BENEDICT STAVE
The Political Economy of Inflation in China
This article explores a reasonably conventional
model of the political economy of
inflation: when political leaders feel weak, they increase money supply to create the
illusion of economic growth. In practice, however, many people are hurt by inflation,
and ultimately the government suffers further loss of support. This article demonstrates
that this model, which evolved from analyses of non-socialist systems, is also applicable
to socialist systems.
In the past, inflation was thought to be a characteristic problem of market economies
but not too important for socialist systems. With the exceptions of a ten-fold inflation of
prices in the Soviet Union from 1928 to 1940 and a gradual inflation in Yugoslavia
throughout
the 1960s and 197Os, socialist countries have been characterized
by
remarkable price stability.’ China, for example, had no inflation from 1965 to 1980.2
Indeed, one of the foundations of the legitimacy of Chinese communist government was
its effectiveness
in stopping
the destructive
hyper-inflation
of the nationalist
Government in the late 1940s.3
By the mid-1980s,
however, a strikingly new pattern was emerging. Yugoslavia
teetered on the brink of hyper-inflation
as prices went up 251 percent in 1988 and
started 1989 with inflation at about 6 percent per week.4 In the Soviet Union inflation
was apparent in prices of new goods, in black market prices, and in the deterioration in
quality of goods, even if obscured in official statistics.5 Some guessed the rate was
perhaps 6-7 percent, and reformers were very cautious about recommending
price
reforms that might bring more inflation.6 Hungary experienced 16-17 percent inflation
during 1988; an inflation rate which contributed to an expansion in the number of
Hungarians living at and below the poverty line from 2.1 to about 2.5 million, almost a
quarter of the population.7 Inflation was also one dimension of the persistent crisis in
1. Michael
Ellman,
Socialist Z’lannins (Cambridge:
Cambridge
University
Press, 1979), p. 183.
Press, 1988), p. 222.
2. World Bank, World Deuelo@ent Re@t, 1988 (N ew York: Oxford University
3. Peng Kuang-hsi,
why China has No Inflation (Peking:
Foreign Languages
Press, 1976).
4. Henry Kamm,
“Yugoslavs,
Citing Their Disarray,
Struggle for Unity and Direction,”
New York Times,
February
22, 1989.
5. Fyodor I. Kushnirsky,
“Inflation,
Soviet Style,”
Problems ofCommunism, vol 33, no. 1 Uanuary
1984),
pp. 48-53.
6. Bill Keller, “Deficits
in Soviet Budgets are Disclosed
by Kremlin;
Wasteful
Subsidies
Blamed,”
New
York Times, October
28, 1988, p, 1, and “Soviets
Concede
the Ill of Inflation
Afflicts Their Body Politic as
Well,”
New York Times, November
3, 1988, p. 1.
“Hunparians
Shocked by News of Vast Property
in Their Midst,”
and “In Economic
7. Henry Kamm.
Hard Tim&,
Hungarian
Uiions
Call for Raises,”
New York T&es, February
6 and 9, 1989, p. 3 and 5. I.
Tarafas,
“The Possibility
and Condition
of Anti-inflationary
Economic
Policy in Hungary,”
Acta Oeconomica
(Budapest),
vol. 34, no. 3-4 (1985), pp. 287-97.
8. Z. M. Fallenbuchl,
ed., “The Polish Economic
Crisis,”
Eastern
European Economies, vol. 24 (spring,
1986), pp. 3-98; vol. 24 (summer,
1986), pp. 3-89.
STUDIES IN COMPARATIVE COMMUNISM, VOL. XXII,
No.
0039-3592/89/02/3
of Southern
0235-16
$03.00
@ 1989 U mversity
213, SUMMER/AUTUMN
California
1989, 235-250
STUDIES IN COMPARATIVE COMMUNISM
236
Po1and.s
In China,
inflation
in 1988,
with urban
areas
emerged
suffering
after
30.3
1979,”
and eventually
reached
17.7
percent
percent
inflation-it
became
a critical
political
in China
and other
socialist
countries
issue.
From
a global
the rates
of inflation
high.
In recent
decades
many
figure
inflation.
lo According
are not very
even
triple
perspective,
higher
annual
Israel,
182 percent;
inflation
several
countries
around
Nevertheless,
even
politically
systems
lack adjustment
to make
savings
484
Peru,
some
percent;
examples
Argentina,
100 percent;
Mexico,
in China
is modest
not
to inflation,
are
mechanisms.
used
Inflation
salary
cover
the interest
has been
their
very painful
fixed living
expenses.
rate on savings
accounts,
and
consumption,
processes.
The
that
lit strikes
in the price
a critical
of meat;
factor
326
percent;
64 percent;
and
spent
in China,
in political
on
tensions
after
it
price
to ordinary
people
as soon
undermined
further
fueling
in Poland
in 1980
increases
and eventually
and
Moreover,
inflation
and demonstrations
stability
terms,
and wage
savings
became
and
of much
in comparative
withdrew
spark
had double
.I 1
People
monthly
rate exceeded
was an increase
1988
Bolivia,
Bank,
have
people
and
inflationary
significant.
their
as the inflation
include:
157 percent;
50 percent
countries
to the World
if the rate of inflation
has been
trying
rates
Brazil,
developing
slowed
in food prices
in
down
structural
and a drop
in supply.
reforms.
Chinese
Indeed,
1985,
inflation
was not caused
the period
industrial
1978
1988,
by 11.2
a year
percent
characterized
weakened
position,
due to ideological,
no longer
demand
that people
price
stability
The
and social
restructuring.
Pattern
of Inflation
in China
standards,
figures
for the General
index
of 100.
While
The
as are similar
According
One
economist
index
indices
social,
was
in China
this indicator
Price
has not been
shown
Union.15
suggests
mild
part
inflation
an upward
inflation,
Index
revision
monetary
grew
in
by 10
and fiscal policies
because
changes.
