How China Avoided Soviet-Style Collapse

Understanding the shifting balance of social forces, interest groups and political factions is essential to see how China escaped the shock therapy that brought down the Soviet Union.

Pete Reynolds for Noema Magazine

Adam Tooze teaches history at Columbia University. His latest book is “Shutdown: How Covid Shook the World’s Economy.” He writes a newsletter called “Chartbook.”

For three days in the middle of May 1989, the Soviet General Secretary Mikhail Gorbachev visited Beijing. It was the first visit by a Soviet leader to China since the Sino-Soviet split. It would be the last. 

After Gorbachev went home, the two countries’ paths divided. Over the next two and a half years, the Soviet Union and its alliance system were dismembered. A world power was relegated to the status of a Eurasian spoiler with an outsized nuclear arsenal. As the apparatus of Soviet command was dismantled, the economies of the former Union and its allies imploded. People suffered a disastrous collapse in their standard of living. The life expectancy of Russian working-class men plunged. 

China, by contrast, was on the path to Communist Party-led rocket-ship growth. National economic heft, a rising standard of living and political legitimacy all compounded each other to launch what Xi Jinping’s propagandists would dub the “China dream.”

Today, the race between China and the United States hogs the limelight. But China is unlikely ever to overtake the United States in per capita terms, and it is still trying to catch the U.S. in the absolute size of its economy. Russia, though, is the superpower that China already eclipsed. 

On the Eurasian landmass, this is a reversal of historic proportions. In 1914, the GDP per capita of the Tsarist Empire was approximately three times China’s; by the 1970s, it was six. Soviet citizens enjoyed a GDP per capita in the middle income range, while China remained abjectly poor. 

“Russia is the superpower that China already eclipsed.”

Forty years later, in terms of purchasing power parity, China has nearly caught up with Russian GDP per capita. This is true whether we look at bottom half or top fraction of the income distribution. Multiplied by its giant population, China’s GDP is now more than nine times larger than Russia’s. Russia retains its mighty nuclear arsenal, and it is a top-three exporter of fossil fuels. But as a world power it is now completely overshadowed by China. In the 1950s, it was aid from the Soviet Union that sustained China in the Korean War and propelled Maoist industrialization. Today, it is Russia that looks to China, both as its strategic and economic prop. 

What explains this shocking reversal of fortune? China’s rise and Russia’s decade of humiliation both took place within the context of the unipolar moment and the Washington Consensus. Neoliberal ideas were hegemonic. Western economists superintended Russia’s disaster. In Russia and Eastern Europe, shock therapy — comprehensive and sudden price liberalization (otherwise known as the Big Bang); fiscal austerity to consolidate budgets and slash aggregate demand; and privatization — became synonymous with the callous insouciance of market economics. 

China, on the other hand, profited from globalization but retained a high degree of autonomy in economic policy. It fared much better. How did China escape? Why did the Soviet bloc succumb? 

Transition Economics 

A common explanation of China’s success is that it has had the good sense to ignore Western economics. As the Harvard economist Dani Rodrik has written, no one can “name the (Western) economists or the piece of research that played an instrumental role in China’s reforms.” Economics, “at least as conventionally understood” in the West, played no “significant role.” 

In the Xi Jinping era, Chinese nationalists relish this interpretation. As the historian Julian Gewirtz noted, they are only too happy to claim that China’s economic miracle was “grown out of the soil of China” thanks to the “great daring and resolve” of “Chinese Communists.”

The problem is that it clearly isn’t true. Gewirtz’s pioneering book, “Unlikely Partners: Chinese Reformers, Western Economists and the Making of Global China” showed that, in fact, China’s economists and economic advisors had close contact with the West throughout the 1980s. They formed a mélange of doctrines that, in his view, deserves credit for China’s success. It is neither Western nor Chinese economics per se, but rather the act of opening the economy up to the world that is at the center of his narrative. 

