The Reluctant Dragon

Crisis Cycles in Chinese Foreign Economic Policy

Lawrence C. Reardon

• Publisher: University of Washington Press
• Year: 2014
• ISBN:
  9780295803333
• Topic: History
• Subtopic: Chinese History
• Index: History

Chinese foreign economic policy before 1978 has been considered isolationist and centered on Maoist self-reliance. In this revisionist analysis, Lawrence Reardon argues that China was not out of touch with the global marketplace during the 1949-78 period and that Deng Xiaoping's heralded liberalizations in fact were revisions and expansions of policies from the Maoist period. The dramatic economic reforms initiated by China's leaders in 1978 boosted GDP by between 9 and 13 percent each year during the 1980s and 1990s, while the nation's foreign trade figures rose from a trivial US$1.94 billion in 1952 to US$325 billion in 1997. By opening to the outside world and liberalizing the domestic economic infrastructure, China has become the third largest and one of the fastest-growing economies in the world. The story of China's on-again, off-again trade efforts provides an important window on the cyclical struggle for power between Mao Zedong's ideologically driven allies and more pragmatic leaders such as Zhou Enlai and Deng Xiaoping, whose approach eventually prevailed. Reardon relies on primary sources, including Chinese Communist Party histories and other restricted-circulation materials that have recently come to light, to show that China's apparently sudden turn outward in 1978 was actually an extension of previous experiments hobbled by bureaucratic infighting and conflict among rival elites. He describes in unprecedented detail the seemingly contradictory strategies used by Mao and other leaders to assert China's absolute self-sufficiency while also striving to modernize the economy and achieve maximum prosperity as rapidly as possible. These latter goals required engagement with global economic forces - even capitalist nations - but were necessary to enhance national security in a hostile geopolitical environment and to assure continued domestic stability.

CHAPTER 1

The Domestic Determinants of Chinese Foreign Economic Policy

During the post–World War II era, developing countries considered foreign trade as a crucial element for economic growth.¹ Although facing far different circumstances, China joined the other East Asian economies in the 1950s in choosing an inwardly oriented strategy of import substitution. Yet China did not accompany Taiwan, South Korea, and the other high-growth Asian economies along the evolutionary road toward outwardly oriented development, but instead continued along a circuitous inwardly oriented path until the late 1970s.

The UN economic embargo undeniably affected China’s adoption of inwardly oriented policies in the early 1950s. However, elite disagreement over the best path to self-reliance caused the two-decade continuation of inwardly oriented policies. Policy elite coalitions coalesced around a particular inwardly oriented strategy—import substitution or semiautarkic development—based on their different beliefs and experiences. Contending elite coalitions used crises to delegitimate existing policies and to implement their preferred development strategy. The resulting changes created a cycling of contending inwardly oriented development strategies; this cycling prevented the Chinese from enjoying the high growth rates experienced by “Asian miracle” economies.

Systemic Explanations of Chinese Foreign Economic Policies

Inwardly and Outwardly Oriented Development Regimes

Before World War II, most developing countries adopted—or were forced to adopt—primary export-led growth, which is based on the neoclassical doctrine of comparative advantage. By exporting their abundant raw materials and foods, developing countries theoretically used factors of production more efficiently, improved factor endowments (foreign investment, domestic saving, labor and skilled personnel), and stimulated development in other industrial sectors. To gain greater political and economic independence after World War II, many of these developing economies explored alternative growth strategies focusing on development of the country’s industrial sector.² They subsequently adopted two industrial development regimes—inwardly and outwardly oriented development (table 1.1)—to achieve their ultimate goal of economic parity with the developed economies.³

These development regimes are based on two fundamentally different views of the international marketplace.⁴ Inwardly oriented strategies treat the international market as a dangerous adversary whose influences on domestic economic growth must be controlled and in certain instances eliminated. The developing economy can achieve economic parity only by eliminating dependence on the developed economies through self-sufficiency. Outwardly oriented strategies take a more utilitarian view. Although the international market must be watched, it is regarded as a “partner in development,” which provides an invaluable source of export revenue, technology innovation, and capital financing. Thus, domestic industrialization and economic parity can be achieved by becoming more integrated with the international market.