It could
and it could
no longer
of a broad
economic,
1950
it is as good
to be characterized
of the price
industry
and economic
modest.
accompanied
to
inflation
incentives,
from
1978
productivity
grew in real terms
of the process
has been
From
and labor
output
political,
is not perfect,
in the Soviet
to this index,
doubled
has allowed
with very limited
Retail
in production.
lies in government
leadership
Inflation
inflation
official
available.14
work
by flat.
political,
By Western
political
than
of agricultural
inflation
not in balance.
more
of production
growth
by troublesome
and the value
that were
impose
vigorous
production
l3 The cause of China’s
percent.
by a collapse
has seen
and agricultural
also grew. l* In
real terms
since
Figure
to 1987,
index
1 shows
using
by fabrication
growth
to about
China’s
1950
as the alternative
economic
it is in a
as an
indices
and fraud,
in the 1950s.
3.5 percent
per
9. Chen Nai-Ruenn
and Chi-ming
Hou, “China’s
Inflation,
1979-83:
Measurement
and Analysis,”
Economic Development and Cultural Change, vol. 34. (1986), p. 811-35.
10. Mrityunjoy
Banerjee, Iflation; Gmres and Cures, With sp e&l Reference to Deuelopmg Countries (Calcutta:
The World Press, 1975), pp. 122-3.
11, World Bank, note 2, p. 222.
12. Statistical Yearbook of China,1986 (Beijing: China Statistical Information
and Consultancy
and Hong
Kong: Economic Information
and Agency, 1986), p. 16, 24.
no. 6, February 6-12,
1989, p. 21.
13. “The Chinese Economy in 1988,” Beijiq R&w,
14. Chen and Hou, note 9, pp. 812-14.
15. Kushnirsky,
note 5.
237
The Political Economy of Inflation in China
0
0
0
0
0
0
150
0
00°
0
0
0
000
o.
0
00
0000000
125
0
ooOO
000
00
1950
1955
1965
1960
1970
Yeor
FICUKE 1. General
for the
year
percent
1952
commodities
above
in
percent
1978
inflation
cities
which
(see Table
tors,
17.7
of many
in 1985,
index
leveling
were
general
6.0 percent
the
off at about
reasonably
index
in 1986,
necessities
for the country
have
been
stable,
of retail
a 12
35 percent
by
but
prices
and 7.3 percent
rose
as a whole
with
different
for
the different
began
to refer
20 percent
mend
that university
higher
than
research
there
are
56.2
since
the
went
up 6.0
in 1987.
From
percent.”
and around
In
1988,
30 percent
of “market
baskets,”
items
conceptual
in the
to a “Price
for the
index.
(including
refrigera-
problems
Perhaps
in specifying
to deal
Necessities,”
Price
Index.“lg
Some
new price
and does
198Os,
has been
higher
indices
not inspire
in large
cities
index
changing
of Daily
in detail
price
In a rapidly
Index
Retail
develop
of the retail
400 items.
is not understood
inflation
the accuracy
than
significant
the “Social
units
about
of more
types
weights
about
raised
of the price
etc.)
the
prices
The
of daily
televisions,
index
1959-63
eventually
inflation,
persistent.
average
the Chinese
During
and
shortage
questions
issues,
official
in 1953
and
percent
environment
appropriate
inflation
of
l).‘s
years
stereos,
a 14 percent
to the mid-1970s,
price
is a weighted
economic
including
has been
the
reached
In recent
retail price index (1950 = 100).
depression
8.8percent
1987,
I&
The
sharper
1960s
inflation
in 1980,
to
1985
levels.
the early
197Os,
1980
period,
1956.16
triggered
the earlier
From
late
to 1957
inflation
1975
because
with
these
which
Chinese
was
recom-
even in China
the
full confidence.2”
and coastal
areas
than
in
16. Katharine
H. Y. Hsiao, Money andMonetary Policy in Communisl China (New York: Columbia
University
Press, 1971).
17. State Statistical
Bureau,
“Statistics
Reveal Income Changes
Over Decade.”
FBIS January
4, 1989,
p. 50.
18. Yuan Mu, Beijing
TV. FBIS January
17, 1989, p. 38. “State
Statistical
Bureau
Says Inflation
Slowing,”
China Daily, December
15, 1988, p. 2. FBZS December
15, 1988, p. 20.
19. Ibid.
20. Q&m Jiaju,
“No Way Out But Reform,”
Wenhui Baa, June 16, 1988. Available
in Inside China Mainland, October,
1988, p. 8-11.
STUDIES IN COMPARATIVE COMMUNISM
238
TABLE 1. Annual
Price
Index and
1949-88.
Year
Price
index
(1950 = 100)
Annual
inflation
rate
(percenty
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
100.0
112.2
111.8
115.6
118.3
119.4
119.4
121.3
121.8
122.6
126.4
146.9
152.6
143.6
138.3
134.6
134.2
133.3
133.4
131.9
131.5
130.6
130.3
131.1
131.8
131.9
132.3
135.0
135.9
138.6
146.9
150.4
153.3
155.6
160.0
174.1
184.5
198.0
233.0
12.2
-0.4
3.4
2.3
1.0
0.0
1.5
0.2
0.9
3.1
16.2
3.8
-5.9
-3.7
-2.7
-0.3
-0.7
0.1
-1.1
-0.2
-0.7
-0.2
0.6
0.5
0.2
0.3
2.0
0.7
2.0
6.0
2.4
1.9
1.5
2.8
8.8
2.8
8.8
17.7
“1950-85: Statistical Yearbook
Accumulation
Rate,
Accumulation
rate
(percent)”
21.4
23.1
25.5
22.9
24.4
24.9
33.9
43.8
39.6
19.2
10.4
17.5
22.2
27.1
30.6
21.3
21.1
23.2
32.9
34.1
31.6
32.9
32.2
33.9
30.9
32.3
36.5
34.6
31.5
28.3
28.8
29.7
31.1
33.7
of China, p. 535-36.
1987: Beijing Reuiew, no. 10, March 7-13, 1988, p. vi.
1988: Yuan Mu, Beijing TV. FBIS January 17, 189, p. 38.
“(accumulation/national
income) Statidcal Yearbook o~C/zina, p. 49
239
The Political Economy of Inflation in China
small
towns
percent
or rural
while
rural
Guangdong
buted
went
into
labor
urban-rural
difference.