And for Gewirtz, who recently joined the Biden administration as the China director on the National Security Council, that has practical implications: “If we emphasize the conflicts between the Western systems of economic organization and China’s, then these examples of conflict are likely to breed more of the same. But if we can focus on the stories of partnership and exchange between China and the wider world, then we may be able to push back against Chinese jeremiads about ‘hostile foreign influences’ and American warnings about the unmitigated ‘threat’ of China’s ‘influence’ around the globe.”

By taking not China’s success, but the painful post-Communist transition of the 1990s as the backdrop, the political economist Isabella Weber‘s new book, “How China Avoided Shock Therapy,” changes the terms of the debate. Weber’s question is not so much how China benefited from opening up, but how it succeeded in avoiding the disaster that integration into the world economy was to become for the Soviet bloc. 

On Weber’s telling, reform-minded Zhao Ziyang, the premier of the People’s Republic from 1980 to 1987, was torn between two contending factions. On one side were the free market, “package reform group” led by figures like younger, Western-orientated economists like Wu Jinglian, who is lionized by Gewirtz. On the other side, Weber identifies a group whose careers had been marked in the 1960s and 1970s by the Cultural Revolution, and whose vision for a more gradual and pragmatic process of price reform grew out of prolonged exposure to the Chinese countryside. They found support among old cadres who were rehabilitated after the Cultural Revolution. 

Ironically, the package reformers, who advocated a comprehensive and simultaneous liberalization of prices, were also proponents of a highly technocratic effort to calculate the proper prices from which to start liberalization. By contrast, the more pragmatic reformers favored a dual-track system, in which a certain portion of output was delivered to state agencies at fixed prices, while another portion was reserved for sale at market prices. This would enable a gradual process of price discovery. 

“In the 1950s, it was aid from the Soviet Union that sustained China. Today, it is Russia that looks to China, both as its strategic and economic prop.”

As Weber stresses, though the two camps of economists were quite distinct both in their programmatic planning and their political and institutional affiliations, neither was parochial in outlook. Both camps had international connections and the affinities could be confusing. To make their case against radical market reform at home, pragmatists like Chen Yizi and Wang Xiaoqiang consulted with ordoliberals in Germany and embraced agrarian policies pushed through by Augusto Pinochet’s regime in Chile. 

As Weber shows, the two camps were divided not only in terms of immediate policy advice. They also differed more fundamentally in their understanding of basic economic phenomena. 

Of particular interest is the argument about how to understand inflation. Is it a strictly macroeconomic phenomenon driven by imbalances in aggregate demand and the money supply — always and everywhere a monetary phenomenon, as Milton Friedman would insist? Or do we disaggregate it into a series of separate price movements, each driven by a complex combination of demand and supply conditions?

The package reformers argued that there was little to fear from a “Big Bang” price liberalization, so long as the prices were set properly and there was no monetary overhang due to excessive credit-creation. With this in mind, they tended to view state investment principally through the lens of aggregate demand and credit growth, and thus as a driver of inflation. 

The pragmatic group, by contrast, concentrated their attention not on inflation in general — as measured by aggregate price indices — but on the prices for key consumer and producer goods, as determined by specific supply and demand conditions in each case. They viewed investment not just as a source of demand, but also as a factor determining what productive capacity might be available to meet demand. After years of experience in agriculture, they were well aware of the consequences of starving crucial sectors of public funds. In determining the risk of inflation, they refused to give priority, a priori, either to macroeconomics over microeconomic factors, or to demand over supply conditions. 

It is all the more fascinating to read Weber’s subtle recounting of this debate because it is with us still today in debates about inflation in Europe and the U.S. amid the COVID recovery. Take, for instance, a post-Keynesian like J.W. Mason in the summer of 2021 remarking with frustration about the current inflation debate:

The problem is this notion that inflation — the change to the overall price level — is something more than, or distinct from, an average of particular price changes that we’re seeing for particular goods and services for particular reasons. 

I think this is one of the fundamental sources of confusion. People have this idea in their head that somehow the overall change in the price level must be driven by a force other than the myriad things that are driving up particular prices. But that isn’t the case. Here is all that inflation is: You take all the prices that you can observe, and you average them in some way — and there’s debatable choices you have to make in averaging them, in designing your standard basket of goods and services — and that’s inflation.

