by Yong Zhao
Team leader Yan Hongchang then dated the agreement: December 1978. This was a calculation error. The villagers were used to the Chinese lunar calendar, but Yan wanted to make it as official and formal as possible, so he decided to use the Gregorian calendar. Normally there is a one to two months' difference between the two calendars. Since it was October on the lunar calendar, Yan thought it must be December. He realized his mistake only two days later when he looked at a calendar on display at the state-owned Supply and Consumption Society on a shopping trip.
The mistake hardly mattered. In the next year, this village of twenty families produced sixty thousand kilograms of grains, about the total amount produced by the village between 1955 and 1970: their gamble had paid off. The secret was quickly discovered by neighboring villages—and, of course, the government. Fortunately, the top leaders were ready for change, and this risky experiment became a model for reform in China. By 1982, China had dismantled most communes and adopted what the government called the family responsibility system, which in essence restored family farming and gave each family independent control over its livelihood. As a result, crop yields rose, and the national grain harvest shot up from 304.8 million tons in 1978 to 407.3 million tons in 1984, basically solving the food shortages that had plagued China for the previous three decades.
The December 1978 agreement has been on exhibit in the Museum of Chinese Revolution, in Tiananmen Square in Beijing, as a significant artifact of China's modern development. The story of the meeting has been told and retold by state media as the beginning of China's success for more than three decades. As appealing as this Hollywood “little-guy-saves-the-world” story is, it's hard to believe eighteen peasants had the capacity or power to change China. But they happened to do the right thing at the right time under the right leader. Had they done the same five years earlier, their fears would have been realized: they would have been punished like so many others who had dared to challenge the communist government.
But the Chinese government was ready to change. A month later, in December 1978, the Chinese Communist Party held its own historic meeting, and not in secret. The Third Plenum of the Central Committee of the Chinese Communist Party was held in Beijing from December 18 to December 22. The four-day meeting ended Mao's dogmatic ideology and began a new era of reform and openness led by Deng Xiaoping. The peasants of Xiaogang Village became an excellent example of the new China, and they have been not only pardoned but also lauded as heroes.
China clearly does not owe its recent rise to a benevolent and foresighted leader or to its well-educated scholar-officials, but to a group of uneducated peasants desperate to make a living. The moral of the story is not that commoners can challenge authority, but that when commoners are left alone, they can do great things. The story illustrates the constraining effect of government planning and the liberating power of autonomy. When autonomy is granted, people become more motivated and, because they are free to act, more creative in designing solutions to their problems.
The First Entrepreneurs
China's recent economic growth is not the result of wise planning. It is the result of government retreating from overregulation. Since 1978, the Communist government has dramatically loosened its control of economic and social activities, making room for individuals to exercise their own free will. One of the most significant changes has been the legalization of private enterprises.
About the same time that the peasants in Xiaogang Village held their secret meeting, an illiterate, self-labeled “fool” merchant in the same Anhui Province challenged China's leaders again. Nian Guangjiu, founder of the Fool's Sunflower Seeds, a household brand name in China, employed twelve people to help with his sunflower seed business. According to the Marxist doctrine about exploitation, a private business with over eight employees becomes capitalist and thus engages in exploitation. Was Nian a capitalist and therefore should have been banished from Communist China? The debate raged not only among academics but also among political leaders. It lasted until 1982 when China's leader, Deng Xiaoping, settled the debate with a typical Deng-style verdict: Let's wait and see. By then, Nian had expanded his business to over 140 employees. Deng's verdict saved him and hundreds of thousands of other merchants.6
“Wait and see” was a clever political strategy employed by Deng Xiaoping to maneuver through a tough political situation. Privatization and marketization were still considered a threat to dogmatic communism. Instead of fighting head-on, the pragmatic Deng famously used his “cat theory” to put the issue to rest: “It does not matter if a cat is black or white. It is a good cat as long as it catches mice.” Instead of arguing over communism versus capitalism, he directed the nation's attention to economic development. What did it matter if progress was communist or capitalist as long as it improved people's lives and strengthened the nation? “Cross the river by feeling the stones” was another Deng maxim that made room for the Chinese to explore different (often illegal at the time) forms of economic activity.
Alas, Nian got in trouble again. In 1987, he was charged with embezzlement. He protested the charge and was rumored to have slapped the Communist Party leader of the local government. How could it be “embezzlement” if he spent his own money? The embezzlement charge was dropped, but Nian was still given a three-year prison sentence in 1991 for hooliganism. Once again, Deng saved him. On his famous Tour of the South in 1992 to restart China's economic reform, which had stalled after the massive student demonstration in 1989, Deng, now retired from his official position but still the most powerful political leader in China, told Nian's story: “At the beginning of reform in the countryside, there was the incident of the Fool's Sunflower Seeds. Many people were uncomfortable with him because he became a millionaire. They wanted to do something about it, but I said no, because if we touched him, people would doubt our policy. The loss outweighed the gain.”7
Nian was released almost immediately. This was his third time in jail. In 1963, he'd been jailed for peddling fish and in 1966, for peddling nuts. Reflecting on his prison terms, Nian was extremely grateful to Deng Xiaoping: “I know he did not only speak out for me. He spoke out for many fools.”8
These “many fools” were China's first entrepreneurs. Despite the severe consequences of engaging in private commercial activities in a culture that looked down on merchants, a large number of individuals secretly took on entrepreneurial activities prior to 1978. They knew that if the government discovered their activities, they would be jailed or even put to death. But like Nian and the peasants in Xiaogang, their need to survive was so strong that they took the risk. With nearly 1 billion people living in impoverished conditions, there were plenty of people desperate to make a decent living at any cost. All they needed was Deng Xiaoping to speak out for them.
