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History of the People's Republic of China
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1976–1989: Deng era Gang of Four Boluan Fanzheng 1978 Truth Criterion Controversy New Enlightenment Reforms and Opening Up Special economic zones China–United States relations Three Communiqués Four Modernizations Sino-Vietnamese War Beijing Spring Strike Hard Against Crime Campaign Sino-British Joint Declaration Campaign against spiritual pollution Bourgeois liberalization Opposition 863 Program 1986 Chinese student demonstrations Sino-Portuguese Joint Declaration 1989 Tiananmen Square protests and massacre
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The Chinese economic reform (simplified Chinese: 改革开放; traditional Chinese: 改革開放; pinyin: Găigé kāifàng, literally Reform and Opening) refers to the program of economic reforms called "Socialism with Chinese characteristics" in the People's Republic of China (PRC) that were started in December 1978 by reformists within the Communist Party of China (CPC) led by Deng Xiaoping. The goal of Chinese economic reform was to transform China's stagnant, impoverished planned economy into a market economy capable of generating strong economic growth and increases in well-being for Chinese citizens.

According to Kenneth Pomeranz, for centuries, China had been one of the world's largest and most advanced economies, and its per capita incomes probably equalled and exceeded that of Western Europe as recent as the 18th century. However, List of regions by past GDP (PPP) per capita#World 1–2003 (Maddison)#the most comprehensive analysis to date, by the British macroeconomist Angus Maddison, shows that Western Europe's GDP per capita consistently surpassed that of China, or for that matter any other world region, throughout the last two millennia save around 1000 AD. The economy declined in the nineteenth and much of the twentieth century, with a brief recovery in the 1930's. From 1949 to 1978, Mao's disastrous Great Leap Forward and Cultural revolution had devastated the Chinese economy, resulting in the destruction of much traditional culture and a massive drop in living standards. After Mao's death, his main leftist supporters, led by the Gang of Four, were ousted in a coup, and reformists lead by Deng Xiaoping took power.

Economic reforms since 1978 began in two stages. The first stage, in the late 1970's and early 1980's, involved the decollectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start up businesses. However, most industry remained state-owned and inefficient, acting as a drag on economic growth. The second stage of reform, in the late 1980's and 1990's, involved the privatization and contracting out of much of state-owned industry and the lifting of price controls, protectionist policies, and regulations, although state monopolies in sectors such as banking and petroleum remained. The private sector grew remarkably, accounting for as much as 70 percent of China's GDP by 2005, a figure larger than many Western nations. The period from 1978 to now witnessed amazing growth, with the economy increasing by 9.5% a year. The Conservative Hu-Wen Administration took a bigger hand in regulating and controlling the economy after 2005, rolling back some reformist gains.

The success of China's economic reforms has resulted in massive change in Chinese society. Poverty was drastically reduced, and wealth inequality drastically increased, leading to a backlash lead by the Maoist New Left. In the academic scene, scholars have debated on the reason for the success of Chinese economic reforms, and have comparded them to attempts to reform socialism in the eastern bloc.

Chinese economy prior to reform

During the 1930's, China had developed a modern industrial sector, which stimulated modest but significant economic growth. Before the collapse of international trade that followed the onset of the Great Depression, China’s share of world trade and its own ratio of foreign trade to GDP achieved levels that were not regained for over sixty years. The economy was heavily disrupted by war against Japan and Civil war from 1937 to 1949, after which the victorious Communists installed a planned economy. Afterwards, the economy largely stagnated and was disrupted by the Great Leap Forward famine which killed between 30 and 40 million people, and the purges of the Cultural revolution further disrupted the economy. Urban Chinese citizens experienced virtually no increase in living standards from 1957 onwards, and rural Chinese were no better in living standards in the 1970's than the 1930's. Socialist equality had destroyed the incentive to improve; one study noted that average pay levels in the catering sector exceeded wages in higher education. The economic performance of China was extremely dismal when compared with other East Asian countries, such as Japan, Korea, and even Chiang Kai-Shek's rival Republic of China. The economy was riddled with huge inefficiencies and malinvestments, and with Mao's death, even the CPC leadership turned to market-oriented reforms as the only path to salvage the failing economy.

