Prisoner of the State: The Secret Journal of Premier Zhao Ziyang

by Adi Ignatius

  But there were also opposing points of view. [State Planning director] Yao Yilin and Li Peng had concerns. There was still the issue of resolving the nation’s overheated economy and reaching a “soft landing.” If the coastal regions were to speed up their development, wouldn’t the economy become overheated again? In fact, this concern was needless. The so-called “overheating” was not a simple issue of the pace of development being too slow or too fast, but about whether the pace was more than what could be absorbed. The issue was mainly about overinvestment, belated returns on investment, or investments that yielded low returns. In addition, consumption funds were huge, causing an overabundance of currency in circulation.

  These problems would not exist if the coastal regions proceeded with the strategy. First of all, there was no need for large amounts of investment; second, their products could be sold quickly; and third, raw materials could be imported from abroad.

  The economies of the four Asian Tigers had proven this. It was at a time of relatively high inflation that they had developed their export-oriented economies, exporting labor-intensive products while importing raw materials. The result was the sped-up development of their economies with consecutive years of sustained growth. At the same time, their inflation rates dropped and their economies grew more stable.

  China is a big country with diverse regional conditions. We often tried to apply a single approach suitable for the entire nation, but that tended to ignore regional strengths and characteristics. For example, the coastal regions could have developed faster without the problem of economic overheating, but since we were trying to reduce the nationwide problem, we limited the development of the coastal regions as well, which cost us opportunities. We proceeded in that way for many years. If we were to do anything, we would do it all across the nation; when we made adjustments to slow things down, we slowed down every region. The coastal areas had missed development opportunities many times.

  A few Party elders had another concern. For example, Chen Yun worried that, while “two ends extending abroad” was a good concept, it would not prove easy. I understood his fears: If we agreed to import raw materials but then our products could not be exported abroad, how would we balance our foreign currency? But while his concern was understandable, the real question was, If we have such favorable conditions and if the four Asian Tigers had managed it, why couldn’t we? Why wouldn’t we be able to compete?

  There were two obstacles: the system of foreign trade, and state-owned enterprises. In order to carry out the coastal development strategy, foreign trade had to be reformed and those involved in trade needed to be granted responsibility for their profits and losses. At the time, I was proposing allowing “huge volumes of imports and exports without delays.” The system of foreign trade had to remove barriers to allow for greater volumes of imports and exports.

  The other issue was how to reform the state-owned enterprises. It wouldn’t be easy to change the habit of “eating from one rice bowl” or “taking the profit but sharing the losses.” I emphasized first the development of township-owned enterprises in the coastal regions. These enterprises were flexible and easier to deal with. I had looked into many township enterprises and saw that they delivered on time, paid attention to quality, and had very good reputations.

  There was a third concern, held mainly by academics and scholars involved with planning and foreign trade. They pointed out that the Asian Tigers were very small while we were so much bigger and with a much larger population. They wondered whether all of our products could be sold abroad.

  This issue should have been considered in this way: as long as the products were of good quality and low in cost, they would find their place in the market. The market was not frozen or static in a fixed size where, once you’d had your share, there would be no more. Certainly, there was no vacuum in the international market and no commodity that the international market was lacking. The issue was market share: how much you took up and how much I took up. The total volume would grow with world economic development and growth. However, market share is variable and depends on competition. That is why developed countries had stopped producing labor-intensive products and adjusted their industries. Once the emerging economies took off, their own labor costs rose, and they gradually lost their advantage. For example, Japan moved its labor-intensive production to the four Asian Tigers, but now the Asian Tigers have lost their advantage on this front.

  A country like China has the advantage of enormous labor resources. There is no need to worry about the future. Once the first step is taken, we can take a second and then a third. As long as we started exporting labor-intensive products, we would accumulate capital and more advanced technologies, and we could then compete internationally on capital-or technology-intensive products.

  But that was a question for future development, and there was no need to be afraid. This was just the beginning. We were not instantaneously pushing 200 million people to face direct international market competition. This was a process of development.

  There were also some people who were reluctant to give up the pretense of being a world power. They questioned how a socialist People’s Republic of China could emphasize labor-intensive production and rely on exports from rural township enterprises. They believed the right way was to organize giant enterprise groups to produce and export products with highly advanced technologies.

  This was totally unrealistic for our country. What were we exporting at the time? They were mainly agricultural products, not industrial products, and much of it was raw materials. We were a developing country, and no matter how much we might have wanted to pursue high-tech products, doing so in large volumes was impossible and therefore couldn’t improve the unemployment issue in the coastal regions. We needed to start with labor-intensive products with huge export volumes. After the economy stabilized and became more robust, we could return to the goal of exporting advanced high-tech products and those with a higher added-value.

