The end of the 20th century was the evident period of the transition in quite a few countries in the developing part of the world. The change from the or planned economy, which is directed by government, to market economy, which is based on the supply and demand laws, started taking place. The 1980’s the crisis in debt started the reforms in Latin America. However, all of Latin American countries had some market-oriented activity before the announcement of reforms to move towards market orientation. More serious and stressful were the economic reforms in China and former Soviet Union. These two countries faced Communist revolutions in the beginning of the 20th century and later attempted to develop the socialist “workers’ paradise.”
Both countries changed their economic orientation from government-planned to market-oriented. China’s reforms took place in the end of 1970’s and Russia’s in the beginning of 1990’s. However, the success of carrying out these reforms is considered to be different in the two countries. Many scientists think that the Chinese reforms are more successful and even set them as the example.
The goal of this paper is to analyze the reasons for such reforms being successful in China. Also the paper will state what lessons we can recap from the Chinese example.
Reason for providing reforms
As mentioned earlier, China and some of the Eastern European countries were functioning in centrally-planned system. It was a closed system, isolated from the outer world. Governments of most of these countries did not give their citizens any access to the information of what was going on in other countries, persuaded that capitalism is not efficient and that people in market-oriented countries are poor.
But the truth could not be hidden forever. The contrasts in the economic performance between North and South Korea, between East and West Germany, as well as between Eastern and Western Europe were visible. Rapid economic growth and development that took place in the market-oriented economies served as an examples that a market economy can perform better than expected from by socialist countries.
People had suffered from the economic consequences of central planning, including the shortage of consumer goods, the limited selection of goods and the lack of improvement in quality. Consumers had to kowtow to the suppliers of consumer goods and wait in long lines to get what was needed. They had to go through the “back door” (or use personal connections) to get what was considered to be essential consumer goods. Thus, most of people desired a market-oriented reform (Chow 128).
Moreover, many economic planners understood that a planning system was difficult to manage and economically inefficient. This is witnessed from the writing of economic officials that appeared in the late 1970’s, although the understanding of the weakness of the planning system varied among these officials.
Evolution of Chinese economic reform
Authors usually identify three main stages in transition of Chinese economy from the planned to the socialist market.
The first stage (VI and VII Five Year Plan, 1980-1990)
On this stage the economic growth was declared as the main purpose. It meant that the general level of development of the country as a whole or of a particular region should be constantly improving. Therefore the concept of growth included the increase in production and quality, productivity, and the improvement of the structure of supply and demand, etc.
However, the end of VII Five Year Plan (1989) was marked by the growth of the consumption fund and intensive emission of money. This had a negative impact on the overall economic situation. As a result of economic uncertainty, the political situation in the country was destabilized. Consequently, this led to the events in Tiananmen Square that took place on June 4, 1989.
The second phase (VIII and IX Five Year Plan, 1990-2000)
The biggest challenge for Chinese government on this stage was to provide economic stability. This involved the maintenance of price stability, the prevention of hyper-inflation, increasing employment as well as avoidance of high unemployment. It also oriented towards
balancing income and expenses in the budget of the country and in foreign trade and
establishing balance between aggregate supply and aggregate demand.
As a result, the GDP of China increased by almost 40% in 5 years reaching 1,083.3 billion annually. The average annual growth reached 8.3%, and industrial production has increased by 35%.
This stage has formed the basis for the market economy. All the institutions of a modern market system fully participated in macroeconomic regulation.
The third phase (X and XI Five Year Plan, 2000-2010)
In the beginning of XXI century the uneven socio-economic development of the regions in China became one of the major destabilizing problems. So the main purpose for this phase was to provide an even economic development in different regions of the country.
The red line of the Chinese reform strategy
The leaders of China have been permanently searching for the optimum ways to reach an effective interaction between government and market. The reform strategy has never been a strict plan. On the contrary, it is constantly renewing and acclimatizing according to the rising problems and needs.
Nevertheless, based on the research described above it is considered that the main purpose of reform strategy have been the smooth decentralization of decision-making process, as well as liberalization of state and non-state economy.
