Cut Loose at Fifty: Chapter Twenty Two – Picture this...
By Chris Clancy
web posted July 16, 2012
January 2009. We made plans to head south and visit Sean, YoYo and Mr. Wu. We decided to go just after the Spring Festival got underway. The idea was there wouldn't be as many people travelling. This was true, although, not "as many people travelling" in China, still meant millions on the move.
This gave me about three weeks to dive back into the Austrian stuff again. In an academic sense, my first attempt at teaching it had put my nose seriously out of joint.
I set myself a very short but specific reading list which I knew would lead to a lot more reading. For the next two weeks nearly every waking hour was spent in my workroom. By the end of it I had got to grips with the problem areas. I spent the next week putting it all together while it was still fresh.
We headed south.
The journey at that time of year was the usual nightmare. No sooner had I started it than I found myself swearing, "never again" - yet again.
We spent about ten days there. It was great to meet up and see the baby but it was the wrong time to go. A first baby changes everything. Any routines a couple may have go out the window. Like it or not the child becomes the center of the universe – with all the paraphernalia – the buckets, the diapers, the washing and the feeding. The sleepless nights. The perpetual mess. The turmoil. And then the backdrop to the whole thing - that unmistakable smell of "baby' - everywhere - permeating everything – an almost toxic mixture of something nice, something not so nice and something horrible in the middle.
And let's not forget the worst part of it all - the crying – the disbelief and wonder that something so small could possibly make so much noise?
Ear-splitting.
Enough to drive any sane, well-adjusted human being, to the point of distraction.
Forget about waterboarding. Just play that noise to any man for twenty four hours at a time and he'd crack – guaranteed – he'd say or do whatever was required. Mud-wrestle his own mother if it came to it. Anything, just to get away from it.
We didn't do much or go anywhere – not possible really – not with the baby. It would have been a logistical nightmare.
To begin with Thiti pitched in and helped YoYo with great enthusiasm. She even said she'd started to feel a bit broody. By the time we left, having been virtually locked up in a small apartment with their "bundle of joy", things had changed.
For my part, any reservations I had about having a baby with Thiti were confirmed. I wasn't going through all that again – no way!
As we travelled home I told her how I felt. I expected a problem – a big one. There wasn't. Having seen the reality of caring for a baby – up close and personal for nearly two solid weeks she said she'd never be able to cope with it – even if by some miracle she managed to have one.
I wasn't sure if she really meant it at the time, but as the years passed we talked about it less and less - until in the end we just stopped – it was another bridge we had to cross.
Once back in Wuhan we quickly got back into the swing of things.
We had about two weeks before the semester began. I had a couple of articles in mind and planned to spend the time doing some background reading. I remember settling in front of my computer. The screen was a bit dusty. I hunted around for something to clean it with. In the bedroom Thiti's bra was hanging on the back of a chair. I found if I pushed everything into one of the cups I had a perfect duster.
Just the job.
Once again I settled in front of my computer.
The doorbell rang. It was one of my students from the ill-fated Austrian course. He had brought a book which he said he'd tried to read but found the English too difficult – he thought that perhaps I would find it of interest.
I did indeed.
The book was written by an American-based Chinese professor - Yasheng Huang. The title was, Capitalism with Chinese Characteristics: Entrepreneurship and the State.
You can pick up some books and find you can't put them down. Then again there's the other type of book – once you put it down you never pick it up again. This book was somewhere in-between. Every time I put it down I dreaded picking it up again. Not because it was a bad book – far from it – but because of the incredible amount of research and empirical detail which had gone into it.
Not exactly bedtime reading.
But how thankful I am that I persevered and ploughed my way through it.
For those of us nuts enough to find such stuff interesting, "surprises" like this don't come any better. Professor Huang, in a single volume, managed to expose not one, but three great myths about China's economic "miracle".
The first, and the biggest, was that China's rapid development in the 1980s was achieved by heavy central planning on the one hand and no property rights on the other.
This was an impossibility - unless China had found a new way of doing things!
The truth was that that the amazing speed of economic activity had little to do with central planning and everything to do with free markets and property rights.
In 1958 the agricultural commune system was imposed by the government. For farmers and their families it was little more than serfdom or "slavery" by another name. It was a disaster. For the next twenty years they laboured and suffered under an unworkable system.
Then, in 1978, two years after China's visionary leader, Deng Xiaoping, assumed the leadership, something remarkable is said to have happened.
Picture this …
A destitute farming community in a tiny village called Xiaogang - in Anhui Province - one of the poorest in China. Late in 1978, the actual date is uncertain, 18 impoverished farmers met. They agreed to break up the land between each household and farm it individually. They would meet their government quotas, but whatever was left they would keep and sell themselves.
