China in Transition

People's Republic of China Celebrates 60th Anniversary:
From an era of economic reform to an era of political reform

Chi Hung KWAN
Consulting Fellow, RIETI

On October 1, 2009, the People's Republic of China celebrated its 60th anniversary. The history of the People's Republic so far can be divided roughly into two equal periods: the first 30 years, when Mao Zedong (1893-1976) reigned supreme as absolute ruler, and the second 30 years, when the policies of reform and opening up were launched under the leadership of Deng Xiaoping (1904-1997). During the first period, when China adopted a "socialist economic system" based on central planning and public ownership of the means of production, the economy stagnated. In contrast, the economy achieved stunning growth over the second three decades, when such capitalist elements as the market economy and private ownership of property were introduced.

Although the economic results under the "capitalist" system proved superior to those under the socialist system, distortions such as a widening income gap and aggravated environmental problems have emerged as the costs of economic development. Political reform centering on democratization is essential to correcting these problems. China must actively press forward with political reform in the coming decades, building on its economic reforms of the last 30 years.

The First Thirty Years: Development stalled under a planned economy

After the 1949 revolution, China not only introduced a planned economy but also completely prohibited the private ownership of property and banned production and exchange in the pursuit of profit. In fact, China only allowed public ownership of enterprises, either state-owned or collectively-owned ones. Private companies and foreign affiliates did not exist. Under this system, the efficiency of resource allocation and the motivation to work were low. The economy stagnated for many years, reflecting additional disturbances such as the Great Leap Forward and the Cultural Revolution. From 1953 to 1978, annual average GDP growth was 6.1%, and GDP growth per capita adjusted for the population increase was only 4.0% (based on "Comprehensive Statistical Data and Materials on 50 years of New China" [1999] compiled by the Department of Comprehensive Statistics of the National Bureau of Statistics of China).

Deng Xiaoping, who has come to be known as the grand architect of China's reform and opening up, summarized the first thirty years of the People's Republic as follows ("Advancing Democratization in Politics and Implementing Reform in the Economy" April 15, 1985, Selected Works of Deng Xiaoping Volume III, People Press, 1993).

"Following the state's founding, we moved forward with land reform and building up cooperative organizations in rural areas, and implementing the socialist transformation of capitalist industry and commerce in urban areas; and both worked well. However, since 1957, far-left thoughts began to emerge and gradually dominated. In 1958, the year of the Great Leap Forward, the government sprang up and worked on the creation of people's communes, emphasizing large scale and public ownership, and this caused great trouble as the people ate 'rice from a cauldron' [a metaphor of false egalitarianism meaning that treatment will be the same whether you work or not]. For the Cultural Revolution, the problems also go without saying. Even after destroying the Gang of Four in 1976, the economy still remained stagnant for another two years, and this situation continued until 1978, essentially connected to the mistakes of the far left. Over the 20 years from 1958 to 1978, incomes of farmers and workers increased little, and their standard of living remained low, without their being allowed to develop productivity, no matter what the improvement may be. GDP per capita was below $250 in 1978. At the end of 1978, the Third Plenary Session of the (Communist) Party's 11th Central Committee was held. We calmly analyzed the present state of China and summed up the experiences. Although we confirmed that the performance over the 30 years until 1978 since the state's founding was very high, not all the endeavors were successful."

Understood in terms of the restoration of China's national sovereignty which had been lost since the Opium War, Deng's comment that "the performance over the 30 years until 1978 since the state's founding was very high" would be a fair assessment of the first three decades of the People's Republic.

The Second Thirty Years: China surged ahead with a market economy

Starting from the Third Plenary Session of the Party's 11th Central Committee held in December 1978, China shifted to a strategy advocated by Deng Xiaoping centering on "reform and opening up" and actively adopted capitalist elements such as the market economy and private ownership, based on recognition of the failure of the socialist experiments of the first 30 years.

At the early stage of the reform and opening-up process, China abolished the people's communes in the agricultural sector and introduced the household contract system. The industrial sector was also allowed to pursue profit under "decentralization" (transferring authority to enterprises and distributing profits). The pursuit of self-interest by individuals and enterprises invigorated the Chinese economy.

Although the reform and opening-up process temporarily stalled following the Tiananmen Square incident in 1989, it accelerated once again, triggered by Deng Xiaoping's remarks during his tour to southern China in 1992. The 14th Communist Party Congress, held in the same year, made the construction of a "socialist market economy" the target of reform. Since then, the role of the market has been gradually replacing the plans and administrative guidance of the government not only in consumer goods but also in producer goods and the allocation of factors of production such as labor, land and capital.

As the market economy developed, non-state-owned enterprises such as foreign-affiliated and private companies proliferated, while the privatization of state-owned enterprises began in the second half of the 1990s. The productivity of the Chinese economy as a whole increased as a result of the shift of production factors such as labor and capital from the state-owned sector where efficiency is low to the non-state-owned sector where efficiency is high.

Thus, the era of the market economy came to see resources being used more efficiently, with people pursuing their own interests based on the principle of competition amid the process of survival-of-the-fittest (Adam Smith's "invisible hand"), in contrast with the days of the planned economy. As a result, annual GDP growth for the 30 years from 1979 to 2008 reached 9.8%, while the GDP growth per capita rose to 8.6%, both significantly exceeding the results during in the first 30 years of the People's Republic (China Statistics Summary 2009 compiled by the National Bureau of Statistics of China).

The Next 30 Years: Political reform will become the most important issue

Thanks to the reforms over the last 30 years, China has generally improved the lives of the people and increased its presence in the international community. At the same time, however, public dissatisfaction with the widening income gap, aggravated environmental problems and corruption by officials has been mounting. Chinese society has become less stable, as indicated by the frequent occurrence of riots in the streets. Political reform is essential to resolve these problems, because they arise from the contradiction between the economic system, which has been significantly liberalized, and the political system which remains a one-party dictatorship under the Communist Party.

In fact, the 17th National Congress of the Chinese Communist Party held in October 2007, highlighted the goal of political reform, with Party General Secretary Hu Jintao repeating the word "democracy" more than 60 times in his report. Political reform centering on democratization will become the most important challenge for China over the next 30 years, although resistance from vested interests and other twists and turns can be expected.

Related article

"Democratization: India is Premature and China is Overdue," China in Transition, December 11, 2007

October 21, 2009