Economic Reorganising Programme

The Economic Reorganising Programme (Xiaodongese: 經濟重組計劃), sometimes referred to as the 20 Year Plan was a policy of economic liberalisation conducted in Xiaodong from 1984 to 2004.

Prior to the ERP Xiaodong operated under a closed economy which utilised heavy government intervention in the economy, with massive regulatory bodies controlling almost every aspect of the economy in a framework of state capitalism. Whilst this framework had led to rapid import substitution industrialisation by the 1980's it had engulfed the economy in stagflation with the government incurring massive deficits, supply shocks and high inflation. The dire economic situation in mid-1984 led to the government of Qian Xingwen to approve of radical economic reforms spearheaded by Mao Zhukang and Wang Datong in form of shock therapy that saw mass privatisation and corpratisation of state-owned enterprises, removal of price controls, substantial reduction of tariffs, deregulation of all major industries, reducing subsidies and aggressive anti-inflationary monetarist policies. The initial intention of the ERP was to create an artificial economic shock to allow the market to readjust to its "natural conditions".

Following the Orchid Revolution the process of shock therapy and aggressive anti-inflationary policies were abandoned in favour of gradual liberalisation. The more conservative economic stance of Yang Zhengming coupled with the Duljunese War meant that the government imposed certain economic controls in order to deal with the crisis leading to the reform programme to temporarily stall. The end of the war in 1997 and the assumption of Han Guanzheng to the premiership in 1999 saw the reform programme come back into the fore, with a "supply-side miracle" taking place from 1997 to 2004 with economic growth increasing in the context of an increase of commodity prices globally.

The ERP under Mao's initial plan ended in 2004, but the economic liberalisation measures were continued. Economic liberalisation entered its "second phase" in 2006; the more conservative government of Yuan Xiannian implemented a stronger internal regulatory framework within the domestic market whilst liberalising aspects of the foreign market such as removing trade barriers. This model continued until 2016 when a bank stock crisis and subsequent recession emboldened the government to implement much more statist policies.

The effects of the ERP are still disputed; whilst the economy went into recession during much of the 1980's the pre-1984 fiscal problems were largely solved by the late 1980's, whilst rapid growth occurred between 1997-2002 averaging 10% per annum. However, inequality substantially increased as did poverty and unemployment. The effects of the ERP are still disputed by economists, with some stating the ERP inhibited growth rather than accelerate it.

Pre-liberalisation context

When the Corrective Revolution occurred in 1936 Xiaodong had undergone economic collapse to what was previously an industrial economy. In order to revive the economy and reindustrialise the economy the government under Lu Keqian and Ma Renzhong implemented import substitution industrialisation, central planning and the nationalisation of most major industries. The state also created a regulatory framework with the state determining wages, employment and the importation of goods whilst also tightly monitoring private business.

First Minister Sun Yuting in 1982 implemented a price and wage freeze in the face of massive inflation

During the 1940's and 1950's Xiaodong entered the "Decade of Development" wherein Xiaodong saw massive economic growth with industry especially reasserting its dominance. However under the Li Zhaozheng government the economy began to falter, resulting in tighter protectionist policies with the Renjin being rendered nonconvertible on the foreign exchange markets and import duties substantially raised. Under the Sun Yuting government "red tape" regulations were imposed in a attempt to shield the economy from foreign markets. The government borrowed billions from overseas to prop up "zombie industry" and to ensure the stability of the Renjin.

Crisis of 1980

In August 1980 as a result of the difficulties incurred globally through the recession of 1980 the government encountered significant difficulties regarding the fiscal situation as inflation reached very high levels. This was accompanied with ongoing stagflation led to calls to devalue the Renjin, cut wages and deregulate sectors of the economy. Sun refused both these options, and in August 1980 announced a freeze on both prices and wages in order to stabilise the economic situation.

In the short term the freeze succeeded in providing economic stability but to maintain wages and prices the government had to borrow even more money from overseas. The government was always faced during the freeze of entering a potential balance of payments crisis as the government maintained an artificially high exchange rate and was borrowing more money from abroad. Rationing was introduced in 1983 to stem the crisis but the economy still faced massive difficulties.

