In a path-breaking article, the American political scientist Francis Fukuyama (1989) predicted “the end of history” and the final victory of the Western-type liberal, capitalist system. He wrote it in a few months between November 1989 (the collapse of the Berlin Wall) and the beginning of Boris Yeltsin’s rule in July 1991 (as president of the newly “re-created” Russia). But history continued. Fukuyama’s point of departure was the fall of communism, the only historically proven, 20th century viable alternative to the capitalist market economy and liberal political systems. (Fascism, the other abysmal alternative to liberal democracies, proved to be relatively short-lived from the 1920s until the 1970s.)Footnote 7
Indeed, as Szelenyi and Mihályi (2020b) explained, 70 years after Russia’s Bolshevik Revolution, 26 socialist countries spanned more than 31% of four continents. Their combined populations in 1987 amounted to 34% of the world’s total. Then, unexpectedly on 9 November 1989, half a million people gathered in East Berlin in a mass protest; the Berlin Wall dividing communist East Germany from capitalist West Germany crumbled. Within a few months, the communist system disappeared from Europe, and the two Germanys were united. And, indeed, the first 15 years following the publication of Fukuyama’s seminal article saw a spectacular retreat of socialist systems worldwide and the expansion of freedom and liberal democracies. The most persuasive argument for an optimistic interpretation of ongoing history was the relatively peaceful disintegration of the Soviet Union (and with that the liberation of the three Baltic states), but the changes in China offered the second definitive proof. Although five other countries (Cambodia, Cuba, Laos, North Korea, and Vietnam) have remained faithful to communist principles, those countries were usually relegated to footnotes as actually existing but quantitatively insignificant counterexamples. It is appropriate to treat the four Asian countries as China’s satellites—which in fact they are. (Cuba is a special case.)Footnote 8
Size matters: The Union of Soviet Socialist Republics (USSR) was and the People’s Republic of China (PRC) is a global superpower. Had the Soviet-type planned economy not been abandoned by the USSR and its allies in Eastern Europe, and the socialist world system remained a more or less credible alternative to the capitalist market economy, China, or even India and Brazil—i.e., the largest and politically strongest states of the “third world”—might not ever have opened their markets to Western multinational companies to the extent that they did. Thus, globalization would not have happened either—at least not with the same speed as it did happen.
It is well known that the Chinese economic reforms arising from the dismal performance of the classical socialist model started earlier, in 1978. However, what matters from the perspective of this paper is that the reforms continued after 1989. In 1978, the term “reform” referred merely to modernization, more specifically the “Four Modernizations Program” of Deng Xiaoping (Shi 1998, p. 5). In name at least, reform referred mainly to the reopening of the 1963 modernization program associated with then Prime Minister Zhou Enlai. Very importantly, in the new interpretation, that program included—in fourth place—the Open Door Policy, an effort to attract foreign capital. So the language changed slowly, although Yu Guangyuan supposed that Deng might have used the term “market economy” as early as 1979.Footnote 9 The expression “market economy” only began to appear in academic publications by the mid-1980s (more cautious Chinese authors preferred to write about a “commodity economy”). In 1984, the official party line was, “We do not practice the market economy which is completely regulated by the market”, phraseology ambiguous enough to be used by both those who supported and those who opposed the market economy, in order to argue that their position was backed by the party (Yu 2005, p. 37).
Deng Xiaoping was one of the most complex and consequential politicians of the 20th century. He joined the Communist Party of China (CPC) in 1924 when he was just 20 years old, fought with the communists against the Kuomintang and Japanese, and was rewarded with a vice-premiership in 1952. His main allies were the reformer Zhou Enlai and Liu Shaoqi. Deng opposed including “Mao’s thoughts” in the Chinese constitution;Footnote 10 after the failure of the Great Leap Forward, he, together with Zhou and Li, tried to rebuild the economic institutions destroyed by Mao. Unsurprisingly, at the start of the Cultural Revolution in 1966, he lost all of his positions. After Mao’s death in 1976, Deng came back. He outsmarted his conservative enemies (the so-called Gang of Four) and by 1978 was China’s de facto ruler.Footnote 11
The post-1978 reforms were not merely a reincarnation of the Four Modernizations Program. Given China’s cultural respect for tradition, Deng realized that he could not break with Mao like Khrushchev and Gorbachev had rejected Stalin. Hence, Deng’s famous verdict on Mao’s historical role: “He was 70 per cent good and 30 per cent bad”. Whatever we know about him today, Deng was hardly a communist ideologue like Mao or Stalin, who ruled their empires for nearly 30 years. His famous statement that “it does not matter if the cat is black or white so long as it catches mice” made the Chinese reform work. The only problem with that quotation is that Deng said it at a Communist Youth League conference in 1962; therefore, it was not meant for a moment to be interpreted as the CPC’s attitude after 1989.Footnote 12 Few storytellers care about such bibliographic detail, however.