Course of reforms

Economic reforms began after Deng Xiaoping and his reformist allies ousted the Maoist faction. By the time of Deng's ascension, there was widespread support among the elite for economic reforms. As de facto leader, Deng's policies faced opposition from both party conservatives but were extremely successful in increasing the country's wealth and turning the economy into a world powerhouse.

Initial reforms, 1978-84

Deng's first reforms began in agriculture, an area long neglected by the Communist Party. By the late 1970's, food supplies and production had become so deficient that government officials were warning that China was about to repeat the "disaster of 1959"- a reference to the famines which had killed tens of millions during the Great Leap Forward. Deng repsonded by decollectivizing agriculture and emphasizing the Household responsibility system, which divided the land of the People's communes into private plots farmed by farmers, who were able to keep the land's output after paying a share to the state. This move tremondously increased agricultural production and the living standards of hundreds of millions of farmers, as well as stimulating rural industry.

Reforms were also implemented in urban industry to increase producitivity. A dual price system was introduced, in which state-owned industry were allowed to sell any production above the plan quota, and commodities were sold at both plan and market prices, allowing citizens to avoid the shortages of the Maoist era. Private businesses were allowed to operate for the first time since the Communist takeover, and they gradually began to make up a greater percentage of industrial output. Price flexibility was also increased, expanding the service sector.

The country was also open to foreign investment for the first time since the Kuomintang era. Deng created a series of special economic zones for foreign investment that was relatively free of bureaucratic regulations and interventions that hampered economic growth. These regions became prosperous and drivers of the national economy.

Gradual industrial reforms, 1984-97

This era was marked by continuation of Deng Xiaoping's policies beyond the initial reforms. Controls on private business and government intervention continue to decrease, and there was small-scale privatization of state enterprises which had become unviable. A notable development was the decentralization of state control, leaving local provincial leaders to experiment with ways to increase economic growth and privatize the state sector. Township and village enterprises, firms nominally owned by local governments but de facto private, began to gain market share at the expense of the state sector. Conservative elder opposition, lead by Chen Yun, prevented many major reforms which would have damaged the interests of the government bureaucracy and special interest groups.Corruption and increased inflation increased discontent, contributing to the Tiananmen Square protests of 1989 and a conservative backlash after that event which ousted several key reformers and threatened to roll back many of Deng's reforms. However, Deng stood by his reforms and in 1992, he affirmed the need to continue reforms in his southern tour.

Although the economy grew quickly during this period, economic troubles mounted in the inefficient state sector, whose heavy losses act as a drain on the economy as they had to be made up by state revenues. Bouts of inflation plagued the economy in 1985, 1988 and 1992. Privatizations began to accelerate after 1992, and the private sector surpassed the state sector in share of GDP for the first time in the mid-1990's. China's government slowly expanded recognition of the nonpublic economy, first as a “complement” to the state sector (1988) and then as an “important component” (1999) of the “socialist market economy”.

Rapid privatization, 1993-05

In the 1990's, Deng forced many of the Conservative elders such as Chen Yun into retirement, allowing radical reforms to be carried out. Despite Deng's death in 1997, reforms continued under his handpicked successors, Jiang Zemin and Zhu Rongji, who were ardent reformers. In 1997 and 1998, large-scale privatization occured, in which all state emterprises except a few large monopolies were liquidated and their assets sold to private investors. During the same period, Jiang and Zhu also reduced trade barriers and regulations, reformed the banking system, dismantled much of the Mao-era social welfare system, forced the PLA to divest itself of military-run businesses, as well as joining the World Trade Organization.

By 2005, the state sector made up only 30% of GDP, a figure less than many western nations. However, some state monopolies still remained, such as in Petroleum and banking.

Retrenchment, post-2005

With the ascension of the conservative Hu-Wen Administration in 2002, many of Deng Xiaoping's reforms were reversed. The government re-nationalized health care and adopted a loose monetary policy, which lead to the formation of a U.S.-style property bubble in which property prices tripled. The prileveged state sector was the primary recipient of government investment, which under the new administration promoted the rise of large "national champions" which could compete with large foreign corporations.

