That afternoon, the national security police, the armed police, and the People’s Liberation Army jointly announced the beginning of a crackdown on criminal elements, and social order was restored almost immediately; even petty looting came to an abrupt halt. The government also announced that it would start distributing rice from its grain reserves. Rations would be handed out every day, completely free of charge, and no one would be refused; the people’s livelihood would be guaranteed and they need have no fear of hunger. The most interesting thing, however, was that the people grumbled that the reserve rice, having been harvested over a number of years, tasted bad. They didn’t want to eat it, and they certainly weren’t going to line up for it. Also, due to the crackdown on criminal activity, the usual opportunists didn’t dare to buy up the reserve grain to sell off to rice-wine distilleries.
“Why? Why did you have to terrorize the common people like that?” Fang Caodi indignantly interrupted He Dongsheng.
He Dongsheng answered as though he were delivering a classroom lecture: “The beginning of the crisis was the key; if handled poorly at first, it would be hard to clean up the mess later. This crisis was extraordinarily serious, serious enough to give rise to mass disturbances on a nationwide scale. It started as an economic crisis, but it was capable of causing the long-smoldering volcanic contradictions deep under the surface of society to erupt. If the government reaction was too mild and too fragmentary, the people would remain dissatisfied and their resentment would be even greater. If the government acted too harshly, dispensing strong medicine too hastily, some strata of society would not accept it and would fight back. No matter what the government did then, it would be the only target.
“The situation at the time was as follows: except for incidents involving conflict between
Han and minority ethnic nationalities, in general most of the major protests involved a confrontation between the masses and the government. For years many of the common people had long made up their minds and believed that the only way to solve their problems was to create a disturbance. The smallest thing, the pettiest grievance, was enough to set off a collective protest.
“If mass protest riots broke out at the same time all over the country, and all the criticism and resentment were aimed at the government, the machine of state would have collapsed.
“On the other hand, as long as all the complaints were not aimed at the government, mass protests would be difficult to start. A few lawless elements stirring up trouble would be insufficient to start a series of mass protests.”
“So what did the leadership do to prevent the popular masses from aiming all their resentment and criticism at the government?” asked Fang Caodi.
“Well, after considering the situation from every angle, the leadership decided to allow the Chinese people to frighten themselves, let them be afraid of the government abandoning them, afraid of anarchy. The condition of anarchy is what Thomas Hobbes called ‘the war of all against all.’ In an anarchic state of nature, to quote his book
The Leviathan,
the ‘life of man’ is ‘solitary, poor, nasty, brutish, and short.’ To have no security for their life and property is, indeed, the people’s ultimate terror. And because they are afraid of anarchy and chaos, everyone is willing to bow down voluntarily before the power of a really quite unlovely Leviathan. Only this Leviathan of a government can guarantee their lives and property. That means the party-state can win only by making the people feel that our Communist Party is their only hope in a major crisis, that the party-state is the only power great enough to concentrate our resources to do big things.”
“Now you’re talking about having a government
or
having anarchy,” Little Xi needled He Dongsheng. “Nobody said that the government has to be your Communist Party!”
“It’s fruitless to argue that,” said He Dongsheng. “The government and the Party are one and the same.”
“After you created a state of anarchy,” asked Little Xi, “and fooled everyone so that even the people of Beijing filled the streets to welcome the People’s Liberation Army into the city, what did you want to do then? Why did you have to have a crackdown? Do you know how many people die every time there’s a crackdown?”
“I was almost executed in that crackdown,” said Fang Caodi.
“In good faith, I also hope that this was our last crackdown,” said He Dongsheng. “But the government in power at the time had no other choice but to take a hard line in the face of the upcoming transfer of power.
“With the global economy in a deep freeze, China had to save itself. That required administering strong medicine to the economy, but the government might lose control of society, its orders might be distorted, and the people might protest. The government had to have complete control over society and tame the masses; everybody had to be submissive to government orders. But how does the Chinese government usually tame the masses? In 1983, when the market economy experienced turmoil, didn’t Old Deng order a crackdown? And June 4, 1989, was another big crackdown. Do you see? Sacrifices are inevitable if we want to accomplish something big and important.”
Little Xi and Fang Caodi felt He Dongsheng was being unreasonable and they were anxious to refute his arguments, but he motioned for them to let him finish first.
“In 1816, the year after the end of the Napoleonic Wars,” He Dongsheng went on, “the effects of the war faded and Britain suffered an economic recession; its national debt was two and a half times its GDP. Most unfortunately, in 1815, the Mount Tambora volcano in Indonesia erupted, the worst eruption in history, and spread volcanic ash all around the world. The next year was called ‘the year without a summer’ and there was virtually no agricultural harvest in Europe. The British prime minister at the time was Lord Liverpool, and who do you think his adviser was? None other than the celebrated economist David Ricardo. In the face of an imminent economic depression potentially leading to great social unrest, they instituted a program of crisis management. And what was it? Liverpool got Parliament to agree to
a suspension of habeas corpus, Britain’s protection of personal freedom. The government could round up and imprison anyone who caused trouble or didn’t do what they were told, without following the law or legal procedures. In modern language, the government could trample human rights at will. The result of this policy was that during the entire period of economic decline, the usual troublemakers didn’t dare start anything, and in one year the national economy recovered. Wasn’t that pretty amazing?”
Little Xi and Fang Caodi sat grimly with their arms folded.
