China has paid a high price for economic transformation since 1949. It’s reaping dividends, but the reform process must continue.
By Wu Jinglian 30 September 2009
(Caijing Magazine) Since its founding 60 years ago, the People’s Republic of China has been transformed from a centrally planned economy to a market economy. The journey has been fraught with twists and turns on a road paved with hardship, upheavals and reversals. It’s been an important process, however, as any search for direction in the course of human development. And it’s taught us valuable lessons about the entire process of a planned-to-market economy transformation.
China’s modern history began six decades ago with a grand experiment aimed at realizing national development through a planned economic system based on public ownership. It was an experiment destined to fail. When an entire society eliminates the rights and freedoms of individuals to experiment and innovate, and only an elite few lead an entire nation toward a future filled with uncertainty, more often than not, things go astray. Even attempts to correct mistakes can be rigid and ineffective. Coming to realize that a mistake was made may involve only a small elite class, but fixing it requires concerted action by an entire society. And since a society’s actions are not always right, a perpetual cycle of trial-and-error may result, forcing everyone to pay an unnecessarily high price that’s difficult to measure.
Poverty necessitated a change for Chinese people 30 years ago. The central government stopped tinkering with its centrally planned economic system, sparking a spectacular transformation to a market economy. At that time, China decided to launch market reforms, and average citizens started regaining the right to control their own destinies. Individuals also gained to a certain extent a mission of shared responsibility for determining the direction of society’s development.
One of the strengths of an ideal market economy is that an individual has freedom to pursue the goals he or she chooses. And because people have different natural gifts, as well as spells of good and bad fortune, the probabilities for certain individuals to find new paths to innovation can vary. As soon as an individual discovers a new path, others in society can share the benefits. Pricing mechanisms play an important role in this process, both because they reflect the level of scarcity and allow for optimal resource allocation, but more so because they provide an objective look at the behaviour of people. Individuals that innovate can obtain fair returns through the market’s pricing system.
Three fundamental elements of a market economy -- property rights, an open market and private enterprise -- are absent in a planned economy. On the basis of property rights, whether an allocation or organization of human or physical capital is accomplished through market pricing mechanisms, or by administrative order through enterprises, depends on which of the two methods is more effective. For similar economic activities, if an enterprise formed through administrative decree has operating costs higher than the transaction costs dictated by market pricing mechanisms, the enterprise is ineffective in performing the given activity, and the activity should return to the market. This kind of enterprise reorganization is commonly seen in market economies but never in planned economies, in which a whole nation is one, giant enterprise. And because there are no external market factors and pricing systems to maintain balance, the system ultimately becomes inefficient and starts to decline.
During most of the 60 years of modern China’s development, much time has been spent on carrying out various economic reforms. From original struggles to system reform to developing a market system while maintaining the system of public ownership and a planned economy, and then on to a complete transformation to a market economy, the direction has been clear for a long time, and the end goals have gradually become more apparent. Property rights reform, market (pricing) reform, enterprise reform, and reform of the political system, working together, have to a great extent unleashed vitality in the national economy and led to an average growth rate of close to 10 percent per year for the past 30 years. The rapid pace of development has allowed China to become the world’s third-largest economy.
Still, the going is toughest toward the end of any journey. The road to reform for China’s economy is far from complete: Reform on property rights still has a long way to go, and many key decisions such as energy prices, interest rates and exchange rates are still tightly controlled by the central government. Reforms for state-owned enterprises in certain monopolized industries such as energy, telecoms and banking are even harder to push forward. Government and government-owned entities still control a major part of the national economy’s resources. Incomplete reforms are one root cause of social problems such as corruption, social inequalities, economic imbalance and environmental deterioration.
Despite China’s phenomenal success over the past 60 years, problems will accumulate unless national economic reforms are thoroughly implemented. It could be hard to avoid falling short of success during the last big push despite great accomplishments during the 31-year period of reform and opening up. If this happens, China’s economy will lose a dependable foundation.
China’s economic reforms have already waded into deep waters. If it is said that in the early days of reform all society benefited, then now at this new stage of reform it can be said that certain entities including the government may lose certain vested interests. But now, there is no turning back. And there is reason to expect that more practical and effective reform plans will be push the country forward. —— Caijing editors
Taking Root
China as a nation has experienced great challenges as well as adversity since 1949. Success in dealing with these challenges can be attributed in no small part to the market reforms introduced over time. And the reform process is not complete. Only if China draws on the lessons of 60 years can the country permanently overcome today’s challenges and realize the dreams attached to China’s rapid rise on the world stage.