Economic performance since reform

China's economic growth since Reform has been phenomenal, outshining even the East Asian Tigers. Economists estimate China's GDP growth from 1978 to 2005 at 9.5% a year. Since the beginning of Deng Xiaoping's reforms, China's GDP rose from some 150 billion USD to more than 1.6 trillion USD, with an annual increase of 9.4 percent. Increases in productivity were the most important factor, with productivity accounting for 40.1% of GDP increase, compared with a decline of 13.2% for the era 1957 to 1978 (the height of Maoist policies). For the period 1978-2005, Chinese GDP per capita increased from 2.7% to 15.7% of US GDP per capita, and from 53.7% to 188.5% of Indian GDP per capita. Absolute poverty declined from 41% of the population to just 5% from 1978 to 2001. Real wages rose sixfold between 1978 and 2005.

Reforms in specific sectors

After three decades of reform, China's economy experienced one of the world's biggest booms. Agriculture and light industry have largely been privatized, while the state still retains control over some heavy industries. Despite the dominance of state ownership in finance, telecommunications, petroleum and other important sectors of the economy, private entrepreneurs continue to push into sectors formerly reserved for public enterprise. Prices have also been liberalized.

Agriculture

During the pre-reform era, agricultural performance was extremely poor and China was plagued by food shortages. The inital reform period saw huge increases in output of 8.2 percent a year, compared with just 2.7% in the pre-reform era, and despite a decrease in the amount of land used. Real food prices fell nearly 50%, while incomes soared.

A more fundamental transformation was the economy's growing adoption of cash crops instead of just growing rice and grain. Vegetable and meat production increased tremondously, to the point that Chinese agricultural production was adding the equivalent of California’s vegetable industry every two years. Growth in the agricultural sector slowed post-1984, with agriculture falling from 40% of GDP to 16%; however, increases in agricultural productivity allowed a huge amount of labor to be released for work in industry and services, while simultaneously increasing agricultural production. Trade in agriculture was also liberalized and China became a great exporter of foodstuffs, a great contrast to its previous famines and shortages.

Industry

In the pre-reform era, industry was largely stagnant and the socialist system stifled incentives for improvements in quality and productivity. With the introduction of the dual price system and greater autonomy for enterprise managers, productivity increased greatly in the early 1980's. Foreign enterprises and newly formed township and village enterprises, owned by low level governments and often de facto private firms, competed successfully with the state sector. By the 1990's, large-scale privatizations reduced the market share of both the TVE's and state-owned enterprises and increased private sector market share. Between 2001 and 2004 alone, the number of state-owned enterprises dropped by 48 percent. Foreign capital controls much of Chinese industry and plays an important role.

From virtually an industrial backwater in 1978, China is now the world's biggest producer of concrete, steel, ships, textiles as well as the world's biggest auto market. For example, Chinese steel output quadrupled between 1980 and 2000, and then from 2000 to 2006 rose from 128.5 million tons to 418.8 million tons, one-third of global production. Labor productivity at some Chinese steel firms exceed western productivity. From 1975 to 1992, China's auto production rose from 139,800 to 1.1 million automobiles before jumping to 9.35 million in 2008. Light industries such as textiles rose greatly as well, due to less government interference. Chinese textile exports increased from 4.6% of world exports in 1980 to 24.1% in 2005. Textile output increased 18-fold over the same period.The increase in production is largely the result of removal of barriers to entry and increased competition; the number of industrial firms rose from 377.3 thousand in 1980 to nearly 8 million in 1990 and 1996; the 2004 economic census, which excluded enterprises with annual sales below RMB5 million, counted 1.33 million manufacturing firms, with Jiangsu and Zhejiang alone reporting more firms than the nationwide total for 1980. Compared to other East Asian industrial growth spurts, China's industrial performance outpaced Japan but lagged behind Korea and the rival Republic of China.

Trade and foreign investment

Scholars find that China has an "attained a degree of openness that is unprecedented among large and populous nations", with competition from foreign goods in almost every sector of the economy. Foreign investment helped to greatly increase quality, knowledge and standards, especially in heavy industry. China's experience with free trade supports the assertion that globalization greatly increases wealth for poor countries. Throughout the reform period, the government reduced tariffs and other trade barriers considerably, with the overall tariff rate falling from 56% to 15%. By 2001, less than 40% of imports were subject to the tariff and only 9 percent of import were subject to licensing and import quotas. Even during the early reform era, protectionist policies were often circumvented by smuggling. When China joined WTO, it agreed to considerably harsher conditions than other countries.Trade has increased from under 10% of GDP to 64% of GDP ove the same period. China is considered the most open large country; By 2005, China’s average statutory tariff on industrial products was 8.9 percent. For Argentina, Brazil, India, and Indonesia, the respective percent figures are 30.9, 27.0, 32.4, and 36.9 percent.