  There was another kind of objection. Some cadres in the central and western regions, or who were involved in planning and macroeconomics, questioned why we would want to further develop the coastal regions when they were already ahead of the inland provinces. Wouldn’t the discrepancy become even greater? Comrades from the inland provinces believed that developing the coastal regions would make the rich richer. They wanted to know: Why not make the poor richer?

  In fact, the acceleration of development along the coast would not only benefit the coast but also drive the economy of the whole nation, including the inner provinces. Without the development of the coastal regions, where would all the migrant workers find employment? If the coastal regions developed, the laws of labor-intensive production would also apply within the country and shift to places where labor was even cheaper. As the cost of labor started to grow in the coastal regions, they would be forced to make adjustments in their production. Therefore, we could not develop at a uniform speed and we needed to proceed with one area driving and promoting another. Uniform moves would mean neither could move faster. The coastal regions were part of China; if their strengths were utilized, it would be beneficial to the whole nation, including the central and western regions. From the point of view of overall development, it was necessary to make development of the coastal regions a priority.

  Despite the many concerns, the development strategy of the coastal regions was passed by the Politburo and implemented. After June Fourth, the strategy was no longer mentioned by name, but in reality it has continued. It was because of the sustained development of the coastal economy that the nation reached large export volumes in just a few years and foreign reserves grew to a huge amount. It was all because of having taken this path, was it not? Of course, after June Fourth, no one could talk about this strategy as a policy, which undermined even more active implementation of this strategy.

  I once spoke to a wealthy businessman from Taiwan, Chang Yung-fa, chairman of the Evergreen Group. He was as famous in Taiwa
n as Wang Yung-ching [the onetime chairman of Formosa Plastics]. During the conversation, I said to him, “It is not a trivial thing that you in Taiwan have been able to accumulate several tens of billions [of dollars] of foreign reserves; for such a small region, how did you accomplish this?”

  He said, “This is not difficult. Just continue your current policy of reform and openness and develop foreign trade. It won’t be long before you will have large amounts of foreign reserves. If Taiwan could do it, the mainland can also do it.” He said this very optimistically and confidently.

  At the time, I had doubts. Could it really be that easy? It now appears that it indeed was not all that difficult. The key was to embrace openness. I mentioned this many times before to illustrate this point: so long as we implemented the Reform and Open-Door Policy, our economy would be able to develop rapidly.

  From autumn of 1987 to January 1988, I traveled to Fujian, Guangdong, Zhejiang, and Jiangsu for long inspection tours and held talks with local cadres at county, municipal, district, and provincial levels. I also exchanged views with relevant central government agencies, after which I proposed the strategy for coastal region development. The most important point of the strategy was to develop an export-oriented economy in the coastal regions to fully take advantage of opportunities offered by a global economy in transition. The plan covered a region along the coast that included between 100 million and 200 million people. The following items were included:

  The development of the coastal region will essentially be the formation of an export-oriented economy. Taking advantage of the opportunity offered by the structural adjustments of the global economy, concentration will be placed on developing labor-intensive production, or production that is both labor-and technology-intensive.

  Huge volumes of imports and exports must be achieved with “two ends extending abroad.” Capital, equipment, and product sales will be made on the international market to attract international investment and to import equipment and raw materials. Processing will occur domestically and then the products will be exported. Huge volumes of imports and exports should be allowed without delay.

  When developing the export-oriented economy, the full potential of township enterprises must be realized and they should become a major or even dominant force. That means utilizing the full potential of township enterprises and using them as a vehicle to pave the way to an export-oriented economy. Ultimately, a large portion of rural labor in the coastal regions will be integrated into this export-oriented economy and the international market.

  In order to adapt to this kind of transformation, centralized imports and exports in foreign trade must be reformed. All entities or enterprises with the capacity to produce for export, and those enterprises that are conducting imports and exports in foreign trade, must be responsible for their own profits and losses while being allowed to conduct their businesses freely.

  In summary, this meant allowing the 100 million to 200 million people in the coastal regions, and the enterprises in the regions, to integrate into the global market and participate in the exchange and competition of the international market.

  Outside of China, adjustments in the international economic structure were already under way, and in some of the industrialized nations or emerging industrialized nations people’s living standards were higher, so the costs of their labor were also higher. This would cause labor-intensive production to gradually move to places where labor costs were lower.

  In the Asia Pacific Region, it was the United States that first moved some of its labor-intensive production and manufacturing to Japan. Japan took the opportunity to develop itself. Later the United States and Japan moved some of their production and manufacturing to the four Asian Tigers. As the Asian Tigers developed, Japan and the Asian Tigers are moving some of their industries to the countries of ASEAN [a grouping of ten Southeast Asian nations].

  Economic structural adjustments, whether from a global or Asian Pacific perspective, will not stop. This revolving process presents an opportunity for developing countries. In the past, because we had closed our doors to the world and implemented a rigid, highly centralized system without the free flow of information, we had missed many opportunities. We could not throw away another chance!

