Decentralizing the Command Economy, 1958-’78. Multiple transfers of administrative power brought disorder and ended in a return to centralized power.
By Wu Jinglian 07 October 2009
(Caijing Magazine) Let’s consider the ways China’s economy changed over the 20 years that began in 1958. Reforms in the areas of public ownership and socialist means of production gave the centrally planned economy a welcome push during this period, and the economy was able to accomplish some notable feats. But the system’s inherent problems soon became evident. The entire national economy resembled one, large enterprise, with the central government functioning as head office and local governments the branches. Enterprises that should have been independent entities resembled production workshops operating under a parent company umbrella.
Like a big business, the central government issued directives and passed them on to lower level departments, which in turn gave orders to the workshops. This top-down system of order-giving was unusually complicated and oftentimes led to inaccuracies. It combined production with consumption and lacked the flexibility needed to make adjustments. To an outside observer, China’s national economy might have appeared orderly. But, in fact, it had already fallen into a state of rigid inefficiency.
As central planning began dragging down the national economy, the central government tried to make some policy adjustments. However, constrained by the ideology of that period and limited knowledge, the adjustments in this early phase were little more than minor patches for the framework of a planned economy. Also, measures often deviated from their original plans – and sometimes moved in the opposite direction -- when put into practice.
Later, it became evident that there was no way to root out all potential problems while reforming a centrally planned economy. On the contrary, whenever a policy adjustment was implemented by central planning’s elite few, everyone in China was suddenly forced to participate, jolting the entire society. Moreover, the system lacked any sort of social safety net.
During this phase, the central government started granting more administrative power to local governments. This policy marked the first major revamping of the planned economy. It was as if leaders of a parent company had granted a certain amount of managerial authority to subsidiaries. The adjustments increased competition among subsidiaries but, in essence, the system did not significantly change.
The central government was still the nation’s largest enterprise, relying primarily on administrative decree to operate. It did not depend on market price signals to allocate resources based on scarcity. To a significant degree, it was extremely dependent on accurate and detailed advanced planning. Without price signals to provide objective criteria, it was difficult to assess the pros and cons of subjective planning and make rational decisions. Intrinsic shortcomings of policy, as well as problems with execution and motivational issues, contributed to varying amounts of inefficiency, waste and loss.
In 1957, based on an August 1956 resolution approved at a meeting of the Eighth National Congress of the Communist Party of China (CPC), the central government instituted reforms and granted more administrative power to local governments. The transfer of power took effect at the beginning of 1958, creating a kind of decentralized command economy.
At the same time, massive numbers of people were moving into communes. The merging and reorganization of agriculture production cooperatives and the integration of governmental administration and commune management further strengthened the government’s control of the rural economy as well as the entire society. This movement became the basis for the Great Leap Forward initiated by Mao Zedong in 1958.
The policy that granted administrative authority to local governments did not match Mao Zedong’s line of thinking when he raised the subject in a speech called On 10 Major Relationships. As a result, changes in the structure of domestic politics in 1957 and ‘58 made the idea of transferring power to local governments and enterprises politically incorrect.
Prior to the Eighth National Congress, many controlling economic bodies and state-owned enterprise (SOE) leaders had already expressed a keen interest in Yugoslavia’s experiment with “enterprise autonomy,” and hoped China could draw lessons. At the congress, autonomy became a hot discussion topic. But later in 1957, CPC criticism of Yugoslavia’s so-called “self-governing socialism” began to grow, and the idea of granting more power to enterprises was subsequently left off the reform plan agenda for China.
Mao Zedong’s On 10 Major Relationships touched on how best to grant more power to enterprises, workers and individuals in order to “muster up enthusiasm.” At the time, his ideas were very similar to those found in policies in other socialist countries, which were increasing material incentives for SOE workers through a process of “de-Stalinization.” By 1957, a divergence in views between CCP and the Soviet Union regarding Stalinism was becoming apparent. The Anti-Rightist Movement was well under way, and “individualism” had been deemed as harmful as opposing the CCP and socialism. The movement demanded that people “cut the fetters and fame of wealth.” That put the idea of using material incentives to muster enthusiasm among individual workers in direct conflict with dominant ideology.
In this political climate, policies granting additional power and profit rights could only be implemented for the sake of local governments. So a transfer of power to local governments became the basis for reform in 1958. “Institutional reform” was defined as “transferring administrative power to lower levels.” And this kind of reformist thinking had a profound influence on China’s future economic development.