First,
and to sell them
Second,
big
restrictions
the cities
the higher
cities
costs
and
retail
up
the
on internal
migration
suffered
in the coastal
cities
in interior
areas.
Several
contri-
1985,
farmers
of urban
mark-ups.
Third,
factors
allowed
the market
real estate
higher
of production
helped
were
price
value
to cities
rate of 12.2
indices
in
cost
an inflation
price
at whatever
scarcity
pushed
cities
percent;
into
marketing
near
of 4.4
the index
up.
were
for example,
double
to this
porated
In 1985,
had a rate
and Fujian
commodities
prices
areas.
areas
for
opportunity
produce.
wage
rates.21
was making
several
urban
bear;
to be incor-
rural
elevate
to bring
would
began
of
costs
of
Finally,
Reform of the Price System and Inflation in 1988
Inflation began in China
institutional
reforms
connection
between
“production
inflation
economy”
mechanisms
into
of economic
expanded
the autonomy
Banks
been
given
greater
agencies
have
administrative
in various
Chinese
until
and
prices
argued
changing
The
were
the changing
practical
in prices
needs
and changes
were
raised
for many
Some
argued
that
there
would
however,
it would
be better
be constant
however,
was
demand,
market
and
would
changes
in some
prices,
this
that
decisions
could
were
Local
freedom
not function
to
effectively
stable,
and
in avail-
in an industrializing
forces
and technology.
and for coal,
In the
iron,
prices
to be set by market
in line
with
several
highly
the
for the changes
supply
decades
determination
be
conditions.2’
enterprises.
and
lowered.23
to allow
after
and replace
the reforms
had held prices
products
its
market
on investment,
and
population
be the
that
to market
to compensate
adjustment
means
to funds
in productive
prices,
problem,
and
markets
agricultural
suppressed
stability
access
of a growing
prices,
goods.
so that
needed
is changing
to economic
the government
world
prices
Economists
actions,
that
For decades
to make
money
China
Specifically,
according
greater
economists
rationalized.
of resources,
consumer
given
foreign
society,
many
to loan
enterprises.
ability
198Os,
freedom
of economic
adjustments
early
of products,
must
to supplement
fiat.
enterprises
sales
types
were
eventually
the economy
important
question
which
by administrative
been
level,
economy,”
throughout
and
a critical
At the broadest
of economic
of inputs,
so that
a “commodity
management
use
have
the government
system,
and reform.
production,
invest
when
are to be introduced
the system
have
at a time
in its economic
was
disruptive
inter-
and demand.
of enforced
likely
to bring
to many
parts
price
sharp
of the
economy.
As
reforms
generate
profits
gave
more
while
managers
for
indirectly
by lowering
past,
when
that
autonomy
increasing
matter)
quality
the government
have
to enterprise
wages,
been
Chinese
tempted
or by shifting
had tight
control
managers
managers
to increase
prices,
to new products
over
prices,
and
(like
required
Soviet
either
with higher
managers
could
them
to
or capitalist
directly
prices.
or
In the
not casually
21. Macroeconomic
Research Office, Economic Structural &form
Institute of China, “An Analysis of
the Economic Situation in 1986,” China’s Development and Reform, May 1987. Available in Chinese Economic
Studzes, vol. 21, no. 3 (spring, 1988), p. 12.
22. Wang Huning, “The Changing R&t&ships
Between Central and Local Governments
in China.”
Paper for the International
Political Science Association Conference,
Washington
DC, August, 1988.
23. Gao Shangquan,
“The Reform of China’s Industrial System, ” in Gene Tidrick and Chen Jiyuan,
eds, China’x Industrial Reform (New York: Oxford University Press, 1987), pp. 137-8.
240
STUDIES IN COMPARATIVE
resort
to these
to set prices
After
years
to reform
the
techniques,
freely
of discussion
the price
govenment
downward
portion
been
gradually
disruption.
came
in spring,
prices
foods
went
up 24.2
retail
price
By the third
quarter
the price
cities. 26 To
In Shanghai,
in state-run
Monetary
Because
many
than
17.9
which
critical.
are
forms
annually,
but
imbalance.
In the
up
went
between
1980
and
units
on behalf
provided
grew
money
was being
August,
1988,
1985.**
generally,
prices,
up by a huge
in the first half of
wage
for government
and more
than
subsidies
were
workers,
workers
received
nationalities
received
2 yuan
extra.
system
and
percent,
faster
currency
money
cause
or more
China
of inflation.
8
important.
suffered
adjustment
However,
Monetary
a seemingly
policy,
From
1983
the
went
up
19.1
percent;
went
up 8-14
total
years
payroll
raised
1984
to
1988,
GNP
percent.
*’
Total
savings
consumption
(i.e.
wages
national
deposits
purchases
rose
21.2
percent
annually.2g
purposes.
From
1979
to 1987,
the volume
about
6 times
than
the economy
was
the growth
could
expanded
contributed
of national
grow:
by
to by China’s
and bonuses
income
40
percent
quadrupled
goods
of money
August,
in
By 1988
1987,
percent.“’
banks,
went
bonuses
income.30
from
about
for
expan-
of consumer
employees)
of
there
uncontrolled
Factories
in circulation
supply
of the price
power.
Institutional
of their
printed
the
in the
went
percent
vegetables,
and productivity.
16-26
cash for these
644.4
equally
of purchasing
in production
by work
seen
In the 1980s
wages
Banks
raised
fruit,
students
as a major
and other
circulation
the government
meat,
1. College
reform
factors
the
has
price
on May
accompanied
increases
but
Minority
for a
policy
so that eventually
and vegetables
per month
has been
percent
aggravated
including
was up 16 percent
reform
has been
sion of money
In May,
in 1988
price
other
1988.
were started
to keep
prices
government
rose by 13-14
in 1988
However,
administered
prices,
in food
agreed
and Inflation
inflation
prices,
market.
of market
percent,
of 10 yuan
7 yuan.
the
are retained,
for increases
and retirees
students
Policy
example,
subsidies
by
foods,
index
index
compensate
enterprises,
and technical
expansion
of non-staple
overall
in big
annually,
in the direction
severe
Non-staple
set
prices
The
offered.
up
administered
leaders
and
For some commodities,
also retained
without
percent.24
faster
to be
on prices
sugar.
some
prices
to plan production
were involved.
the government
decisions
47.7
yuan
Chinese
can be lifted
and
1988.25
experimentation,
types of changes
to allow
the administered
power
and local
Two
Where
these
more
pressures.
of the goods.
