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economic policies

Economic reform in the People's Republic of China

The Chinese economic reform refers to the program of economic reforms called "Socialism with Chinese characteristics" in the People's Republic of China (PRC) that were started in 1978 by pragmatists within the Communist Party of China (CPC) led by Deng Xiaoping and are ongoing as of the early 21st century. The goal of Chinese economic reform was to generate sufficient surplus value to finance the modernization of the mainland Chinese economy. Neither the socialist command economy, favored by CPC conservatives, nor the Maoist attempt at a Great Leap Forward from socialism to communism in China's agriculture (with the commune system) had generated sufficient surplus value for these purposes. The initial challenge of economic reform was to solve the problems of motivating workers and farmers to produce a larger surplus and to eliminate economic imbalances that were common in command economies. Economic reforms started since 1978 have helped lift millions of people out of poverty, bringing the poverty rate down from 53%of the population to 12% in 1981 to 8% by 2001.

Chinese economic reform has been undertaken through a series of phased reforms. In general, these reforms were not the results of a grand strategy, but as immediate responses to pressing problems. In some cases, such as the closing of state enterprises, the government has been forced by events and economic circumstances to do things that it did not want to do. As of 2005, 70% of China's GDP is in the private sector. The relatively small public sector is dominated by about 200 large state enterprises concentrating mostly in utilities, heavy industries, and energy resources.

Although Chinese economic reform has been characterised by many in the West as a return to capitalism, Chinese officials have insisted that it is a form of socialism, because to do otherwise would call into question the validity of Marxism and the legitimacy of the regime. However, they have not argued against the premise that many of the reforms involve adopting economic policies that are in use in capitalist nations, and one of the premises of Chinese economic reform is that China should not avoid adopting "whatever works" for ideological reasons.

In addition, many of the economic structures that have been created in the course of Chinese economic reform may appear superficially similar to those found in other nations, but are in fact quite unique.

History

The first reforms in the late 1970s and early 1980s consisted of opening trade with the outside world, instituting the household responsibility system in agriculture, by which farmers could sell their surplus crops on the open market, and the establishment of Town and Village Enterprises (TVEs).

The process of economic reform began in earnest in 1979, after Chinese leaders concluded that the Soviet-style system that had been in place since the 1950s was making little progress in improving the standard of living of the Chinese people and also was failing to close the economic gap between China and the industrialized nations.

The reforms of the late 1980s and early 1990s focused on creating a pricing system and decreasing the role of the state in resource allocations. The reforms of the late 1990s focused on closing unprofitable enterprises and dealing with insolvency in the banking system. After the start of the 21st century, increased focus has been placed on narrowing the gap between rich and poor in China.

Chinese economic reform, unlike perestroika, has been an economic success, generating over two decades of rapid economic growth. The standard of living of most Chinese has improved markedly since 1978. The CCP goal of modernization also seems to be moving forward. Throughout China one can witness the rapid modernization of infrastructure, including new superhighways, airports, and telecommunications facilities.

The first part of Chinese economic reform involved implementing the household responsibility system in agriculture, by which farmers were able to retain surplus over individual plots of land rather than farming for the collective. This was followed by the establishment of TVE's, which were industries owned by townships and villages. An open door policy was introduced by which the PRC began to allow international trade and foreign direct investment. These initiatives immediately increased the standard of living for most of the Chinese population and generated support for later, more difficult, reforms.

The second phase of reform occurred in the 1980s and was aimed at creating market institutions and converting the economy from an administratively driven command economy to a price driven market economy. This difficult task of price reform was achieved using the dual-track pricing system, in which some goods and services were allocated at state controlled prices, while others were allocated at market prices. Over time, the goods allocated at market prices were increased, until by the early-1990s they included almost all products.