The Eighth Plenary Session of the CPC, which convened in September 1957, was the meeting where the Great Leap Forward was launched. At the same time, it established an “economic administrative management system” to “make rapid progress in building a solid economic foundation.” A five-member working group headed by committee member Chen Yun drafted three key regulations, including directives for improving industrial and commercial administrative management systems, and for dividing the financial and administration powers of the central and local governments.
Chen’s group formally submitted these directives to the Standing Committee of the National People’s Congress. The regulations were designed to give more power to local governments and delegate power to local administrative organs, generating motivational enthusiasm and giving free rein to local enterprise initiatives. On November 14, the standing committee ratified the regulations. They were to take effect in 1958. So the transfer of administrative power in 1958 primarily consisted of the following:
-- Transferring enterprise jurisdiction. The CPC Central Committee and the State Council jointly issued directives April 11 under a Regulation of the Transfer of Authority for Industrial Enterprises. The directives said that, aside from a small number of special and experimental enterprises that the State Council deemed important, management authority for all enterprises would be held by individual local governments. As a result, 88 percent of enterprises and state-owned institutions that were once subordinate to the central government were transferred to local governments. Some were transferred to neighborhoods and communes. To put the matter in perspective, industrial enterprises subordinate to the central government accounted for 39.7 percent of China’s total industrial output in 1957. But in 1958 that number decreased dramatically to 13.8 percent.
-- Transferring resource allocation authority. This step included decreasing the assortment and quantity of goods and resources that were once uniformly dispersed by the state planning commission (called “goods under the unified ration plan” or “type one goods”) and departments under the State Council (called “department-controlled goods” or “type two goods”); switching from the central government’s “unified distribution” plan to a system of “regionally balanced allocation” based on the needs of individual provinces, cities and autonomous regions; and giving local government planning offices authority to allocate and transfer goods and resources.
-- Transferring government approval rights for capital construction projects, investment and credit. When projects went beyond prescribed quotas, local governments had to submit a brief petition to the state planning commission. All other projects could be approved locally, and decisions to invest in projects falling below the quotas could be made by local governments. This gave local governments the power to initiate all kinds of projects and raise funds, including raising funds for large-scale projects that exceeded the prescribed quota. Local banks could issue credit according to each area’s “production requirements.” They could also decide the amount and timing of credit issuance.
-- Transferring finance and tax authority. The decision to implement “tax fanning” was made to strengthen local financial resources and expand the economic power of local governments.
-- Transferring administrative authority for labor and recruitment. The authority to implement labor and recruitment planning policies had been the responsibility of the central government. Now, it would be delegated to provinces, autonomous regions and municipalities.
In addition to granting more autonomy and authority to local governments, the 1958 reforms included certain measures that granted more power to enterprises. Some measures reduced indicative planning targets by cutting the national planning commission’s directive targets from 12 requirements to eight in terms of principal product output, staff sizes, wage levels, profits, etc. Other measures altered the original system for “enterprise rewards” (factory manager funds) based on certain proportions of profits, according to industry, by launching a system based on a “proportionally equal sharing of profits.”
Other measures expanded the rights of enterprises to organize their workforces, excluding leaders and key technical personnel. Enterprises were given authority to manage their own employees and adjust structures and personnel as long as they did not increase total employment. Enterprises could allocate a portion of capital for company use. They also had the authority to increase, decrease and/or discard fixed assets.
After these reforms, local governments gained enough power and resources to make their own decisions. And while many enterprises at many levels saw a corresponding rise in autonomy, it still seemed the overall reform plan had left local governments in charge of “workshop” production. Competition rose among local governments for control over enterprises and resources, but no pricing mechanism provided signals to guide decisions. Neither was there natural selection to drive out ill-performing enterprises. Thus, these reforms did not lead the economy in a positive direction; instead, they set the stage for the Great Leap Forward.
On the other hand, since planned economic policies were coming from an elite few, it was easy for ideology to restrain reforms. Knowledge levels, political positions, and even fluctuating moods played roles as well. Indeed, during this phase of reform, politics deeply influenced China’s economic progress.
By refusing to alter the framework for maintaining a planned economy – while allocating resources through administrative decree and dividing power among local governments – the planned economy was decentralized. This, coupled with a mass movement of China’s population to rural communes, paved the way for the Great Leap Forward.
Under this system, all levels of government responded to Mao Zedong’s call to “surpass England in three years, and surpass the United States in 10 years.” Local governments fully utilized their power to accumulate resources, launch industrial projects, conduct large-scale employee recruitment, and freely allocate agricultural resources. It was all in the name of achieving impossible feats ordered by the government, such as doubling annual steel production. The result was a war for resource control waged among regions, government departments and enterprises. The practice of “excessive egalitarianism” – in other words “egalitarianism combined with free resource allocation and the authority to collect” -- was in fashion. And the economy was is disarray.
