3.0.2 Why Reforms Started with the Rural Agricultural Sector

3.0.1 Guiding Ideology, Model of Growth, Critical Events
3.0.2 Why Reforms Started with the Agricultural Sector

3.0.1 Guiding Ideology, Model of Growth, Critical Events

Table 3.1 : Guiding ideology, model of growth, critical events during the 1980s and their impacts on the evolution of organizations.

	Late 70s and 1980s
Guiding Ideology / Model of Growth	Deng Xiaoping’s Ideology – “Four Modernizations” 四个现代化 Socialism with Chinese characteristics  建设有中国特色的社会主义 Deng’s model of growth – “Crossing the river by feeling the stones” 摸着石头过河 Strategy of Incrementalism and Experimentalism
Main Events / Efforts / Initiatives	Delegation of power to the local governments Started with reform in agricultural sector. Increasing marketization Relaxation of state control over allocation of resources (land, prices, production, labour) to support increasing marketization and industrialization Explosive growth of new enterprises in non-state sector.1 Rise of rural-based entrepreneurial capitalism Weaning the SOEs off government supports. Adjustment in policies and government functions. Adoption of “CCP Central Party Committee Resolution on Economic System Reform” during the Third Plenum of the Twelfth CCCPC in 1984 and full rollout of reforms in urban industrial sector. Tiananmen Incident and change of top leadership in 1989. Rise of Shanghai clique.
Evolution of SOEs 国有企业的进化	Weaning off the governmental support in terms of resource allocation. Funding switched to bank loans instead of administrative allocation to reflect true costs of capital. Pay taxes instead of submission of profits to government. More autonomy under the responsibility system but still rigid. Political influence still predominant within enterprise with the enterprise’s party secretary having more power than the factory director. Face increasing competition from the collectives and private enterprises.
Evolution of Collectives 集体企业的进化	With the demise of people’s commune system, rural collectives emerged from the production teams and brigades. With the support of the local government, rural collectives experienced rapid growth during the 80s.
Evolution of Private Enterprises 私有企业的进化	Rapid rise of private enterprises especially from the rural sector. Driven by poverty as well as success in agricultural reform. Moved in to capitalize on the shortage of consumer goods due to inflexibility in the state sector. Policy environment generally conducive for their growth. Strong support from local government in eager pursuit of economic growth. Gained market share at the expense of state sector even though starting from positions of weaknesses.
Evolution of FIEs 外资企业的进化	Mainly from Hong Kong, Taiwan, Macau reflecting the cultural root and geographical proximity. Mostly in low value-add processing trade.
Key Regulatory Changes	Agricultural :  Household responsibility system (1978); Dual-track price system for agricultural products (1978); Demise of people commune system (1984) Industrial /  Commercial : Introduction of ‘loan for grant scheme’ (80) 2 Constitution regarding Land rights enacted (82). Labour Contract System introduced (83) “Tax for profit” scheme introduced (83) 3 Price control and sales of consumer goods lifted (83) Industrial reform in cities fully unfolded (84) 4 Factory Director Responsibility System (85) Dual Track Price System for Capital Goods (85) Trial for shareholding system began (86) Dual exchange rate system adopted (86) 5 Provisional Ordinance on Private Enterprises adopted (88) 6 Foreign Sector Setting up of 4 SEZ in southern coastal cities. (80) Opening up of 14 coastal cities (84) GATT membership application (86)