Foreign investment was also liberalized upon Deng's ascension. Special economic zones were created in the early 1980's to attract foreign capital by exempting them from taxes and regulations. This experiment was successful and SEZ's were expanded to cover the whole China coast. Although FDI fell briefly after the 1989 student protests, it increased again to 160 billion by 2004.

Services

In the 1990's, the financial sector was liberalized. After China joined WTO, the service sector was considerably liberalized and foreign investment was allowed to enter the service sector. Restrictions on retail, wholesale and distribution were ended. Banking, financial services, insuarance and telecommunications were also opened up to foreign investment.

Reasons for success

Scholars have proposed a number of theories to explain the success of China's economic reforms despite unfavorable factors such as the troublesome legacies of socialism, considerable erosion of the work ethic, decades of antimarket propaganda, and the “lost generation” whose education disintegrated amid the disturbances of the Cultural Revolution. One notable theory is that decentralization of state authority allowed local leaders to experiment with various ways to privatize the state sector and energize the economy. Although Deng was not the originator of many of the reforms, he gave approval to them afterwards. Another theory focuses on internal incentives within the Chinese government itself, in which officials presiding over areas of high economic growth were more likely to be promoted; scholars have noted that local and provincial governments in China were "hungry for investment" and each strove to outdo the other in reducing regulations and barriers to investment to boost economic growth and the officials' own careers. A third explanation believes that the success of the reformists are attributable to Deng's cultivation of his own followers in the government.

Effect on inequality

The economic reforms have increased inequality dramatically within China. Despite rapid economic growth which has virtually eliminated poverty in Urban China and reduced it greatly in rural regions, the Gini Coefficient of China is estimated to be above 0.50, comparable to many South American countries. Increased inequality is attributed to the disapperance of the welfare state and differences between coastal and interior provinces, the latter of which is still burdened by a greater state sector. Some Chinese free-market economists, influenced by the Austrian School, have suggested that privatizing state monopolies and distributing the proceeds to the population can reduce inequality.

Comparison to other economies

China's transition from socialism to capitalism has often been compared with other economies in Eastern Europe undergoing a similar transition. China's performance has been praised for avoiding the major shocks and inflation that plagued the Eastern bloc. The various Eastern bloc economies saw declines of 13 to 65% in GDP at the beginning of reforms, while Chinese growth has been very strong since the beginning of reform. China also managed to avoid the hyperinflations that Eastern Europe experienced, in the range of 200 to 1,000%.This success is attributed to the gradualist and decentralized approach of the Chinese government, which allowed market institutions to develop to the point where they could replace state planning. This contrasts with the "big bang" approach of Eastern Europe, in which the state-owned sector was rapidly privatized with employee buyouts, but retained much of the earlier, inefficient management. Other factors which are thought to account for the difference are the greater urbanization of the CIS economies, as well as differences in social welfare and other institutions. Another argument is that, in the Eastern European economies political change is sometimes seen to have made gradualist reforms impossible, so the shocks and inflation involved were unavoidable.

Criticism

Deng Xiaoping's reforms enjoy popular support, though recently they have been criticized by the Chinese New Left for increasing inequality and allowing private entrepreneurs to purchase state assets at low prices. These accusations reached an intense level during the Lang-Gu dispute, in which New Left academic Larry Lang accused Gu Sujung, a private entrepreneur, of usurping state asets, after which Gu was imprisoned. The Hu-Wen Administration has adopted some New Left policies, such as halting privatizations and increasing the state sector's importance in the economy, keynesian policies that have been criticized by many Chinese economists who instead advocate a policy of deregulation, tax cuts, and privatization inspired by the Austrian School.

References

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Sources

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• Wong, P.W. Christine et al, China's Fiscal system: a work in progress in China's Great Transformation (2008) Edited by Brandt, Loren and Rawski, G. Thomas. Cambridge:Cambridge University Press.

See also

• Economic history of China (pre-1911)
• Economic history of Modern China
• Great Divergence
• Globalization

• Economic history of the People's Republic of China
• Economy of the People's Republic of China
• Economic liberalization