Due to chaos in the economy, production declined substantially. Mass consumption and a wasting of resources ensued. Local leaders exaggerated statistics in hopes of pleasing superiors and getting credit for the achievements of others. Only later did facts prove that their production claims for steel, grain and other goods were completely false.
Meanwhile, some leaders let the veneer of success go to their heads. During a food shortage, as nationwide famine was about to break out, Mao Zedong was asking, “What if there is too much grain?” Gradually, communes adopted new food distribution methods, such as public cafeterias, to feed “each according to his need.”
By the end of 1958, the negative implications of these practices were finally revealed: Production had declined, enterprises had suffered major losses, daily necessities were in short supply, and the national economy was in dire straits.
In 1959, from July to August, the Eighth Plenum of the Eighth Central Committee of the CPC (the Lushan Conference) convened at Lushan in Jiangxi Province. At the beginning of the conference, Mao Zedong said the main purpose was to review experiences and lessons learned from the Great Leap Forward. Mao admitted the movement was “unbalanced and upset natural proportional relationships in the national economy.” He also called the transfer of power “excessive.” Later, after Defense Minister Peng Dehuai heeded Mao Zedong’s request for leaders to honestly reflect on the experiences and lessons of the Great Leap Forward, Mao Zedong decided to extend the conference an additional 10 days. Mao Zedong then criticized Peng, and launched a nationwide movement to “oppose rightist tendencies.” Thus, the political climate shifted dramatically from “correcting the left” to “opposing the right.”
The movement to “oppose rightist tendencies” led to a second wave of “excessive egalitarianism, causing the economy further deterioration. In 1959, the nation produced a total 170 billion kilos of grain – down 30 billion from the 200 billion kilos produced in 1958. In 1960, gain output decreased to 143.5 billion kilos – less than the 143.7 billion kilos harvested in 1951. Widespread famine began to grip the nation.
Because of limited access to information and a lack of proper prevention measures, widespread malnutrition started appearing in cities and towns, leading to mass disease. Between 20 million and 40 million people in rural areas died prematurely during this period.
In autumn 1960, the CPC Central Committee finally settled on an Eight Character Policy to implement a process for “regulation, consolidation, replenishment and improvement” of the national economy. The recovery was lead by Chen Yun and a group of economic leaders from the CPC Central Committee. Its aim was to adopt measures to overcome grave economic problems caused by the Great Leap Forward and communes. Here are some of the activities that paralleled introduction of the Eight Character Policy:
-- The CPC Central Committee convened in January 1962 with central authorities and cadres from five levels participating in a working conference on growth (called the Seven Thousand Member Plenary Session). During the conference, Mao Zedong took personal responsibility for mistakes of the Great Leap Forward and tried to calm resentful cadres. At the same time, he called for unity to overcome the challenges that would lay ahead. A group of Central Committee leaders led by Chen Yun was responsible for economic recovery and accepted the daunting task of “regulating” the national economy.
-- The central government withdrew powers that had been granted in the 1958 reforms to local governments in areas of finance, credit and enterprise jurisdiction.
-- The policy was based on a system that relied on a high degree of central decision-making power for allocating scarce resources. Key measures included ordering steel producers to completely abandon small-scale industries tied to “folk methods” of production as well as “small enterprises using modern methods.” Also, roughly 30 million peasant workers who had moved to cities and towns for work were told to return to the countryside. A policy that called for closing, discontinuing, merging and restructuring industrial enterprises was implemented in cities.
Several months after the reforms were implemented, the economy gradually stabilized. And by 1964, it had largely recovered. But while people rejoiced over economic recovery, problems inherent to central planning had resurfaced. As a result, more attention was given to further reform.
However, before the Cultural Revolution ended in 1976, an ingrained ideological belief that socialist economies were only able to allocate resources through administrative decree made it difficult to rally political support for market-oriented reform. As a result, transferring power to local governments seemed the only possible avenue for reform. This resulted in new policies that mirrored the 1958 reforms that had shifted administrative division of power. For example, large-scale economic reforms in 1970 were heralded with a 1958-style slogan: “Decentralization is the revolution. The more decentralized, the more revolutionary.”
So between 1958 and ‘76, multiple transfers of administrative power brought disorder and ended in a return to centralized power. This is turn led to a vicious cycle in which decentralization yielded chaos and re-centralization choked the economy.