Deng was behind some critical changes in the political system. Already in 1982, China imposed term limits on high-level political positions (including the president and the Party’s first secretary) and significant decentralization measures, which included more power for village and township governments and a substantial move towards some democracy at the local level (Oi 1999). The big test came in 1989. Deng had practically retired from day-to-day politics by then. His closest ally, Prime Minister Zhao Ziyang, was sympathetic to the student demonstrators and even tried to negotiate with them. The conservatives wanted to show force, but it was Deng who had to make the final choice. He opted for brutal force at Tiananmen Square. His “boss”, Zhao, lost, was sacked, and spent the rest of his life under house arrest. Deng did not stand behind him. Conservatives tried to use 1989’s political crisis to undo the reforms and return to the Maoist model. It was only after Deng’s Southern Tour in 1992 that the reform was back on track, and it was now officially equated with the transformation of China into a “socialist market economy” (Shi 1998, p. 6).
From Kornai, we knew that it was doubtful from the very beginning whether such a hybrid system could be sustainable without turning the political system from a communist dictatorship into some form of legal-rational authority (if we may use a Weberian term here). Our interpretation is that China for more than three decades after 1978 was cautiously building “capitalism from below”Footnote 13—more and more capitalist and less and less just a hybrid political system. In 1983, the rural system of people’s communes was replaced by townships (Oi 1999). The reforms allowed certain free market forces to operate. The two measures together unleashed an economy based on rural family farming. As communist cadres and the urban population were increasingly becoming dissatisfied (Nee 1988), the reform was an attempt to pacify the local cadres by creating township and village enterprises (TVEs).Footnote 14 The policy then gradually shifted—more forcefully after Deng’s Southern Tour—to cities and industry. Nevertheless, in the early stages of the reform, when the private sector was still discriminated against, private firms often were classified as collectives. That term remains in use today. The Statistical Office classifies firms as follows: state-owned, collective, cooperative, joint and limited liability share companies, private firms, funded by Hong Kong, Macao and Taiwan, foreign companies, and self-employed units. No wonder the statistical distinction between China’s private and public sectors is blurred (Kolodko 2018; Nuti 2019).
Similar to the agrarian reforms in Hungary from the mid-1960s onwards, agricultural prices were gradually deregulated. Production quotas were lowered and later eliminated. The result was a closing of the gap between urban and rural incomes. The big winners were the peasants. When China began reforms in 1978, it was still primarily a rural, agrarian country. To some extent, the nation’s extraordinary economic growth explosion can be attributed to its inexhaustible labor supply.Footnote 15 Initially, the 1978 reforms may not have been much more than an attempt to moderate the Cultural Revolution’s extremes, and especially to solve the devastating but recurrent food shortages.Footnote 16 That goal was reached by undertaking relatively minor adjustments, especially by shifting from agrarian communes to the household responsibility system.
Unlike many other countries (e.g., Russia or India), an ample “historical reservoir” of rural entrepreneurship is found in China. As Huang (2008, pp. 57–62) has pointed out, entrepreneurship in China had deep rural roots, not only in agriculture. Whyte (2009) also emphasizes that China had had centuries of extensive commercial development and intensive agriculture. Instant familiarity with markets exists among ordinary villagers (see also Rawski 2007, p. 103). Of course, one has to be careful in ascribing entrepreneurial success to such a historical reservoir, that is, to China’s cultural heritage. After all, since Max Weber, the received wisdom has been that Chinese culture in general, and Confucianism in particular, have been obstacles to modernization and entrepreneurship. But the rise of capitalism in East Asia and China’s economic growth during the past three decades does not necessarily exclude the Weberian argument. After all, Weber was interested in the origins of capitalism, and why capitalism emerged in the West and not in the Orient. The question to be posed now is this: can the elements of traditional culture be reassembled to fit the requirements of modernity (Peng 2005, p. 345)? The answer many scholars gave to that question was “yes” (Vogel 1991, pp. 92–101; Peng 2005; Whyte 2009).
The next stage was creating isolated free-trade zones attracting mainly small-scale Chinese capital from Hong Kong and Taiwan. After 1985, and especially after 1989, the reform began to shift from the countryside to the cities. The creation of private property rights in state-owned enterprise happened much later, but even when the enterprise sector was privatized to a large extent, the word “privatization” was never used in official documents. Instead, Chinese authors preferred to speak about cross-border mergers and acquisitions, a terribly misleading euphemism (Chen and Young 2010). In retrospect, it also is important to underline that the concept of private property was not incorporated into the Chinese constitution until 2004.