  At the same time, our coastal regions had the right conditions: proximity to coastal ports with convenient transportation, better infrastructure than the inner provinces, and quality labor in both cultural and technical terms. The coastal regions were closer to international markets and had a tradition of doing commerce with the outside world. Having both the opportunity and the right conditions, if we only eliminated the obstacles in our thinking and adopted appropriate policies for guidance, the coastal regions could develop at a fast pace.

  If we did not adopt this strategy, the regions would suffer more and more difficulties. If we continued with our old methods, the regions would be limited, primarily because of a lack of natural resources. The highly centralized planned economy looked upon the entire nation as a grand chessboard and relied on the state to invest in the development of natural resources in the western regions and transport them far away to the coastal regions for manufacturing. This path could no longer continue.

  Since the inland provinces had become unwilling to sell their resources cheaply to coastal provinces, the conflict between inland and coastal regions had intensified. Therefore, transforming the coastal regions into an essentially export-oriented economy was a major and critical issue.

  The proposal had important political significance as well. The highly centralized planned economy made the entire nation develop in a uniform manner so the strengths of the coastal regions could not be utilized. Neither the inland nor the coastal regions could develop at a fast pace. Before liberation, Shanghai was a highly developed metropolis in the Asia Pacific Region, more advanced than Hong Kong, let alone Singapore or Taiwan. But after a couple of decades, Shanghai had become run-down and had fallen far behind Hong Kong, Singapore, and Taiwan. This made people ask, “What exactly is the advantage of socialism?”

  If one area of China, an area with hundreds of millions of people, could develop as quickly as they had, then the situation would be much better and people would not say socialism was a hindrance to the development of productivity. From a political perspective, it would reduce people’s doubts and fears of the handover of Hong Kong and Macau* and the unification of Taiwan with the mainland. It would engender in people more enthusiasm for reuniting with the motherland.

  I proposed the coastal development strategy after much observation, experimentation, and deliberation. It was also in response to the need for further implementation of reform.

  I had worked for many years in Guangdong, which is adjacent to Hong Kong and Macau, so I had an earlier and deeper understanding of the international market and foreign trade. Very early on, I had come to believe that it would be beneficial to allow the coastal regions to utilize international trade to develop their full potential.

  For example, if Guangdong were allowed to plant sugarcane, 1,000 catties of sugar could be produced per acre. If the area were made into rice paddies, 1,000 catties per acre of rice could be produced. The value of 1,000 catties of sugar was so much higher than 1,000 catties of rice! The export revenue from 1,000 catties of sugar could import several thousand catties of rice. But in the past, we did not take advantage of international trade. In order to resolve food shortages, we could not expand sugarcane plantations, so there had always been this problem of sugarcane and rice in competition for fields.

  There was also a variety of high-quality rice in Guangdong that could be sold at high prices on the international market. One catty of this variety could bring in as much as several catties of ordinary rice. When I was in Guangdong, I used the method of exporting one catty of high-quality rice to buy back one catty of ordinary rice plus several catties of fertilizers, and then using the fertilizer to exchange for more rice domestically. By doing this, we had grain, fertilizer, an
d foreign currency. But in the past we had mechanically emphasized self-reliance and had not taken advantage of international markets, so we’d undermined our own strengths.

  There is huge potential in foreign trade. I thought about this while I was working in Guangdong. If one enterprise or one region were free to import raw materials and export its own finished products, it would have been profitable. The reason that some places around the nation were not able to make products for export was because many of them lacked good material resources, so either the products could not be produced or the quality was not high enough. If we could import raw materials, use our industrial equipment to process them, and export the end product, then not only could we buy back whatever we needed, we could also bring in foreign currency.

  In the 1960s, I had written to the Central Committee to propose increasing our foreign trade and using imports to generate export revenue. We had attempted to use this method in Guangdong. With the consent of Ye Jizhuang, the minister of Foreign Trade, we conducted a certain amount of our own imports and exports, and the resulting foreign currency revenue was shared at local government levels. Guangdong’s economy recovered relatively fast in the early 1960s, largely as a result of this.

  I believed strongly back then that there was huge potential in foreign trade for the coastal regions. Our system and policies had suffocated it. It wasn’t for lack of opportunity, or because it had been impossible, but rather because it had not been permitted.

  In 1981, when I was on inspection tours of enterprises in Tianjin, this issue also came up. Many of the textile factories in Tianjin lacked a supply of raw materials and were unable to upgrade their equipment, making it difficult to proceed with production. It happened to be during the period of readjustment, and many factories had been compelled to suspend production. I had discussions with them and asked if they had been allowed to import raw materials and whether they could then export their products. They said that of course they could. I wondered what would happen if the coastal regions were all oriented toward developing export-oriented industries. Later, as other issues emerged, this matter was dropped.