Critical
are
agreed
have
are inflationary
on prices,
controls
that
system.
managers
there
pressure
to adjust
sharply
but when
in markets,
COMMUNISM
whose
to
This
loans
Paper for the American
Political
Science
24. Benedict Stavis, “Post Mao Political Reforms in China.”
Association
Annual
Meeting,
1988.
“Can
China
Control
Inflation?”
Be&g
Reutew, no. 41, October
10-16,
1988,
25. Zhang
Shubao,
pp. 19-21.
26. FBIS, October
26, 1988, p. 32.
“Inflation
in China Since 1978 Economic
Reforms,”
Centrally Planned Economzes
27. Shwu-Eng
Webb,
Re,m, vol. 1, no. 6 (1988), pp. 37-9.
28. Statutica
Yearbook, 1986, note 12, p. 599.
” Seek Truth, no. 7, October
1, 1988. FBLS
29. Wang Mengkui,
“Certain
Questions
on Curbing
Inflation,
October
26, 1988, p. 33.
30. Ibid., p. 35.
31. Zhang,
note 25, p. 19.
The Political Economy of Inflation in China
between
1984
economic
growth
or of bank
deposits.
currency
in 1988,
in contrast
to 35 billion
the growth
and
1987
of the money
deposit
reserve
raising
of the interest
Once
grew
supply,
requirement
inflation
took money
annually
and once
suddenly
brought
Dianwu
likened
additional
savings
yuan
loans
far
to issue
50 billion
in the previous
year.
the raising
rate
to reduce
of
in
As ways of slowing
and
of China’s
also
urged
rate on deposits,
the value
the
tiger
depositors
of their
to the marketplace
to a “ferocious
of
yuan
demand.32
to maintain
power
in excess
of the Bank
13 percent
the low interest
efforts
purchasing
of 39.3
urged
it exceeded
in their
deposits
percent,
planned
its current
rate on bank
began
a rate
banks
economists
from
out to buy or invest
by
The
241
assets.
This
and economist
in a cage,”
with great
Wan
destructive
potential.33
Economic
money.
theory
In
Latin
correlation
many
anticipates
between
Chinese
economy
inflation
America,
for
when
example,
the rate of inflation
economists
are
is the root cause
of inflation.
supply
is like the firewood
boiling
is not to stir it, but to remove
Fiscal
Policy
that
If inflation
underneath
the extra
also contributed
to inflation.
High
price
coupled
problems
budget
deficits.
China
products
by 30 to 50 percent,
the retail
level.
goods
and
into
were also inserted
some
desired
a significant
program
grew
revenues,
and over
to 1984.
portion
to occupy
By
the percentage
level
highly
one-half
1985,
burden
procurement
reasons
imported
of the total
price
goods.
Table
expenditures
began
subsidies
the
from
of grain
other
was not passed
on at
on the central
while
for agricultural
This
total
budget
subsidy
package
that
subsidy
and local
of the central
to drop
to
and
2 shows
of central
for invest-
contributed
of production
consumer
one-quarter
of price
water,
spending
have
this increase
budget.
subsidies
Thus,
in the
way to stop the water
policy,
into the means
of the actual
price
of
close
power
to a pot of boiling
The
in tax
of the national
about
a very
~upply.~~
purchasing
rates of government
the
but for political
Subsidies
became
1981
increased
was
firewood.35
and
1979,
in the supply
there
in the money
is likened
policy
with
increase
1969
excess
the pot.
Fiscal
In
to
the
ments
subsidies,
is a rapid
1950
and the increase
convinced
money
there
from
the
government
government
expenditures
dropped
from
rose,
so
to the still high
of 37 percent.
The
Chinese
recognized
delays
in investment
enough
to balance
investment:
foreign
negotiate”
contracts
investment.36
system
enterprises
difficult,
these
and
desirability
unwilling
price
suppliers
this
subsidies.
exerted
period,
There
great
always
governments
reducing
reliance
shifting
to income
from
for evasion
were
and local
Chinese
taxes.
China
leadership
on profit
were
despite
government
whenever
the
but
to cut other
pressure
finance,
and opportunities
of retrenchment,
or unable
for investment;
During
of public
the
were
from
also continued
for more
it had to “reto expand
to restructure
government-owned
Implementing
legion,
demands
suggested
decided
occasional
expenditures
the new tax systems
but tax revenue
the
economic
was
did climb.
32. Zhong Chengxun and Ma Gengzhi, “The Key Is to Control the Total Scale ofcredit Supply,” People’~
Daily, December 9, 1988. FBZS December 16, 1988. pp. 49-51.
33. “Symposium
Discusses Theories on Economic Reform,”
Seeking Truth, no. 10, November 16, 1988,
pp. 6-14. FBZS December 15, 1988, pp. 21-30.
34. Banerjee, note 10, p. 127.
35. Qian, note 20, p. 10.
36. Chen and Hou, note 9, p. 828-29.
STUDIES IN COMPARATIVE COMMUNISM
242
TABLE 2. Price Subsidies
Price
Year
Total
subsidies
1978
9.4
1979
18.1
1980
24.2
in the Chinese
Budget (billion
Central
budget
yuan)
Price subsidies
(expenses)
expenditures
central
as % of
expenditures
1981
32.7
111.5
60.2
53
1982
31.8
115.3
57.5
55
1983
34.2
129.2
64.2
53
1984
37.0
154.6
73.9
50
1985
29.9
184.5
79.8
37
1986
25.7
Source: Statistical Yearbook of China,1986, 0. 509, 525, and Zhoqguo Toqji Nianjian, 1988, p. 763.