Mason might be channeling one of Weber’s dual-price economists. This should not be surprising. As Weber shows, J.K. Galbraith, himself a veteran of World War II-era price control in the U.S., was one of the Western economists whose work was circulating in post-Mao China. Despite the huge distance that separates us, the effect of Weber’s subtle, lucid and evenhanded treatment is to render 40-year-old debates in reform-era China neither exotic nor outdated, but strikingly contemporary. In this respect at least, she shares Gewirtz’s intention to overcome false divisions and bring China and the West into closer dialogue. And into the bargain she gives us a dramatic story. 

China: Walking The Tight Rope

As Weber tells it, China walked a tight rope in the 1980s. Twice the package reformers came close to persuading reform-minded Zhao to introduce full-blown price reform. Twice they were defeated. 

In 1986, it was, above all, opposition from within the ranks of the experts that stopped Zhao’s price liberalization push. It was on this occasion that consultations in Eastern Europe proved particularly important in undercutting the argument for radical action. On the basis of extensive enquiries in Hungary and Yugoslavia, the System Reform Institute that advised Zhao concluded that China was in no condition to attempt comprehensive and immediate liberalization. 

The second great set piece came in 1988 when Zhao made his most fateful push for price reform. After a sustained campaign — including, among other stunts, a visit from Friedman — at a meeting held in August, the Politburo announced the imminent liberalization of all prices. The result was a wave of panic-buying and bank runs. Inflation accelerated ominously. Deng Xiaoping immediately slammed on the breaks. Chen Yun, the veteran inflation fighter of the 1950s, was summoned to the frontlines. Zhao was humiliated. 

All further moves toward price liberalization were halted; in 1989, amid the repression of the protest movement, Beijing embarked on a fiscal and monetary consolidation. After surging to an annual rate of 28% in April 1989, by the middle of 1990 inflation was brought virtually to a halt. As a result, China suffered a major political shock and a fiscal and monetary contraction, but economic growth as a whole proceeded without dislocation. 

This sets up a painfully ironic denouement. If it was the pragmatic advocates of a dual-price system who won the argument in 1988, why did they not come to occupy the limelight in the subsequent years of triumphant growth? Why is it that the radical package reformers like Wu Jinglian, who were defeated in 1988, are today celebrated as the godfathers of reform? 

“If it was the pragmatic advocates of a dual-price system who won the argument in 1988, why did they not come to occupy the limelight in the subsequent years of triumphant growth?”

This is where Weber’s painstaking and deeply sourced reconstruction delivers the sting in its tail. In 1989, as the student protests in Beijing gathered force, the advocates of pragmatism remained true to Zhao and his ill-starred quest to broker a deal between the students and the regime. In the aftermath of Tiananmen Square, they suffered the consequences: driven into exile or silence. Like Zhao, who spent the rest of his life under house arrest, they have been written out of history. 

By contrast, the package reformers proved radical in theory but pragmatic in political praxis. After Zhao abandoned them during the inflation crisis in 1988, the package reformers had few qualms in 1989 about denouncing both him and the student protestors. Their loyalty to the powers that be was rewarded. Once the dust had settled, it was the package reformers who, under Jiang Zemin and Zhu Rongji, came dramatically to the fore. Zhou Xiaochuan, one of the most brilliant exponents of package reform in the late 1980s, would serve as governor of the People’s Bank of China from 2002 to 2018. 

Gewirtz is right. How we tell the story of Chinese economic expertise in the 1980s is political. Gewirtz may champion the package reformers as cosmopolitan travelers between worlds, but as Weber remarks in a pointed review, “Gewirtz’s contribution is to lift the story of Wu and his allies from the memoir literature into the realm of historical research.” 

