market system work. If you don't have a competitive market, you will have nothing."

The second proposal mandated total revision of the conventional system of state ownership. No longer, advocates of this view maintained, could China persist with an economy dominated by state proprietorship of industry. Rejuvenation of unwieldy enterprises could only occur through a form of privatizing, when owners' economic interests compelled efficient operation. Proponents of this ownership reform argued that only by turning these industries into stock-owned public companies could they achieve needed autonomy from state control. This, they said, is a prerequisite for real reform.

The leading figure in promoting this view has been an economist at Beijing University, Li Yining. Li sees ownership reform, he told one recent interviewer, as "the key to it all."

While supporters of these proposals succeeded in swaying the leadership early last year, a combination of economic and political developments shocked China's leaders--even those pushing reform most aggressively. As 1988 unfolded, the gradual freeing of prices on an array of consumer goods brought a sharp rise in inflation--the first serious jump since the Communist Party came to power in 1949.

In urban areas, where the vast majority of people subsist on government-controlled fixed salaries, prices leapt officially by as much as 20% and unofficially by more than 50%. City dwellers were stunned by the sudden erosion of their already paltry incomes. The country's leaders were also stunned by the ballooning prices and last August, as grumbling among city people increased noticeably, they ordered a halt to future price reforms, a freezing of prices on an array of basic goods and wider rationing of scarce staples, such as pork and cooking oil.

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