In November 1982 a group of Finance Ministry bureaucrats approached Sun where they recommended he devalue the Renjin, privatise unsustainable industry and liberalise all aspects of the economy. Sun stated that as First Minister only he knew the economic outlook of the next decade and that the current course "was fundamentally ensuring the stability of the economy".

By 1984, the economy was in a seriously precarious situation - inflation was very high at 315% and foreign reserves were quickly being depleted. In 1987 Finance Minister Mao Zhukang stated that by June 1984 (the month the Economic Reorganising Programme was introduced) the Xiaodongese government only had "three or four months left wherein it could finance imports with foreign reserves".

Course of reforms

In January 1984 Sun Yuting was assassinated by a Senrian agent resulting in his deputy, Qian Xingwen, to ascend the position of Regeneration Society chairman and First Minister. Qian, considered to be a reformer within the regime, quickly appointed the Governor of the Reserve Bank Mao Zhukang to the position of Minister of Finance due to his connections with military hardliners.

Mao had as Reserve Bank governor had been associated with economic reformers, pushing for financial and trade liberalisation. Mao's chief economic adviser was Wang Datong, an economics professor from the University of Rongzhuo who was associated with radical neoliberal economics and was credited with prescience regarding the economic situation having predicted the crisis in 1978. In 1983 a document within the Reserve Bank's executives proposed devaluing the Renjin but Mao ordered for the document to be suppressed before it reached the First Ministers office. Mao stated at the time that whilst devaluation could end the recession it would do so at the expense of further structural reform, and that state bureaucrats and the citizenry needed to accept the scale of the crisis so the government could implement policies of structural reform.

Neoliberal policies had deeper influence within the Financial Ministry, with many bureaucrats having been educated at the University of Rongzhuo and abroad in neoclassical economics with the majority believing structural reform was needed for economic prosperity. Following the 1980 crisis many bureaucrats began to propose neoliberal strategies to end the recession and reinvigorate the Xiaodongese economy, who they believed had lagged in innovation due to the state-sponsored industrialisation policies. Mao saw the neoliberal proposals of decisive action to end the recession and the failure of demand-side economics to stimulate growth as core to the strategy of economic revitalisation and so adopted them into his policy platform. Mao claimed in 1984 that as Minister of Finance "whilst I will destroy the import-substitution industrialisation model, I will build a model that suits the new era".

Upon becoming Finance Minister Mao created the Reformatory Economic Consultative Committee that was made up of Finance Ministry and Reserve Bank bureaucrats to "recommend and draft a programme of broad structural reform". The RECC soon drafted a set of policy proposals that envisioned a series of neoliberal economic reforms over a period of 20 years that aimed to restructure the Xiaodongese economy from being based around regulated, state-driven import-substitution industrialisation to instead be under a free-market model of export-orientated industrialisation and financial deregulation. Coined the Economic Reorganising Programme on the 11th June 1984 as the economy continued to suffer Mao presented First Minister Qian with the plan to reinvigorate the economy. Qian approved the plan with no reservations, having little knowledge of economic affairs and confident in Mao's ability to deliver economic stability.

Shock therapy (1984-1988)

Mao Zhukang (second from the left) with finance ministry officials in 1986.

The first and most controversial aspect of the Economic Reorganisation Programme implemented was its plans for rapid liberalisation, known as "shock therapy economics". Wang Datong in his 1967 paper "New Directions" had called for a positive artificial economic shock that would entail privatisation, trade liberalisation, marketisation and the removal of price controls and subsidies in order to stabilise what he termed as the natural rate of unemployment. The Economic Reorganising Programme broadly recognised that for the eventual aims of the programme to be implemented causing such a shock was necessary.

On the 12th June 1984 Mao announced Supreme Decree 927 which abolished the freeze on wages and prices as well as "adapting the prices of good and services to international standards". In practice this amounted to an overnight abolition of price controls, significantly raising the prices of various goods and services for ordinary citizens. Mao also announced that the Ministry of Finance in cooperation with the Reserve Bank would pursue a strategy of monetarism to reduce inflation by raising interest rates and taxes especially on land and goods, further increasing the price of goods and services for citizens. Supreme Decree 927 also forbade financing the state budget deficit by the Reserve Bank and forbade the issue of new currency to order to reduce the monetary supply. Measures were also introduced to allow the convertibility of the Renjin in all operations and a liquidation of foreign trade controls.

