Weekend Long Read: Economist Wu Jinglian Explains Why Reform Has Been So Vital to China’s Prosperity
By Wang Shuo
To celebrate Caixin’s 15th anniversary, we are republishing a series of interviews with some of the most influential economists, business leaders and government officials in China. A look back at what they said offers insights into some of the most pressing issues of today, such as climate change, the green transition and the China-U.S. tech war.
In 2014, marking the 110th anniversary of Deng Xiaoping’s birth, Caixin interviewed renowned economist Wu Jinglian to reflect on Deng’s pivotal role in China’s market economy reforms.
The conversation explored why reforms were essential and the pressures they faced, while examining whether China’s challenges stemmed from the reforms themselves or their incomplete implementation. It also highlighted the crucial decisions made by China’s leadership during key historical moments and their lasting impact on the country’s economic trajectory in the decades that followed.
Wu, a 94-year-old researcher at the Development Research Center of the State Council, is one of China’s most influential pro-market economists. A key figure advocating “holistic reform,” Wu believed that the economic system was an organic whole, and that reform to establish a market economy must be carried out in several key areas simultaneously. Single breakthroughs and lone forces often failed to achieve success and could even be harmful.
In 1985, Wu proposed the Three-Linkage Supporting Reform concept, which requires synchronized progress in three aspects of reform — enterprises responsible for their own management and bottom line, a competitive market system, and a macro system that emphasizes indirect regulation and ensures macroeconomic stability. This proposal established a relatively clear framework for China’s market-oriented reform for the last three decades.
Wu’s holistic reform school brought together scholars who later became Chinese financial and fiscal leaders, such as Lou Jiwei, a former finance minister; Zhou Xiaochuan, a former governor the People’s Bank of China (PBOC); Li Jiange, an ex-deputy chairman of the China Securities Regulatory Commission; and Guo Shuqing, the PBOC’s party chief.
These individuals advocated for the government to implement tax and fiscal reforms and establish a nationwide unified market.
Deng’s anniversary offered a timely backdrop for this interview, but it was China’s post-2008 economic shift that made the conversation especially relevant. Despite a 4 trillion yuan ($555.5 billion) stimulus plan to counter the 2008 global financial crisis, China’s growth slowed, ending the era of double-digit expansion. This shift raised urgent questions about deepening institutional reforms, a focus for leaders, businesses and academics alike.
In 2013, the Third Plenary Session of the 18th Central Committee of the Communist Party unveiled an ambitious reform plan, outlining 60 tasks on a scale unprecedented since the Deng era. Wu highly praised the plan, expressing hope for its full implementation.
“The key question is: where do we go from here? The historical significance of the party’s 18th National Congress lies in providing a clear and correct answer to this crucial issue for China’s future,” Wu said.
Deng’s famous remark that “If we don’t change, we are at a dead end” remains a powerful reminder today. Reflecting on China’s economic transformation, Wu traced the difficult path from the 1984 proposal for a socialist commodity economy to the 1992 shift to a socialist market economy. He emphasized the critical role of leadership in navigating these decisions. “Deng had a broader vision than any of us and understood where China’s core issues lay,” Wu said.
Wu credited Deng with giving reform a boost twice, once in the 1980s and again in the 1990s, and for being a savvy politician who was able to negotiate the shoals of opposition to reforms.
Wu said public opinion is always divided about making more changes. “The thing is, not everyone will benefit from continued reform.” He also argued that it is self-defeating to say “more control can root out corruption” because the problem stems from the government having too much influence over distributing out resources in the first place.
A decade has passed quickly, and this year marks the 120th anniversary of Deng Xiaoping’s birth. The top leadership has reaffirmed its commitment to furthering reforms. In this context, the conversation with Wu remains a source of valuable insights that are still relevant today.
While China’s economic strength has grown significantly over the past decades, challenges facing the country have become far more complex, said Wu. “Addressing these challenges requires reform — it’s the only way forward.”
The following interview was originally published in Caixin Weekly on Aug. 22, 2014.
Caixin: You’ve observed and experienced the whole process of reform. Looking back, what would you say about Deng Xiaoping’s decision to launch reforms?
Wu Jinglian: After 10 years of Cultural Revolution, China’s economy and society were both near falling apart. So the majority of Chinese believed we must reform, but in what direction? China had always treated Soviet Union-style socialism as the truth and as its goal before and after the founding of the new China, but if reform happened within this framework, it would be only a slight mending. A fundamental reform would not be possible.
I think Deng stood higher than us all, than a lot of party leaders, and saw China’s fundamental problems. As he put it, Chinese communists pursued socialism, but they didn’t figure out what the nature of it was and thought it was equivalent to what the Soviet Union had, which led to huge losses for the country. Deng raised the concept of “socialism with Chinese characteristics,” and a market economy was its major economic feature. So in the third plenum of the party’s 12th Central Committee in 1984, this was articulated. The meeting said the goal of China’s reform was to establish a socialist commodity economy, which was a market economy in the Soviet Union’s language.
It was a long way from a socialist commodity economy to socialist market economy. What is your opinion on the transformation?
