Good morning, everybody!
Today I will explain the sixth crisis in China
That was in the 1980s
and we are trying to give a more detailed explanation
about the economic system reform
Most people from China and abroad
know that China started the economic reform
since the late 1970s and early 1980s
Last time
we gave a background analysis to tell people
that the economic system reform was caused by the fifth crisis happening
in the late 1970s and the early 1980s
It was because a large amount of foreign capital flew into China in the 1970s
because at that time
China re-established diplomatic relations with Western countries
This time we are trying to give a more detailed explanation
about the background
Why since the 1980s
China could accelerate the economic reform
and also have so-called high growth since the 1980s
First, we must notice that
the 1980s was a new historic era in the name of neoliberalism
We have a picture to show that
since the 1960s industrial capital expanded
but most of these countries that gained independence
after the Second World War were still very poor
Western countries reindustrialized after the Second World War
could produce a large number of industrial goods
but there was no [big enough] market
From the 1960s
most of these industrialized countries fell into social chaos
And a lot of left-wing movements encouraged by Maoism in Western society
became very serious
and thousands of people joined these social movements until the 1980s
You can see that the historical difference is very clear
In the 1960s
every decade, every year
Fordist and Keynesian?model declined
Mass production is kind of typical of Fordism for the industrialization
for the expansion of industrial capital
But from the 1960s to the 1970s
they could not generate enough capital accumulation
so it decreased every year
until the 1980s
The 1980s are very important
because in the late1970s and early 1980s
when China as the country with the largest population
and the biggest market size
started to absorb Western countries’ surplus industrial capital
it immediately gave rise to a new phenomenon
Here you can see that
the real production in the West decreased every year
but overseas capital returns increased
since the late 1970s and early 1980s
And before the 1980s
most of these Western countries transferred out their manufacturing industries
to so-called Asian Four Little Dragons and Little Tigers
But these countries in the region are mainly located in peninsulas or islands
So they were geographically small and the populations were also small
Therefore they could not absorb too much surplus industrial capital
The process started from the small economies
But then China opened to the West
China re-established diplomatic relations with Western countries
It's very important because China is a big mainland country
So that is why from the 1970s to the 1980s
especially from the 1980s
these American industrial capital
could have more gains from overseas investment
So let’s go back to this one
That also shows the accumulation rate since the 1980s increased very fast
And then most of the overseas investment
created a large number of overseas returns
which flew back to Western countries
especially to the United States
mainly into the stock markets to take part in speculation
From the 1980s onwards
neo-liberalism was adopted to facilitate financial capital growth
So industrial capital declined and financial capital rose up
This decline and rise induced a big change in the Western capitalist system
The new era, as we said, is the global financialization, starting in the 1980s
combined with the neo-liberalism
That is a very important background
to understand [why] the developing countries “developed”
It is because previously industrial capital played a very important role
Since the 1980s, financial capital has played a leading role
We need to talk about the background
First, we must know that it’s a new era
Financial capital kept Western society growing
because they transferred out their industrial capital
to developing countries and thereby
had a large amount of overseas returns
which became a very strong force in the stock market
the financial markets
So the West financialized their economy
and transferred out their physical production bringing
about the financial capital era
That is a very critical background
And at that time there was a big change in Western countries
So most of these Western countries mainly took revenues the profits
from financial capital growth
As China reestablished diplomatic relations with Western countries
these industrialized advanced countries
joined the competition in Chinese industrial market
mainly for transferring facilities and machines to China
China got a chance to adjust its industrial structure
But the restructuring of heavy industry，machinery industry, military industry
still needed intensive capital investment
That means the institutional costs would be high
And also, there was a very important event
In the 1970s when China established diplomatic relation with Japan
China forgave Japan’s Second World War compensation
Japan in return gave official aid loan and also technological facilities
to help China’s industrial development
The general loan interest rate in the 1970s and 1980s in China
was more than 10%
But the loan that Japan gave to China was of less than 3% interest rate
And also, the repayment period could be thirty years
So they were long-term loan with very low interest rate
It benefited China a lot
because at that time China was in a huge shortage of capital investment
So Japan provided China with a large amount of official investment
and that was a very positive
event for the restructuring of China’s national economy
and industrial structure in the 1980s
At the first three years
the first period when Japan aided China with a large amount of loan
50% of which was used to buy Japanese facilities
That means Japanese government gave the loan to China
and Japan sold a lot of facilities and machines to China
to occupy Chinese machinery market
There was another very important event in the 1980s
Because of the so-called second land reform at the beginning of the 1980s
most of these peasant
households in rural regions took back their plots of arable land
A large number of surplus labor force were being released
from the collective system
Previously Chinese rural labor was organized by the collective system
and mainly worked on the construction of reservoirs, irrigation systems
and state infrastructure
But since the 1980s
the government could hardly organize
the labor force to work on the national construction
So the labor force was dispersed in almost every household
Immediately there was a big surplus labor force
If you calculate the total arable land
China only needs one hundred million rural labor
It is enough
But since the 1980s when rural reform was completed
you'd find that there were almost 200 to 300 million surplus laborers
in the countryside
So this was a big surplus
Because there was a big surplus, the labor price was very cheap
The peasants started to run their own workshops and factories in the countryside
So in townships and villages the number of rural enterprises grew quickly
Rural industrialization was started mainly by surplus labors
who invested their own labor force into the rural industries
That was very important
Because local industrialization mainly relied on the rural industrialization
at the beginning of the 1980s
rural industrialization was indeed local industrialization
Take these events into consideration
we may understand why China could gain high growth
It’s because a large number of surplus rural laborers
worked on local industrialization
They got very little income
A large amount of the profits were taken by the local industries
and then became accumulation of capital
Just several years later
the rural industrialization became more and more important and grew faster
We should know that
because of the rural labor
labor-intensive manufacturing with overseas demand grew up in coastal China
But another side is also very critical
Almost all of the old rural collective system were dismissed
people's communes were dismissed, production brigades were dismissed