The sound of a firearms salute on Tiananmen Square during the nation’s October 1 anniversary celebration welcomes a new era. Nonetheless, the success has a dark side. China’s great economic recovery has caused some to grow boastful and think rashly, overestimating their abilities.
The process of hurriedly adopting a socialist transformation by implementing the Soviet model for a centrally planned economic system did not stimulate the country’s creative enthusiasm. On the contrary, it created a situation without proper incentives and lacking vitality. As a result, reform rose to a high place on the national agenda.
China, like the Soviet Union and East Europe socialist countries, attempted some economic adjustments starting in the 1950s to reduce inefficiency in their centrally planned economic systems. To inject vitality into China’s economy, an “economic management system reform” plan was put forward in 1956. It aimed to implement some policy adjustments while maintaining the framework tenets of public ownership and a planned economy.
More than 20 years later, after much trial and error, the correct path to instituting market reforms gradually became clear. Even still, there were diverse opinions when questions were raised about how – and what kind of -- market economy to establish.
Now, China has successively adopted numerous measures to transform its planned economy into a fully functioning market economy. These measures have roots in different schools of thought in terms of economic theory. Over the years, goals and directions of the measures were often very different -- sometimes even contradictory.
In this article, China’s primary reform measures will be used as benchmarks of the decades-long process. Economic reforms will be separated into three stages, the merits and faults of each reform measure discussed, and the effects of reform on China’s economy and development path analyzed.
During the first phase, from 1958 to ‘78, the government implemented a decentralized command economic system. The focal point of reform was the central government’s delegation of power and yielding of profit-making to lower levels of government.
The second phase stretched from 1979 to ‘93. This was a phase of increased reform that saw a greater focus on promoting the economy in areas beyond state-owned entities. Private enterprises grew in strength, which moved forward the entire national economy.
The third phase began in 1994 and continues today. It is a push-forward phase, with the goal of establishing a market economy and carrying out comprehensive reforms.
In China’s reform process, elements of each phase are intertwined. Reforms implemented in the early phase often contained elements that were seen in measures during later phases, and vice versa.
(To be continued)
Wu Jinglian is one of preeminent economists in China. He is a senior research fellow for the Development Research Center of the State Council.
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China’s Economy: 60 Years of Progress
China has paid a high price for economic transformation since 1949. It’s reaping dividends, but the reform process must continue.
By Wu Jinglian
30 September 2009
(Caijing Magazine) Since its founding 60 years ago, the People’s Republic of China has been transformed from a centrally planned economy to a market economy. The journey has been fraught with twists and turns on a road paved with hardship, upheavals and reversals. It’s been an important process, however, as any search for direction in the course of human development. And it’s taught us valuable lessons about the entire process of a planned-to-market economy transformation.
China’s modern history began six decades ago with a grand experiment aimed at realizing national development through a planned economic system based on public ownership. It was an experiment destined to fail. When an entire society eliminates the rights and freedoms of individuals to experiment and innovate, and only an elite few lead an entire nation toward a future filled with uncertainty, more often than not, things go astray. Even attempts to correct mistakes can be rigid and ineffective. Coming to realize that a mistake was made may involve only a small elite class, but fixing it requires concerted action by an entire society. And since a society’s actions are not always right, a perpetual cycle of trial-and-error may result, forcing everyone to pay an unnecessarily high price that’s difficult to measure.
Poverty necessitated a change for Chinese people 30 years ago. The central government stopped tinkering with its centrally planned economic system, sparking a spectacular transformation to a market economy. At that time, China decided to launch market reforms, and average citizens started regaining the right to control their own destinies. Individuals also gained to a certain extent a mission of shared responsibility for determining the direction of society’s development.
One of the strengths of an ideal market economy is that an individual has freedom to pursue the goals he or she chooses. And because people have different natural gifts, as well as spells of good and bad fortune, the probabilities for certain individuals to find new paths to innovation can vary. As soon as an individual discovers a new path, others in society can share the benefits. Pricing mechanisms play an important role in this process, both because they reflect the level of scarcity and allow for optimal resource allocation, but more so because they provide an objective look at the behaviour of people. Individuals that innovate can obtain fair returns through the market’s pricing system.