Notes

1.     New enterprises in the nonstate sector fall into five categories: newly formed urban and rural collectives, private enterprises, foreign capital enterprises, and joint ownership enterprises
2.     In 1980 a measure called ‘substitution of loans for fiscal appropriations’ (拨改贷bo gai dai) was introduced to turn fixed asset investment in state and urban collective enterprises into bank loans. This was followed by a central government decision in 1983 to reduce the role of the fiscal authority in the allocation of working capital and to make state banks the main source of supply and supervision.
3.     “Tax for profit” scheme (利改税  li gai shui) – Replacement of profit hand-over with taxes.
4.     “CCP Central Party Committee Resolution on Economic System Reform” adopted during Third Plenum of the Twelfth Central Party Committee held in Oct 1984. After that meeting, reform was fully unfolded in the industrial sector.
5.     China adopted a system of dual exchange rates – the yuan for domestic transactions and Foreign Exchange certificate (FEC) for foreign investors.
6.     For the first time, the rights of private enterprises were written into constitutions. Private enterprises were regarded as important supplements to public ownership in a socialistic economy.  3月25日~4月13日，七届全国人大一次会议举行。会议通过了《宪法修正案》，将“国家允许私营经济在法律规定的范围内存在和发展，私营经济是社会主义公有制经济的补充。国家保护私营经济的合法的权利和利益，对私营经济实行引导、监督和管理”以及“土地的使用权可以依照法律的规定转让”等规定载入《宪法》。

The watershed event that signaled the start of China on its path to economic reforms is without a doubt the Third Plenum of the Eleventh Central Party Committee (中共十一届三中全会) in December 1978. After consolidating his power, Deng began to focus on reforming the ruined economy. One of the most important resolutions adopted at the meeting is the decision to set aside development based on classless ideology and focus all efforts on economic development.

Even though the objective of the economic reforms was to modernize China through industrialization, reforms were set to start in the rural agricultural sector first for several reasons.

Firstly, at the start of the reform, China was essentially still an agricultural country with about 70% of its population still residing in the rural area. Reforms in the agricultural sector, if successful, would bring immediate reliefs to the majority of the masses who were living in extreme poverty attributed to decades of economic mismanagement.

Secondly, within the echelon of its first generation leaders, many had roots that were linked to the agricultural sector. Unlike the Russian Bolshevik Revolution which was urban-based, the Chinese communist revolution had its power base rooted in the countryside during its formative years. Under the leadership of Mao, the CCP won the heart of the peasants through land reform programs, relieving the peasants from the suppression of the exploitative landlords and warlords during the Nationalist era. Millions of peasants subsequently joined the revolutionary army and many became the cadres and leaders of the state bureaucracy after the victory of the revolution in 1949 (Song Defu 1994). Despite the proclaimed goal of catching up with the developed countries through urban industrialization after 1949, the source of CCP’s power remained rooted firmly with the peasants in the rural areas. It was therefore natural that leaders within the CCP had the welfare of the peasants close at heart. The proximate affinity between the CCP and the peasants was visibly reflected in the CCP’s choice of leaders to be at the helm of the economic reforms. Leaders in the 1980s, such as Zhao Ziyang and Wan Liwere predominantly rural-oriented. Before they were brought to Beijing to be the premier and vice premier, Zhao and Wan led Sichuan and Anhui provinceswhich pioneered agricultural reforms. It was therefore not surprising that reforms started in the rural agricultural sector.

Thirdly, unlike industry, agriculture is harder for the government to plan and manage. This is because agricultural harvest depends very much on natural conditions such as soil quality and weather, which the government has little control over (Huang 2008; Wu 2005). As a result, the central government was less directly involved with the agricultural production than they were with the industrial sector. This meant that structurally, there was therefore less organizational complexity involved and reforming it was simpler. It also required less resources from the central government. There was therefore ahigher chance of success with agricultural reforms. In contrast, reforming the urban industrial sector involved tampering with the entire state apparatus comprising of input allocation, production and output distribution systems. The process would require intricate coordination among the various government agencies, each with strong vested bureaucratic interests (Shirk 1993). Furthermore, under the central planning system, the decision chains were long-stretched, intertwined, and teemed with interpersonal rivalries and factional politics (Harding 1981; Lampton 1987; Lieberthal and Oksenberg 1988; Walder 1986). The perceived risk of failure of reforming the urban industrial sector was thus much higher.

