Zhao Ziyang on Deficit Financing

From Prisoner of the State: The Secret Journal of Premier Zhao Ziyang, trans. by Bao Pu and Renee Chiang (Simon & Shuster, 2009), Kindle Loc. 2059-88:

After the Third Plenum of the 11th Central Committee, our country’s financial revenue gradually declined in proportion to the gross national product, while expenditures steadily increased, thus resulting in a deficit. This was the price we had to pay; it was normal and solvable. In 1984, I began proposing a gradual raising of the revenue-to-GNP ratio. To reduce the deficit, we temporarily scaled back infrastructure construction and reduced the pace of economic development. There was no other choice.

If we had ignored the situation and launched an “all-out fast-paced campaign,” we would have faced seriously high inflation and put greater strains on farmers and workers. The readjustments in 1979 and 1980 and again in 1981 had been necessary. As a result of the 1981 readjustments, the agricultural sector continued to enjoy big harvests, the market continued to prosper, and the nation’s economy showed no negative growth. On the contrary, the economy grew by an annual rate of 4 percent. And as the readjustment deepened in 1981, growth increased. The growth rate in the first quarter was relatively low, the second quarter was better, the third quarter was higher, and the fourth quarter was significantly higher. This proves the readjustment was good and the economy had recovered.

Here’s how we kept the economy growing: by scaling back infrastructure projects and reducing heavy industry, iron and steel production, and machinery production; by expanding light industries such as consumer products and textiles while allowing and encouraging private businesses; by developing service industries. The cities continued to prosper and living standards continued to rise. Employment rates rose. In the end we achieved a balanced budget and the people were generally more satisfied. That said, the policy had its shortcomings. We still hadn’t entirely corrected the traditional way in which the Planning Commission cut back on infrastructure projects, which was to “cut straight across the board.” With the old system still in place, it was hard not to do so, and so we set quotas for each region.

In order to save projects that really should not be cut, however, I asked the Planning Commission to be flexible with a part of the budget so that we could revive some of these projects. After the general spending reduction, we reviewed which cuts would incur too great a loss, or which projects were so beneficial they should continue. Of course, there could not be a large number of exceptions, but we were able to reduce the negative impact of “cutting straight across the board.”

Still, in retrospect, the readjustment was too severe. We should have made exceptions for all projects where equipment had already been received or was urgently needed and could be installed and put into production quickly. This would have been more cost effective, particularly if you consider the cost of storage. Even though some of these projects resumed a year later, time and money was wasted. Some of the projects took years to recover.

The reason we didn’t take more flexible measures was mainly because we lacked sufficient domestic funds to pay for these projects; the deficit needed to be reduced so that a financial balance could be achieved. It was all too mechanical.

For example, if the deficit had not been eliminated immediately and some of the budget had been spent on worthwhile projects, the investment could have been returned in a year or so. And under the open-door policy, we could have resolved the problem by taking out more foreign loans.

But Chen Yun was concerned and firmly insistent. He was afraid of excessive and overly large projects and insisted on the reductions. At the time, there were things we didn’t clearly understand, since we did not have enough experience.