China Emerging_ 1978-2008 - Xiao-bo , Wu [25]
While he was visiting Sichuan, Milton Friedman and the governor of that province engaged in an amusing conversation that was widely broadcast throughout China. Friedman told the governor, “If you want to cut off the tail of a mouse, you shouldn’t do it slowly, one piece at a time. You must do it all at once. Short pain is better than prolonged pain.” In response, the governor asked for Friedman’s advice. “Professor, you do realize, of course, that our Chinese mice are somewhat different. They have many tails, all quite intertwined with each other. Which do you think we should cut off first?” Friedman had no response to this and simply shrugged his shoulders. The Hong Kong economist Steven N.S. Cheung soon published an article that noted, “In fact we do have an answer to the governor’s question though we didn’t say it at the time. Our answer is to cut all the tails promptly, at the same time. That should do the trick.”
Friedman quickly found soul mates in China who, like him, wanted to cut all tails once and for all. These advocates included some senior central government officials. They were well aware that China’s abnormal price volatility was the result of both the planned economic system and the twotrack pricing policy. They felt that, in order to cast off the shackles of a bizarre system, they must use very decisive measures: namely, allowing pricing to be determined by market forces as soon as possible. The recommendations of the great price guru, Friedman, provided the theoretical backing for their views.
A survey undertaken by the China Economic System Reform Research Institute supported the idea that the Chinese people would approve of this approach. It interviewed basic-level enterprises and employees, and the results gave the central leaders great confidence. They indicated that 75.3% of the people felt that, “we want reform to be done properly, and we are willing to lower our standard of living for a while in order to achieve that.” With Friedman’s blessing and this tacit approval of the people, the government decided to loosen the controls, and to eliminate the two-track pricing system. It decided to implement a policy that was called, “allowing prices to break through the pass.”
This led to the beginning of a dramatic time in China. The curtain was drawn open on a “movement to allow prices to rise,” a movement
Panic-stricken people queuing up to buy goods.
that set people’s hearts pounding with apprehension. In March of 1988, the “release of prices” began in the industrialized city of Shanghai, with the uncoupling of price controls on 280 different commodities. Most of these were daily necessities and small items. Prices immediately rose between 20% and 30%. In
April 1988, the State Council began to implement a proposal that allowed non-staple food prices to rise, while allocating appropriate subsidies to employees. On May 19, the Xinhua News Agency issued the statement, “China’s price reform is a courageous act and we must take a certain risk, but the central government has confidence that this will be done properly and will come out all right.” The policy and its repercussions quickly rippled across the entire country. From May onward, the prices of pork and other meat in major urban centers rose by an average of 70%, and the prices of small items rose swiftly on the heels of food prices.
The policy of allowing prices to “break through the pass” quickly got out of hand. Inflation followed. As prices were expected to rise further, a panic buying swept across the country. According to the then reports, “People started buying whatever they saw in front of them, as if in a daze. They bought durables, but they also bought consumer goods, and even what had previously been unsaleable. If a television screen could show any kind of image, they bought it. If a fan could rotate, they bought it. If a refrigerator could freeze things, they bought it.” At that time, China had more than two hundred fan-producing factories with a total output of thirty-four million fans.