Agricultural production became the responsibility of small peasant households
and small households didn't need agriculture machine
Before the 1980s
China had set up almost 3000 agricultural machinery factories at the county level
China set up five small factories in every people’s commune
There were two levels
people's communes were changed to townships
and the county stayed as the county
The agricultural machinery manufacturing system at these two levels
almost all went bankrupt
Since the 1950s
China invested in local industries mainly to facilitate agricultural production
After rural reform when peasant households regained the land
they didn't need machines in farming
So machinery factories at county level and township level
almost all went bankrupt
because there was no market
And think about the industrial chain as a whole
When machinery factories at county level went bankrupt
certainly industries at
the upper stream like heavy industries, mining and so on
all suffered very bad impact
This was a kind of negative chain reaction
When local factories went bankrupt
even big factories in cities also had to face a very adverse situation
So these were the events of the 1980s’ reform
And we have given an explanation about these
This one indicates that Japan aided China
From 1979 to 2012
the official development aid (ODA) from Japan to China
accounted for almost 60% of its total sum of overseas aid loan
Most of the Japanese loan was invested in infrastructure construction
In the first three years
most of it was used to buy Japanese machines and facilities
Later most of it was invested in infrastructure construction
And infrastructure construction could not generate returns in a short term
So Japanese development aid loan became very important
because it was mainly invested in infrastructure construction
which means Chinese government needed
such kind of aid loan every year
and had to pay the interests and repay the loans
After buying facilities from Western countries
China had to wait a long period to have returns
not a short term investment
This means Chinese government accumulated a large number of foreign debts
The ratio of foreign debts to GDP
especially short-term foreign debts to GDP was very high
If China did not have sustainable sources of foreign aid
immediately Chinese government would face the challenge of a budget deficit
Japanese official development aid loan
did play a very important role in the 1980s
But it somehow became a risk
because Official Development Aid was lent to China
and denominated by foreign currency
China started to receive ODA in the 1970s
and started to repay the loan in the new century
And the repayment must be in Japanese yen
Somehow Japanese yen’s exchange rate rose up in these years
It means China needed to pay more when repaying the loan
So that was a risk
Most of these Japanese official aid loans
benefited Chinese infrastructure construction in the 1980s
Because of the foreign aid and foreign investment
a large amount of foreign capital flew into China
mainly taken by the central government
The central government still maintained the traditional policy
to use foreign capital in the form of loans
to restructure China’s industries
During the 1950s when the Soviet Union provided industrial facilities to China
they were mainly for military and heavy industries
And heavy and military industries
as I have explained needed double cost to maintain
Now China wanted to restructure the industrial system
and develop light industries such as textile and chemical industry
But until the 1970s
this plan had never been carried out
because of the geopolitical situation
because of a lot of political challenges
until the late 1970s to the early 1980s
Chinese central government still maintained the policy
to adjust the industrial structure
and to develop light industries
China needed more capital investment
in order to carry out the plan of industrial restructuring
So for this purpose
China had to pay a high price for the capital-intensive restructuring
Moreover, the local industrialization
was mainly invested by overseas Chinese companies in the coastal regions
These companies imported facilities and machines from overseas
The markets were also in overseas
Therefore they had little relation with the inland industries
It means that inland industries
especially state-owned industries, had no markets
There's no market relation
between central government-controlled state-owned industrial capital
and local overseas-oriented manufacturing industries
I think we need to pay attention to this relation rupture
Previously the local industries only could be facilitated
by the central industrial capital
Central government controlled the machinery and heavy industries
The central produced a lot of machines for the local
If local government wanted to develop local industries
they needed to acquire the machines from the central
But now, since the 1980s
because China
especially the coastal regions absorbed a lot of manufacturing
from overseas Chinese investment
They got machines from abroad
and the products were also sold to overseas market
It means the manufacturing located in the coastal regions had no relation
with the national industries in mainland China
It's extremely important
As I mentioned, agricultural production was taken by the peasant households
and they didn't need machines for farming
So national agricultural machinery manufacturing went bankrupt
It’s a similar economic regularity
If the overseas-Chinese-invested manufacturing
didn’t need machines and equipments from the national industries
especially heavy industries and machinery manufacturing
then the national heavy industries had no market
So China fell into the trap
The more foreign capital was allocated in the coastal regions
the more booming the economy in these regions became
However, the more foreign investment in the coastal regions
the smaller the market of the national industries
was getting In the previous three decades
China had paid a very high price
to maintain the heavy industries and machinery manufacturing
invested by the Soviet Union
Now there was no market for these industries
No manufacturing factories needed the machines you produced
The central government took a lot of foreign capital
trying to restructure the state industrial system
They paid a high cost
and finally they found out there was no market for their products
That was the trap of state industries
At the beginning of the 1980s
China had a very important change
Originally China tried to balance regional development
During the 1960s to 1970s
a lot of industries were transferred from the coastal regions to the inland
to western China
That was the so-called the Three Defense Lines Construction
It cost almost 260 billion Chinese yuan
Transferring industries from the coastal into inland was very costly
It lasted for almost twenty years
But now, the state launched a new development strategy
which was called “phased development”
It said we got to go step by step
First, we needed to develop the coastal regions, the coastal provinces
When they became rich
they could facilitate the development in inland provinces
So this allowed some regions to get rich before others
That was a new strategy of development in the 1980s
Because of this strategy
regional developments showed big difference
and regional gaps were enlarged
Coastal China attracted a lot of foreign investment
in manufacturing for export to overseas markets
They had a strong tie with overseas markets
but not with inland markets
They only needed cheap labor and raw materials
Sometimes, in some regions
they even didn't need local materials
They could import materials overseas
and then sold their products overseas
So the coastal areas became more and more economically independent
They had a strong tie with overseas markets
and less relation with the inland
Local industrialization became mainly focused on overseas markets
But China has an important geographical line
In Heilongjiang there is a county named Aihui
And down to the south in Yunnan province
there is a county named Tengchong
One can draw a line from Aihui to Tengchong
That is the line dividing east from west in China.