Three fundamental elements of a market economy -- property rights, an open market and private enterprise -- are absent in a planned economy. On the basis of property rights, whether an allocation or organization of human or physical capital is accomplished through market pricing mechanisms, or by administrative order through enterprises, depends on which of the two methods is more effective. For similar economic activities, if an enterprise formed through administrative decree has operating costs higher than the transaction costs dictated by market pricing mechanisms, the enterprise is ineffective in performing the given activity, and the activity should return to the market. This kind of enterprise reorganization is commonly seen in market economies but never in planned economies, in which a whole nation is one, giant enterprise. And because there are no external market factors and pricing systems to maintain balance, the system ultimately becomes inefficient and starts to decline.
During most of the 60 years of modern China’s development, much time has been spent on carrying out various economic reforms. From original struggles to system reform to developing a market system while maintaining the system of public ownership and a planned economy, and then on to a complete transformation to a market economy, the direction has been clear for a long time, and the end goals have gradually become more apparent. Property rights reform, market (pricing) reform, enterprise reform, and reform of the political system, working together, have to a great extent unleashed vitality in the national economy and led to an average growth rate of close to 10 percent per year for the past 30 years. The rapid pace of development has allowed China to become the world’s third-largest economy.
Still, the going is toughest toward the end of any journey. The road to reform for China’s economy is far from complete: Reform on property rights still has a long way to go, and many key decisions such as energy prices, interest rates and exchange rates are still tightly controlled by the central government. Reforms for state-owned enterprises in certain monopolized industries such as energy, telecoms and banking are even harder to push forward. Government and government-owned entities still control a major part of the national economy’s resources. Incomplete reforms are one root cause of social problems such as corruption, social inequalities, economic imbalance and environmental deterioration.
Despite China’s phenomenal success over the past 60 years, problems will accumulate unless national economic reforms are thoroughly implemented. It could be hard to avoid falling short of success during the last big push despite great accomplishments during the 31-year period of reform and opening up. If this happens, China’s economy will lose a dependable foundation.
China’s economic reforms have already waded into deep waters. If it is said that in the early days of reform all society benefited, then now at this new stage of reform it can be said that certain entities including the government may lose certain vested interests. But now, there is no turning back. And there is reason to expect that more practical and effective reform plans will be push the country forward. —— Caijing editors
Taking Root
China as a nation has experienced great challenges as well as adversity since 1949. Success in dealing with these challenges can be attributed in no small part to the market reforms introduced over time. And the reform process is not complete. Only if China draws on the lessons of 60 years can the country permanently overcome today’s challenges and realize the dreams attached to China’s rapid rise on the world stage.
The sound of a firearms salute on Tiananmen Square during the nation’s October 1 anniversary celebration welcomes a new era. Nonetheless, the success has a dark side. China’s great economic recovery has caused some to grow boastful and think rashly, overestimating their abilities.
The process of hurriedly adopting a socialist transformation by implementing the Soviet model for a centrally planned economic system did not stimulate the country’s creative enthusiasm. On the contrary, it created a situation without proper incentives and lacking vitality. As a result, reform rose to a high place on the national agenda.
China, like the Soviet Union and East Europe socialist countries, attempted some economic adjustments starting in the 1950s to reduce inefficiency in their centrally planned economic systems. To inject vitality into China’s economy, an “economic management system reform” plan was put forward in 1956. It aimed to implement some policy adjustments while maintaining the framework tenets of public ownership and a planned economy.
More than 20 years later, after much trial and error, the correct path to instituting market reforms gradually became clear. Even still, there were diverse opinions when questions were raised about how – and what kind of -- market economy to establish.
Now, China has successively adopted numerous measures to transform its planned economy into a fully functioning market economy. These measures have roots in different schools of thought in terms of economic theory. Over the years, goals and directions of the measures were often very different -- sometimes even contradictory.
In this article, China’s primary reform measures will be used as benchmarks of the decades-long process. Economic reforms will be separated into three stages, the merits and faults of each reform measure discussed, and the effects of reform on China’s economy and development path analyzed.
During the first phase, from 1958 to ‘78, the government implemented a decentralized command economic system. The focal point of reform was the central government’s delegation of power and yielding of profit-making to lower levels of government.
The second phase stretched from 1979 to ‘93. This was a phase of increased reform that saw a greater focus on promoting the economy in areas beyond state-owned entities. Private enterprises grew in strength, which moved forward the entire national economy.
The third phase began in 1994 and continues today. It is a push-forward phase, with the goal of establishing a market economy and carrying out comprehensive reforms.
In China’s reform process, elements of each phase are intertwined. Reforms implemented in the early phase often contained elements that were seen in measures during later phases, and vice versa.
(To be continued)
Wu Jinglian is one of preeminent economists in China. He is a senior research fellow for the Development Research Center of the State Council.
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