Let It Be (or Governance without Interference)
Deng Xiaoping spoke out not only for Nian and his fellow peddlers and for the peasants who divvied up the state land, but also for all aspiring entrepreneurs in China. Although he never held the official highest position, Deng became China's de facto leader in 1978. Under his leadership, the Chinese government went through historic reforms to allow its citizens to make their own decisions.
First, in 1978, the Third Plenum of the Central Committee of the Chinese Communist Party gave peasants permission to make decisions about their farming activities and to trade the surplus of their production. More important, it allowed farmers to move away from their land to work in the mushrooming “township and village enterprises”—small-scale industrial or commercial businesses owned by local villages or township—work for other farmers, or set up shops in the city to sell agricultural produce.
The 800 million peasants thoroughly enjoyed their new autonomy. It was they who supplied the first fuel for China's global ascent.9 They became much more productive as farmers, so they had surpluses. They began to sell their surpluses to each other and to city dwellers. Some farmers seized the opportunity to become full-time merchants, en
trepreneurs who collected surplus agricultural goods from individual farmers and sold them in the city. Others specialized in transporting these goods over long distances, making a profit from price differences. Still others began to focus on vegetables, meat, poultry, and fish instead of the traditional rice, wheat, and corn in response to the needs of their new customers. That shift brought them enough capital to develop their small businesses into large enterprises. They began to employ their fellow villagers, which provided more opportunities for others to earn cash and improve their standard of living.
Over the past thirty years, according to the World Bank, China has lifted more than 600 million people out of poverty. The proportion of Chinese people living under the poverty line dropped from 85 percent in 1981 to 15.9 percent in 2005, and most of that decrease had been achieved in the first decade after 1978.10
Farmers also began to venture into entirely new markets, making and selling daily necessities such as clothing, shoes, and household supplies. The Communist government had either completely neglected or deliberately ignored daily consumer products. Moreover, to curtail capitalism, it had also instituted an extremely inflexible distribution system. As a result, even the most basic necessities, such as salt, oil, food, clothing, and paper, were in short supply and had to be rationed. The empty shelves and cold attendants in state-run stores spelled opportunity for the newly liberated farmers, especially those in areas where land was limited. Wenzhou, a mountainous area in southeastern Zhejiang Province where there was little land suitable for farming—on average, half of 0.08 acre—became the first hotbed of private enterprise. Wenzhou merchants became famous all over China as they moved about the country selling their wares and buying raw materials. Like Xiaogang Village, Wenzhou also became a model and experiment field for the new economy. As a result, it quickly became one of the wealthiest areas in China. Gross domestic product in Wenzhou had jumped from 1.32 billion RMB in 1978 to 258.8 billion RMB in 2009, almost a two-hundred-fold increase.
In 1979, in addition to granting farmers economic freedom, the government allowed city dwellers the freedom to operate small businesses. Faced with 8 million unemployed youth, most of them who had just returned from their “reeducation” in remote rural areas, and other ex-convicts, the Chinese government permitted the establishment of individually operated repair shops, artisan crafts, retail stands, restaurants, and other service businesses. These individually owned businesses are called getihu. In 1980, a nineteen-year-old girl in Wenzhou was granted the first getihu license. By 1999, the number of getihu in China had grown to over 30 million. By 2013, it had surpassed 40 million, with some 80 million people working as or for getihu.11 Many of the getihu evolved into private enterprises as they gained more capital and expanded their businesses.
Economic freedom paid off for China. It improved productivity in the countryside and solved employment problems in the city. It generated capital for investment and a large consumer base able and eager to buy goods and services. Furthermore, the early entrepreneurs served as examples, motivating many others to be more enterprising. With their newly acquired wealth, the pioneer entrepreneurs also forced the Chinese to reexamine some of their cultural values. Seeing uneducated peasants and ex-convicts becoming millionaires made the traditional elites—city dwellers and government employees, that is, almost all of whom had secure public sector jobs at the time—begin to question their own choices. As a result, some began to abandon their “iron rice bowl” (secure job) and xiahai—“enter the sea”—which means to join or start a private business.
Among the many who “entered the sea,” Liu Chuanzhi is perhaps the best known. He quit his position at the Chinese Academy of Sciences in 1984 and started a computer company that eventually became Lenovo, one of the largest computer makers in the world. It purchased IBM's microcomputer business some twenty years later.