Over the next year the government began implementing more shock therapy policies. Price subsidies for goods and services - particularly food and fuel - were slashed or in some cases eliminated altogether. Subsidies for zombie industries were also withdrawn, with the government stating that unprofitable businesses had no role in the new economy. A uniform tariff rate of 20% was imposed on foreign imports, ending the protectionist policies that had been in place since the Heavenly Xiaodongese Empire and embracing a free trade model. Privatisation was pursued with the government selling off several large state owned enterprises and other assets. Fiscal retrenchment was also implemented with large cuts to state expenditure, albeit notably defence spending increased during this period.

The immediate effect of shock therapy throughout 1984-1987 was to deepen the recession. The aggressive anti-inflation policies led to a decline in GDP growth and an increase in unemployment rising to 8.7 million by 1986, a fact made worse by the declining supply of money in the economy and the increases in both prices and subsidies. The withdrawal of state subsidies meant that unemployment disproportionately affected industrial workers'. However this was justified by business leaders and the government as removing unnecessary workers' and increasing efficiency in order to improve productivity.

In July 1984 the government entered negotiations with foreign creditors to temporarily suspend foreign debt payments in order to halt unnecessary pressure on the Xiaodongese economy. After several rounds of negotiations with creditors this proposal was agreed upon with the conditions that the reforms be implemented in full. This gave the government the ability to continue the reforms whilst dismissing opposition to them as being unworkable with commitments to foreign creditors in place.

Opposition within the government to monetarist policies was fierce with State Chairman Yuan Jiaxiang particularly threatening to veto Supreme Decrees relating to restricting the monetary supply. First Minister Qian under pressure from the Reformatory Economic Consultative Committee however defended the measures as necessary, dismissing ministers and members of the Regeneration Society's national executive who opposed the policy. Economists also criticised the monetarist policy as being to deflationary, accusing the government setting unrealistic money supply targets which were unreliable in character and for causing unnecessary social disorder and economic dislocation.

Nevertheless despite an initial increase in inflation in 1984 between 1985-1988 hyperinflation was substantially reduced from 315% in January 1984 to 11% in March 1988. The success of inflation reduction led to Qian against the wishes of Finance Ministry bureaucrats to quietly drop monetarism as a government policy. This was due to Reserve Bank officials indicating that the money supply was reduced through wage growth being contained through high rates of unemployment rather than monetary policy. In addition to this the Reserve Bank stated that the control of the money supply was more difficult than anticipated, with growth within the monetary supply remaining high necessitating the government to implement tighter monetary and fiscal policies that were seen to cause social unrest and as a result cause significant destabilisation to the regime.

The other significant aspect of shock therapy was the large privatisation programme. As much of the economy was dominated by large state-owned monopolies the Reformatory Economic Consultative Committee recommended that to create a market economy many of these should be broken up, sold to the private sector and thereby encouraged to compete in order to facilitate the growth of a market economy where newly-private businesses would not be reliant on the state for subsidies. Initially the Ministry of Finance recommended using an asset-sale model where there would be asset divestitures to strategic investors via auctions. However it was amended by the government that instead privatisation should be carried out through vouchers with the reasoning that with public support for the government being fairly low that encouraging citizens to hold shares in the new economy would result in popular support for the structural reform programme.

The main industries privatised during the shock therapy phase were the postal service, water and sanitation providers, airports, sections of the rail service, the healthcare sector and the banking sector which had previously been under majority government control. Despite the voucher programme being designed to see shares distributed amongst the general population most resulted in the political, bureaucratic and business elite alongside elements of organised crime to acquire control of most assets that were privatised, leading to the rise of oligarchs. This was because whilst most of the population were given vouchers many being poorly informed about the nature of the program or were very poor often sold their vouchers to insiders for money, unprepared to invest and struggling to deal with the increasing cost of living shock therapy had imposed. Whilst in some sectors privatisation led to an increase in productivity due to the often corrupt nature of it it often led to companies instead to undergo asset stripping leading to a rise in vulture funds that further undermined the new economic model bureaucrats were envisioning.

Gradual liberalisation (1988-1997)

Supply-side miracle (1997-2004)

Effects

Economic

Social

Decline

Legacy and criticism