The
ment,
price
subsidy
program,
and the difficulties
deficit,
the
budget
deficits
not
offset
Chinese
economists.“7
US
1978-83,
Chinese
government
739 billion
yuan,
and deficits
ones,
consider
consumer
Table
income,
precise
coupled
inherent
dimensions
that
by
of which
loans
analysts,
such
with an expanded
in moving
are
subject
to 59.2
on the other
hand,
revenues
totalled
55 billion
deficits
supply,
to debate.
accumulated
totalled
budget
money
into a new tax system,
estimate
684 billion
contribute
From
billion
1979
yuan,
that
yuan,
yuan: s8 Chinese
rising
1987,
to
in the five years
expenditures
by
to
according
economists,
to inflation
invest-
led to a budgetary
totalled
as Western
overstimulating
demand.
3 presents
official
Chinese
statistics
and
deficits
at the central
expenditures,
TABLE 3. Budget Deficits
Central
Year
Income
at Central
Deficit
the
national
and
local
deficit
levels
Income
for
from
1981-85.
1976
and
These
and Local Levels
Local government
government
Spend
on
Spend
Deficit
Total
deficit”
1976
3.0
1977
-3.1
1978
1.0
1979
17.1
12.8
1980
1981
22.5
60.2
37.7
86.5
51.3
- 35.2
2.6
1982
1983
25.8
37.2
57.5
64.2
31.7
27.0
86.5
87.6
57.8
65.0
-28.7
-22.6
2.9
4.3
1984
52.4
73.8
21.4
97.7
80.7
- 17.0
1985
69.0
79.8
10.8
117.7
104.6
- 13.1
4.4
-2.2
“A positive number
represents a deficit. A negative number represents a surplus.
Numbers may not add up due to rounding errors.
Source: Statistical Yearbook of China,1986, p. 509, and Zhongpo Ton& Nianjian, 1988,
p. 763.
37. Wang Mengkuei,
note 29, p_ 34.
38. Dean Carver, “China’s Experiment with Fiscal and Monetary Policy,” China’s Economy Looks Toward
the Year 2000, Voll: The FourModernizations (Washington:
Joint Economic Committee,
May 21, 1986), p, 116.
The Political Economy of Inflation in China
statistics
show that a persistent,
1981-84
and then became
substantial
a small
deficit
in 1979-80
became
surplus
in 1985.
Different
accounting
divergence
coverage
apparently
contribute
to
estimates
by Chinese
and
economists.
The
data
also reveal
of the
198Os,
revenues
from
local
decentralized,
revenue.
local
Under
relied
time,
these
financial
subsidy
program
and
which
had been
adopted
revenues
from
the funds
pressures,
the
local
earlier.
areas
and local
they
central
had
the increases
delayed
for several
Inflationary
Pressures
From
Excess
Apart
its impact
on the
government’s
years
before
hitting
by
more
on its own tax
even
faster
as
coffers.
to reduce
the
in procurement
In this way the inflationary
were
At the
was offset
rose
government
and
became
and more
spending
in
and
data
in China.
power
to central
deficit
procedures
that
remitted
to pass on to the consumer
years
finance
deficit
as
a small
Chinese
a large
mid-1980s,
rose
the
of public
ran
the
less on funds
sharply
between
in the nature
government
By
local
reduced
sector
shift
the central
the center
agricultural
the
government.
At the same
governments
foreign
a striking
beginning
243
price
prices
pressures
from
the
the consumer
with
full
contributes
to
force.
from
inflation
through
other
growth
in socialist
systems
labor.sg
These
economist
mechanisms.
bottlenecks
Xue
Muqiao
usually
brings
shortages
in China:
revenue
contracts,
factories,
tobacco-producing
products.
formation
localities
goods,
of inputs.
or
Leading
areas have vied
areas to establish
Because
small
the price of raw materials
factories
into a predicament.
have tried to blockade
and development
of a unified
time,
cheaper
of
have been
for panic purchase
has risen sharply,
Because
of rising
from another locality,
each other,
socialist
of the shortage
and technology
or to plunge into big struggles
prices, a locality has often tried to buy materials
and various
economic
areas small cotton textile plants, using high
with better equipment
the big processing
up
capital
in the prices
wool-producing
to make low-grade
As a result,
speed
of raw materials,
this process
forced to reduce production
throwing
to
detailed
big factories
of raw materials.
investment
pressures
worsted mills, and cotton-growing
raw materials,
excess
investment
inflationary
small cigarette
grade raw materials
deficit,
Excessive
bring
[I]n order to overfulfill
to establish
Investment
thus disrupting
commodity
market
the
in the
country.40
because
of extensive
investment
At
the
same
projects
lengthened,
thereby
products.
In addition,
shortages
of desirable
planning
and
inflationary
In reality,
complicated
management,
pressures.
further
41 Chinese
the empirical
relationship
it takes
the
agree
between
some
down
consumer
reduced
economists
by the fact that
investments,
slowing
time
time
expansion
taken
goods,
resulting
availability
of
with
to complete
of supply
from
goods
in
inefficient
to
soak
up
this analysis.42
investment
after
the
the
and inflation
the investment
is somewhat
is made
for bottle-
39. Jan Adam,
Wage Control and Inflation in the Soviet Bloc Countries (New York: Praeger, 1979), p. xvi-xviii.
40. Symposium,
note 33, p. 23.
41. George Garvy,
“Inflation and Price Stabilization Policies in Verne Eastern European Countries,”
CESES,
L’Est, no. 6 (1974); Money, Banking, and Credit in Eastern Europe (York: Federal Reserve Bank of New
York, 1966). P. Wiles, Economic Institutions Compared (Oxford:
Oxford University
Press, 1977), p. 84; “The
inflation
consists of too many bankers chasing too few ideas,”
CESES, L’Est, no. 6 (1974), p. 231.
42. Wang Mengkui, note 29, p. 32.
STUDIES
244
TABLE
4.
