ABSTRACT

This chapter shows how two competing reform approaches—wholesale liberalization versus gradual marketization—clashed in China in the mid-1980s. Opening a market track while keeping the plan intact, the dual-track price system allowed the possibility of both a return to the old system as well as a further shift to the market. Intensifying exchanges between Chinese and international economists—such as the famous Bashanlun World Bank conference that included Janos Kornai, James Tobin, and Alec Cairncross among its participants—built up momentum for radical liberalization and austerity. In 1986, Premier Zhao Ziyang initiated a program for wholesale price, wage, and tax reforms but was stopped by the System Reform Institute based on findings from surveys in Hungary and Yugoslavia sponsored by George Soros. The Institute argued that shock therapy would destroy the old system without creating functioning markets and urged that the system should instead grow into the market while maintaining state control over the industrial core. The question was not whether or not to reform, but how to—whether by “feeling the way forward” or by consciously imposing short-term pain in the hope of long-term gain. As a result of a fierce intellectual struggle among reform economists, China escaped the implementation of shock therapy.