The single most stunning economic story of the  last few decades has been the rise of China.  

From 1980 to 2020, China’s economy grew more  than 75-fold. Huge new cities were built.  

Hundreds of millions escaped  poverty. It was the largest  

and most rapid improvement in material  conditions on record in modern history.

Let’s go back. When the economist  Adam Smith was writing in the 1700s,  

he considered China to be one of the wealthiest  countries that had ever existed. But after decades  

of war and instability in the 19th and early  20th century, China began a rapid decline.

Up until a few decades ago, China was  one of the poorest countries on earth.  

But now China is an economic powerhouse.  

Economists predict that it will overtake the US as  the largest economy in the world in this decade.  

People called it “the Chinese miracle.” You can hear some people describe this  

“miracle” as a straightforward story of the  free market. They say it’s a simple story:  

“China was poor. Then the economy was freed  from the grip of the state. Now China is rich.”

But this is misleading. China’s rise was NOT about  the triumph of the free market. To understand why,  

we have to look at what happened to other  countries which remade their own economies in  

the same period, often to disastrous effects. Since the 1980s, free market policies have  

swept the globe. Many countries have  undergone far-ranging transformations:  

liberalizing all prices, privatizing entire  industries, and opening up to free trade.

But many of the economies that were subjected to  markets overnight have since stagnated or decayed.  

NONE have had a growth record anything like  the one seen in China. African countries  

endured brutal economic shrinkage. Latin America  experienced twenty-five years of stagnation.  

If we compare China to Russia, the other  giant of Communism in the 20th century,  

the contrast is even more  staggering. Under state socialism,  

Russia was an industrial superpower, while  China was still largely an agricultural economy.  

Yet during the same period that Chinese  reform led it to incredible economic growth,  

Russia’s reform led it to a brutal collapse. Both China and Russia had been economies that  

were organized largely through state commands.  Individual players could only act within the  

structures set by state planning. Think of  playing foosball. Each individual player  

can only be moved along with the rod to  which it is attached. It is a rigid set-up,  

you can only go back and forth or rotate. Market reforms in both Russia and China was  

like moving from foosball to an actual soccer  game. Players now could move freely. But while  

Russia jumped right into the game without  setting up a proper stadium, rules, or jury,  

in China the state took the lead in setting up  all infrastructure. The state built the team,  

it trained the players, educated the  coaches and designed an overall strategy.  

Russia followed the recommendations  of the most quote-unquote scientific  

economics at the time, a policy of so-called  “shock therapy.” As a basic principle,  

the idea was that the old planned economy had  to be destroyed to make space for the market  

to emerge. Think of shock therapy like knocking  over a Jenga tower. After a short period of pain,  

Russia was supposed to emerge as a fully-fledged  capitalist economy, almost overnight.

The leader of the plan announced it was “a way  of destroying Communism in Russia.” When Russian  

president Boris Yeltsin took power, he eliminated  all price controls, privatized state-owned  

companies and assets, and immediately opened  Russia up to global trade. So, what happened?

In a word: catastrophe. Shock therapy was a fatal  

blow to the Russian economy. The shock  therapists had predicted some short-term pain,  

but what they didn’t see coming was how severe,  destructive, and permanent the effects would be.

Consumer prices spiraled out of control.  Hyperinflation took hold. Government  

coffers were looted. GDP fell by 40 percent. The  “shock therapy” recession in Russia was deeper  

and longer than the American Great  Depression by a large margin.

This was a disaster for ordinary Russian  people. HIV infections, alcoholism, childhood  

malnutrition, and crime went through the roof.  Life expectancy for Russian men fell by SEVEN  

YEARS, more than any industrialized country has  ever experienced in peacetime. In 2006, Russian  

life expectancy was still several years LOWER  than it had been in 1986, under the Soviet Union.

It turned out that Russia didn’t get  a successful “free market” overnight.  

Instead it went from a stagnating economy to a  hollowed-out wreckage dominated by oligarchs.

If simply getting rid of price  controls and government employment  

didn’t make a country prosper – and in fact,  destroyed its economy and killed huge numbers  

of people – then clearly the rapid application  of “free markets” was not the simple solution.

But what did China do differently? Let me explain.

When Deng Xiaoping took over  the leadership of China in 1978,  

the country he inherited was STILL desperately  poor. In 1980, China had a per capita GDP of just  

one hundred and ninety-four dollars. That was less  than Sudan and Haiti – and almost HALF of Niger.

The Chinese leadership knew they needed  reform. As I show in my book “How China  

Escaped Shock Therapy,” throughout the 1980s,  the Chinese leadership repeatedly considered  

implementing the same type of sudden reforms that  Russia pursued. The idea of starting from a clean  

slate seemed attractive, and shock therapy was  widely promoted by quote-unquote “scientific”  

economics. Programs for rapid price liberalization  were prepared and then withdrawn, twice.

But in the end, they decided not  to pursue shock therapy. Unlike the  

free-market economists in Russia, the Chinese  leadership approached change like a game of  

Jenga. Take out many pieces at once and the whole  thing falls apart. Take out one piece at a time,  

and you can win the whole game.

Instead of knocking over the Jenga tower, China  reformed itself in an experimental and gradual  

way. Market activities were tolerated or actively  promoted in non-essential parts of the economy.  

and farmers had to deliver their quotas to  the government at a certain price set by the  

government. But if they managed to produce more,  they could sell their surplus at market prices.

China was learning from the real story  of the world’s most developed nations:  

countries like the United States, Britain, Japan,  and South Korea. Each of these in their own way  

managed and planned the development  of their economies and markets,  

protecting early-stage industries  and controlling investment.

Western free-market economists thought  this system would be a disaster. The  

American economist Milton Friedman wrote an  open letter to Deng’s premier Zhao Ziyang.  

He said that the dual-price system was  a bad idea, and that China should “free  

prices and wages…[in] one bold  stroke.” Just like in Russia.

But China’s leaders didn’t listen. And while  Russia collapsed after following the “shock  

therapy” program, China saw remarkable success.  The state kept control over the backbone of the  

industrial economy, as well as the ownership  over land. As China grew into the new dynamics  

of its economy, state institutions were not  degraded to fossils from the past but were often  

the drivers at the frontier of new industries,  protecting and guaranteeing their own growth.

China today is not a free-market  economy in any sense of the word.  

It is a STATE-LED MARKET ECONOMY. The  government effectively owns all land,  

and China leverages state ownership through  market competition to steer the economy.

The “shock therapy” approach advocated  around the world was a failure.  

While Russia collapsed after  its sudden transformation,  

China’s gradual reforms allowed it to  thrive. And that made all the difference.

I’m Isabella Weber, assistant  professor of economics at  

the University of Massachusetts  Amherst, for the Gravel Institute.