The two industrial development regimes also prescribe contrasting prescriptions for economic growth. Inwardly oriented strategies mandate explicit or implicit restrictions on foreign trade and investment activities to insulate the domestic economy from international environmental influences and to achieve self-sufficiency, which can be defined as the state’s ability to control its internal economic affairs. A country’s success in achieving such goals is dependent on its level of industrialization, geographic size, resource endowment, and government policies.⁵

The most extreme inwardly oriented strategy is autarky: A strict self-reliance strategy was the preferred solution to the extremely harmful influences of the international economy (see table 1.1, type 1). While economists assume that complete isolation can exist, Yahuda argues that “at no point during Mao’s lifetime was the PRC truly autarkic in the sense of having no foreign trade at all”; Nai-Ruenn Chen describes China’s policies of the 1960s as “import minimization.”⁶ The term “semiautarky” thus cumbersomely describes those periods when China severely restricted foreign economic relations but continued to import vital raw materials, technology, and equipment.

A less draconian type of inwardly oriented strategy involves import substitution. Virtually all economies have engaged in simple substitution of selected imported goods; certain developing economies have implemented a more comprehensive strategy of substituting intermediate goods (petrochemicals, steel), producer durables (machinery), and consumer durables (automobiles, television sets) for imports.⁷ Theoretically, important substitution development is designed to protect the state’s “infant industries” from international market competition until they achieve economies of scale and competitive strength (see table 1.1, type 2).⁸ The state imposes high tariff barriers, import quotas, and other import restrictions to lower overall demand for imports. Through such policies, combined with vigorous regulation of foreign investment and extensive subsidies for domestic industry, the state thus protects the national industries’ monopoly of the domestic market. The overvalued exchange rate makes export activities unprofitable and enables the state to import industrial production technology and equipment for targeted industrial sectors. Unencumbered by international and domestic competition, these targeted industries produce goods for the domestic market that previously were imported. In essence, the state depends on the international marketplace in the short term to achieve autonomy or self-reliance in the long term.

An outwardly oriented regime is the second general type of development regime adopted after the late 1950s (see table 1.1, types 3 and 4). An outwardly oriented regime is based on Ricardian theories of comparative advantage and the Heckscher-Ohlin approach to international trade. Theoretically, developing countries enjoy comparative advantage in labor, land, or both and thus expand production of labor-intensive commodities for the domestic and export markets. Lacking capital and entrepreneurial ability, developing countries increase imports of capital-intensive products and progressively lift many protectionist barriers to foreign direct investment. Eventually, such countries adopt a more equitable pricing system for production inputs, reduce high exchange rates, and eliminate certain protectionist quotas and nontariff barriers.⁹ Several economies, including Japan, Indonesia, Malaysia, Thailand, Taiwan, Hong Kong, and Singapore, took the further step of implementing an export-promoting strategy that regarded exports as the major engine of growth. They established various positive incentives to expand foreign trade (type 4), including export processing zones.¹⁰

While their overall goal is to promote economic growth, the two development regimes are based on two fundamentally different Weltanshauungs. An inwardly oriented regime is designed to strengthen the state’s independence from the international economic system, which is chaotic and promotes inequality. By eliminating discriminatory measures against exports and foreign investment, an outwardly oriented regime promotes a greater integration with the international economy, which is considered a partner in development.

Alternate Explanations for an Inwardly Oriented Development Regime Choice

To understand Chinese foreign economic policy during the pre–1978 period, this study first analyzes why China, like so many other developing countries in the 1950s, adopted an inwardly oriented regime. Economic explanations for regime choice focus on the role of the market, which can either accelerate economic growth rates or suppress indigenous economic forces. Political explanations focus on the nature of power in the international system and the state’s ability to pursue its interests. The latter, neorealist approach is the most appropriate explanation for China’s development regime choice in the early 1950s.

ECONOMIC EXPLANATIONS FOR AN INWARDLY ORIENTED DEVELOPMENT REGIME

Neoclassical economists, who strongly adhere to theories of comparative advantage, emphasize the role of nonmarket forces in the choice of inwardly oriented strategies.¹¹ Such nonmarket forces must also include economists themselves, whose theories of the early 1950s and 1960s were based on “a mixture of touristic impressions, half-truths, and misapplied policy inferences” that contributed to an overemphasis of the infant-industry argument.¹² Therefore, in the 1950s many Latin American, South Asian, and Central and Eastern European economies implemented import substitution strategies that entailed the substitution of nondurable consumer goods and their production inputs. These economies continued to intervene in the marketplace by “deepening” the import substitution strategy to include the substitution of intermediate goods and other durables. Thus private entrepreneurs were unable to respond to international market demands to promote a transition to an outwardly oriented development regime.