70% of the capitals are allocated in the east
whereas 70% of the natural resources are located in the west
The capital-intensive industries are allocated in the coastal area
and natural resources in the west
It means that the coastal area
the eastern part of China takes mines, coals and a lot of resources
for the development in coastal regions
and also for overseas markets
China is very short of natural resources
and the very scarce natural resources
are taken by the coastal area for overseas markets
That means the gap between east and west
not only the economic gap
but also the natural resources gap was enlarged
We can’t use our scarce natural resources to benefit our own people
So this phenomenon took place in the 1980s
because the strategy was to develop these coastal provinces first
because they had a new theory of development
the so-called “step by step” strategy
Officially you can see Chinese economy grew up very fast in the 1980s
But if you go deeper in the studies on Chinese development
you can find there were so many contradictions in the 1980s
Furthermore, there were some very important events
We need to understand that when coastal provinces absorbed foreign capital
the debts thus incurred were not repaid by themselves
It was because China had a particular financial system
Any penny of foreign capital flew into China
was immediately taken by the central bank
and exchanged to RMB yuan against the foreign currency
It means that
the central government
took up the liability of foreign debts accumulated from accepting foreign capital
The foreign capital invested in any regions in China
immediately turned into liability taken by the central government
So the local governments could achieve fast economic growth
but the cost
especially foreign investment as a cost
was taken by the central
Most people just see that
the coastal regions have a booming economy and think it's good
But they never conduct research to know that
the liability and the institutional costs
are not taken by the local governments
That’s why
there are so many contradictions between central and local governments
since the 1980s
It's also very important to know that
because of the foreign investment in coastal regions
local government policies are mainly pro-foreign capital
Pro-capital policy means that
they wouldn’t like to set up pro-labor
and pro-environment regulation
There is contradiction if your policy is pro-capital
especially pro-foreign capital
Then you are not pro-local capital or pro-labor, social welfare, or environment
It means coastal region’s booming economy implies very big cost
and it is not taken up by the coastal regions
Foreign capital became debts which were taken by the central government
And they didn't offer social welfare to migrant workers
Their children, elderly people
these marginalized population
became the responsibility of inland local governments
And also
foreign investors and local governments didn't care about the environment
So serious pollution happens in the coastal regions nowadays
That means even though there is a very fast economic growth
if you do your studies
you may realize there are very complicated
very comprehensive institutional costs
not totally paid by the coastal regions
That is the so-called regional gap
It is not so simple
It is not only the income-gap
We need to know that
the unbalance is not only an economic issue
but also social and environmental issues, etc
There are many things
It's not totally positive
Local industrialization also incurs big institutional costs
There are two types of industrialization
Both have incurred very big institutional costs
In the 1980s, the institutional costs finally led to crises
not only economic crisis but also political crisis
The contradiction among local governments
between central and local governments
between different social groups and between different interest groups
became more and more serious
In the 1980s
a lot of people thought that it was the ideological issue
I said no, it’s because of the economic growth
Inside the economic booming growth
we had many contradictions
It has never been analyzed by the official studies and scholars
When we talk about these contradictions
I have to say that
in the 1980s
China was also considered by Western ideology as neo-liberal
And Chinese leaders in the 1980s
were also considered as the leaders of neo-liberalism
It was kind of joined together
Western countries transferred their industries
their manufacturing facilities out
There must be a big space that could be the market
the container to absorb the foreign industrial capital
That is the so-called international market
or international institution
So why people are more interested in the neo-liberalism
That is because neo-liberalism not only takes place in advanced countries
They wanted to move out their physical productions
and then upgraded the economy to a higher level
That is the financial capitalism era
But these financial capitals
need to find the container to contain the institutional costs
The institutional costs were transferred to China
and inside China
they became multiple contradictions
between central and local governments, among local governments
and between different interest groups, etc
From the 1980s onwards
China has absorbed a large amount of foreign capital for high growth
A lot of people think it is a very positive experience
Few people pay attention to the negative lessons
My analysis emphasizes that
even though there is economic growth
you need to do some studies on the economic growth
to learn about the institutional costs
That is what this slide is trying to explain
So the central government carried out their plan
because they wanted to restructure the national industries
Okay, they have accomplished this aim
Look at this one
In 1978 started the economic reform
And the light industry grew up
Since 1985 it was having almost the same weight as heavy industry
Then in 1990, they were half-half
So heavy industry and light industry became balanced
Previously the heavy industry occupied more than 60%
In the 1950s it was more than 70%
In the 1970s it went down to 60%
and then in the 1980s it was 50%
The national industrial structure was originally imbalanced
There were more heavy industries
Now became half and half
That is very important
Since the 1980s
a lot of people's livelihoods can be satisfied by national industries
This one is the line I’ve mentioned between Aihui and Tengchong
70% of the capital was allocated in the east
and 70% of natural resources in the west
This one is about the foreign investment in the coastal area
We have learnt that Western countries transferred out their physical industries
their manufacturing industries from the 1960s to the 1970s
First to the Asian small economies
like South Korea, like Chinese Taiwan, Hong Kong,
Malaysia and the Philippines and Thailand, Singapore
But these countries are too small with a small labor-force reserve
So in less than ten years
almost all the so-called prices of productivity increased very fast
which means that
the manufacturing industries in these small economies
became not very cost-effective
so they got to move away
When they moved along and enlarged their production
the best place was coastal China
It is because as I mentioned coastal China could absorb
a large amount of cheap labor from inland China
These overseas Chinese factories directly moved to the coastal regions
It's also very important
because when they moved to the coastal regions
they were only located in the Pearl River Delta
That is Hong Kong and Macao
That's Taiwan
It means the overseas Chinese investment
did not disperse to the whole coastal area
They only hustled in a small area near Hong Kong
It was because they were benefited by the low price of productivity
If they moved further-even in Guangdong province