The first major success of the economic reform program was the introduction of the responsibility system of production in agriculture, a policy that allowed farm families to work a piece of land under contract and to keep whatever profits they earned. By 1984 the responsibility system had dramatically increased food production, and the government had eliminated the people's communes--the hallmark of Chinese socialism for over twenty years. In most other sectors of the economy the role of government was reduced, managers were given more decision-making power, enterprises were encouraged to produce for profit, the role of the private sector increased, and experimentation with new forms of ownership began in the state sector. Constraints on foreign trade were relaxed, and joint ventures with foreign firms were officially encouraged as sources of modern technology and scarce foreign exchange. With rising incomes, greater incentives, and rapid growth in the service and light industrial sectors, the People's Republic of China began to exhibit some of the traits of a consumer society.

Movement toward a market system, however, was complex and difficult, and in 1987 the transition was far from complete. Relaxing restrictions on economic activity quickly alleviated some of China's most pressing economic difficulties, but it also gave rise to a new set of problems. Inflation--the greatest fear of Chinese consumers--became a problem for the first time since the early 1950s, and along with new opportunities to seek profit came growing inequality in income distribution and new temptations for crime, corruption, and Western cultural styles, regarded by many older Chinese people as decadent and "spiritually polluting." The state still owned and controlled the largest nonagricultural enterprises, and the major industries were still primarily guided by the central plan.

Thus, the Chinese economy in the late 1980s was very much a mixed system. It could not be accurately described as either a centrally planned economy or a market economy. The leadership was committed to further expansion of the reform program as a requisite for satisfactory economic growth, but at the same time it was compelled to keep a tight grip on key aspects of the economy--particularly inflation and grain production--to prevent the emergence of overwhelming political discontent. Under these circumstances, forces in the economic system worked against each other, producing what the Chinese leadership called internal "contradictions." On the one hand, the economy was no longer tightly controlled by the state plan because of the large and growing market sector. On the other hand, the market could not operate efficiently because many commodities were still under government control and most prices were still set or restricted by government agencies. Under the leadership of Deng Xiaoping, the entire nation was "riding the tiger"--making great progress but not entirely in control--and therefore unable to stop the process without risk.

Despite the burst of progress in the 1980s, the Chinese economy still shared many basic characteristics with the economies of other developing countries. The gross national product per capita in 1986 was ¥849, or about US$228 (at the 1986 exchange rate), reflecting the low average level of labor productivity. As in many countries that did not begin sustained industrialization efforts until the middle of the twentieth century, the majority of the Chinese labor force--over 60 percent--was still employed in agriculture, which produced around 30 percent of the value of national output. Agricultural work still was performed primarily by hand. Modern equipment was in general use in industry but was largely typified by outdated designs and low levels of efficiency.

In other respects China's economy was quite different from those of most developing nations. The most important difference was that the Chinese economy--although in the midst of far-reaching changes--was organized as a socialist system, directed by a central planning structure. The predominance of state and collective ownership, firm central control over the financial system, redistribution of resources among regions, rationing of grain, and subsidized provision of housing resulted in a pattern of income distribution that was much narrower than those in almost all other developing countries. There was relatively little true capitalism in the form of private ownership of productive assets. Agricultural land was farmed under lease by farm households but was formally owned by villages, towns, and townships--the collective units that had replaced the rural commune system.

In the mid-1980s most Chinese were still very poor by American standards, but several important measures indicated that the quality of their lives was considerably better than implied by the level of gross national product (GNP) per capita. According to World Bank data, in 1984 energy consumption per person was 485 kilograms of oil equivalent, higher than that for any other country ranked as a low-income country and greater than the average for lower middle-income countries. In 1983 the daily calorie supply per capita was 2,620--11 percent above the basic requirement and nearly as high as the average for countries classified as upper middle-income countries. Significantly, infant mortality in 1985 was 39 per 1,000, well below the average for upper middle-income countries, and life expectancy at birth was 69 years, higher than the average for upper middle-income countries.

Despite the major economic gains made by China since 1949 and the dramatic advances of the 1980s, serious imbalances and deficiencies have persisted. Contributing to these deficiencies were the political turmoil that disrupted the economy during the Cultural Revolution decade (1966-76), insufficient flexibility in the planning process, and serious inaccuracies in price structures. Power shortages, inadequate transportation and communication networks, shortages of technicians and other highly trained personnel, insufficient foreign exchange for procurement of advanced technology from other countries, and inadequate legal and administrative provisions for both foreign and domestic trade further hindered modernization.