The curse of choosing between chaos and rigidity hovered like a dark cloud, prompting some policymakers to rethink the entire system. Some blamed the intrinsic shortcomings of a centrally planned economy based on state property ownership. Their reflections gradually deepened and clarified official understanding. And the ideology shifted slightly, laying a foundation for future reform.
The first person to seriously criticize “power transfer” ideology was economist Sun Yefang. In a report to economic leaders in 1961, Sun pointed out that the system’s fundamental problem was not how to divide power between central and local governments. Rather, he said, it was a problem that concerned “enterprise operations and management.” According to Sun, only by granting authority to enterprises “could the national economy be stimulated.”
Sun’s critique was not based on concerns about the effective allocation and use of scarce resources, but rather as a way to support an ideological framework for transferring power to lower levels of government and encouraging enthusiasm. Therefore, he didn’t explain clearly from a theoretical standpoint why transferring power to lower government offices could not solve the nation’s economic problems, saying only that granting more power to enterprises and “expanding enterprise management rights” would raise the nation’s productivity.
Furthermore, China at that time was politically controlled by an extreme left. Even if Sun’s request for expanding enterprise decision-making power within the framework of a planned economy had been heard, it would not have been accepted by central government authorities. As a result, not long after he raised his points, Sun was dubbed a “radical revisionist,” criticized and persecuted.
But in 1976, after the extreme left lost power, Sun’s ideas began to win widespread acceptance. Only years later -- in the mid-1980s -- did scholars in China start using modern economic theory to analyze the positive and negative effects of the “transfer of administrative power.” In the course of this new debate, economists adopted one of two schools of thought.
The first school held that transferring administrative power played an important role in pushing forward China’s economic development, particularly outside the state-owned sector. For example, in the 1980s, property ownership rights were transferred to local governments through adoption of a policy of delineating income and expenditures in fiscal budgets. This encouraged local competition, which in turn stimulated enterprise development and production. After local governments received a certain degree of financial independence, local officials acting in the best interests of constituents used their power to let towns and township enterprises raise capital, manufacture goods, sell products and conduct other business functions. This was a major contributing factor for the rapid development of private enterprises.
Scholar Zhang Wuchang once summed up China’s 30 years of market-oriented reforms with an exceptionally high appraisal of the policy that transferred power to local governments. He thinks it was precisely these reforms that brought about regional competition and facilitated the rapid development of China’s economy.
Economists belonging to the other school of thought are critical toward the idea that transferring administrative power was the main catalyst for economic reform. They think the central government should not implement a division of power as an overarching reform goal, but rather first establish that there are two completely different ways to divide power. One is a division of power under a market economy (or economic division of power). The other is a division of power under a planned economy (administrative division of power). To fundamentally improve implementation and raise overall efficiency, they say, governments should employ only an economic -- not administrative -- division of power. Their grounds for argument are as follows:
-- For a planned economy to function -- as well as engage in meticulous planning and organization – an essential condition is strict enforcement of orders that have been passed down from higher ups. If orders are not enforced, and each department acts on its own by allocating resources according to local interests and the whims of senior officials, complete disorder in the economy will be the end result. In short, resource allocation in a planned economy essentially requires a dictatorship. A planned economy with decentralized power is actually much worse than a planned economy with centralized state power. The only way to shake off the curse of choosing rigidity via a planned economy with centralized power or chaos through a planned economy with decentralized power is to carry out market reforms, establish a market-based system, tolerate healthy competition, and allow price mechanisms that let scarcity create a basis for resource allocation.
-- A market economy is in many ways a decentralized economy. In a market system, individuals and enterprises take their own initiative to reach decisions over what and how much to produce, and who to produce for, based on pricing signals and self-interest. Dividing administrative power has a short-term effect by being able to encourage local governments to energetically support enterprise development. In the end, however, this leads to forming a system based on cozy relations between local governments and enterprises. It also facilitates regional protectionism and breeds corruption.
From another perspective, the administrative division of power policies implemented separately in 1958, ‘70 and ‘80 certainly provided the potential for competition among regions. Yet the policies led to growing regional protectionism and a trend toward dividing markets. Until the mid-1980s, regions were effectively sealed off from one another. Partitioned markets and local protectionist behaviour became significant obstacles to an integrated, national market. Some even labelled China a feudal economy.
As a result, China’s economy grew in strength only after the mid-1980s, as breaking down regional barriers and fully integrating market mechanisms became important reform targets.
