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Origins of China's Miracle & Relevance Today

Nick Sargen
Chinese town in the mountains
  • For those who believe individuals can shape history, Ezra Vogel’s award winning book on Deng Xiaoping offers a fascinating perspective of how he transformed China’s backward, socialist economy into a modern-day global power.1 Among Deng’s greatest attributes were his pragmatism and openness to ideas, including allowing market forces to dictate resource allocation and applying lessons gleaned from the experiences of more advanced economies.
  • Deng’s approach combined strategic planning by the central government with decentralized decision making at the regional and local levels. He believed in experimenting with various reforms and assessing their success rather than undertaking “shock therapy.” He also understood human nature and the way that people respond to economic incentives.
  • While Deng had to tread carefully to ensure the reforms would not be rejected, Vogel notes he also benefited from a functioning national party and unified government under Mao. Throughout his life Deng remained loyal to the Party and Mao’s leadership, but he rejected many of Mao’s economic doctrines.
  • By comparison, China’s current leaders are more doctrinaire and wary of foreign investment and ideas. Meanwhile western governments are responding to populist pressures by becoming more nationalistic, and political leaders in the United States are less committed to free trade. If these tensions persist, they could lead to disputes with China that would unsettle world markets at some point.    

Deng’s Role in China’s Transformation

When I discovered economics in the 1960s, I wanted to understand what made some countries successful while others lagged. The Soviet Union attracted considerable attention then, as some observers believed its command economy might overtake the United States’. I was also intrigued by the writings of Oskar Lange and Abba Lerner, who demonstrated how a socialist economy could use market forces to allocate resources while the state retained ownership of the means of production.2 They referred to their approach as “market socialism.” The Soviet Union, however, did not pursue this approach, and its command economy faltered in the 1970s and 1980s, the victim of widespread inefficiencies and poor resource allocation.

Just when the Soviet development model was being discredited, China embarked on a series of economic reforms in the late 1970s under the leadership of Deng Xiaoping that ultimately transformed a backward socialist economy under Mao Zedung to a modern, market-oriented economy today. Since the 1990s, I have spent time getting up to speed studying the various stages of China’s development. They include: (i) reform of the agricultural sector away from collectivization; (ii) attraction of foreign investment and talent to develop export capabilities; (iii) privatization of former state owned enterprises (SOEs) to make them more efficient; and (iv) China’s entry into the World Trade Organization (WTO) in the past decade, which helped catapult it as an economic superpower.

Prior to reading Vogel’s book, however, I did not fully appreciate the incredible challenges Deng faced in embarking on economic reforms that Mao and other Chinese leaders feared would bring capitalist principles to China. On two occasions Mao banished Deng from high positions in the government, and it was not until two years after Mao’s passing in 1976 that he emerged as China’s new leader. Even then, he had to tread carefully to lessen the risk of political backsliding on his reform program.

One misconception I had was to think of Deng as the architect of China’s modernization. Vogel rejects this image, claiming that the reforms began before Deng assumed power and that “there was in fact no clear overall design in place during this era.” Instead, he claims “Deng was the general manger who provided overall leadership during the transformation.” According to Vogel, Deng’s role included the following: (i) packaging ideas and presenting them to colleagues and the public; (ii) providing a steady hand that gave people confidence in the reforms; (iii) selecting and guiding the team that implemented the reforms; (iv) generating problem-solving ideas that would work in various contexts; and (v) fostering a strong governing structure that could stay in control amid changing circumstances.

Attributes of a Great Leader

Vogel’s book is also instructive in identifying attributes that made Deng one of the greatest leaders in the post war era. First and foremost, he was open-minded and pragmatic. Unlike most politicians, he did not claim to have the answers to problems; however, he was committed to understand the nature of the problems China faced and to seek out solutions based on experiences of other countries, including China’s former adversary, Japan. In this respect, Deng was open to experiments that involved testing reforms in select areas of China — most notably the coastal provinces and the agriculture sector of rural areas—and seeing how they fared. As they succeeded, he would follow up with bolder measures.

Deng also had high regard for people with technical expertise — notably, scientists, economists, managers, and intellectuals. They had been victims of the Cultural Revolution in the 1960s, in which talented people were sent to work with common laborers in rural areas so they would learn socialist values. Deng realized that educated people would be vital to China’s modernization, and he reinstituted entrance exams to Chinese schools to identify the best talent. In government, he created a meritocracy in which officials were judged on the basis of their performance rather than on their ideological purity. He also allowed ethnic Chinese who resided outside China to open businesses inside the country.