if they went to the north Guangdong or west Guangdong
they needed to pay more for transportation
So they only stayed around Hong Kong
It was easier to export their products to overseas markets
That phenomenon showed that
a large percentage of this so-called foreign investment was from Hong Kong
It lasted until now
Originally in the 1980s
more than 90% of the foreign investments in Guangdong province
were from Hong Kong and Macao
Nowadays it is still around 60%
These can prove my argument
I want to make people understand
that only by receiving overseas manufacturing investment
cannot help to create your own capital
You only create profits for overseas investors
There is little profit left to the local
So the local do not have enough capital accumulation
to upgrade their economy
Nowadays Guangdong province or other coastal provinces
like Zhejiang and Fujian
have no ability to upgrade their economic structure
And even if they want to change these low-level manufacturing
these industries have a very strong relationship with local elites
local interest groups
Up to now
a large amount of foreign investments would like to invest in China
but they are mainly invested in Shanghai, Jiangsu, Shandong
not in Guangdong or Fujian
It's because most of these places
have been occupied by low-level manufacturing industries
You cannot just kick them out
So when we talk about local industries
we need to know that there are so many things we should study further
And we may have more experiences and lessons
to show to other developing countries
It's a big lesson
If you can only absorb manufacturing industries
for overseas markets’ needs
then you won’t be able to generate enough capital accumulation
to set up your own national industries
or to upgrade your economic structure
It’s a lesson we learn from coastal China
especially the southeast coastal China
It may be applied to other developing countries
Of course they want to have fast money
The foreign investment focuses on the manufacturing industries
which are faster and easier to move away
Nowadays it’s like Vietnam, Myanmar, Bangladesh or Sri Lanka
These countries accept a large number of manufacturing industries from China
because the labor price and environmental cost are getting higher here
They therefore move to these poorer countries
Manufacturing industries only seek after cheap labor and cheap land
They don’t even have interests in local development
They only want to generate revenues from a region
Local governments of developing countries are usually pro-foreign capital
not pro-labor, nor pro-environment
These manufacturing industries mainly generate profits
at the expenses of social welfare and environmental protection
If local governments don’t implement policies
to protect labor’s welfare
and don't pay the expenses of social security
these expenses are not to be paid by foreign investors
In China
the old generation of migrant workers
have already returned to their home villages
Nobody gave them pension
Nobody gave them social securities
Their problems can only be solved by the inland provinces
When we pay attention to such kind of development
we need to indicate
that it does not benefit local people in general
but only some interest groups, some local elites
This is not a kind of inclusive but exclusive growth
Here are some slides
Some data here to show that it is a big lesson
Here are some statistics about China’s labor force
When China just started the reform
it had the largest labor force in the world
In most countries
the ratio of labor force to the total population is less than 50%
But in China
it was 63.5%
because Chinese female labor ratio is the highest in the world
In most of these countries female met a lot of difficulties
in joining the labor market
But in China
because of the land reform since 1949
female labor was liberated into labor market until now
So the percentage of female labor in China is the highest
Because of it
the ratio of Chinese labor force to the population is the highest in the world
And these manufacturing industries employed a lot of young female labor
That is quite different from South Asian countries
When we talk about central industrialization and local industrialization
we point out that
the budgets share between central
and local governments varied in different periods
In the 1950s
as the Soviet aid was mainly taken by the central government
so the central budget share was 80% or less, around 70%
After the Soviet aid retreated
the central budget share went down to 20%
In the 1960s because of the Three Lines Construction
the central concentrated budget power
so its share increased
And then in the 1970s
because a large amount of Western investment
was only taken by the central government
the central’s budget share also increased
In the late 1980s, the crisis happened
The central government had to repay heavy foreign debts
So the central budget share decreased
until 1994 when the tax-division reform took place
Afterward the central budget and local budgets went half-half till now
You can see that
different policies in different periods
caused the contradictions between the central and the local
We use this picture to show the contradictions
between the central and local governments
Indeed it’s very critical
The central always wanted to take more
But local governments always wanted to protect local interests
China is a big country with long-term contradictions
between the central government and local governments
The late 1980s crisis was caused by the so-called dual price system
This system created bureaucratic speculation
and then caused high inflation
What is dual price system
Initially in rural China
the peasants sold family products in free markets at market price
But the government wanted to
increase the selling of industrial products for capital accumulation
So the government purchased part of agricultural products at a low price
So there were two prices
One was the price at the rural markets
the other was the government’s purchase price
That was the dual price system from the 1950s until now
In rural society there is still the dual price system
But the urban sector wanted to carry out the reform
Government departments were given special privilege
You know the government officials at that time
somehow didn’t have a high income
Their income was very below
Also, because in the late 1970s and early 1980s
a large amount of urban youth had no job
including the cadres’ young children
The cadres’ children needed to have a kind of privilege to have employment
From the beginning of the 1980s
the central government gave a special privilege to the departments
Every government department could set up a company
This company created revenues contributed to the department
And the department’s officials could share such kind of revenues as subsidies
Even for the Central Party Committee
there was a central party’s department
They were not much involved in economic affairs, you know
I still remember in the 1980s
Zhongnanhai-middle south sea
if translated word to word- the central yard
was surrounded by a red wall
It is the center of Chinese politics
The north part belongs to the State Council
south part to the Central Party Committee
The south part’s cadres, the officials
somehow considered their position was lower than those in the north
because in the north is the State Council
There were a lot of economic departments in control of economic affairs
and they had a lot of benefits from different levels
But the officials in the south were in charge of party affairs
not much involved in economic affairs
so they didn’t have such kind of benefits
So the cadres in the south, high-level ones were satisfied with their positions
and they could also be promoted when they reached middle age or elder
They might take some position in economic departments
But the young cadres complained: “We are very poor.”