One of the great merits of Weber’s painstaking trawl through the historical record is that it redresses the balance. Through her meticulous reading of the memoir literature and her remarkable collection of interviews, she recuperates the historical significance of a generation of intellectuals whose careers were twice derailed, first by the Cultural Revolution and then by turmoil around Tiananmen.

Why The Soviet Union Did Not Follow China

This is profoundly illuminating of the interior life of China’s economic policy. But for the wider question — why China and the Soviet Union’s paths diverged — it leaves questions. If China avoided shock therapy, why did the Soviet Union succumb? 

Of the three facets of shock therapy — sudden price liberalization, fiscal austerity and privatization — Weber’s focus is on the last. If one follows Weber’s train of thought about China, the obvious inference is that, whereas the Chinese elite made the right choices, the Soviet disaster was the result of taking a wrong turn. As she puts it: “What was at stake in China’s market reform debate is illustrated by the contrast between China’s rise and Russia’s economic collapse.” The authority that she cites at this point is Peter Nolan, who Weber credits as her supervisor, a leading expert on the Chinese economy and one of the foremost heterodox critics of shock therapy. In his writing in the 1990s, he spelled out with unusual clarity the basis for his comparison of China’s success and Russia’s failure. 

The first move in Nolan’s chain of reasoning is the boldest. To counter the argument that China’s relative success was due to structural advantages that made it easier for China to “grow out of the plan,” as Barry Naughton would put it, Nolan insists that, in fact, the opportunities for catch-up growth were quite similar. Though the details of Nolan’s argument may be unpersuasive, it’s true that, given the inefficiency prevailing in both Communist regimes, both ought to have had huge opportunities for growth. Unbelievably, despite its huge agricultural potential in the 1970s and 80s, the Soviet Union struggled to feed its population. The wastefulness of Soviet industry was legendary. If Russian economic growth disappointed in the 1990s, it can hardly be for lack of catch-up opportunities. 

Secondly, Nolan argued that, contrary to the package reformers, who believed that the destruction of Communist Party rule was crucial to enabling a successful transition, in fact, a “more successful transition away from a Communist economy may be easier to achieve with a strong state which is able to place the overall national interest above that of powerful vested interest groups.” And, lest there be any mistaking his drift, Nolan added: “A self-reforming Communist Party may be the least bad vehicle available to accomplish this. The causes for China’s … success may lie above all in the set of historical factors which allowed the Communist Party to survive in China (whereas it was overthrown in Eastern Europe and Russia) and to preside over the introduction of an increasingly competitive economy.”

It is the relative autonomy of that decision-making center within the Communist Party that prepares the ground for Nolan’s final move: “Reform of the Stalinist economies may be seen by history to have been a knife-edge situation in which correct choices in political economy could produce explosive growth, and incorrect ones could send the system spinning backwards at high speed for an extended period.” 

“The Russians were easy prey for the messianic appeal of the zealous advocates of wholesale economic and political reform.”

Whereas the Chinese Communist Party had a robust and sophisticated policy argument, Nolan claims that nothing similar was possible in the ossified culture of the Soviet Communist Party. In contrast to Deng’s robust pragmatism, Gorbachev’s remarks on economics were, in Nolan’s view, vapid and insubstantial. The Russians were easy prey for the messianic appeal of the zealous advocates of wholesale economic and political reform. Nolan and Weber both remark on the cold-blooded revolutionary logic by which package reformers advocated pain now for gain later. 

But is this a plausible account of the collapse of the Soviet Union? Not if you follow the highly original history of its later years offered by Chris Miller in “The Struggle to Save the Soviet Economy.” With unprecedented access to the Politburo files, Miller set out to fundamentally revise our understanding of Gorbachev’s role in the economic and political reform process. He reveals the deep preoccupation that Soviet leaders and experts had with China’s experience. As Miller shows, Gorbachev was fascinated with the Pacific and Asia and saw it as the new frontier for economic development, a prospect that was far from unattractive from a Soviet point of view. Far from dismissing China’s gradualist approach to reform, Soviet economic experts studied it in detail. They experimented with enterprise reform and economic development zones along Chinese lines. The problem, as Miller shows, is that they simply could not make Chinese-style reform work in the Soviet Union. 

