On the Two Industrialisations of China

The rulers of China who initiated economic reforms of the 1980s were Communist, and were thinking about economy in a very Soviet way. They saw strategic weaknesses of China in a way not dissimilar to how the Soviet leaders of the yore viewed theirs.

Ruling over a poor, underdeveloped country, the rulers of China felt that their country lacked the foundations for the further growth. So, to facilitate the industrial development, they needed first and foremost lay the foundations for it.

Which foundations, though?

The heavy industries or, to put it another way, the “Mother Industries”.

Every supply chain, every production chain starts from the four basic, fundamental “Mother Industries” that lie in its beginnings. These four Mother Industries are:

Metallurgy, Chemical & Petrochemical, Machinery, Energy¹

This is where each and every production process starts, by necessity. This is the foundation everything rests relies upon. So, if you are to build a modern industrial economy you must start with its beginnings, as outlined above, and work everything else out from there.

Sounds logical, isn’t it?

First, make these basic elements you build everything from, and then make everything out of them. Seems to be almost tautologically true

Wrong. However logical it may sound, the Soviet approach (= start from the basic elements) does not work:

1. These industries are hard. It is very, very easy to fuck everything up

2. These industries are expensive. Even a subpar steel mill costs lots of money.

3. Last but not least, these industries are small, and the more sophisticated, the smaller (in terms of the market size)

Long story short, these industries make for a suboptimal point to start your industrialisation from. It will be obscenely expensive, excruciating hard, and all for the relatively little financial return. Chances are, you will just go bust.

Like the USSR did

(If you read the text ☝️, you will understand this one better)

Now the thing with the Chinese economic planners is that they had been heavily impacted by the Soviet style of thinking and viewed the economic reality in very Soviet terms. They too had a predisposition to the heavy, fundamental industries. They, too, inclined to forge the basic elements and then work it all out from there.

They too had a mother industries bias, and were their plans to succeed, China would not have become the manufacturing superpower it is today. If China became one, that is not because the Chinese industrial policy succeeded, but rather because it failed.

It did not work out as planned.

***

At the start of the economic reforms, the upper leadership viewed the state of Chinese economy in very Soviet terms. The heavy, basic industries is what we need. In a perfect world, we would have built them ourselves. In this sad reality, we have neither money, nor skills. So, what we need to do is to invite foreigners. Together with foreigners, we will establish joint ventures, focused on our strategic needs (as the economic planners see them).

There is a nuance here that foreigners may fail to register. When I said “we establish joint enterprises”, whom did I mean by “we”? State-owned enterprises, of course.

Chinese SOE + Foreign investor → Joint Venture

That was the original formula of the Chinese economic reform. When the state decided to invite foreign investors into the country, it did not mean abrogating its monopoly on the economic contacts with the outer world. To the contrary, it meant to guard this monopoly, as carefully as it could. Monopoly on the external economic relations is the most precious leverage of the socialist state and the state was not willing this asset to go.