In the 1980s
at that time I was a young fellow
in the central party committee’s office for rural work and rural policies
We didn’t have any benefit
There was even no dining hall in the department
We got to go to the streets to have lunch or dinner
We were very cautious to save money
because at that time we were very poor
So the departments were allowed to run business
including our department
We also had the privilege to start a taxi company
We had a special right to run a company
and take benefits from the company
When one had such special rights
and government departments controlled the purchase price
they could got the raw materials or commercial goods at low price
for their companies
and take more benefits from the markets
to subsidize the incomes of the officials
When they started such kind of bad behavior
immediately it caused corruptions
The larger the price differential because of the dual price system
the more they could be benefited from the market
At that time there was a shortage of raw materials
like iron and steel, metal materials, and glasses etc
They got a part of these under their control by the planning
They had the power
so they converted the power to money
That was in the 1980s
And who executed it
Their children
At that time
ordinary people made very bad comments on such kind of corruption
in the 1980s
People called it guandao
which means bureaucratic speculation
Even though they were officials
they had their business
Their business was to get materials at low price from the markets
And then step by step
they didn't directly get these purchases at low price from the markets
Now they just issued documents
saying how much materials or commodities one could have
And then the documents could be transferred from one to the other
Sometimes a document could even be transferred ten times
That made a lot of profits
But these practices made the market price rising faster than before
even causing high inflation
So the bigger shortage, the higher inflation
It was not mainly caused by the so-called marketization
but by the bureaucratic business
These things led to a lot of social movements
because eventually this high inflation
became the institutional costs taken by the society, by common people
So no matter how the state wanted to carry out a reform
all become negative
It was because even the businessmen
didn't believe that you would have a good policy
because every day they were facing the challenge
Such kind of dual price system
created serious bureaucratic speculation and corruption
causing high inflation and social movements
According to studies by some scholars
in 1988 when there was high inflation
the total amount of price differentials
was 350.9 billion Chinese yuan
almost 30% of the total national income
That was also bigger than the total savings in the bank system
A large number of profits were lost in such kind of system
These speculators or corrupted bureaucrats
not only made a lot of profits but also caused high inflation
You can see that here indicates the high inflation
Since the Reform there were two occasions of high inflations
One was in 1988-1989
In the early 1990s it went down to the bottom
And the second one was from 1993 to 1994
These two crises happened one after the other
The high inflation in 1988-1989
was mainly caused by the bureaucratic speculation
And also there was another aspect to help you to do the analysis
Local industrialization also needed a large number of raw materials
Rural industrialization had never been calculated by the planning system
Some of the local industries located in coastal regions
could import raw materials
and then export manufactured products
At least they could reach a balance
However rural factories under the county level developed very fast
but were never calculated by the planning system
There was only one way to get raw materials and bank loans and funds
I remember in the 1980s
some local people were trying to send gifts
to some government departments in Beijing
But the streets in Beijing were very complicated and traffic was also bad
So they didn't know how to drive into Beijing
So at that time in the 1980s
I helped them by showing the way to the government departments
Also at that time, the corruption was not so concentrated
I mean all the officials or employees in the government departments
could share some benefits
If you were a minister
you might get a basket of eggs
because the rural factories might sent a lot of fresh agricultural products
or local products
They might send you some clothes, some curtains
pork or some eggs
A big truck drove to the yard of government departments
and you could share equally
But just several years later, it changed
They didn't need to drive the truck to Beijing
They just sent gifts to the key persons
Then the corruption was concentrated in some small groups
That was the late 1980s
The order, the regulation changed
It had a very bad impact on the official system
Imagine if you were them
what would you do as a change
They said “ok, we can do something”
Yes, they did
What was it
The so-called price reform
to marketize all the price mechanism
When they just had discussion in the political bureau
trying to launch a new reform to marketize all the prices
it immediately caused social chaos
In May 1988, people rushed for panic shopping
which means the mass hustled in the stores
to buy whatever they could buy
because they were all worried about the inflation
and they had suffered a lot by such kind of inflation caused by speculation
If a store started to sell some commercial goods
they would immediately hustle to take them
So the stores could not fully open the door
they could just open a little
Whatever you wanted to buy
you gave me money and I gave you the commercial goods
So this picture shows people hustled at the counter in the store
trying to buy stuff that they even didn't need
They bought a lot of things and stored them at home
After many years they were still there
like clothes, soap, laundry powder, etc
a lot of commercial goods for daily use
The central government just began to discuss
about marketizing all the raw materials and goods, etc.