What Gorbachev ran up against were not intellectual limits, but a densely interwoven web of political and economic interests. Those were rooted in the historic legacy of the transformation of Soviet society under Stalin between the late 1920s and the 1950s. What Gorbachev faced was the entrenched interest of Soviet collectivized agriculture: a massive and powerful block of state industrial companies that did not want to see their interlocking relationships jeopardized. And, above all, he faced the military-industrial complex, the mightiest interest of all. Gorbachev had to struggle even to obtain basic information about the military budget. If he pushed too hard, he feared that the Soviet military would remove him from power. 

Frustrated by sluggish growth but stymied in his efforts to introduce structural reform, Gorbachev decided to accelerate out of the impasse. Both subsidies and investment spending were raised. The result was to dramatically worsen the macroeconomic imbalances that lurked behind the fixed prices of the Soviet economy. If there was a mistake on the Soviet side, it was this. Up to the mid 1980s, the inflationary pressures were manageable. By 1989, the entire Soviet economy was overshadowed by excess purchasing power. If rising investment spending and consumer subsidies had actually triggered accelerated production and productivity, Gorbachev might have escaped the deadlock. In practice, however, production plateaued. 

In China, at least as Weber tells the story, a case could be made for both monetary and cost-push theories of inflation. To a considerable degree, prices were already liberalized. Markets were adjusting. In the Soviet Union, as Miller describes, the basic driver of dysfunction was clear: the monetary overhang. Too much purchasing power was chasing an inadequate supply of goods, whose prices were rigidly fixed. With an increasing volume of demand and fixed prices, the result was increasing dislocation, queuing and inefficiency. 

“What Gorbachev ran up against were not intellectual limits, but a densely interwoven web of political and economic interests.”

By 1989, the counterpart to the Tiananmen protests in the Soviet Union was a strike wave, which the regime no longer had the will to repress. Discipline was breaking down and the debate about the future of the Soviet system polarized. Inspired by Eastern European advice, Soviet package reformers began to think in terms of a 500-day program. Boris Yeltsin backed them in his bid to upgrade the power of Russia within the U.S.S.R. 

At the same time, those in Moscow attached to the existing order took inspiration from the Tiananmen crackdown. As Miller shows, there was more to the conservative resistance to Gorbachev than merely senile attachment to the old ways. The aim of the industrial, agrarian and military interests was to sustain the political economy from which they had been profiting for decades. To maintain their position, they knew that maintaining the authority of the Communist Party was crucial. The August 1991 coup was their last-ditch effort to sustain that coalition.

It was the failure of the coup that finally decided the issue in favor of the Russian package reformers. As he ripped Russia out of the Soviet Union, Yeltsin completely liberalized all prices on Jan. 2, 1992, in a desperate effort to unblock markets and restart supply chains. The Big Bang was, at that point, simply the only way out of an increasingly perilous situation of economic collapse. 

At this point it is helpful to return to the three elements that make up shock therapy. There are few if any who would defend the rapacious privatization in post-Soviet Russia. The effort to impose fiscal and monetary austerity had only limited success. In the first instance, Russia slid toward hyperinflation. By contrast, the Big Bang, the complete liberalization of prices on Jan. 2, 1992 — the policy question that Weber makes the pivot for her history of China in the 1980s — was, in Russia, widely considered unavoidable. And this is true even for severe critics of the transition. 

Take Branko Milanović, for instance: 

The opprobrium that is often heaped at the Big Bang comes in part from the lack of knowledge of the contemporary conditions, and from easy conflation between macroeconomic reforms and privatization, which indeed began at approximately the same time, but were two distinct processes. While the Big Bang was successful and after a year of output decline and reduced real wages allowed Poland to grow fast, and would have certainly done the same for Russia, the hurried and inequitable privatizations created a kleptocratic oligarchy whose net contribution to innovation was close to zero but whose ability to extract surplus from political connection was infinite. 

