 There is no magic bullet of development. Possibly there's not one big blueprint that we can derive from the experience of one country and then spread throughout the world and that will solve the problem of development. Rather I think that the lesson of China's economic growth story is it requires very careful study of the experiences of other countries in order to understand the precise conditions under which certain policies have been implemented and then it requires very careful study of the conditions in the respective local country in order to understand how the conditions in this historical experience compare the conditions in your home country and then to work out policy solutions that are really tailored to the specific conditions that a country is facing. My name is Isabella Weber. I'm an assistant professor of economics at the University of Massachusetts Amherst and I work on China's political economy and in particular the question of the history of China's economic reforms as well as on history of economic thought more broadly. My book is about the question of how China escaped shock therapy and in particular the moment in the 1980s when China was just embarking on market reforms and the question was really how could China go about introducing market mechanisms into its largely command economy at the time. We really have to think about the 1980s as a crossroads in history, not only China's history but really the history of the world. It's the moment when China started to take off. We have to remember that in 1980 China was an incredibly poor country. China was still one of the poorest countries in the world as a matter of fact. The GDP per capita was less than that of Sudan or Haiti just to illustrate to remember what the starting point was. So in that context a big debate arose in China how to go about market reforms. One of the options that was considered would have been a policy choice that is quite similar to what later came to be called shock therapy which starts with a overnight liberalization of prices in a so called one big bang. Now the track record of shock therapy is pretty devastating in the context of transition in another socialist formerly socialist countries and in particular in Russia the so called transition recession was deeper and more prolonged than the Great Depression in the United States of the 1930s. So had China implemented shock therapy we of course don't know what would have happened since this is a counterfactual exercise but it is not at all unimaginable that China would have gone through a recession that would have been comparable to what happened in Russia and if we remember just how poor China was at the time that could have resided in a human disaster on a scale that is really hard to conceive. More directly relevant it's fairly clear that if China had undergone such shock liberalization the foundations for its rapid economic rise that is often being described as unprecedented in history would likely have been undermined. So in that sense if we consider China's rise as an incredibly important event in recent economic history then the choice not to implement shock therapy is really an important piece of the puzzle to understand what the conditions of China's rise were and the debate over how to marketize China or how to introduce markets into China's economy really turns out to be a path breaking debate not only for China but really for the world economy in the recent decades. As pertains to the question of how China escaped shock therapy one of the critical questions was really the question of price reform and how to change the price mechanism since before reform China was organized in a way where prices were not the signals that would induce decision makers to take certain economic decisions and therefore prices did not have the kind of coordinating function that they have in a market economy. More importantly in China the price system was designed in a way to redistribute across sectors so in particular industry goods in the upstream industries such as steel, coal, electricity and so on were priced very low whereas so-called luxury goods which at the time would have been things like bicycles, radios, wristwatches and so on were priced very high so that you had a redistribution between sectors through prices that were consciously set not to reflect costs. Furthermore prices were organized in a way that the most important goods such as the upstream industries such as steel, coal and so on were controlled much more tightly than the more downstream less essential industries. So in this context the question of how to move from an economy that is really organized primarily through plans and commands to an economy that integrates market mechanisms raised the question of how to deal with prices. In the agricultural reform a more or less spontaneous solution emerged that was not entirely spontaneous in the sense that it is sometimes being portrayed that there were simply a number of passions that came together and then took decisions and that changed all of China. I think that is an undue simplification. However the agricultural reforms did emerge from a bottom-up process that was then systematized and turned into national policy. So what were these agricultural reforms all about? They were really about transferring the responsibility for production from the communes and the production teams to the households. However in this process the commitment of the commune level production continued in the first instance. So quotas in terms of let's say grain continued to exist. Plant prices for say grain continued to operate but households once they had delivered their share in the quota for say the village could choose to produce more and to produce for the market. So as a result of this you had a system that had two tracks a plant track and a market track. In the context of agricultural reforms this also meant the end of the communes which was a very radical change in the organization of China's economy since China at the time was still a largely agricultural economy where the relationship between the industrial sector and the agricultural sector continued in the first instance to be on the surface the same kind of relationship that it was before that is the agricultural sector is delivering quotas of agricultural output to the planning authorities at a set plan at the same time these households were transferred into market oriented entities that were starting to operate based on the logic of the market mechanism. As agricultural reforms turned out to be an overwhelming success in terms of the increase in agricultural outputs the question quickly became how could one reform the urban industrial economy. Now the urban industrial economy was organized based on the ideal of one national workshop. Now of course this was an ideal and it did not translate completely into practice nevertheless it was the case that every production unit in the urban industrial economy would be implementing commands in terms of producing output with a given set of input and a given set of prices and we're not market agents that will be operating on the market. Now one side in the market reform