This was against the law.
Fearful of what might become of their families if they were arrested and imprisoned, they drew up an agreement. If any or all of them were taken away, everyone else in the village would look after their children - until they reached 18 years of age.
The agreement was signed with signatures and thumbprints.
And this, according to the story, was how it all began.
The following year the grain harvest was six times what it had been in 1978. They easily met their quotas and then sold the excess — many by the roadside. Per capita incomes jumped by several factors. Party Secretary, Wan Li, who was in charge of Anhui Province at that time, heard about what was going on but wisely decided to turn a blind eye.
Word spread quickly to other communities throughout China. Such were the amazing improvements in productivity and output that it was given official approval by Deng in 1980. Four years later the commune system had all but disappeared.
Throughout the 1980s rural per capita incomes rose by an average of 9% pa. This extra spending power encouraged non-farm businesses to spring up. These became known as Township and Village Enterprises (TVEs). They were actively encouraged by the government, given easily obtained loans and lower tax rates.
Having been virtually excluded from China's welfare system, such as it was, peasants saw this as their opportunity to provide their own safety net.
And they went for it - not in their tens of thousands - but in their millions.
As part of his research, Huang delved into the archives of the Ministry of Agriculture. For the year 1985 he found that, of the twelve million officially recognized TVEs, more than ten million were privately owned and run by individuals and their families.
They had the right to own their own businesses, make what was demanded, sell to whom they wanted and keep the profits they generated.
Rural reforms made the whole thing possible but it was the emergence of free markets and property rights that made it happen.
"The diversity of production, commodity economy, and all sorts of small enterprises boomed in the countryside, as if a strange army had appeared suddenly from nowhere. This is not the achievement of our central government." Deng Xiaoping, People's Daily, 13 June 1987. (Emphasis added).
The 1980s finished with Tiananmen Square.
In passing, Huang explodes the second great myth.
In his own words:
"After the collapse of the Soviet Union, many western and Chinese analysts came to the conclusion that China was spared the same fate in 1989 because it did not liberalise its political system. This is a flawed reading of history. The reason why China did not collapse in 1989 has very little to do with lack of political reforms … The real reason China did not collapse was that its rural population was reasonably content … At the height of the Tiananmen turmoil, Deng reportedly made the following remarks to other Chinese leaders: 'The economy is still the base; if we didn't have that economic base, the farmers would have risen in rebellion after only 10 days of student protests — never mind a whole month'."
Huang writes that his research proves there was a deliberate switch in policy in the early 1990s under the leadership of Jiang Zemin and then Zhu Rongji. The switch was from the rural economy to urban centers. He's honest enough to say he doesn't know exactly why this happened, but that Tiananmen Square was certainly a factor.
Rural reforms were scaled back along with liquidity flows; in the 1980s 30% of rural households had access to some kind of credit — in the 1990s this fell to less than 10%. Higher taxes were imposed along with more expensive health care and higher education fees. These policies were used to fund the investment in urban centers. The result was that per capita increases in rural incomes fell to less than 4% pa for most of the 1990s.
Thus, the rapid growth in the countryside of the 1980s ended in the early 1990s.
However, as a whole, the economy continued to grow at more than 9%. Huang argues that foreign academics and researchers failed to see what was really going on because they simply concentrated on figures for GDP and Foreign Direct Investment.
Now, there's no shortage of research material on China, but there is a problem with its reliability. Here Huang had a distinct advantage over his foreign counterparts. Being native Chinese, he could read the original source documents and this he did with a vengeance (e.g. as part of his research he combed his way through twenty-two volumes of internal bank documents; yes, 22 volumes!).
He then destroyed the third great myth.
Chinese manufacturers were forced to sell abroad, not simply because domestic consumers saved too much but, more importantly, because the fall in disposable incomes in the countryside meant they simply didn't have the money to soak up all the output.
Using an undervalued currency to promote exports was not a deliberate development strategy as such — they didn't have much choice — there was no other way of shifting their output.
This, he argues, was the beginning of a global trade imbalance which just grew and grew.
What a nice "find" this book was – and what a marvelous story – the one about the farmers in Anhui Province.
Could it really all have started with a handful of desperate peasants, back in 1978, selling their surplus vegetables by the roadside?
I don't doubt something like this happened. But to say this is what kicked the whole thing off is, perhaps, a bit of a stretch.
But what the hell – at the very least I like to think they played a part.
Once again, my thanks to Professor Huang! 
Chris Clancy lived in China for seven years. Most of this time was spent as associate professor of financial accounting at Zhongnan University of Economics and Law in Wuhan City, Hubei Province. He now lives in Thailand where he spends his time reading, writing, lecturing and, whenever he gets the chance, doing his level best to spread Austrian economics.