It was not Gaidar’s reforms (the Russian Big Bang), which took place under even worse conditions than in Poland — when the country was on the verge of famine and even a possible civil war — that were responsible for what happened since, but privatization.

The crucial difference is that China never reached the extreme point that Milanović describes. Thanks to the success of the agrarian reforms, China in the 1980s was never on the verge of famine. Nor, despite repeated waves of protests, did it face anything resembling “civil war” — or, indeed, a military coup. As far as the economy was concerned, though price reform was gradual, it had also started early. By 1989, roughly half of prices were already liberalized. There was inflation, but that in itself helped to drive adjustment. Talk of impending hyperinflation reflected panic rather than macroeconomic realities. The commonly cited figure of 28% inflation in the spring of 1989 is not per month, which would indeed be approaching hyperinflation, but per year. 

So, if we want to understand why China avoided shock therapy, in the sense of being forced to adopt comprehensive and immediate price liberalization, whereas Russia had no option but to opt for the Big Bang, the question we have to answer is: Why could Deng shepherd a process of incremental institutional and macroeconomic adjustment, whereas Gorbachev faced an impasse?

Wars Of Attrition 

In the 1990s, one of the underrated intellectual developments in Western economics was the convergence of macroeconomics and political science. In political science, this unleashed the “rat choice” revolution and an obsessive focus on causal identification and quantitative methods. In economics, it led to the systematic incorporation of political economy into economic modeling. 

In no small part, this was driven by the question of why the kind of impasse facing the Soviet Union and many Latin American countries in the 1970s and 1980s was not resolved sooner, and why instead they were forced to resort to last ditch measures like the Big Bang. The most influential model of this was what Allan Drazen and Alberto Alesina — he of expansionary austerity — dubbed “wars of attrition.” 

As they put it in the abstract to their seminal 1989 paper:

When a stabilization has significant distributional implications (as in the case of tax increases to eliminate a large budget deficit) different socio-economic groups will attempt to shift the burden of stabilization onto other groups. The process leading to a stabilization becomes a “war of attrition,” with each group finding it rational to attempt to wait the others out. Stabilization occurs only when one group concedes and is forced to bear a disproportionate share of the burden of fiscal adjustment.”

On Miller’s reading, the late Soviet Union was a classic war of attrition. China was not. To explain why, contrary to Nolan’s view, structural differences do come strongly into play. 

The Soviet Union and Poland were middle-income countries whose political economy had more in common with inflation-plagued Italy or crisis-ridden Latin America than low-income China. With a per capita income six or seven times China’s, both entrenched interest groups and the population at large had much to lose from any adjustment. 

As Miller describes it, the powerful coalition of interest groups resisting reform had the added advantage that relations between them were stabilized by their relations within the Party. The problem was not, as Chinese critics like Xi Jinping sometimes allege, that the Soviet Communist Party had lost its grip, but that it proved too strong in cementing vested interests. It was extremely difficult to break the deadlock by pitting one interest group against the others. On Miller’s reading, it was precisely that gridlock that motivated Gorbachev to engage in the dangerous experiment of attacking the party’s monopoly on political power and embarking on economic reform at the same time. 

In China, by contrast, not only were there huge gains to be made simply by improving and shrinking the giant sector of peasant agriculture, not only had the party recently been convulsed by factional struggle over the Great Leap Forward and then the Cultural Revolution, not only was the military far less powerful and far less independent — but interest group conflict within the Party was structured differently. 

Rather than a war of attrition building to the terrible climax of a Big Bang, China’s political economy has seen regular cycles of expansion and contraction. The struggles over economic policy in 1986 and 1988 were preceded by cycles of expansion and contraction in 1981 and 1983, and were followed by further episodes in the 1990s and 2000s, all the way to the present. For the last 40 years, pulling back from the brink and escaping wars of attrition has been a recurring feature of China’s political economy. 

