Why China Stopped Liberalizing: The Hidden Story Behind China's Economic Miracle and Political Reversal

Professor Yasheng Huang reveals why China's rapid growth wasn't due to autocracy but despite it, exploring the hidden pluralism of the 1980s reform era and the political factors that derailed China's liberalization trajectory.

Key Takeaways

• China's economic success stems from human capital advantages, particularly literacy rates far exceeding India's, rather than autocratic governance structures
• The 1980s featured remarkable political and economic liberalization including rural financial reforms unknown to most China scholars today
• Tiananmen Square in 1989 marked the decisive turning point when conservative forces consolidated power and reversed political reforms
• Xi Jinping's elimination of term limits represents a more dramatic departure from Deng Xiaoping's reforms than previous leadership transitions
• China achieved higher rural income growth in the 1980s than under subsequent generations despite lower GDP focus
• U.S. engagement strategy failed by prioritizing Wall Street access over information industry presence that could have supported political pluralism
• Succession crises become inevitable when autocratic systems abandon clear rules like term limits, creating structural instability
• The "Shanghai takeover" after 1989 shifted focus from rural development to urban-centered, export-oriented growth benefiting coastal elites

Timeline Overview

00:00–18:30 — Imperial Legacy and Mao's Transformation: How Mao inherited autocratic traditions while rejecting meritocratic bureaucracy, extending central control beyond traditional boundaries through modern technology and revolutionary ambition.

18:30–35:45 — China vs. India Development Puzzle: Debunking the autocracy-explains-growth narrative by examining human capital differences, particularly literacy rates, and questioning GDP data reliability from the reform period.

35:45–52:20 — The Hidden 1980s Liberal Era: Revealing extensive rural financial liberalization, political fragmentation at the top, and organic policy experimentation that drove growth through bottom-up entrepreneurship rather than state planning.

52:20–68:15 — Tiananmen as Turning Point: How 1989 enabled conservative "Shanghai faction" takeover, reversing political reforms and shifting from rural-focused to urban-coastal development model.

68:15–85:30 — Xi Jinping's Constitutional Revolution: Analyzing how current leadership departed from Deng Xiaoping's core principles while achieving some inequality reduction through centralization and transfer payments.

85:30–102:45 — U.S. Engagement Strategy Failures: Why American policy prioritized financial and manufacturing access over information industry presence that could have supported intellectual pluralism in China.

102:45–118:20 — Succession Crisis and Future Instability: How elimination of term limits recreates the "Tullock curse" of autocratic succession problems that plagued China before institutional reforms.

The Human Capital Foundation

• China's development advantage over India stems primarily from dramatically higher literacy rates established during the Imperial period through civil service examination systems, not from autocratic governance structures that both countries possessed in different forms.
• Professor Huang's research reveals that China was likely growing faster than India even during the Mao era despite catastrophic policies like the Great Leap Forward and Cultural Revolution, suggesting fundamental structural advantages unrelated to political systems.
• The comparison between autocratic China and democratic India fails when examined globally, as autocratic systems show wildly variable performance from spectacular successes like Taiwan and South Korea to dramatic failures across Africa and Southeast Asia.
• GDP data from the 1980s reform period suffers from methodological problems inherited from Soviet material product measures that excluded service sectors, making historical China-India comparisons unreliable for drawing political system conclusions.
• Educational and health infrastructure developed during Imperial China and maintained through the Communist period provided the foundation for rapid skill acquisition when economic liberalization created opportunities for entrepreneurship and industrial development.
• The literacy advantage becomes crucial when combined with globalization of human capital, allowing Chinese workers and entrepreneurs to absorb foreign technology, management practices, and market knowledge more effectively than less educated populations.