It was the so-called "twin-track approach", which is the process of building of the market economy that would coexist with the planned economy. This approach has been spread in all areas of decision-making: the reforms in the economic sectors, setting prices without government intervention, enterprise restructuring, regional development, trade, currency exchange control, fiscal relations between the central and local governments, etc.
The typical process of "twin-track" transition includes following:
- · at first, opening of the free market without changing the volume of public procurement at lower planned prices;
- · at second, the gradual change of plan prices in order to reach the market level;
- · at third, enterprises have the freedom to operate in China and overseas, but they are required to produce goods and services that are essential for the approval status of the enterprise.
On the general scale, despite liberalizing domestic market and running market economy as means for solving social and economic problems, government is still controlling key sectors of the economy.
Comparison of the economic reform strategy in China with the strategies pursued by Russia and the Eastern European countries
The critical differences in economic structure revolve around two major aspects. The first one is the level of economic development. The second is the role of the state in the economy.
With regard to the level of development, Eastern Europe and the former Soviet Union were much more industrialized and urbanized at the start of their reforms than the Chinese economy at the start of their own reforms. At the start of the reform period (and still today) the vast bulk of the European labor force worked in industry and services, while in East Asia, the predominant proportion of the labor force was still in agriculture.
With regard to the role of the state, the Soviet Union was burdened by the communist-era commitments of universal social protection, which created a social welfare state far more extensive than anything ever attempted in Asia (either in the communist or noncommunist economies). The result is labor immobility, fiscal crisis, and political paralysis in Eastern European countries.
Many studies have stressed that Eastern European countries were not only industrialized, but in fact over-industrialized. Central planners had planned for a purpose of creating a vast military industrial complex. The result was that the Soviet Union and the Eastern European communist countries succeeded in producing vast amounts of steel, coal, chemicals, and heavy machinery, to the neglect of consumer goods and services. As just one well-known example, in 1988 the Soviet Union produced 17 times more steel per dollar of GDP than did the United States (with GDP measured in PPP terms).
The differences in the sectoral allocation of the labor force in SU and China and in the social welfare systems are also reflected in the differences in the social organization of work. In China, only 18 percent of the labor force, as of 1978, was employed in state-owned enterprises, and only 8 percent were employed in state-owned enterprises in the industrial sector. Around 70 percent of the population was in communes, which were soon to be dismantled. This meant that by the early 1980s, only around one-fifth of the Chinese population worked in a state bureaucratic unit, while the rest of the population was employed outside of the state bureaucracy.
The vast majority of the population worked in activities that had almost no direct financial connection with the state. Peasant farmers did not receive social welfare transfers, state loans, or other kinds of direct state subsidies for production. In the Soviet Union, by contrast, around 99 percent of the labor force in 1985 worked in state-owned enterprises of various sorts.
Why was economic reform in China successful?
Gregory C. Chow in his article Economic Reform and Growth in China mentions:
Success in China’s economic reform was measured partly by its rapid economic growth in real GDP in the order of about 9.5 percent annually in the two decades after 1978. In the meantime there were significant changes in economic institutions …. Note that economic growth was important for carrying out further economic reform. Without growth, reform would not and could not have proceeded because the reformers would have lost confidence and the support of Communist Party members and the Chinese people. (Gregory 141)
So one of the main factors of success was the economic growth and without this growth China would be unable to continue reformation.
The second factor that Gregory mentions is the freedom and opportunity to make money on the part of Chinese citizens by hard working and ingenuity, with rewards dependent on the ability and effort. This gave a strong impulse for Chinese economy to grow rapidly.
The third factor was the large amount of human capital in China. The human capital was imbedded in the Chinese culture and had been accumulated and developed for at least several thousand years. The cultural factor cannot be ignored. The investment in human capital has taken place for a very long period and was felt by the society as a whole. Its importance is no less than family and school education for an individual.
I suppose that one more important factor was the decision to provide an open-door policy. China’s economy was essentially a closed economy before the economic reform. Deng Xiaoping’s open-door policy encouraged the opening of China to foreign imports and the promotion of exports. Without foreign capital China would not have enough resources to build up industry.