An important by-product of the reform program since the late 1970s has been an enormous increase in the amount of information available on the economy. The government collected and published basic national economic data in the 1950s, but the centralized statistics-keeping system broke down at the end of the 1950s, and very little statistical information was available during the 1960s and early 1970s. It was not until 1979 that the State Statistical Bureau ended the statistical "blackout" with the publication of an economic statistical communique. In subsequent years the State Statistical Bureau published larger and more frequent compendia, including annual almanacs of the economy and annual statistical yearbooks, which became progressively more sophisticated and informative. In addition, most provincial-level units and cities, as well as the major industries and economic sectors, such as coal mining and agriculture, began to produce their own specialized statistical yearbooks. In the early 1980s, numerous new periodicals, many of which specialized in economic data and analysis, started publication. Although Chinese statistical definitions and practices still differed from those in other countries in many respects and the accuracy of some figures was called into doubt even by Chinese economists, foreign analysts in 1987 had access to a rich and growing body of data that would support extensive analysis of the Chinese economy.

However the transition to a market based system in the early 1990's created two major problems. First the end of central planning required the creation of mechanisms to set monetary policy, and a system of banking and capital markets. Work was done throughout the 1990s to put these systems in place.

Another problem involved that of state owned enterprises. Under a system of fixed prices, the inputs and output prices of SOE's were fixed, allowing them to use the difference to fund social services. Once input and output prices were market based, most of the SOE's then became extremely unprofitable, both because they were responsible for social service provision to their employees and because they were producing outputs that no one wanted to buy. This was temporarily resolved by borrowing from the banking system, but this created the problem of massive non-performing loans. In the late 1990s and early 2000s, this problem was dealt with by the closing of unprofitable state-owned factories and the development of social security systems.

Comparison to Perestroika

Chinese economic reforms occurred at almost the same time as perestroika in the Soviet Union, yet perestroika has been widely judged to be a failure while Chinese economic reform has been widely considered to be a success. Several reasons have been given for this. First of all, the initial stages of reform were planned so that there were only winners and no losers. The market economy was added to the pre-reform central economy rather than replacing it, and hence all groups benefits originally from the pre-reform economy, continued to benefit in the early stages of reform. Second, the focus in China involved creation of new systems rather than the replacement of old. The vast majority of economic growth in the early stages of reform came in the form of new enterprises. Finally, while allowing for economic reform, the Communist Party of China was intent on maintaining political control.

State budget

The nature of the state budget also was significantly altered by the reform program. Before 1979 the state budget was the financial component of the national economic plan. It was made up of the budgets of both the central government and the local governments and included the revenues and expenditures of all state-owned enterprises. All profits from state enterprises were remitted to the state budget, and investment funds were allocated from the state budget. Under the reform, there was increased separation of enterprises from direct state control. Enterprises now paid proportional taxes on their incomes rather than remitting their entire profits to the state. Investment funds were, in principle, no longer to be allocated directly to state enterprises from the state budget but were to be obtained from the banking system in the form of interest-bearing loans.

In 1985 total state revenues of ¥186.6 billion included ¥51.4 billion in income taxes from state-owned enterprises and only ¥4.4 billion in enterprise incomes. The largest category of revenues was industrial and commercial taxes, which amounted to ¥110.1 billion. Agricultural taxes were ¥4.2 billion, continuing the previous policy of levying only negligible taxes on the farm sector. Revenues also included borrowing equal to ¥9 billion, a practice followed annually since 1978. As of 1983 roughly 30 percent of total revenues were collected by the central government and 70 percent by local governments, while each accounted for about 50 percent of expenditures.

In 1985 the largest category of budget expenditure was appropriations for capital construction, which received 31.3 percent of the total allotment. Culture, education, science, and public health constituted the next largest category, with 17 percent of expenditures. National defense, which averaged 19 percent of budgetary expenditures in the 1960s and 1970s, received only 10.3 percent of the total in 1985. Administrative expenses were 7.7 percent of the budget and new technology in enterprises 5.5 percent. In 1984 the state paid out ¥37 billion in price subsidies, an amount equal to 24 percent of total expenditures in that year. The bulk of the subsidies - ¥32 billion - was for consumer goods.