The Lost Decade of the 1980s

• The 1980s represented a period of remarkable liberalization that most China scholars remain unaware of, including extensive rural financial reforms documented in thousands of pages of government records that Professor Huang uncovered through archival research.
• Rural credit foundations operated at near-national scale with support from the heads of major banks including the Central Bank, Agricultural Bank, Bank of China, and Construction Bank, creating large-scale financial institutions serving 800 million rural residents.
• Political fragmentation at the top between figures like Deng Xiaoping, Chen Yun, Hu Yaobang, and Zhao Ziyang created space for local initiative and policy experimentation that drove organic economic development rather than centralized planning.
• The policy ethos prioritized tangible improvements in people's lives over GDP targets, with any practice that improved living standards automatically considered legitimate regardless of ideological orthodoxy or central planning preferences.
• Township and Village Enterprises emerged spontaneously without central direction, with Deng Xiaoping explicitly stating that "the Central Committee of the Chinese Communist Party takes no credit for it" because it was "a total surprise to us."
• Rural reforms went far beyond agricultural changes to include contracting reforms, land reforms, village elections, and financial liberalization that created the foundation for China's later industrial development through accumulated capital and entrepreneurial experience.

The 1989 Watershed Moment

• Tiananmen Square protests provided conservative forces the opening to consolidate power and reverse political reforms initiated by leaders like Hu Yaobang and Zhao Ziyang, who had implemented separations of power between party and state along with transparency and media protections.
• The "Shanghai faction" takeover after 1989 fundamentally reoriented Chinese development strategy from rural-focused, bottom-up growth toward urban-centered, coastal export manufacturing that benefited educated elites at the expense of interior populations.
• Unlike Taiwan and South Korea, which experienced similar political crackdowns but continued liberalization trajectories, China's leadership chose to move in the opposite direction from their previous economic and social reforms.
• Post-1989 leaders rejected all political reforms proposed by Zhao Ziyang while embracing globalization and privatization, but only in forms that strengthened central control rather than dispersing political power to markets and civil society.
• The ideological shift included emphasizing national humiliation narratives in education curricula, creating generations of students taught to view foreign influence with suspicion while celebrating Chinese Communist Party achievements over historical failures.
• Rural financial liberalization was systematically dismantled after 1989, with Western scholarship showing little interest in documenting or understanding this reversal despite its impact on 800 million rural residents.

Xi Jinping's Constitutional Revolution

• Xi's elimination of presidential term limits represents a more dramatic departure from Deng Xiaoping's reform framework than previous leadership transitions, touching what Professor Huang calls the "third rail" of Chinese politics alongside mandatory retirement ages.
• While previous leadership generations changed "the game" within established rules, Xi changed "the rules of the game" itself by reversing core institutional constraints that had enabled peaceful power transitions since the 1980s.
• The current administration achieved measurable inequality reduction and poverty alleviation through transfer payments and centralized redistribution, but at the cost of slowing overall GDP growth and reducing entrepreneurial dynamism.
• Environmental improvements and anti-corruption campaigns represent legitimate policy objectives, but Professor Huang argues these goals could have been achieved through transparency, media scrutiny, and legislative oversight rather than political centralization.
• The shift away from economic growth as the primary legitimacy source toward ideological indoctrination and nationalist mobilization marks a fundamental change in Chinese Communist Party governance strategy.
• Current policies overemphasize supply-side industrial policy and high-technology development while underemphasizing demand-side consumption and grassroots entrepreneurship that drove earlier growth periods.

Failed U.S. Engagement Strategy

• American engagement with China prioritized Wall Street financial access and manufacturing investment over information industry presence that could have supported intellectual pluralism and political space for diverse viewpoints.
• When Google left China and the New York Times was banned, the U.S. government provided minimal diplomatic support compared to extensive advocacy for General Motors, Goldman Sachs, and other traditional industries seeking market access.
• The original political justification for engagement became subordinated to purely economic considerations, with implementation focusing on business interests rather than the stated goal of political liberalization through economic integration.
• A more effective strategy would have insisted on reciprocal access for American universities, media organizations, and technology companies rather than accepting asymmetric arrangements that favored Chinese state-controlled entities.
• Academic exchanges suffered from lack of reciprocity, with Chinese Confucius Institutes operating freely in American universities while American institutions faced severe restrictions on independent operation in China.
• The engagement strategy lacked clear benchmarks for success or failure, making it impossible to adjust course when political liberalization failed to accompany economic integration over multiple decades.