It means marketization
They wanted to adopt radical marketization reform
You may compare it with the Soviet Union
and other Eastern European countries at that time
No matter wherever and whenever
someone tried to adopt marketization as a policy in their country
almost all caused a lot of troubles
even big chaos
In the late 1980s
not only China but also Eastern European countries and the Soviet Union
all believed in marketization and the free market system
But when they implemented these reforms
a lot of social chaos happened
When people were dissatisfied
they started strikes and campaigns
Here said: down with the bureaucratic business and speculation
There were even young kids
I think they were pupils from school
They went to the streets
because they also suffered from high inflation
Finally, it became the 1989 political movement in Tian’anmen Square
Here also said “anti-corruption”
in the name of memorizing Hu Yaobang
On one banner there were two slogans
One said in memory of Hu Yaobang
because he was somehow not so corrupted
The other said anti-bureaucracy and anti-corruption
By putting these pictures together
you can see that
even the policeman at that time showed their agreement
with the social movement
That was a protest against corruption and high inflation
High inflation made people
I mean common people very unsure of their daily life
So they joined the panic shopping
The mass hustled in stores one time after another
It happened several times
Here the mainstream officials still insisted on such kind of marketization
That was the policy
So in May they started the discussion
and made a decision which ignited the social chaos
Later in June and July and August
they insisted on such kind of policy
and made people nationwide go panic shopping
People hustled to the store to buy whatever there was
And because all the people went to the store to buy commercial goods
the price rose up faster than before
The bureaucratic business took this chance to make profits
because it was a historic chance
The market price was much higher
and the purchase price was much lower
As they were businessman
they had to take the chance
It means that higher the inflation
the more bureaucratic speculations
In late 1988 and early 1989
there was social chaos everywhere
Not only in Tiananmen Square
a lot of people also joined in the local movements
When there was such kind of economic crisis
mainstream policy designer did need to take measures
But such measures caused further crisis
First, because of the high inflation
people went to banks to take out the savings
to buy commercial goods
Then there was bank run
As too many people withdrew the savings
the banks had no money to offer loans to industries and commerce
So the leaders eventually gave up the price reform
Originally they had a very strong determination to marketize all the prices
In late August the leaders gave up the reform
And at the same time
they adopted special policy to maintain the saving interest rate
Not only the banks offered the public the official saving interest rate
but the government also according to the inflation subsidized the banks
and the saving interests
At that time the inflation rose up to more than 15%
So if the saving interest rate was say 5%
meanwhile you would get another 15%
It means the saving interest rate could be 20%
How much was the bank loan interest rate
If you got a loan, you’d need to pay the interest rate
which was 20%
And you’d need to pay at least 5% more as bank’s cost
So it means that if you raise the saving interest rate
you must raise the loan interest rate as well
But the government only raised the saving interest rate
and didn’t raise the loan interest rate
Then you can guess what happened
First, the banks did have the chance of rent-seeking
because there was a big gap between saving and loan rates
Anybody who wanted a loan should pay at least 25%
but the loan rate stayed at 7% or 8%
Previously the saving interest rate was only 5%
and loan interest rate only 7%
But now, the saving interest rate was increased to 20%
but the loan interest rate still remained at 7%
Bank employees could negotiate
They paid more than 7%, maybe 15%
and still had a lot of profits
Some calculated the gap between interest rates
and annually it might be more than three hundred billion
The banks themselves didn’t have these three hundred billion
A large amount of benefits were lost
That is the first problem
They had a minus interest rate
because they paid more for the savings
and got less from the loans
That is the first issue
But this immediately caused the second very negative event
All banks recorded large deficits
Banks belonged to the government at that time
In the late 1980s and early 1990s there was no private bank
So banks were at the government’s hands
The government immediately took over all the bank deficits
and put it into the budget deficit
So in the late 1980s
the government’s budget deficit increased faster than before
It also means that the government had no ability
to invest into industrialization
A large number of employees had no job
So in 1989 because of high inflation
and government’s measures, social conflict emerged
It's normal
Any government when facing the challenge of high inflation
needs to take some measures
Most of these governments’ measures created negative impacts
such as an increase of unemployment
In 1989 because of the government’s big deficit
and lack of the investment
unemployment problem started to emerge
And also
because the government got to raise up the interest rate for the loans
in 1989
a lot of business in reality couldn't get loans from banks
such as stores
These stores needed to take the bank loans
to buy products from factories
and then sell these products to repay the bank
That was a cycle
Bt these stores said to the upstream factories
OK, I can sell your products
but I cannot pay you
because the loan costs too much
I have no fund
You can give me your products
and I will sell them for you
These stores owed the factories
but they needed to pay the salaries to their employees
They didn’t reduce any fees
The costs were still there
So the whole economic system turned into a chaos
Liansuo fuzhai, debt chain means that the debts became a chain
The factory that produced products
needed to pay for the machines to the upper-stream factories
They had no money
so they said “ok, I owe you”
The whole industrial chain became a kind of debts chain
That was in 1989, until 1990
The whole industry got stuck
It couldn’t work
The economic cycle came to a halt
because of the financial capital problem
The real economic crisis took place
because the leaders were trying to follow the neo-liberalism
to marketize the whole economy
They then faced the challenge
and they didn’t have any appropriate measures
They only thought that
they were following the path of the market system
and that was the only right way
But when they were trying to adopt the measures
they immediately faced a lot of big problems
And then it became social chaos
I think most of the senior leaders
had no clear idea about what an economic crisis was
And they also didn’t know that
economic crisis must become a social problem
They thought that was an ideological issue
So they took some political measures
to try to stop the so-called bourgeois mental pollution
They came up with a lot of new concepts
to describe such kind of social problems
They said it was because you were influenced
by the capitalism ideology
Or they thought that you were trying to do some bad things
to damage the stability
So they took some political measures
That’s why it became a political event: Tiananmen political event
And eventually it was suppressed by the government
Now the picture of the 1980s becomes clear
We can tell you what really happened step by step
There were the economic contradictions
between the central and local governments
as well as between the local
The contradictions could not be resolved
because of the unbalance, the gap
It was also because local industrialization developed fast
and caused a shortage in raw materials supply
The raw material supply needed to be controlled by the government
and the government allowed some raw materials
not priced at the purchase price but at market price
That was the dual price system
which caused the bureaucratic business and speculation
This led to high inflation
And the high inflation caused the social movements
The social protest was started in the name of memorizing some politician
It was a complicated situation
We can just focus on the economic development
We realize that it is a regularity: economic crisis caused social conflict
In the late 1980s
when the Tiananmen Square movement was suppressed by the government
and then immediately America took action one day later
So on June 4
the government suppressed the Tiananmen Square movement
On June 5
the American president halted the military collaboration
Then it was followed by the measures of sanctioning China
The US blockaded China economically
and also asked other America-controlled international organizations
like the World Bank and the IMF
to stop providing fund to China
In late 1980s
I was a member of the Chinese group to facilitate the World Bank loan
to help China to transit from the planning system to market system
That loan could be maintained
because it was for the transition out of ideological reason
Other international organizations
all stopped their development projects in China
China in 1989 and the early 1990s
had to face the new challenge of shortage of foreign capital
Originally there was a large amount of foreign capital flowing into China
Therefore China could restructure its national industries
and readjust its economic structure
China could have done a lot of things with the foreign capital
to rebalance the light industry and heavy industry, etc
But now it was similar to the time
when the Soviet Union stopped providing China with aid and loans
Immediately China had economic crisis in 1960
This time in 1990 China immediately fell into depression
because Western countries stopped capital from investing into China
No matter wanting to develop local industries
or to readjust the national industries
China always needed to deepen the capital investment
That was a capital-intensive growth
But when Western capital stopped
and as I just mentioned the domestic banks
at that time all had very big deficits
They did not work well
And overseas capital stopped
So China had a big depression
That was in 1989 and 1990
This time when China was trying to re-link itself with western countries
in the 1970s up to the late 1980s
it was almost twenty years
In the 1960s, it was delinking
11 or 12 years passed
Around 1971 and 1972
China started to re-link with Western capital investment
with Western technical aid, etc.