Even the proponents of reform have had disagreements over the pace of implementing the changes. The slow progress of reform in the 1980s created huge room for rent-seeking activities. Back then, some production materials were subject to planned allocation and others were market allocated, so the price varied. People who got things from planned allocation could sell them for a much higher price on the market. The nature of these brokers’ actions was to exchange political privilege for money.
What happened in 1989 gave opponents of reform an excuse to blame the turmoil on market reform. Over the next three years, the economy largely returned to central planning. During that time, however, reformists in the party and government came to realize that a lack of progress in reforms was the reason behind the political and economic problems.
Several important speeches made by Deng during that period all mentioned this. In 1992, he made it all more clear that the country must reform or perish. This changed the government’s course, putting it back onto the path of reform.
A year later, the third plenum of the party’s 14th Central Committee decided on 50 items to establish a socialist market economy. The decision has since come to serve as a road map for reform.
You mentioned the three-year period of stagnation from 1989 to 1992. Was Deng’s decision to push forward with reforms in 1992 driven by a strong sense of crisis?
Certainly. During the three-year stagnation from 1989 to 1992, the economy was in poor shape. State-owned enterprises (SOE) were stagnant, with excess products piling up in warehouses. Instead of pushing reforms, the solution was to issue large loans to state-owned enterprises, but this only temporarily boosted production, leading to even more unsold goods. The cycle was unsustainable, and the economic situation worsened.
Excess capacity was directly tied to the lack of reform. Without reform, the only option to maintain growth was to inject more money into the economy.
This experience offers valuable lessons. While China’s economic strength has grown significantly since then, today’s challenges are far more complex, both in terms of structure and scale. Addressing these challenges requires reform — it’s the only way forward.
Some progress has been made reforming the share ownership of SOEs, but there is still a long way to go. Meanwhile, public opinion has diverged on how reforms need to proceed. What do you think caused the divergence?
The reform of small and midsize enterprises has been relatively well-implemented. Almost all small SOEs and enterprises controlled by grassroots government authorities have been opened to private investment. This has done a lot to fuel economic growth.
Supporting small enterprises’ development is also an integral part of the Chinese government’s reaction to the 1998 Asian financial crisis. The 15th Central Committee has redefined non-publicly owned enterprises as an important part of the public economy, instead of a complement. That is how we survived the crisis.
The 15th Central Committee also raised the idea that the state needs to control only sectors vital to the national economy. Two years later, it fleshed out the delineation of those sectors, setting the stage for a new round of SOE reform. The party also said at the time that all SOEs in sectors that do not require state monopoly should have a diversified share ownership structure. In today’s words, it means mixed-share ownership.
Twenty years have passed, but SOE reform has still not reached its goal. Why?
Indeed, it takes time. The reform is flawed to the extent that the mixed-share ownership reform has taken place in only the subsidiaries of companies that are still completely owned by the state. The SOE parent companies continue to manage subsidiaries the way they always did. They drag down their subsidiaries and, because they stand to benefit from private investments in the subsidiaries, lack incentives to reform. That is why SOE reform slowed after 2003 and 2004.
The two periods of fast reform coincided with the economy experiencing difficulties. Is this because people are more likely to rally behind reform in times of crisis?
Not necessarily. It is the people’s thoughts and ideas that matter most. There is bound to be different opinions regarding how to handle a crisis. Reform will deepen if reformists prevail and go backward if the opponents win out. This is where smart politicians come into play. Deng played a very important role in economic reform by throwing his weight behind it.
It seems that the consensus for reform, as we saw in the 1980s, has waned lately. Why?
The reasons are both pragmatic and ideological. On the pragmatic side, in the 1980s, everyone felt the harm of a planned economy deep in their hearts because there was no escape from it. Now it’s different. The thing is, not everyone will benefit from continued reform. Also, the downsides of reform may have impressed people more strongly and personally than the benefits of it.
As for ideology, I think it is important that the public understands the whole story of reform during the past three decades. In my view, most of today’s problems resulted because reform has not been as fast and thorough as it should be. Corruption, for example, has been a hot topic in the debate over the merits and drawbacks of reform. Some believe that an open economy is to blame for revealing the greedy part of human nature and enabling government officials to become corrupt. The truth, however, is that graft is the result of government power intervening in market activities, thus creating the room for rent-seeking. This also explains why it is wrong to assume that a more heavy-handed approach by the government and more control can root out corruption. On the contrary, graft will only get worse the more power the government has over resource allocation.
At crucial moments in reform, the decision to either strengthen the government’s role or push for further reforms is pivotal. In these moments, the top leader’s decisions are vital. What’s your opinion?
The significance of the party’s 18th National Congress lies here. In the five years leading up to it, and even longer, there was intense debate over China’s direction. At the Third Plenary Session of the 18th Central Committee (in 2013), when explaining the decisions made, General Secretary Xi Jinping stated that the core issue was resolving the relationship between government and market. Essentially, this meant determining whether the market or the government should play the decisive role in resource allocation.
The key question is: where do we go from here? The historical significance of the party’s 18th National Congress lies in providing a clear and correct answer to this crucial issue for China’s future.
Contact editor Han Wei (weihan@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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