How Deng’s Ghost Threatens China’s Innovation Economy

Includes: FXI, PGJ
by: David Wolf

In what is probably the most interesting and thought-provoking part of an article in Policy Review comparing the economic trajectories of China and Russia, Paul Gregory and Kate Zhou debunk a popular myth about China’s reforming and opening: that the credit goes to Deng’s policies. Not so, say the authors:

Our narrative contradicts much received doctrine. The standard account is that China succeeded because a wise party leadership deliberately chose gradualism, retained the monopoly of the Communist Party after rebuffing democracy at Tiananmen Square, and carefully guided the process over the years. The narrative says that Russia failed because the tempestuous Gorbachev ignored the Chinese reform model, moved too quickly, and allowed the party monopoly to fall apart. This standard account is incorrect. Deng Xiaoping and his supporters, contrary to popular legend, did not agree on a reform program at the Third Plenum of the Eighth Party Congress in 1978, which installed him in power. A Chinese reform official by the name of Bao Tong later admitted as much: “In fact, reform wasn’t discussed. Reform wasn’t listed on the agenda, nor was it mentioned in the work reports.”

Throughout the reform process, the Chinese Communist Party simply reacted to (and wisely did not oppose) bottom-up reform initiatives that emanated largely from the rural population. Deng Xiaoping’s famous description of Chinese reform as “fording the river by feeling for the stones” is not incorrect, but it was the Chinese people who placed the stones under his feet.

Now, before you start tossing zongzi at me for being a revisionist, I give due credit to Deng Xiaoping and the leaders around him for yanking China out of its ideological stupor and creating the political headspace within the Party to allow this evolution to take its course. Even if they were not great policy virtuosos, their political acumen – and their willingness to give the country a little rope – was laudatory.

And we have to pause for a moment and consider our source: Gregory and Zhou are publishing in the house organ of the Hoover Institution, an entity that might be fairly labeled the West Coast headquarters of neo-conservative thought. Naturally, therefore, they would posit a soft version of Thomas Paine’s old adage “That government is best which governs least.”

Believing Their Own PR

Yet, as China’s central government undertakes a long-term effort to foment “independent innovation” through industrial policy, one has to ask whether this effort is based on a received myth among policy makers that, basically, stuff happens when the government makes it happen, and the last 30 years of economic development in China are living proof? If this is the case, that mistaken perception may be one of the core blockages to the nation undertaking policies that will actually restart China’s innovation engine after several idle centuries.

Trying to change that perception among regulators would be a waste of time: wagering on China’s bureaucrats arguing against their own importance (or power bases) while debunking a leader who has been all but deified in the national canon is a sucker bet. If anything, regulators look set to deepen their involvement in technology driven industries. The government’s core economic policy document for the next five years, the Twelfth Five Year Plan, is being drafted. My gut feeling is that the plan will not only mention independent innovation, it will enshrine it in the form of specifying industries and sectors to be supported by the government in its effort to jump-start China’s innovation economy.

C’mon, People Now…

The answer, of course, is parallel efforts. The government will focus, as it does, on large-scale projects and enterprises as the nexus of economy-changing innovation. The government is comfortable with such efforts, and they are not entirely wrong: many of the innovations that lie at the core of American competitiveness emerged from government or defense research in universities or large enterprises.

But critical mass – and the kind of opportunistic development work that drives an innovation economy – comes from small enterprises, and this is the part of the equation with which the Chinese government is least comfortable. The challenge will be for China’s entrepreneurs to understand what they need to be successful, to communicate that to the government, and to band together to make sure they are not steamrolled by the more politically powerful SOEs. And the last bit is the hard part. Chinese entrepreneurs are a tough bunch to get to trust one another, and in order for grass-roots innovation to be allowed its role in China’s development, innovators need to generate a powerful, unified voice. The questions are: can they and how long will it take?