When China introduced Western facilitie
it needed to use Western management system
That triggered the economic reform
China became open to any kind of Western investment
From the late 1970s and the early 1980s
Mao started to re-link partially with the West
And then Deng re-linked completely
any kind of foreign investment could directly settle in China
So it was linking again with the international system
Relinking became a very common phenomenon
in the 1970s and the 1980s
It was less than two decades
From 1972 China started to import foreign production facilities
until 1988, 1989
It means that China took 16 years to 17 years
to relink with the West
It is extremely important
not only for China to remember the historical lessons
but also for any other developing countries
If you do want to re-link with international capital
you need to take the Chinese lesson into your consideration
You cannot notice only that China has had high growth
or fulfilled industrialization
You also need to know the price China has paid
and how many crises have happened in China
when China started relinking with Western capital
since the 1970s to the 1980s
This time when America tried to blockade China
it did not last for a long time
You know that since the 1950 because of the Korean War
America led other countries to blockade China until 1971
So it was 21 years
This time from 1989 to 1993 when America gave up the sanction
It’s because most of the Western countries
had their interests in this biggest market, China
So they could not follow America
Even at that time some Western countries kept investing in China
America couldn’t stop it
They could just suggest other countries not to do that
They could control international organizations
but could not stop other countries from investing in China
Even though it was just a small amount
it was still there
So the sanction didn’t last long
just 3 years and a half
This curve was smooth
But here, we see high growth in 1984 and 1985
And then from 1988 to 1989
it dropped to only 4%
Before it, it was more than 10%
and then decreased not to zero
but less than 4%
In these two years the crisis happened in a very serious way
This is the short-term external debts to the nominal GDP
Because in 1989 foreign capital stopped flowing into China
the short-term external debts to the GDP ratio also decreased
Many things happened in the late 1980s
and we got to give the final conclusion
Among the ten crises
this one in the late 1980s was the sixth one
The sixth crisis was the first stagnation crisis
For the first time
it was caused by marketization
the first marketization in China
in the 1980s
It coincided with the stagnation
which is a type of economic crisis
You can easily learn it from Marxism
But in China few people talked about stagnation
because they didn't think that it was a kind of economic crisis
The positive experience is that since the 1960s
the state had taken three decades
and finally accomplished
the purpose of balancing heavy industry and light industry
So since the late 1980s to the early 1990s
China had a rich variety of light industrial products, like textiles
People's livelihood was much improved
But that was not simply the outcome of the 1980s
It started in the 1960s and 1970s
During the 1960s and 1970s
China had paid a very high price until the 1980s
when the aim of balancing the industrial structure was realized
heavy and light industries have reached a balance
A country wants to have industrial sustainability
and industrial sustainability needs market
Heavy industry contributes production facilities
and machines for light industry
Light industry contributes commercial goods to the market
Finally, China has realized such kind of sustainable industrialization
but paid a very high price
Until the 1990s China was still paying the high price
I will give the explanation later
when we talk about the seventh and eighth crises
I will give more details
as it involved 45 million state-owned enterprises employees being laid off
In terms of unemployment
it was the highest price in the world
When we talk about the crisis
we must say that the crisis
was mainly caused by external issues
because of relinking
First, China utilized foreign capital
and started a reform to adjust the structure of national industries
I have mentioned several times before this lecture
that any penny of the foreign investment in developing countries
immediately became foreign debt
If you have money
you don’t need to have foreign capital investment
Most of the developing countries
wanted to achieve modernization through industrialization and urbanization
both are capital-intensive as intrinsic mechanism
If you are short of capital
you must take the capital overseas
And then foreign capital flows into your country and becomes debt
Debts cause deficit and deficit causes crisis
So it means external factors are important for us
to understand what happened in China in the 1980s
The local governments started local industrialization mainly from the 1980s
Local industrialization got the rootless investment
mainly from overseas Chinese
As I mentioned, in the Peral River Delta of Guangdong
more than 90% of the overseas investment
came from Hong Kong and Macao
The majority was from Hong Kong
These rootless investments only sought after social rent
and environmental rent
They could not create a large amount of added value
No added value means no capacity for local capital accumulation
And it implies local government was incapable
of adjusting the local economic structure
From the 1980s to nowadays
almost 40 years
local governments in coastal China still find it very difficult
to adjust the local economic structure
They do not have high-tech industries
They do not have heavy industry, no machinery industries
Nowadays it is still manufacturing that plays an important role
So when these manufacturing industries moved out
to other countries like Bangladesh
there's a kind of local worry
especially from the governments
because the laborers will have no job
And if those who have destroyed the local environment move out
you’ll have no tax revenues to solve your environmental problems
That is a very important adverse impact
Another impact is as the manufacturing sector
imported production facilities from overseas
the upstream national industries
could not supply machines to the manufacturing in the coastal regions
It means the domestic market relation was cut
The national industries got caught deeper and deeper in the trap
Finally they got to go bankrupt
We need to know that
originally the domestic market had a shortage of products
We’d had a shortage economy
But after the 1980s
manufacturing economy
for overseas demand did not need the national industries
to produce machines
to facilitate the manufacturing in the coastal regions
This one
I said, is also very important
Even if it was for a short term
it would create tax revenues or foreign exchange reserve
from trade surplus
Nowadays China became a country
with a trade surplus mainly relying on the coastal regions
That was a gain
You also need to consider the costs
So here are the costs
The external factors also included the American sanction from 1989
Now China relied on foreign investment
When China had political conflicts with the United States