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 (Part II)
Decentralizing the Command Economy, 1958-’78. Multiple transfers of administrative power brought disorder and ended in a return to centralized power.
By Wu Jinglian
07 October 2009
(Caijing Magazine) Let’s consider the ways China’s economy changed over the 20 years that began in 1958. Reforms in the areas of public ownership and socialist means of production gave the centrally planned economy a welcome push during this period, and the economy was able to accomplish some notable feats. But the system’s inherent problems soon became evident. The entire national economy resembled one, large enterprise, with the central government functioning as head office and local governments the branches. Enterprises that should have been independent entities resembled production workshops operating under a parent company umbrella.
Like a big business, the central government issued directives and passed them on to lower level departments, which in turn gave orders to the workshops. This top-down system of order-giving was unusually complicated and oftentimes led to inaccuracies. It combined production with consumption and lacked the flexibility needed to make adjustments. To an outside observer, China’s national economy might have appeared orderly. But, in fact, it had already fallen into a state of rigid inefficiency.
As central planning began dragging down the national economy, the central government tried to make some policy adjustments. However, constrained by the ideology of that period and limited knowledge, the adjustments in this early phase were little more than minor patches for the framework of a planned economy. Also, measures often deviated from their original plans – and sometimes moved in the opposite direction -- when put into practice.
Later, it became evident that there was no way to root out all potential problems while reforming a centrally planned economy. On the contrary, whenever a policy adjustment was implemented by central planning’s elite few, everyone in China was suddenly forced to participate, jolting the entire society. Moreover, the system lacked any sort of social safety net.
Power Transfer
During this phase, the central government started granting more administrative power to local governments. This policy marked the first major revamping of the planned economy. It was as if leaders of a parent company had granted a certain amount of managerial authority to subsidiaries. The adjustments increased competition among subsidiaries but, in essence, the system did not significantly change.
The central government was still the nation’s largest enterprise, relying primarily on administrative decree to operate. It did not depend on market price signals to allocate resources based on scarcity. To a significant degree, it was extremely dependent on accurate and detailed advanced planning. Without price signals to provide objective criteria, it was difficult to assess the pros and cons of subjective planning and make rational decisions. Intrinsic shortcomings of policy, as well as problems with execution and motivational issues, contributed to varying amounts of inefficiency, waste and loss.
In 1957, based on an August 1956 resolution approved at a meeting of the Eighth National Congress of the Communist Party of China (CPC), the central government instituted reforms and granted more administrative power to local governments. The transfer of power took effect at the beginning of 1958, creating a kind of decentralized command economy.
At the same time, massive numbers of people were moving into communes. The merging and reorganization of agriculture production cooperatives and the integration of governmental administration and commune management further strengthened the government’s control of the rural economy as well as the entire society. This movement became the basis for the Great Leap Forward initiated by Mao Zedong in 1958.
The policy that granted administrative authority to local governments did not match Mao Zedong’s line of thinking when he raised the subject in a speech called On 10 Major Relationships. As a result, changes in the structure of domestic politics in 1957 and ‘58 made the idea of transferring power to local governments and enterprises politically incorrect.
Prior to the Eighth National Congress, many controlling economic bodies and state-owned enterprise (SOE) leaders had already expressed a keen interest in Yugoslavia’s experiment with “enterprise autonomy,” and hoped China could draw lessons. At the congress, autonomy became a hot discussion topic. But later in 1957, CPC criticism of Yugoslavia’s so-called “self-governing socialism” began to grow, and the idea of granting more power to enterprises was subsequently left off the reform plan agenda for China.
Mao Zedong’s On 10 Major Relationships touched on how best to grant more power to enterprises, workers and individuals in order to “muster up enthusiasm.” At the time, his ideas were very similar to those found in policies in other socialist countries, which were increasing material incentives for SOE workers through a process of “de-Stalinization.” By 1957, a divergence in views between CCP and the Soviet Union regarding Stalinism was becoming apparent. The Anti-Rightist Movement was well under way, and “individualism” had been deemed as harmful as opposing the CCP and socialism. The movement demanded that people “cut the fetters and fame of wealth.” That put the idea of using material incentives to muster enthusiasm among individual workers in direct conflict with dominant ideology.
In this political climate, policies granting additional power and profit rights could only be implemented for the sake of local governments. So a transfer of power to local governments became the basis for reform in 1958. “Institutional reform” was defined as “transferring administrative power to lower levels.” And this kind of reformist thinking had a profound influence on China’s future economic development.