“Of course the people were going to suffer and be hungry during this crisis, and, besides, such recessions have always been a cyclical phenomenon of capitalism in the past; they would last a year or two, and after getting through them, everything would return to normal. But this latest crisis was like the great depression of the 1930s, and it might have lasted for a decade or more. The government couldn’t just ride it out; they had to go into action. My main point is that stability is always the number-one priority, but stability is not the ultimate goal—we need stability in order to accomplish great things. Therefore, in extraordinary times or emergency situations, we have to order a crackdown. We have to beat the grass to frighten the tigers. After that, while the effects of the crackdown are still in play, we are free to implement new policies.”
According to He Dongsheng, the crackdown was the second phase of the “Action Plan for Achieving Prosperity amid Crisis.” The third phase was to put forth a set of five new policies.
Number One:
Twenty-five percent of all the balance of every National Bank savings accounts was to be converted into vouchers for use in China only. One-third of these had to be spent within ninety days, and two-thirds within six months. Beyond that time limit they would no longer be valid.
The Chinese people’s excessive savings were one of the reasons for insufficient domestic demand. Personal savings equaled more than 20 percent of the nation’s annual GDP, and business savings were more than 30 percent. When the foreign economic environment was bad, people with surplus cash held on to their money and spent even less. With everyone doing this, how could the economy avoid recession? Merely lowering bank interest rates and moral suasion were no longer enough to make the Chinese people spend their money. The government had to rely on coercive measures of the sort Western countries would not dare dream of.
The greatest thing about this government order was that it was so simple to enforce. All the banks are computerized, so it was easy to cut into the savings accounts. The second virtue of this policy was that it affected only people who had money. It primarily impacted the urban middle or moderately well-off classes who had “got rich quick” in the Reform era. These included civil servants, professionals, white-collar workers, staff in government enterprises, small-business entrepreneurs, and pensioners. The government could easily get away with making them spend 25 percent of their savings on themselves in order to stimulate the national economy and help China make it through the crisis. Consumers and businesses all started spending money.
The third benefit of this policy was that it did not need the National Treasury to allocate major funds or follow Keynesian “job creation” to turn the recession around. At the very least it would successfully jump-start the engine of an economic growth driven by domestic demand. This policy was estimated to have increased the GDP by at least five percentage points. The urban population with savings was busy trying to decide where to spend the vouchers and on what commodities or services.
Number Two:
Since demand had been created, it had to be supplied. The second set of new policies was to repeal over three thousand regulations governing the manufacturing and service sectors, making it easier for private capital to invest in business, relaxing credit policies for companies catering to domestic demand, and encouraging entrepreneurship.
At the same time, the function of government was transformed in accordance with the slogan: “The officials retreat and the people move in.” The government removed the restrictions on all businesses except those involving national security and government monopolies.
“Now anyone can start a publishing company,” said He Dongsheng, looking straight at Lao Chen. “You can just publish your books without a government-issued book number.”
“But all books still have to be sent in for approval,” countered Lao Chen, “and many subjects are still forbidden.”
“But at least today there are private publishers everywhere,” said He Dongsheng. “There are even Chinese and foreign joint-venture publishing companies, all in complete accord with WTO requirements.”
These policies were extremely effective. In a short time, it looked like everyone in China was in business. Everybody was talking business regardless of age, sex, location, or trade; everybody was trying to make money, looking for talented employees, or being sought out themselves, searching for raw materials or for people to buy or sell some resource. The Chinese people, you know—just give them a chance to do something and they can make a great success of it.
It was almost a miracle how quickly Guangdong, Jiangsu, and Zhejiang’s underused industrial capacity was changed over from manufacture for export to production for the domestic market. New products and new services flooded the market in the space of a couple of months. In six months, China successfully transformed itself from an economy dependent on investment and exports to one driven by domestic demand.
How successful were these policies? asked He Dongsheng rhetorically.
Then he continued: The target for the first phase was to return to the situation of the 1980s, when domestic demand made up half of the GDP, and this goal was accomplished. The optimum target, however, was to equal the situation of the United States before the 1970s, when internal consumption was 60 percent of their GDP, ideal for a large country. After that the Americans went overboard by relying
too much
on domestic consumption. They let it go over 70 percent of the GDP, they had insufficient investments and exports, debt was excessive, and private individuals had no savings—all this leading to big trouble.
In many areas China can be self-sufficient and doesn’t need to rely too much on exports to foreign countries; in other words, from now on China does not have to be overly influenced by the fluctuations of the U.S. dollar. China’s domestic demand has so far been raised from 35 percent of its GDP only to close to 50 percent. Investment and foreign trade still account for more than 50 percent, and China is still investing too much in capital construction and real estate. Also, after the world economy recovers, the foreign-trade proportion of GDP will still increase slightly, but in general terms the domestic-demand proportion has been significantly readjusted upward. As people’s wages are raised and with good returns on business investments, taxes will also be increased accordingly. China will have successfully eliminated the threat of a domestic economic recession that existed before these policies, and also rectified the most serious structural bias in the economy since the beginning of Reform and Openness.
And the policies killed two birds with one stone because with the rise and expansion of new businesses everywhere the unemployment problem in both urban and rural areas was solved.
Number Three:
During this period many peasants returned to the cities and, taking advantage of the labor shortage, moved into well-paid jobs. But what did the peasants who stayed behind do? They, too, were busy taking care of their own property.
The third set of policies enhanced peasants’ property rights to their farmland. This move had been discussed for years. One of the chief motives behind this policy was to divert the peasants’ attention from any grievances and maintain social stability in a time of economic crisis. And, as expected, the peasants all got busy taking care of their private property.