they stopped investing in China
China immediately fell into the trap of foreign exchange reserve deficit
I’ll give you more explanation on the next lecture
when we talk about the seventh crisis
We'll tell you how much was the foreign exchange reserve deficit
and how it impacted on China’s economic growth
And now we can take a look at the internal issues
Chinese urban economy started in 1984
to apply the dual price system
Originally this system was only applied to the rural sector
not to the urban sector
But they adopted it as positive experience
in the urban economic reform
It led to bureaucratic business and speculation
The bureaucratic business
made profits of more than three hundred billion annually in 1988
It was the worst year of the bureaucratic business problem
because they took too much
and created high inflation rate
Now the data has been altered
Originally in the 1980s
the government admitted the inflation was 18.6%
Now it's altered to 15% which is also very high
because nowadays in a lot of countries like China
the inflation rate is only 3%
or less than 3%
At that time it was 18.6%
It was a very high inflation
Because of the high inflation
the mainstream government officials and scholars
had designed a radical reform plan or reform project
It was similar to most of the Eastern European countries
including the Soviet Union
When the officials tried to implement such kind of reform
they had to make the pre-decision consultation
It’s because all the decisions have to be made in the Political Bureau
and then given as a suggestion to the State Council
It is a very complicate system
The issue was not directly discussed at the State Council's economic department
First it should go through the Political Bureau
But there were many information channels
So when they just came up with such kind of decision in May
a lot of people had got the information
Social problems therefore happened
Beidaihe conference was not formal
but a kind of informal closed-door meeting
The senior politicians all agreed with such kind of suggestion
In May the officials in charge had made a suggestion
In July and August
when the senior politicians settled in Beidaihe enjoying the so-called vacation
they could have many closed-door meetings and discussions
something like a lobby
And then they made a decision
They supported this reform
When the news came out, the social problems immediately broke out
So these things can be deemed negative
But you can also think they were positive
because they made the central politicians
these senior politicians, see that it would not work
So they immediately made a decision to stop it
On August 30
the State Council made a decision to stop such kind of reform
But the bad impact had expanded to everywhere
So nationwide people rushed to buy goods
They government could not stop it
That helped China to stop radical marketization
and left this to Eastern European countries and the Soviet Union
In 1988
almost all these countries sponsored by the World Bank
had similar projects
which was to change their planning system to the market system
But China stopped it in the summer of 1988
Others did no
Maybe their people were somehow more polite or more civilized
They didn’t have such kind of behavior
rushing to buy goods and causing social chaos
There was not
So they pushed forward the reform
And eventually these countries went bankrupt
So I said that the heaven had blessed China with a crisis giving lessons
to both the upper leaders and the lower society
preventing China from collapsing
From that time onwards, from 1989
almost all Western media announced China would collapse
maybe tomorrow, maybe next week, maybe next month
But China is still here
It has not collapsed
I said it was a big lesson
In the late 1980s
China for the first time tried to radically marketize its economy
A big lesson made China stop
and then cautiously move forward
step by step
But six crises were not enough
China needed another lesson which was the 7th crisis
Maybe it was this crisis which made China truly aware
that it was not exactly the right way
We need to be more cautious when going forward
So when we talk about this one crisis
we have to think about what lesson China’s learned
And when we talk about the measures to deal with the crisis
we realize that they made
the state-owned bank system fall into a big trap
That was big deficit
This was a financial crisis supposed to break out but didn’t
It was controlled
That is also a very important issue
that we need to take into consideration
In 1988, all Chinese banks would have to go bankrupt
because they all had very bad deficit
I know it
because at that time I was a policy researcher in the central government
In December the statistics showed that
the whole bank system had a deficit of more than 58-59 billion
The total savings were 300 billion
At that time, there was no Basel Accord commitment
China did not follow the Basel Accord
But anyway
the total savings were 300 billion
and the total deficit was more than 50 billion
It means that 1/6 of the bank assets had gone
It's much higher than the rate Basel Accord allowed which was 8%
So we need to think why the Chinese bank system didn't go bankrupt
It’s because at that time
the bank system and the fiscal system were combined
They were like the two hands of one government
When there was a very serious deficit in the bank system
the government could put the bank
deficit into the budget deficit
because there was no separation
They were together in one system
Only this country could have such kind of mechanism
to solve the bank system’s problem directly through the budget system
So the government took all the bank deficits into the fiscal budget
That made the fiscal budget deficit rose to 50 billion
That was in December 1988
How the Chinese government solved the problem of big bank deficit
Was it market system or not
I'll leave this question to all the audience
You can think about that
How to maintain the key sector of your economic system
The key sector is the financial sector
In the 1980s
all Western countries in the name of neo-liberalism
eliminated any barrier
to allow financial capital flow freely in and out
You can find that there was a country like China
still controlling the fiscal system and financial system
combining them together instead of separating them
At that time
it was a very critical problem
but very easy to solve through this “one body, two hands”
The two hands were not separated
so they could work together for macro-economic regulation
The bank system could handle the problem but enterprises could not
because the interest rate of loans rose up in 1989
Immediately it caused the debts chain as I’ve mentioned
The debts chain made almost all industries of real production
fall into big crisis
And then the whole economy fell into depression
So I said
if we examine the government’s measures in response to crises
you can say some of them were positive and some were negative
We just objectively do our analysis to know what really happened in the 1980s
And we may have a basic understanding of the so-called Chinese reform
in a so-called emerging country like China
I’ve finished this lecture
I hope you would have a deeper discussion about the 1980s crisis in China
Thank you!