There are various competing theories to explain the tides of political economy carrying the intellectual debates on which Weber and Gewirtz focus their attention. Already by 1996, Yasheng Huang argued that the key distinction was between provincial bureaucrats (who were, above all, concerned with the rapid growth of local businesses that generated jobs and tax revenue) and central officials in Beijing (who controlled the largest state-owned enterprises and who favored a more steady and strategically directed pattern of growth). 

“Political economy explains why China had real options in the 1980s, whereas in Moscow, over the winter of 1991-92, there was no choice but to go through with the Big Bang.”

The oscillation in the balance of power between the two groups followed the ups and downs of the business-cycle. In 2008, Victor Shih recast Huang’s analysis. Rather than a juxtaposition of center and region, he argued that the key dividing line ran through Beijing itself, between two different power games. One involved coalitions of central and regional factions competing for overall control of national politics — a power game he referred to as horizontal — and on the other hand were what Shih called vertical or functional elite groups, whose main aim was not overall control but stability in their key areas of concern, whether that be military or financial policy. What explains the oscillatory stability of China’s political economy according to this model is that the dominant players in the horizontal game confront the key players in the vertical game only obliquely. 

In growth phases, party cliques compete with each other for influence above all in decentralized races for resources. Deng was notorious for the favor he extended to Shanghai and Guangdong, generating a huge expansionary dynamic in those growth centers. But when this expansion threatened to unleash wholesale inflation and general destabilization, it was in the interest of Deng and his clique to hand off control temporarily to technocratic interests in Beijing, who took responsibility for stabilization but had no desire to take charge of politics in general. 

According to Shih, it is this power balance that defined the relationship between Deng, the central player in the horizontal game in the 1980s, and Chen Yun, the specialist for inflation control, whose pedigree, as Weber shows, goes all the way back to the 1950s. Chen had the rare distinction of having stood up to Mao himself in the struggles over the Great Leap Forward. In 1988, when the price reform movement advocated by Zhao and his package reform advisors backfired, Deng could sacrifice Zhao to Chen without forfeiting his overall grip on power. In the early 1990s, Chen and his protégé, the hardline Li Peng, forced through a fiscal stabilization before making way for a new wave of expansion. 

Foregrounding the political economy of the inflationary process is not meant to imply that intellectual history and arguments between economists don’t matter. But those arguments play out within a forcefield defined by factional and interest group competition. It is only when we paint that broader picture that we can reasonably compare the Chinese and Soviet experiences. Political economy explains why China had real options in the 1980s, whereas in Moscow, over the winter of 1991-92, there was no choice but to go through with the Big Bang. 

And once we factor in factional politics, the points hotly debated between the economists and the policymakers they advise may take on a new meaning. A case in point is the crisis of 1988. 

For Weber, this was a hair-raising moment at which shock therapy almost triumphed. On Shih’s telling, the crisis was staged. The control faction headed by Chen set a trap for the price liberalizers. Knowing full well the risks of accelerating inflation, they ceded the ground to Zhao, allowing the August 1988 crisis to unfold, only then to pounce. The vertigo that drives the drama of Weber’s account was part of the power play. Chen could have struck earlier but preferred to allow the panic to play out so that Deng had no option but to summon him to reimpose control. 

Whichever version of that moment we prefer, the crucial point is that we cannot answer the question of how China escaped shock therapy while the Soviet Union succumbed unless we understand political economy both as a battle of ideas and a complex and shifting balance of social forces, interest groups and political factions.

The Key Is Autonomy 

The upheaval in Russia was dramatic. After 1992, the combination of the Big Bang price reform, escalating inflation and the violent disposition of the spoils hurled Russian society into deep crisis, inflicting a shattering blow to the real incomes of working-class Russians above all. The late-Soviet gridlock was broken by the failure of the coup, the shock of price reform and Yeltsin’s violent suppression of his opponents in the Russian parliament in October 1993. Agriculture and rural communities across Russia were abandoned to their fate. Following the humiliation of the coup, the once-mighty Soviet military was powerless to resist. And Yeltsin enjoyed the indulgence of the West even as he shelled the opposition in parliament into submission and rigged elections. 