Increased productivity on Chinese farms also resulted in a massive number of eager and hungry laborers who would work for any price under any conditions. They were obedient and compliant: the Confucian values that had been inculcated in every generation for thousands of years had been reinforced by thirty years of Communist government. These hard-working and tractable farmers proved an irresistible workforce for global manufacturers looking for cheap and easy-to-manage laborers. Companies could keep their labor and management costs as low as possible because this docile workforce could be organized and mobilized to fit their changing needs. Once its laborers were allowed to move around the country, China turned into the world's factory. By 2012, one of every three Chinese citizens of work age (fifteen to sixty-four) was a migrant worker, giving China a total of more than 260 million migrant workers.12
In addition, the booming private sector pushed the Chinese government to reform its state-owned enterprises. According to Justin Yifu Lin, a Chinese economist and former vice president of the World Bank, China's private enterprises became more productive than state-owned enterprises.13 Because they did not have the same access to resources and markets as the government-owned enterprises, they had to act more creatively and competitively. As a result, they worked harder; had better management, better services, and better products; and could be more flexible and responsive to markets. To save the state-owned enterprises, the government had to learn from the private enterprises. The lesson? To grant the state-owned enterprises more autonomy.
When he spoke out for the peasants of Xiaogang and Nian Guangjiu (the sunflower seeds peddler), Deng Xiaoping didn't have a road map to China's ultimate economic prosperity. “This was not something I figured out…This was a surprise,” he told a Yugoslavia delegation in 1987, referring to the rapid economic development in China's rural areas. “Our rural reforms have been developing rather fast and farmers have become very motivated. The development of the village and township industries took us by complete surprise…but these are not the achievement of the central government…If the central government has anything to do with this [achievement], that is we made the right policy to give them the autonomy.”14
Although Deng was talking about the achievement in rural areas, his words are true for China's economic development over the past three decades. It was not foresight or wise planning by the central government that led to China's global rise. On the contrary, it was gradual withdrawal of government planning and regulation to create an environment that allowed people to exercise their autonomy. As Deng said, if the government deserved any credit, it was for leaving people alone and letting them be—which had been the fundamental principle of good governance in ancient times.
Like Bruce Lee's art of fighting without fighting, governance without governing was the highest form of government in traditional Chinese philosophy. Rooted in the Taoist thinking of no interference and following nature, Confucius was the first to utter the words “wu wei er zhi”(governing without action) and connect the phrase to government: “May not Shun [one of the most respected leaders of ancient China and thus a model for all rulers] be instanced as having governed efficiently without exertion? What did he do? He did nothing but gravely and reverently occupy his royal seat.”15 In Chinese history, when emperors followed this philosophy, they often achieved great prosperity. The two most prosperous periods in Chinese history, set forth as examples for emperors, are the early Han dynasty under Emperors Wen and Jing and early Tang dynasty under Emperor Taizong, the one who popularized keju.
The Coke Battle
The Chinese government not only freed its people to work, but also allowed them the autonomy to consume. “Under the policies of Deng Xiaoping's ‘market socialism,’ ” wrote Russell Belk and Nan Zhou, researchers at the University of Utah, in 1987, “consumers are being allowed as well as encouraged to want things that would have been totally unthinkable at the time of Mao Zedong's death a decade ago.”16 With nearly 1 billion people suddenly allowed to consume more than necessities, China became an irresistible market for any manufacturer.
Coca-Cola was one of the first to reenter that
market after being banished from the Middle Kingdom for thirty years. Coke's success was great for the company, but even greater for the world's relationship with China. If the Opium Wars had the effect of making the Chinese realize the superiority of Western technology, the battle to reintroduce Coke had the effect of addicting the Chinese to Western consumer goods. The many twists and turns of Coke's reentry also forced changes in government regulations, created new business models for China, and pioneered direct foreign investment. Most important, it won an ideological battle by convincing the Communist leaders that consuming Western goods was neither capitalist nor an act of treason.
China's recent growth has been the result of a series of policies that have been generally lumped together as reform and opening up. If the stories of the peasants in Xiaogang Village and the Fool's Sunflower Seeds exemplify the domestic reforms, the return of Coca-Cola illustrates China opening up to the outside world.
Coca-Cola had nurtured dreams of returning to China ever since 1949, when it was ousted as the Communists took control of the country. In 1972, it set up an office in Beijing, shortly after the PRC replaced Taiwan as the sovereign country in the United Nations. In 1976, it approached the Chinese Liaison Office in the United States to express its intention to export products and establish bottling plants in China. Tong Zhiguang, then secretary of commerce in the Liaison Office and later vice minister of the Chinese Ministry of Foreign Trade, met with the Coca-Cola team but told them that China was not ready. He later explained why to the author of Thirty Years of Battle: Personal Experiences with the Four Great Debates of Reform and Opening-up: “Chinese born after the founding of New China have only seen Coca-Cola in movies, and the Coca-Cola in movies have always been associated with American soldiers. After the Korean War, Coca-Cola meant far more than a drink. China could not accept Coca-Cola because it represented the Western lifestyle.”17