The Eighth Plenary Session of the CPC, which convened in September 1957, was the meeting where the Great Leap Forward was launched. At the same time, it established an “economic administrative management system” to “make rapid progress in building a solid economic foundation.” A five-member working group headed by committee member Chen Yun drafted three key regulations, including directives for improving industrial and commercial administrative management systems, and for dividing the financial and administration powers of the central and local governments.
Chen’s group formally submitted these directives to the Standing Committee of the National People’s Congress. The regulations were designed to give more power to local governments and delegate power to local administrative organs, generating motivational enthusiasm and giving free rein to local enterprise initiatives. On November 14, the standing committee ratified the regulations. They were to take effect in 1958. So the transfer of administrative power in 1958 primarily consisted of the following:
-- Transferring enterprise jurisdiction. The CPC Central Committee and the State Council jointly issued directives April 11 under a Regulation of the Transfer of Authority for Industrial Enterprises. The directives said that, aside from a small number of special and experimental enterprises that the State Council deemed important, management authority for all enterprises would be held by individual local governments. As a result, 88 percent of enterprises and state-owned institutions that were once subordinate to the central government were transferred to local governments. Some were transferred to neighborhoods and communes. To put the matter in perspective, industrial enterprises subordinate to the central government accounted for 39.7 percent of China’s total industrial output in 1957. But in 1958 that number decreased dramatically to 13.8 percent.
-- Transferring resource allocation authority. This step included decreasing the assortment and quantity of goods and resources that were once uniformly dispersed by the state planning commission (called “goods under the unified ration plan” or “type one goods”) and departments under the State Council (called “department-controlled goods” or “type two goods”); switching from the central government’s “unified distribution” plan to a system of “regionally balanced allocation” based on the needs of individual provinces, cities and autonomous regions; and giving local government planning offices authority to allocate and transfer goods and resources.
-- Transferring government approval rights for capital construction projects, investment and credit. When projects went beyond prescribed quotas, local governments had to submit a brief petition to the state planning commission. All other projects could be approved locally, and decisions to invest in projects falling below the quotas could be made by local governments. This gave local governments the power to initiate all kinds of projects and raise funds, including raising funds for large-scale projects that exceeded the prescribed quota. Local banks could issue credit according to each area’s “production requirements.” They could also decide the amount and timing of credit issuance.
-- Transferring finance and tax authority. The decision to implement “tax fanning” was made to strengthen local financial resources and expand the economic power of local governments.
-- Transferring administrative authority for labor and recruitment. The authority to implement labor and recruitment planning policies had been the responsibility of the central government. Now, it would be delegated to provinces, autonomous regions and municipalities.
In addition to granting more autonomy and authority to local governments, the 1958 reforms included certain measures that granted more power to enterprises. Some measures reduced indicative planning targets by cutting the national planning commission’s directive targets from 12 requirements to eight in terms of principal product output, staff sizes, wage levels, profits, etc. Other measures altered the original system for “enterprise rewards” (factory manager funds) based on certain proportions of profits, according to industry, by launching a system based on a “proportionally equal sharing of profits.”
Other measures expanded the rights of enterprises to organize their workforces, excluding leaders and key technical personnel. Enterprises were given authority to manage their own employees and adjust structures and personnel as long as they did not increase total employment. Enterprises could allocate a portion of capital for company use. They also had the authority to increase, decrease and/or discard fixed assets.
Chaos vs. Rigidity
After these reforms, local governments gained enough power and resources to make their own decisions. And while many enterprises at many levels saw a corresponding rise in autonomy, it still seemed the overall reform plan had left local governments in charge of “workshop” production. Competition rose among local governments for control over enterprises and resources, but no pricing mechanism provided signals to guide decisions. Neither was there natural selection to drive out ill-performing enterprises. Thus, these reforms did not lead the economy in a positive direction; instead, they set the stage for the Great Leap Forward.
On the other hand, since planned economic policies were coming from an elite few, it was easy for ideology to restrain reforms. Knowledge levels, political positions, and even fluctuating moods played roles as well. Indeed, during this phase of reform, politics deeply influenced China’s economic progress.
By refusing to alter the framework for maintaining a planned economy – while allocating resources through administrative decree and dividing power among local governments – the planned economy was decentralized. This, coupled with a mass movement of China’s population to rural communes, paved the way for the Great Leap Forward.
Under this system, all levels of government responded to Mao Zedong’s call to “surpass England in three years, and surpass the United States in 10 years.” Local governments fully utilized their power to accumulate resources, launch industrial projects, conduct large-scale employee recruitment, and freely allocate agricultural resources. It was all in the name of achieving impossible feats ordered by the government, such as doubling annual steel production. The result was a war for resource control waged among regions, government departments and enterprises. The practice of “excessive egalitarianism” – in other words “egalitarianism combined with free resource allocation and the authority to collect” -- was in fashion. And the economy was is disarray.