An important function of the state budget was to transfer resources from prosperous regions to poor regions. The budgets that were finally approved by the Ministry of Finance for the provinces, autonomous regions, and special municipalities allowed surplus funds from affluent areas to be transferred to cover planned expenditures in the deficit areas, while bringing the budget for the entire country into balance. The resulting pattern of revenue sharing between provincial-level administrations and the central government was one in which the advanced industrialized regions paid a much higher rate of net taxation than most areas, and the least-developed regions were heavily subsidized. For example, in 1985 Shanghai remitted ¥8.4 billion in profits and taxes, equal to 4.5 percent of national budget revenues, although it had only 1.1 percent of the national population.

Public opinion

Because of the loss of iron rice bowl jobs due to the reforms, many people were initially opposed to further liberalisation of the economy. Protestors at the 1989 Tiananmen Square Incident included workers who felt that reforms had gone too far and threatened their livelihoods. However, according to a study done by the Program on International Policy Attitudes, University of Maryland in 2006, 74% of Chinese surveyed feel that the free market is the best economic system, the highest percentage among the 20 nations surveyed. In comparison, 71% of people surveyed in the United States felt the same. China's 74%, in absolute terms, represents a number of people roughly triple the entire population of the United States, meaning there are actually more capitalist-leaning people in China than there are Americans in America.

Wealth disparity

Living standards for everyone in China have drastically increased in comparison to the pre-reform era, but so has the wealth disparity. Many foreign and domestic Chinese scholars and researchers argue that political reforms are required to counter the widespread corruption in China, which results in corrupted cadres and their associates acquiring wealth at a much faster pace than most people in China. Such accumulation of wealth via illegitimate means has fueled widespread discontent.

A report released during the All-China First Plenatary Session of the Tenth Chinese People's Political Consultative Conference in March 2003 by its standing committee member Mr. Chen Mingde (陈明德), and subsequently published on the website of Xinhua News Agency, highlighted various causes of concern including:

  • By the late 1990's, China had already became second in the world in wealth disparity (Zimbabwe was the first). By 2003, China surpassed Zimbabwe and climbed to the number one spot.
  • The fact mentioned above was supported by the findings of the official Chinese governmental statistics, which was quoted during the same report from the All-China First Plenatary Session of the Tenth Chinese People's Political Consultative Conference: the Gini coefficient for China had already reached 0.417 since the beginning of 2000, above the commonly internationally recognized danger level of 0.40.
  • The same findings mentioned above also included additional causes of concern: there were only 3.5% of the 1.3 billion people in China who earned more than ¥20,000 annually (approximately $2,500, or $11,000 when PPP adjusted), while 50% of the 1.3 billion population earned less than ¥2,000 annually (approximately $250, or $1,100 when PPP adjusted).

Additional studies include:

  • The Chinese branches of the Boston Consulting Group, on the Chinese government's behalf, published an investigative report on October 17, 2006, which was covered by numerous Chinese periodicals such as the Chinese Youth. According to the report, the top 0.4% of Chinese families (about 1.5 million) own over 70% of the nation's wealth, while in contrast, in most developed nations, the top 5% of the families own around 60% of the total wealth.
  • Furthermore, the report only included the obvious assets such as real estate, stock, bank accounts, salaries, and personal property such as cars and furnitures. The report could not account for illegal and semi-legal income sources; if it had, wealth disparity would have been found to be even greater.
  • In a separate report by the World Bank for 2006, the income of the bottom 10% of the population in China actually decreased by 2.4% in comparison to the previous year, while the income of the rest of the population increased.

The issue of extreme wealth disparity caused by the Chinese economic reform has prompted some hard-line conservatives in China to advocate the return of Maoism. However, a majority of the Chinese population believe that further reform of the existing system, rather than a return to Maoism, is the answer to the current problem.

See also

References

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