IN COMPARATIVE COMMUNISM
Correlation
between
Inflation
Accumulation.
and
(Lagged)
Multiple Regression Report
Dependent variable: INFLA
Independent
Parameter
variable
estimate
Intercept
ACCUM
LAGlACC
LAG2ACC
LAGJACC
-6.61
-0.18
0.25
0.28
-0.07
Sequential
Simple
7;
Probability
R2
R2
- 2.07
- 1.68
1.52
1.67
- 0.62
0.05
0.10
0.14
0.10
0.54
0.00
0.53
0.58
0.59
0.00
0.32
0.50
0.09
MS
F
P
9.28
0.000
Analysis of Variance Report
Dependent Variable: INFLA
Source
df
Constant
Model
Error
Total
1
4
26
30
54.2
256.7
179.8
436.6
R Squared
Adjusted R squared
54.2
64.1
6.9
14.5
0.5881
0.5247
necks to occur. Using Chinese data, we can correlate the inflation rate with accumulation and with the accumulation rate in previous years. The results (Table 4) show that
the model as a whole, using all the lagged variables, is definitely significant, and has an
R Squared
of 0.58. Using multiple correlation to look at each of the lagged values
separately, none is unambiguously significant, but the accumulation lagged two years is
almost significant at the 10 percent level, and shows a simple correlation with inflation of
0.5. The scatter plot of inflation with accumulation lagged two years is included as
Figure 2.
This pattern of over-investment
is closely related to the expansion of local govern-
ment powers to make investments and to the new power of banks to issue loans. Central
government investment declined from 51 percent of total investment in 1978 to only 24
percent of total investment in 1985. Banks have expanded their lending so that they now
constitute a major factor in investment and therefore inflation.43 Local government
agencies and enterprises have been eager to borrow as much money as possible for construction projects, partially because the interest rates are kept artificially low, in fact
below the inflation rate.44
43.
44.
Macroeconomic
Research
Webb, note 27, p. 38.
Office,
1987,
note 21, p. 18
The Political Economy of Infation
245
in China
0
0
0
0
O00
00
0
0
ooo
0”
0 00
O
o”
0
ooQ+j
O
0
0
0
IO
20
30
40
Two-year lagged accumulation
FIGURE 2. Relationship between inflation and accumulation.
Inflationary
Pressures
in Agriculture
Another related source of inflation lies in both yearly fluctations and secular trends in
agriculture.
Yearly fluctuations in production ironically seem to be aggravated by
policies of fixed purchase prices designed to stabilize prices. In good years, farmers
make large profits and their expanded purchasing power brings inflationary pressures.
However, when government
storage facilities are filled and food purchase budgets
spent, government purchasing agents cease buying, sending markets and incentives
into a tailspin. Production then falls for a year or two and shortages in supply reappear,
creating new inflationary pressures in retail markets. The fixed price system therefore
fails to send the appropriate signals to adjust production levels, and fails to adjust
income to compensate for changes in prices.
Secular trends in agriculture also contribute to inflation. In any poor country where
people spend a large portion of their income on food, population growth and economic
improvement
combine to increase demand for food. Increasing
food production
requires increasing use of fertilizers, other agricultural chemicals, machinery,
and
energy (for pumping, processing, etc). Agricultural labor rates go up also, as farmers
insist on some degree of parity with urban wages. Unless there is some extraordinary
improvement in managerial efficiency and/or reduction in the amount of labor, the unit
costs of production
for agriculture
will therefore increase.45 In many countries,
including China, the solution to this conundrum
has been to utilize government
marketing agencies to increase procurement
prices while at the same time keeping
urban retail prices stable. This requires, of course, a budgetary subsidy to cover the
difference between procurement and retail prices.
45. Benedict Stavis, “ China’s Cropping System Debate,”
special issue of Chinese Economic Studies, with
Hsin-hui Hsu, Caroline Hoisington,
and Mitch Meisner, winter, 1981-82.
246
Housing
STunt~s
IN
COMPARATIVE COMMUNISM
Policy
Major changes in housing policy also contributed to inflation. Vast investments were
made in housing during the 1980s to alleviate a severe housing shortage, an important
component of over-investment.
At the same time, government policy was to charge very
low rents for housing: the interest costs to cover investment for 1 square meter were 3
yuan, but the rents collected were only 0.1 yuan, not even enough to cover maintenance, much less repay the investment. 46 Investment in housing was pumping money
into the economy without withdrawing it, and was therefore contributing to inflationary
pressures.
In the mid-1980s, the government developed plans to increase payments for housing
and to convert rental housing into owner-occupied housing. In a sense the cities were to
Monthly payments would go up almost ten-fold. In
undergo “condo-conversion.”
experiments in Yantai, monthly rents increased from 0.16 yuan per square meter to
1.28 yuan.*’ This put severe pressure on family budgets. To compensate, the government proposed to issue “housing subsidy coupons” worth 23.5 percent of monthly
wages. This process naturally exerts an upward pressure on wages. On balance, the
increase in rent creates inflation in the cost of living, but removes purchasing power
from people and therefore
Was Inflation
reduces other inflationary
pressures.
Deliberate?
To some extent, China’s inflation was the result ofdeliberate policy. In many countries,
some economists advocate inflation to remove purchasing power from consumers and to
redistribute it to producers. It keeps pressure on workers to maintain labor discipline
and provides a mechanism for redistributing resources back into investment. In Brazil,
high rates of inflation have accompanied rapid economic growth over the past decades.
Indonesia also has had both inflation and growth since the mid-1960s.4s
In China it is known that some economic theorists advocated a policy of high
consumption and argued that moderate inflation was good for economic growth.4” It is
not clear that the political leadership fully accepted this viewpoint. More likely,
inflationary monetary and fiscal policy came from the uncoordinated actions of various
central and local government agencies as they tried to give the illusion of rapid economic
improvement. However, these arguments probably contributed to the willingness of top
leaders to defer the problem of inflation until sometime in the undefined future. It
appears that Zhao Ziyang, head of the CCP, felt that China’s inflation rate was not
serious, and would stimulate economic development. Zhao even sent two specialists to
Latin America to report how Brazil and Argentina had developed their economies
despite high inflation rates. Zhao reportedly thought China could tolerate inflation and
benefit from it as other countries had.jO
$6. Liu Jianjun,
pp. 18-20.