Due to chaos in the economy, production declined substantially. Mass consumption and a wasting of resources ensued. Local leaders exaggerated statistics in hopes of pleasing superiors and getting credit for the achievements of others. Only later did facts prove that their production claims for steel, grain and other goods were completely false.
Meanwhile, some leaders let the veneer of success go to their heads. During a food shortage, as nationwide famine was about to break out, Mao Zedong was asking, “What if there is too much grain?” Gradually, communes adopted new food distribution methods, such as public cafeterias, to feed “each according to his need.”
By the end of 1958, the negative implications of these practices were finally revealed: Production had declined, enterprises had suffered major losses, daily necessities were in short supply, and the national economy was in dire straits.
In 1959, from July to August, the Eighth Plenum of the Eighth Central Committee of the CPC (the Lushan Conference) convened at Lushan in Jiangxi Province. At the beginning of the conference, Mao Zedong said the main purpose was to review experiences and lessons learned from the Great Leap Forward. Mao admitted the movement was “unbalanced and upset natural proportional relationships in the national economy.” He also called the transfer of power “excessive.” Later, after Defense Minister Peng Dehuai heeded Mao Zedong’s request for leaders to honestly reflect on the experiences and lessons of the Great Leap Forward, Mao Zedong decided to extend the conference an additional 10 days. Mao Zedong then criticized Peng, and launched a nationwide movement to “oppose rightist tendencies.” Thus, the political climate shifted dramatically from “correcting the left” to “opposing the right.”
The movement to “oppose rightist tendencies” led to a second wave of “excessive egalitarianism, causing the economy further deterioration. In 1959, the nation produced a total 170 billion kilos of grain – down 30 billion from the 200 billion kilos produced in 1958. In 1960, gain output decreased to 143.5 billion kilos – less than the 143.7 billion kilos harvested in 1951. Widespread famine began to grip the nation.
Because of limited access to information and a lack of proper prevention measures, widespread malnutrition started appearing in cities and towns, leading to mass disease. Between 20 million and 40 million people in rural areas died prematurely during this period.
In autumn 1960, the CPC Central Committee finally settled on an Eight Character Policy to implement a process for “regulation, consolidation, replenishment and improvement” of the national economy. The recovery was lead by Chen Yun and a group of economic leaders from the CPC Central Committee. Its aim was to adopt measures to overcome grave economic problems caused by the Great Leap Forward and communes.
Here are some of the activities that paralleled introduction of the Eight Character Policy:
-- The CPC Central Committee convened in January 1962 with central authorities and cadres from five levels participating in a working conference on growth (called the Seven Thousand Member Plenary Session). During the conference, Mao Zedong took personal responsibility for mistakes of the Great Leap Forward and tried to calm resentful cadres. At the same time, he called for unity to overcome the challenges that would lay ahead. A group of Central Committee leaders led by Chen Yun was responsible for economic recovery and accepted the daunting task of “regulating” the national economy.
-- The central government withdrew powers that had been granted in the 1958 reforms to local governments in areas of finance, credit and enterprise jurisdiction.
-- The policy was based on a system that relied on a high degree of central decision-making power for allocating scarce resources. Key measures included ordering steel producers to completely abandon small-scale industries tied to “folk methods” of production as well as “small enterprises using modern methods.” Also, roughly 30 million peasant workers who had moved to cities and towns for work were told to return to the countryside. A policy that called for closing, discontinuing, merging and restructuring industrial enterprises was implemented in cities.
Several months after the reforms were implemented, the economy gradually stabilized. And by 1964, it had largely recovered. But while people rejoiced over economic recovery, problems inherent to central planning had resurfaced. As a result, more attention was given to further reform.
However, before the Cultural Revolution ended in 1976, an ingrained ideological belief that socialist economies were only able to allocate resources through administrative decree made it difficult to rally political support for market-oriented reform. As a result, transferring power to local governments seemed the only possible avenue for reform. This resulted in new policies that mirrored the 1958 reforms that had shifted administrative division of power. For example, large-scale economic reforms in 1970 were heralded with a 1958-style slogan: “Decentralization is the revolution. The more decentralized, the more revolutionary.”
So between 1958 and ‘76, multiple transfers of administrative power brought disorder and ended in a return to centralized power. This is turn led to a vicious cycle in which decentralization yielded chaos and re-centralization choked the economy.