According to another view, there is a discernible sequence of development strategies among the high-growth Asian economies; this sequence was first experienced by Japan from the 1870s to the 1920s. Reflecting their colonial past, many Asian economies initially were exporters of primary products; the Asian economies subsequently promoted inwardly oriented strategies of import substitution, which eventually were discarded in favor of outwardly oriented development.¹³ Import substitution thus is considered a precondition for an outwardly oriented regime, whose adoption is hastened by higher domestic demand brought about by a more productive agricultural sector.¹⁴

An alternate economic explanation emphasizes the detrimental social and economic costs of comparative advantage. The Latin American school of development criticized primary-export-led growth strategies for condemning developing countries to languish perpetually in the periphery. Their growth stagnated because of weak international demand for raw materials and foodstuffs and the inability of international prices for primary products to keep pace with the manufactured import prices. Over time, countries relying on primary exports are unable to afford manufactured imports, and this inability in turn leads to under-development.¹⁵ During the 1950s, the UN Economic Commission for Latin America and the World Bank counseled developing countries to eschew primary-export-led growth and adopt an import substitution growth strategy.

POLITICAL EXPLANATIONS FOR AN INWARDLY ORIENTED DEVELOPMENT REGIME

Such economic explanations fail to consider the influence of the international environment—especially the development of the Cold War—on the policy makers’ decision to implement an inwardly oriented development regime. Certain international relations theorists, most notably Kenneth Waltz, argue that the international environment is the primary variable affecting foreign policy formation. They criticize subsystemic levels of analysis—such as domestic determinants (national styles, geographic position, the state, the bureaucracy) and decision-making theories (psychological approaches)—as “reductionist” approaches that do not possess sufficient explanatory power.¹⁶ Systemic explanations thus focus on the general interactions between states, especially among the major players.

Two contending models have recently dominated the systems literature in the United States: neoliberalism and neorealism.¹⁷ Neoliberals believe that states are constrained from military conflict by an increasingly complex web of regimes promoting cooperation.¹⁸ Such views readily explain outwardly oriented development strategies—such as those adopted by Hong Kong, Taiwan, and South Korea—and help us to understand China’s experimentation with outwardly oriented development strategies in the 1980s. Yet the low degree of interconnectedness between China and the world economy makes the neoliberal explanation for pre–1979 Chinese foreign economic policy inappropriate.¹⁹ While initially imposed upon China, this low degree of interconnectedness became an idealized goal of Chinese policy makers, who feared systemic manipulation.

The second systems approach—neorealism—maintains that the world system is anarchic.²⁰ States pursue their self-interest by taking advantage of a public good (peace or free trade); such pursuit oftentimes results in major military or economic conflicts, such as World War II or the economic trade wars of the 1930s. Faced with such systemwide disturbances, the developing countries must adapt. To prevent increased interdependence whose asymmetrical structure would have a detrimental effect on their sovereignty, developing countries protect their economies by adopting inwardly oriented strategies—such as import substitution. By becoming more self-reliant, developing countries strengthen their chances of survival in the anarchic world.²¹ This neorealist approach is the most appropriate explanation for China’s initial adoption of the inwardly oriented development regime.

The first important case suggesting this hypothesis occurred during the early years of the new Soviet state. Following the conclusion of World War I, the victorious Western allies attempted to eliminate the Bolshevik threat to Russia and the rest of Europe. After expelling foreign forces, the Soviet leadership insured economic self-sufficiency by nationalizing the means of production, collectivizing the agricultural sector, using the Party to mobilize the state, and engaging in rapid industrialization.²² Between 1921 and 1930, Soviet leaders, lacking finance capital, signed more than three thousand agreements with foreign capitalists ranging from Julius and Armand Hammer’s Allied American Corporation to Germany’s Junkers-Werke. By financing technology imports and transferring the most up-to-date Western technology, these foreign concessions became the essential component of the Soviet Union’s initial import substitution development strategy. Western capitalism thus enabled the radical transformation of the Soviet Union’s ...