The Succession Crisis Problem

• Elimination of term limits recreates the "Tullock curse" identified by economist Gordon Tullock, where autocratic systems without clear succession rules become inherently unstable due to power struggles between current leaders and potential successors.
• China successfully transferred power three times under term limit constraints (Jiang Zemin to Hu Jintao to Xi Jinping), but abolishing this system introduces structural tensions similar to those that created chaos before Deng's institutional reforms.
• Autocratic leaders face impossible dilemmas when selecting successors, as anointing someone empowers them while delaying decisions until physical or mental incapacity increases the probability of poor choices.
• Mao's last-minute selection of Hua Guofeng exemplifies these dynamics, as the decision made during declining health proved wrong because Mao failed to anticipate that Hua would eliminate the Gang of Four and inadvertently empower Deng Xiaoping.
• The succession problem becomes more acute when combined with geopolitical tensions, as domestic political uncertainty could incentivize international adventurism as a means of consolidating power or deflecting attention from internal conflicts.
• Historical precedent from Deng's initiation of the Vietnam War during his consolidation period suggests that power transitions in autocratic systems may increase risks of aggressive foreign policy decisions.

The Nationalism Trap

• Current Chinese political discourse increasingly resembles right-wing nationalism rather than leftist ideology, focusing on abstract concepts like national glory and territorial unification rather than tangible improvements in citizens' living standards.
• The "little pink" phenomenon represents a generation educated through national humiliation narratives that emphasize China's historical victimization and the Communist Party's role in national rejuvenation, creating ideological rigidity resistant to alternative perspectives.
• Chinese students studying in Western countries often maintain nationalist viewpoints despite exposure to different political systems, suggesting that ideological indoctrination has become sufficiently powerful to resist contrary evidence.
• Professor Huang argues that appeals to Chinese Communist Party cadres who have suffered under anti-corruption campaigns might prove more effective than ethnic minority-focused human rights arguments that antagonize the Han Chinese majority.
• The focus on Taiwan unification exemplifies the nationalist trap, as this goal provides little tangible benefit to ordinary Chinese citizens while requiring enormous resources and creating international tensions that could undermine economic development.
• Policy elites in both China and the West have converged on similar views crediting government infrastructure investment and central planning for economic growth, ignoring the role of entrepreneurship and market forces that actually drove productivity improvements.

Conclusion

Professor Yasheng Huang's analysis reveals that China's economic miracle resulted from human capital advantages and periodic liberalization rather than autocratic governance, with the current trajectory representing a departure from successful reform policies rather than their logical extension. The 1980s reform era featured remarkable political and economic opening that enabled bottom-up growth, but the conservative reaction after Tiananmen Square reversed these trends in favor of top-down urban development that increased inequality while constraining entrepreneurship. Xi Jinping's constitutional changes eliminate institutional safeguards that enabled peaceful succession while focusing on nationalist mobilization rather than economic dynamism, creating both domestic instability risks and international tensions that could undermine China's future development prospects.

Practical Implications

• For China Watchers: Focus on institutional changes and policy directions rather than growth statistics to assess China's long-term trajectory and stability prospects
• For Policymakers: Design engagement strategies that support intellectual pluralism and reciprocal access rather than purely economic integration without political conditions
• For Businesses: Prepare for increased political volatility and succession uncertainty that could disrupt economic policies and market access over the coming decade
• For Scholars: Investigate the under-researched 1980s liberalization period to understand successful development models that contrast with current state-directed approaches
• For Investors: Consider how elimination of institutional constraints on power concentration affects long-term political stability and policy predictability
• For International Relations: Recognize that nationalist ideology may create pressures for aggressive foreign policy decisions during domestic political transitions
• For Development Economics: Emphasize human capital formation and institutional quality over regime type when analyzing factors that enable sustained economic growth