47. Ibtd.
“Privatization
of Urban
Housing,”
ik$ng
ftmiew, no. 46, November
14-20,
1988,
48. Ranerjee, note 10, p. 131-156.
49. Xu Xuehan, “Several Questions and Suggestions on Improvementand Rectification,”
People’$ Daily,
December 23, 1988, p. 5. FEW, December 27, 1988, pp. 39-42; Symposium,
note 33, p. 24.
50. Lo Ping, “Notes on a Northern
September 30, 1988, pp. 20-5.
Journey,”
Z/mg iwing, no. 132 (October
1, 1988), pp. 6-8.
FEE
247
The Political Economy of Inflation in China
Political Problems Resulting From Inflation
The
sharp
inflation
was
that
higher
prices
example,
for
percent
subsidies
did not always
price
21
increases,
The
that
their
economic
some
tensions.
rate
were
and farmers
52 Urban
to convert
cash
extent
The
biggest
took
part
December
1987,
in a Xiaoshan
stoppage
where
55 Indeed,
weight.
Recognizing
offered
to resign
central
committee
“yardstick
Zhao
Inflation
system
for judging
ment
officials
profit,
so they are frequently
have
longest
of
game
and stability
were
cases
became
more
on panic
buying
sprees
Zhao
to other
in the apportioneight
times
the
basis.56
discontent,
finally
advocated
are
leader
Zhao
session
of the
policies
to control
and controls
the growth
inflation
reduced
party
plenary
20 percent
He wanted
below
working
would
be
rate of industry
double
figures
effectively.“57
to
was
At
the
drastically.58
in a less direct
kickbacks,
Shanghai,
is similar
have
At the third
low priced
bribes,
after
also has disproportionate
residents
urban
has contributed
to allocate
offered
China
is institutionalized
reforms
system
months
(Beijing,
that getting
was reportedly
three
cities
Urban
workers
was at the Northwest
for
cities
1988.
1500
in the major
be cut back
the
strike
struck
when
rights.53
of 1988.
supply.
in October,
mill
54 In this regard,
1988,
inflation
the power
and
a soccer
of their
bias in China
would
the political
to control
after
conference
textile
of the major
summer
whether
power
the fact
at the quarters
violation
congresses.
acknowledged
Ziyang’s
has affected
adopted
discontent
and money
Zhao
director’s
significance.
September,
on consumption
the
The
workers
of serious
tightened
with
jealousies
order
went
union
(Zhejiang)
implications
He said that investment
to 10 percent.
at a trade
on a per capita
inflation.
drop
inflation,
brethren
in the
in late
robbery
the population
rural
the political
Ziyang
Social
and
1100
to people’s
of their
Beijing.
bonuses.
the urban
of representatives
of the
coupled
rioted
near
over
that
political
residents
where
at a factory
understand
and because
reinforced
murder
of runaway
For
wage
commodity.
was revealed
Factory,
incomes,
problem
Tianjin
and tire slashing
urban
with police
unrest
countries,
meeting,
breaking
fearful
protesting
analysts
representation
of window
motivated
has tremendous
developing
fixed
wealthy,
first
residents.
and
in food costs,
with
in Beijing;
urban
Shanghai,
very
occurred
in a two-day
Appliance
ment
families
battled
Beijing,
The
many
becoming
demonstrated
of labor
strike
for
of
on many
residents,
repercussions.
painful
for the increases
into any available
Medical
Chinese
residents
declined.
were
political
very
standards
Economically
frequent.
political
the
incidents
in Sichuan;
declining.51
were
compensate
pressures
students
Tianjin)
of
entrepreneurs
There
had serious
food
living
top cadres;
The
in 1988
for
way also.
to pervasive
goods
that
The
two-tier
corruption.
can be resold
and favors
for these
price
Governfor great
allocations.
51. Stavis, “Post Mao Reforms,”
note 24.
52. Lo Ping, note 50.
53. “Trade Union Official on Reasons for Strikes,”
Beijing Xinhua, October 25, 1988. FBISOctober
25,
1988, pp. 21-2.
54. ai%croeconomic
Research Office, note 21, p. 15.
55. Robert Bates, Markels and States in Tropical Africa (Berkeley:
Universitv of California
Press. 1981):
Michael Lipton,
Why the Poor Stay Poor: Urban Bias “in World Deue~opment (Cambridge:
Harvard U&ersity
Press, 1977).
56. Benedict Stavis, China’r Polrtrcal Reforms: An Interim Report (New York: Praeger, 1988), p. 54.
57. Zhao Ziyang, “Report
to the Third Plenary Session of the 13th CPC Central Committee,”
Beij;ng
Review, no. 46, 1988, November 14-20,
p. iii.
58. Lo Ping, note 50, p. 23.
STUDIES IN COMPARATIVECOMMUNISM
248
This has become so widespread that the underlying legitimacy of the political system has
been shaken. A Chinese researcher argued that China’s embryonic market system was
becoming intertwined with the old system of centralized power. This situation “has
created a major hotbed for corruption within the party,“5q It was not unusual for a
vigorous investigator of corruption to be arrested and imprisoned as bureaucratic
racketeers fought back.60 A Chinese commentator acknowledged, “public opinion polls
and sociological surveys all show official corruption as the most unsatisfactory phenomenon in China today. Discontent is widespread. If the corrupt elements are allowed to
continue, more grievances will arise among the people.“61
Conclusions
Inflation emerged as a critical factor in China in 1988. It ate away at the standard of
living of politically important urban residents, brought sporadic violence, contributed
to bureaucratic
corruption,
and weakened support for the political leadership. The
leadership has become very worried about potential instability. The Chinese have
debated whether inflation was caused by the reform program, in which case reform
must be slowed down, or whether inflation was caused by the incomplete implementation of reform, in which case reform should be speeded up. In mid-1988 tensions were
attributed to reform, and reforms were slowed down.