After the crisis of 1998, the recovery in the oil and gas sector and the restoration of fiscal and monetary apparatus set the stage for Putin’s revival of the Russian state. If, as Weber says, China is deeply enmeshed into global capitalism and yet resists full-fledged integration with the institutional order of the West, the same might also be said of Putin’s Russia. 

Well before China announced its geopolitical ambitions under Xi Jinping, Putin had already begun to underline his opposition to the hegemony of NATO. Strikingly, he did so on the back of ostentatiously orthodox fiscal and monetary policies. In the period of rebuilding in the 2000s, Russia siphoned fossil fuel revenues into a sovereign wealth fund. Unlike China, the Russian capital account is not subject to systematic controls. Controlling inflation is a key policy priority for the regime. This limits Putin’s scope for large-scale public spending and investment, but it means that he is secured against the kind of inflationary disaster that felled Gorbachev and undermined Yeltsin’s legitimacy. Tight macroeconomic policy has gone hand in hand both with a rough and ready handling of the oligarchs and an increasingly confrontational foreign policy. 

Russia does not break the economic rules so much as play to its strengths within them. Huge foreign exchange reserves, a reduced but nevertheless potent military and gas and oil exports give Putin the platform he needs. An opportunistic alliance with China, Russia’s fellow challenger to the Western order, offers Moscow a further degree of freedom.

In China, the crackdown of 1989 only temporarily slowed the reform process. China’s economy grew out of the plan. Meanwhile, thanks to their cynical political maneuvering, it was precisely in the late 1990s that the exponents of package policy actually got their way. Labor was shed wholesale from state-owned enterprises. The banking system was rebuilt. Growth boomed on the back of a huge export surge. Inequality surged, as did corruption. 

It may not have been a Big Bang, but the wave of restructuring in the 1990s smashed the iron rice bowl once and for all. The new pattern of growth inflicted huge dislocation on the Maoist rustbelt of the northeast. Unemployment surged and protests were rife. As the data compiled by Thomas Piketty’s team for the World Income Database show, the divergence between China and Russia over the last three decades is less striking than their similarities. What makes the difference between them is not the degree of inequality, but the rate of growth and the remarkable level of mass affluence that China has delivered for the urban middle class. 

“It may not have been a Big Bang, but the wave of restructuring in the 1990s smashed the iron rice bowl once and for all.”

Unlike in Russia, moreover, the C.C.P. has not just survived — it is larger and more powerful than ever. Xi Jinping is famous for the contempt in which he holds Gorbachev. For Xi, 1989 was a pivotal moment. The willingness of the Party to impose discipline is a mark of its historic destiny. 

The problematic phase, in fact, are the go-go years of China’s economic growth under Jiang and Zhu in the 1990s and early 2000s. In the era of the Three Represents, when new money was welcomed into its ranks, the Party lost its discipline. Corruption undermined morale and made China vulnerable to American influence. In Nolan’s terms, it undermined the capacity of the Party to serve as an effective source of direction for national policy. 

Restoring agency is what Xi’s purges are about. Putin has humiliated and punished the occasional oligarch. Xi Jinping’s recent regulatory initiatives go far further.

Undisciplined wealth and undirected private capital accumulation as such are in question. That has both a political and a macroeconomic edge. Undisciplined wealth is a political challenge in the sense that it drives the formation of alternative centers of power and prestige. It is a macroeconomic challenge in the sense that it locks China into a recurring pattern of stop and go. 

Whether or not Beijing can shift its growth regime to a more sustainable basis remains to be seen. It has often been promised, but stop-go remains the norm. In the rebound from COVID, Beijing has once again adopted an investment-driven policy. 

But it does seem clear that both China’s and Russia’s political leadership have drawn one crucial lesson from the last half century. The key is autonomy. Freedom of action. What is ultimately decisive is the ability to deploy all the tools of power — institutional change, macroeconomic leverage, political suasion and coercion — to manage the dynamic of growth and the risks of insertion in the world economy. That is what both Xi and Putin seem determined to preserve.