Academic journal article China Perspectives

The Impact of the Tiananmen Crisis on China's Economic Transition

Academic journal article China Perspectives

The Impact of the Tiananmen Crisis on China's Economic Transition

Article excerpt

The political crisis of June 1989 was the catalyst for a shift in the overall pattern of Chinese economic transition. In both political and economic terms, the crisis gave urgency and legitimacy among the ruling elite to a model of concentrated power wielded more effectively. This led, on the one hand, to a regime more capable of mobilising resources for economic development. On the other hand, it resolved the ongoing discussions about ownership and hierarchy in a way that strengthened the alliance between politics and business, and integrated economic and monetary considerations into the fabric of the political hierarchy. These changes, in turn, led to a harsher and more elite-dominated form of state capitalism. For better and for worse, they also paved the way for the explosive phase of economic growth that followed from 1992 through September 2008.

In and of itself, the Tiananmen crisis did not have a large impact on the Chinese economy. Economic growth dropped sharply in the wake of the crisis (1989-1990), but as Figure 1 shows, the economy bounced back quickly and even made up for lost time during the over-heated years of 1992-93. When the crisis is juxtaposed with China's recurrent economic cycles (Figure 2), it is easy to see that the economic cycle was one of the causes of the crisis, but it is not easy to see the crisis having any effect on the pattern of economic instability.

Figure 2 shows inflation rates as a measure of cyclical imbalance: The Tiananmen crisis was clearly related to inflation, since it broke out after a socially destabilising peak in inflation. But the crisis didn't immediately cause any particular change in the dynamics of the economy. Quite the contrary, there were surges in inflation before Tiananmen, and there was one after Tiananmen, in 1993-95. If there was any clear change in macroeconomic regime, it came later, after 1996. In simple economic terms, Tiananmen was not a particularly important event.

And yet, Tiananmen stands at the watershed between two different approaches to economic transition and two different policy regimes. Tiananmen may not have been the watershed, but it certainly was located on the watershed. It is widely recognised that in many crucial dimensions, the 1980s in China were different from the 1990s. The 1990s policy regime emerged with unmistakable clarity only a few years after the Tiananmen Crisis, in 1993-94. But since it took several years for the political dynamics unleashed by Tiananmen to coalesce into a new economic policy regime, it is clear that the Tiananmen crisis was one of the most important events pushing the policy-making equilibrium from one stable state to another. What, then, is the relationship between Tiananmen and the shift in policy-making stance between the 1980s and the 1990s?

The fundamental difference between the two periods is that in the 1980s, before Tiananmen, China's leaders were willing to subordinate other national interests to the quest for a viable economic reform model, and thus a better economy and society. After Tiananmen, while reformers still pursued a vision of a transformed economy, that vision was linked to, and often subordinated to, strengthened, stabilised, and more effective government power. The most direct measure of the difference is the provision of public goods and growthoriented public investment. In the 1980s, this was low and declining, while in the 1990s it was high and rising. The low public goods regime of the 1980s had the advantage of purchasing "space" for economic reform and freeing up resources for new organisational forms. After Tiananmen, a steadily accelerating drive for a more capable state led to a large increase in growth-oriented public investment and other public goods. In order to mobilise the resources required for these purposes, China's leaders sacrificed important opportunities. They closed off alternative paths to reform, imposing a uniformity on policy-making choices and processes that has been, on occasion, suffocating. …

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