China’s problems with inflation in 1988 reflect a political pattern which is recurrent
across time and space. Theodore White has summarized the cause and breadth of the
problem:
Inflation comes when a government has made too many promises it cannot
keep and papers over the shortfall
confetti-and
It was
with currency
which,
combining
their
the
Chinese
inventions-paper
who
first,
and printing-produced
dynasty almost a thousand
as soothe. The
becomes
two
wonderful
which succeeded
down through
that to Chiang
was destroyed
in 1949 by an inflation
K’ai-shek,
the middle class. Such outbursts
governments
that the ability to
will was a drug that could kill as well
assi’nats. So did the Confederacy
Republic
So, too,
it. So, too, all other Chinese
regimes,
whose chief base of political
loyalty
which wiped out the savings and hopes of
of the paper disease have attended
too. The
early
And it was the Sung
Sung dynasty was to die in a burst of paper inflation.
was the Yuan dynasty,
of Western
currency.
years ago which first discovered
produce and print money at a sovereign’s
Weimer
ultimately,
faith is lost.
French
Revolution
of the United
States.
the death
died in a blizzard
of
The death knell of the
was first tolled in the insane inflation of German
currency
in
the 1920s.”
This
inflation
thumbnail
in China.
history
Precisely
of inflation
because
by White
underscores
of the way so many
the significance
Chinese
regimes
of the 1988
have lost their
59. Luo Haigang, “A Probe Into the Causes of Inner Party Corruption,”
Lilun Yuekan, no. 6, 1988,
Peo,z%‘s Daily,_~une 17, 1988, p. 5. FLUS, Tune 22, 1988, p. 20.
60. Cai %olin,
“Make
S&z That B&-eaucratic
Racketeers
Do Not Have Their Officials
to Protect
Them,”
Beijing Radio, December
30, 1988. FBIS January
4, 1989, p. 30-31.
61. Commentator,
“Clean
Government,”
China Daily, June 30, 1988. FBIS June 30, 1988, p. 34. Dai
Yannian,
“Clean
Up Government,”
Be&q R&au, no. 27, July 4-10,
1988, p. 7-9.
62. Theodore
White, America in Search ofI&J
The Making ofthe President, 1956-80 (New York: Harper and
Row, 1982), pp. 137-8.
The Political Economy of Inflation in China
249
legitimacy in a flood of worthless money, the inflation of 1988 was considered especially
significant, both by officials and by ordinary citizens who wondered if the government
would be able to maintain its “mandate of heaven.”
Communist systems are not immune from the disease of inflation. As societies renew
themselves with new generations
who have different historical experiences,
more
education, and knowledge of the world, and as the contradictions in communist systems
intensify, the legitimacy of the communist regimes becomes more problematic. David
Nelson has argued that communist leaders try to create charisma, expand control, and
use coercion to maintain legitimacy; but he acknowledges they are not necessarily
successful.63
In recent decades, communist leaders have succumbed to using a simple, conventional instrument in an effort to expand legitimacy, namely money. Valerie Bunce has
demonstrated
that whenever there has been succession of leadership in communist
countries, “In almost every case, the amount available for investment increased in a
striking fashion immediately after succession,”
as the new leader tried to gain the
support of bureaucrats and others. Similar patterns of increased expenditures appear at
the level of the Soviet republics when there are new leaders.64 In 1985, the year of
Gorbachev’s
rise to power, the Soviet budget deficit came to almost 20 percent of
national income, in contrast to about 10 percent in Latin American countries and 3-6
percent in the US during the 1980s. 65 Soviet economists estimated that the deficit in
1990 might amount to around $162 billion, about 11 percent of GNP.@ It is a short step
from such politically
induced increases
in expenditures
and money supply to
inflationary pressures.
The basic reason for inflation in China is not reform per se but rather the problems
associated with the declining political strength and legitimacy of the state. Whether in
market or socialist systems, whether in the past or present, there is a close relationship
between currency supply and retail prices. s7 Political leaders in both socialist and
market systems sometimes expand demand far above supply to create the illusion of
rapid economic growth. They want people to feel they are improving their standard of
living, without necessarily providing the economic foundations for growth. Such a
policy is adopted in times of political weakness, as an emergency measure to strengthen
legitimacy. In practice, it is at best a temporary and shortsighted strategy, because the
economic and political costs grow even as they are postponed. The solution to inflation
lies just as much in political reform that would strengthen the legitimacy of the state as it
grapples with difficult developmental
decisions; and this, of course, is even more
complicated than economic reform, and is by no means assured of success. Democratically elected governments with a high degree of legitimacy are also tempted to fall
into the inflation trap. There are no simple shortcuts to avoiding or solving the inflation
63. Daniel Nelson, “Charisma,
Control, and Coercion,
The Dilemma of Communist
Leadership,”
Com,6arative Politics, vol. 27, no. 1 (October, 1984), pp. 1-13.
64. Valerie Bunce, “Elite Succession, Petrification,
and Policy Innovation in Communist Systems: An
Empirical Assessment,”
Comparative Political Studies, vol. 9, no. 1 (April, 1976), p. 22 and “Leadership
Succession and Policy Innovation in the Soviet Republics,”
Comparative Politics, vol. 11, no. 4 (July, 1979),
pp. 379.
65. Judy Shelton, The Coming Soviet Crash, Gorbachev’s Desperate Pursuit of Credit in Western Financial Markets
(New York: The Free Press, 1989).
66. Joel Kurtzman,
“Juggling the Books,” New York Times Book Review, February 5, 1989, p. 11.
67. Kushnirsky, note 5, p. 48; Chen and Hou, note 9, p. 811, p. 821.
250
STUDIES IN COMPARATIVE COMMUNISM
problem, which grows more severe as the state suffers a chronic diminution
confidence and authority.
in public
Addendum
The massive demonstrations
in April and May of 1989, ending in the violent repression on June 4,
obviously had roots in the inflation and corruption of 1988. Despite promises and efforts to curb
inflation after the fall of 1988, inflation continued and even intensified.
During the first four
months of 1989, inflation reached 27 percent and more than that in key cities.68 This explains why
so many people, in an unprecedented
fashion, joined students in demonstrating
in Beijing in May,
and why ordinary people, including housewives and grandmothers,
were angry enough to block
physically the military troops and trucks from entering Beijing. The reversion of the government
to brutal military force to crush the demonstrations
underscored the seriousness of the problem
and the extent to which the government had lost its political creativity and credibility.