Another of Deng’s strengths was his skill as a decision-maker and a conciliator. As Vogel notes, “When controversies arose, he played a major role in making the final decision and managed the process so as to minimize cleavages that would tear the country apart. He supported the effort to provide incentives and to offer hope based on realistic enough goals that people were not later sorely disappointed.”

One attribute that is remarkable is Deng’s extraordinary equanimity. Throughout his life, he maintained loyalty to Mao and the Party, even though he and his family were victims of the Cultural Revolution. Deng did so because he understood the role Mao played in unifying the country after a century of domination by foreign powers, but he believed the Cultural Revolution was a terrible mistake.

Deng also believed the Communist Party was the only viable entity that could govern a country as large and diverse as China. Deng’s commitment to the Party caused him to order the crack down of demonstrators at Tiananmen Square in 1989, which was roundly criticized in the West. His justification was that he believed the demonstrations were revolutionary acts that threatened the stability of China.

Challenges Deng Confronted

Much of Vogel’s book is devoted to the challenges Deng faced in transforming China, which he summarizes as follows:

It is difficult for those in China and abroad who became adults after Deng stepped down to realize the enormity of the problems Deng faced as he began this journey; a country closed to fundamentally new ways of thinking; deep rifts between those who had been attacked during the Cultural Revolution and their attackers; proud military leaders who were resistant to downsizing and budget reductions; public animosity toward imperialists and foreign capitalists; an entrenched, conservative socialist structure in both the countryside and the cities; a reluctance by urban residents to accept 200 million migrants from the countryside; and dissension as people continued to live in poverty while others became rich.

In the end, Deng’s legacy is that he supplanted rigid Maoist ideology with a more pragmatic approach to tackle China’s formidable problems. One of his favorite sayings was “It doesn’t matter if a cat is black or white, so long as it catches mice.” In describing China’s economic system he called it “socialism with Chinese characters,” by which he meant that Chinese socialism is compatible with a market-based economy that needed to be adapted to China’s unique circumstances. In this regard, his economic views are very similar to those of Lange-Lerner, which I noted earlier.

Relevance Today: A Great Leap Backward?

Finally, one may ask what the relevance of all of this is today.

In surveying the global landscape, my greatest concern is that the leading economies of the world are increasingly turning inward, as political leaders confront problems they cannot fix and the electorate responds favorably to populist rhetoric. In China, the spirit of reform and openness that Deng fostered carried over until the 2007-08 financial crisis, when China’s leaders questioned whether western models of development were superior to ones in which the government retained more control over the economy. While China’s current leaders have stated they are committed to further reform of the economy and financial system, many observers believe the commitment has waned as China’s economy has slowed and its financial markets have become more volatile.

More concerning are reports that the Chinese authorities are cracking down on dissenting views. For example, a recent Economist article (April 23) titled “The return of correct thinking” noted that China’s president, Xi Jingping, issued an edict that is intended to strengthen the Marxist stance of the Communist Party and to keep members in line with the party leadership in ideology, politics, and action. The Wall Street Journal subsequently reported (May 4) that Chinese government officials are warning economists, analysts, and business reporters who point out problems with China’s economy should be more upbeat, and its editorial of May 7 titled “Xi Jingping’s Politics in Command” observes:

Optimists hoped that Mr. Xi would prove a reformer in the mode of Deng Xiaoping. But Deng had a 'go for growth' mentality and was willing to tolerate some liberalization of information flows to make China prosperous. Mr. Xi seems determined to restore levels of control last seen under Mao, with predictable economic consequences.

At the same time, nationalism is on the rise in the West, as governments are under pressure to deal with economic problems festering from the 2008 financial crisis, as well as new ones resulting from an influx of political refugees from the Middle East into Europe and growing incidences of terrorism. In the United States, none of the leading candidates for President has backed the principle of free trade, which has been a hallmark of U.S. policy in the post-war era, and Donald Trump, the presumptive nominee of the Republican Party, has campaigned on imposing a tariff of 45% on some Chinese imports.

With China and the West both turning nationalistic, there is heightened risk of geopolitical disputes that could unsettle markets at some point. My hope is that world leaders instead heed the lessons of Deng Xiaoping and seek mutual solutions to global problems. However, I am too much of a realist to believe that will happen anytime soon.

1 Ezra F. Vogel, Deng Xiaoping and the Transformation of China, Harvard University Press, 2011. Note: Vogel is an eminent Asian scholar and an emeritus professor at Harvard.
2 The Lange-Lerner framework was formulated in the second half of the 1930s and was developed in response to criticisms of socialism by Ludwig von Mises and Friedrich Hayek.

Nick Sargen, Chief Economist

Nick Sargen

Nick Sargen is an international economist, global money manager, author, and contributor on television business news programs. He earned a PhD and MA from Stanford University and BA from UC, Berkeley.

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