debate hold that in order to create a market economy the most important thing would be to cut loose the chain of command and order between the planning authorities and the production units and in particular to set free prices. In fact this was an idea that was introduced by Milton Friedman but also interestingly supported by a group of Eastern European emigre economists who had been disillusioned with the reform attempts in the Eastern European context. One metaphor that was often invoked in that context was the so called Earhart-Miracle which is the price reforms in West Germany after the war where the idea was that liberalizing all prices overnight would have instantly created a market economy. So based on these ideas the attempt was to implement price liberalizations very quickly and in particular to liberalize the prices of the most important and most essential goods since it was thought that these would be the most important building blocks for the market economy. In contrast the dual track reformers that came out of the agricultural reforms that had formed their reform thinking really through the experience of the remaking of the agricultural economy argued that the same logic that had been applied in the agricultural reforms could also be transferred into the urban industrial economy and that instead of tearing down the old system by shock liberalizing prices one should instead use the institutions of the planned economy as market creators and market participants and thereby transfer from a planned command economy towards a more market-based economy in a fashion that will be less disruptive since the the core relations of the plan were meant to be left in place in the first instance and each production unit would gradually under dual track system grow into the market grow into a market player where the relationship between the state and the market was not one of separation where the state is intervening from the outside but rather through these production units that were growing into the market and that continued to be China's state-owned enterprises the state had an entry point into the market that was quite different from that in say a Western market economy since the state could really operate as a market participant through these entities. Now those who were arguing for dual track reforms were also warning against the implications of shock therapy so it was not only that there were two reform paradigms in terms of how to introduce market mechanisms but there was also a general debate right so those who were in favor of shock therapy in fact argued that this dual track system where you had two kinds of prices and you had state-owned entities participating in the market together with private entities would basically create a big mess and would create an enormous amount of friction and in some sense would create a more irrational kind of economy than a pure planned economy. On the other hand those who were in favor of a dual track kind of reform argued that liberalizing prices overnight would not solve China's problem where China's problem was really reindustrialization and development not free prices and rationalization of prices in an instant since they held that given that the prices in the upstream industries such as for example steel in the old system were systematically below cost so if you were to liberalize these prices were bound to shoot up as these prices will be shooting up and as these production units were not yet market agents but were still production units that were part of this big national economy they would not adjust their prices in reaction to the increased input prices but would simply hand down the price increase to the next production unit in the chain so as a result of that they warned you would get cost-push inflation and eventually a wage price spiral as workers will be demanding higher wages when prices will be going up and therefore you would not be correcting the relative prices that were not reflecting costs but instead you would create a situation of instability and chaos that would undermine the ability to pursue reforms effectively now interestingly in 1986 China came close to implementing such a wholesale price liberalization and one of key moments in turning around from this in warning Jia Zhiyang who had himself actually initiated this wholesale price reform was a delegation that was financed by George Soros to Hungary and Yugoslavia to survey the on-the-ground experiences with attempts at integrating market mechanisms into the economies there and they sent back a telegram warning along the lines as I've just described and thereby ultimately helped Jia Zhiyang to change his mind and pull back on plans that had already been established in terms of very rapid very wholesale and price liberalization in 1986 first of all I think that the debates in the 1980s that were really on some level about whether there could be one big blueprint for reform or whether reforms would have to be developed by groping for stones to cross the river to give you an example along the lines of the air had miracle Milton Friedman when he came to China was arguing that air had miracle was a very simple thing and that it would create an instant growth miracle in West Germany simply by liberalizing all prices overnight when a delegation of Chinese economists went to Western Germany to investigate what had in fact happened in the context of the air had miracle and they interviewed economists that were involved in the West German post war reconstruction they found that these economists themselves warned against the idea of wholesale price liberalization since they argued that in contrast to China Germany at the time had capitalist companies that were market players that had of course gone through the war experience and fascism and all of that but that were more or less ready to be mobilized as market participants and market actors whereas in China the situation was quite different the production units under socialism were really not enterprises in the conventional sense so in this example the starting conditions really matter and it is not the case that you can simply take a policy that had been implemented in one country and transferred to another country and then expect the same outcomes so I think this is one big lesson I think the other big lesson is that pretty much in line with the experience of catch-up in history really but also more recently in the East Asian Tiger development story that it seems to be the case that catch-up development requires a strong state and that a strong entrepreneurial innovative state is essential in order to design policies in a way that can be tailored to the local conditions now of course we should not romanticize China's development trajectory it has produced an enormous amount of growth it has also produced an enormous amount of inequality and natural challenges so the question for other developing countries is not to simply copy China but also to ask critically what are the good elements of the Chinese development part and what what are the elements that might have created these enormous challenges and can they or can they not be disentangled