HOW CHINA ESCAPED SHOCK THERAPY: The Market Reform Debate | By Isabella M. Weber

London and New York: Routledge, 2021. xiii, 342 pp. (Tables, figures, B&W photos.) US$175.00, cloth. ISBN 978-1-138-59219-3.

Isabella Weber’s book How China Escaped Shock Therapy offers an excellent historical comparative analysis of China’s internal intellectual struggle over the approach to reform in the late 1970s and 1980s. She brilliantly documents the policy debates of economists and policy makers affiliated with different institutions on how to proceed with price reform. Weber shows that China’s reform approach resulted from genuine intellectual struggles that resonated with debates over state-market relations that recurred throughout Chinese history, such as in Guanzi’s Salt and Iron Debate in ancient China. She also shows that China’s practical gradualist price reform approach was not necessarily uniquely Chinese but had similarities in the history of the world’s leading capitalist economies, such as the United States and the United Kingdom, during World War II. Weber’s superb analysis is relevant for understanding how current policy makers handle China’s economic challenges.

Weber correctly emphasizes the importance of the Communist Party of China’s wartime experience in economic governance in shaping the path of China’s economic reform after the Cultural Revolution. The fall of ancient Chinese dynasties was often highly correlated with hyperinflation and monetary instability. Weber is right to stress the importance of enforcing price stability in legitimizing the CPC’s power to rule China instead of the Nationalist government (chapter 3). Price stability still matters for the CPC to maintain social and political stability in China today. Successive governors of the People’s Bank of China, including Zhou Xiaochuan and Yi Gang, have emphasized that the single priority of the Chinese central bank’s monetary policy is to maintain price stability.

Weber’s diagnosis of the success of Chinese price reform in the 1980s provides a reference point to understand the lack of policy effectiveness since the Chinese government dramatically ended the stringent “Zero COVID” policy. As Weber observes, as China came out of the Cultural Revolution, reintroducing economics as the guiding logic of governance was a fundamental ideological shift rather than merely a pragmatic response to the challenge of economic development (115–116). Throughout 2023, the Chinese government introduced a series of policies to attract foreign direct investment, promote the private sector’s development, and stabilize the Chinese property market. However, the Chinese economy disappointed market expectations and failed to recover its pre-COVID growth trajectory. A confluence of policy missteps, such as the crackdown on private entrepreneurs and the nationwide anti-espionage campaign, combined with rising geopolitical tensions, have greatly increased policy uncertainties in the Chinese market and hurt confidence in the Chinese economy. Monetary and fiscal policies cannot fix the political cause of China’s economic downturn. Without a fundamental ideological reorientation to prioritize economic development, Chinese consumers would not be confident to spend, and investors would not be confident to expand capital investment.

Weber’s argument also inspires questions about the future of the Chinese economy and compatibility between the Chinese system and the West. She makes a brilliant analogy regarding China’s economic reform process: a game of Jenga. The reformers removed those blocks that could be flexibly rearranged “without endangering the stability of the building as a whole” and “fundamentally changed” the building. She correctly points out that this gradualist reform implied that “the institutional convergence between China and the neoliberal variety of capitalism remained incomplete” (1, 178–179). This implies that non-market structural residuals within the Chinese economic system constrain China’s continued growth following free market principles and are fundamentally incompatible with the Western liberal capitalist economic system. While China escaped the negative consequence of shock therapy, could the cost of growth and stability delivered by building a new system on an old structure be that the old structural residuals cap the potential for sustained economic growth in the long term? The longer the old building blocks remain, the more difficult and politically painful it is to remove them. Furthermore, would the economic conflict between China and the West be inevitable because China’s economic tower of Jenga has critical pieces of the old structure that cannot be removed or assimilated for political reasons?

Weber’s analysis highlights the importance of intellectual debates among economists in research and policy making at China’s critical juncture of reform. While Party leadership is not a central piece of Weber’s argument, she does mention that an important factor in how China narrowly escaped a Big Bang liberalization approach was that Zhao Ziyang gave up on package reform after being warned about the unforeseeable risks and uncertainty about its benefits (chapter 7, 220). Could the course of China’s reform be different if the key decision maker at the time was someone with centralized power and opposed to the gradual approach? Or were there enough institutional constraints preventing the alternative outcome?

Overall, Weber’s book is more than a historical account of China’s economic policy debate. She has made great contributions to understanding the complexity of China’s economic reform in contemporary settings.