Rethinking the Rules
The curse of choosing between chaos and rigidity hovered like a dark cloud, prompting some policymakers to rethink the entire system. Some blamed the intrinsic shortcomings of a centrally planned economy based on state property ownership. Their reflections gradually deepened and clarified official understanding. And the ideology shifted slightly, laying a foundation for future reform.
The first person to seriously criticize “power transfer” ideology was economist Sun Yefang. In a report to economic leaders in 1961, Sun pointed out that the system’s fundamental problem was not how to divide power between central and local governments. Rather, he said, it was a problem that concerned “enterprise operations and management.” According to Sun, only by granting authority to enterprises “could the national economy be stimulated.”
Sun’s critique was not based on concerns about the effective allocation and use of scarce resources, but rather as a way to support an ideological framework for transferring power to lower levels of government and encouraging enthusiasm. Therefore, he didn’t explain clearly from a theoretical standpoint why transferring power to lower government offices could not solve the nation’s economic problems, saying only that granting more power to enterprises and “expanding enterprise management rights” would raise the nation’s productivity.
Furthermore, China at that time was politically controlled by an extreme left. Even if Sun’s request for expanding enterprise decision-making power within the framework of a planned economy had been heard, it would not have been accepted by central government authorities. As a result, not long after he raised his points, Sun was dubbed a “radical revisionist,” criticized and persecuted.
But in 1976, after the extreme left lost power, Sun’s ideas began to win widespread acceptance. Only years later -- in the mid-1980s -- did scholars in China start using modern economic theory to analyze the positive and negative effects of the “transfer of administrative power.” In the course of this new debate, economists adopted one of two schools of thought.
The first school held that transferring administrative power played an important role in pushing forward China’s economic development, particularly outside the state-owned sector. For example, in the 1980s, property ownership rights were transferred to local governments through adoption of a policy of delineating income and expenditures in fiscal budgets. This encouraged local competition, which in turn stimulated enterprise development and production. After local governments received a certain degree of financial independence, local officials acting in the best interests of constituents used their power to let towns and township enterprises raise capital, manufacture goods, sell products and conduct other business functions. This was a major contributing factor for the rapid development of private enterprises.
Scholar Zhang Wuchang once summed up China’s 30 years of market-oriented reforms with an exceptionally high appraisal of the policy that transferred power to local governments. He thinks it was precisely these reforms that brought about regional competition and facilitated the rapid development of China’s economy.
Economists belonging to the other school of thought are critical toward the idea that transferring administrative power was the main catalyst for economic reform. They think the central government should not implement a division of power as an overarching reform goal, but rather first establish that there are two completely different ways to divide power. One is a division of power under a market economy (or economic division of power). The other is a division of power under a planned economy (administrative division of power). To fundamentally improve implementation and raise overall efficiency, they say, governments should employ only an economic -- not administrative -- division of power. Their grounds for argument are as follows:
-- For a planned economy to function -- as well as engage in meticulous planning and organization – an essential condition is strict enforcement of orders that have been passed down from higher ups. If orders are not enforced, and each department acts on its own by allocating resources according to local interests and the whims of senior officials, complete disorder in the economy will be the end result. In short, resource allocation in a planned economy essentially requires a dictatorship. A planned economy with decentralized power is actually much worse than a planned economy with centralized state power. The only way to shake off the curse of choosing rigidity via a planned economy with centralized power or chaos through a planned economy with decentralized power is to carry out market reforms, establish a market-based system, tolerate healthy competition, and allow price mechanisms that let scarcity create a basis for resource allocation.
-- A market economy is in many ways a decentralized economy. In a market system, individuals and enterprises take their own initiative to reach decisions over what and how much to produce, and who to produce for, based on pricing signals and self-interest. Dividing administrative power has a short-term effect by being able to encourage local governments to energetically support enterprise development. In the end, however, this leads to forming a system based on cozy relations between local governments and enterprises. It also facilitates regional protectionism and breeds corruption.
From another perspective, the administrative division of power policies implemented separately in 1958, ‘70 and ‘80 certainly provided the potential for competition among regions. Yet the policies led to growing regional protectionism and a trend toward dividing markets. Until the mid-1980s, regions were effectively sealed off from one another. Partitioned markets and local protectionist behaviour became significant obstacles to an integrated, national market. Some even labelled China a feudal economy.
As a result, China’s economy grew in strength only after the mid-1980s, as breaking down regional barriers and fully integrating market mechanisms became important reform targets.
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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