Finally, there was another push factor that could explain why the rural agricultural sector became the initial focus of economic reform. At the end of 1970s, China was still reeling from the devastating effects of the Cultural Revolution which officially ended only in 1976 with the demise of Mao and the subsequent arrest of the Gang of Four. Agricultural production was still based on the commune system which started in 1958 during the Great Leap Forward years. Under the socialist egalitarian approach, all members of a commune received the same share of output regardless of the effort each put in. The lack of incentives for hard work resulted in low motivation and morale that translated into declining crop yields. The poor harvests in some areas were also exacerbated by periods of drought leading to mass starvation and poverty. Many ended up begging when not working on the fields. There was a pent-up demand for changeat the grassroots level because of the acute hardship that the peasants were experiencing. In desperation, peasants in some areas were driven to self-action. On November 24, 1978, a month before the Third Plenum of the Eleventh Party Congress, farmers from twenty households in the Xiaogang Village of Fengyang County in Anhui Province took it upon themselves to devise a better way of agricultural production. At the advice of an elder who had experienced the effectiveness of contract responsibility system when it was implemented in 1961 as a correction measure for the disastrous Great Leap Forward policies,  the farmers decided to sign a pact to bring it back, leading to the spontaneous rebirth of the radical household responsibility system (HRS) (家庭责任制 jiating zerenzhi).[i] Given the ideologically-charged and intense political environment still prevailing at that time, it was an immense risk that one would not lightly take, unless out of sheer desperation.

Based on aforementioned factors, it was not surprising that the main thrust of the reform was the rural agricultural sector. Rural reform was the genuine starting point.  The success in the agricultural sector stimulated growth in the rural industrial sector, culminating in the extraordinary development of the township and village enterprises (TVEs), spearheaded and supported by local governments. From 1980s to the mid-1990s, the TVEs phenomenon contributed immensely to the growth of Chinese economy at a time when reforms in the state-sector was bogged down by vested interests and the rigid centrally-command governance structure. Therefore 1980s was irrefutably a decade of rural entrepreneurism. It was rural entrepreneurism that started China off on its road of economic reforms.

As for the urban industrial sector, pilot industrial reform programs were developed and carried out in selected factories and limited localities during the initial years of the reform, paving the way for full-scale urban-based industrial reform in the future. At the same time, the economic activities of the foreign sector supported by the inflow of FDI were restricted to the special economic zones at the coastal areas. The amount of FDI received was low and the investments were mainly for low-skilled processing trade. Parts were imported from overseas and the finished products were re-exported.

The 1980s ended with the Tiananmen Incident, an event of mass social disorder, which threatened to deliver a severe blow to the reformation process. In its aftermath, policy makers led by a new central leadership instituted policy changes which fundamentally changed the course of the economic reform. As a result, the new decade marked the start of a new phase in which the focus of the economic reform switched from the rural to the urban sector. Even though China persisted on its road of economic reform, the policy changes delivered a great shock which radically changed the ecological environment and the strategic responses of the economic actors.

The discussion in this section covers the evolution of the economic development in the 1980s. It pays particular attention to the regulatory and institutional changes covering four sectors: the rural agricultural sector, the non-state industrial sector(including the TVEs and the private enterprises), the foreign sector at SEZsdriven by FDI, and the state industrial sector involving the state-run enterprises. This is followed by another section exploring in-depth the strategic choices of economic actors in response to particularistic actions of state agents in each of the four sectors.

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[i] Also called the household contracting system (家庭承包经营制 jiating chengbao jingyingzhi), the responsibility system in agricultural production (农业生产责任制 nongye shengchan zerenzhi), etc. Notably, the household contracting system is not a new innovation in the of the reform era. In fact, it had been practiced during the Mao era.

2.2 Government’s Decentralization Drives in 1958 and 1970.

Contents

2.1       Problems of Central-Command System
2.2       Government’s Decentralization Drives in 1958 and 1970
2.3       From Administrative Decentralization to Economic Decentralization After 1979
2.4       Market Economy with Chinese Characteristics

2.1       Problems of Central-Command System

For a planned economy to work, two premises must be fulfilled. Firstly, the central planning organ needs to have complete information on all economic activities taking place within the society. Secondly, the interests of the whole society must be integrated so that no separate interests or different judgments of value fall outside the scope of the plan as divisive elements of both the society and the plan (Wu 2005; 18).

In reality, however, such assumptions are hard to fulfill because of two mutually-interacting and reinforcing macro-trends: rapid technological advancement and globalization. Production processes today are intricately complex with the concept of distribution production network. Technological advances have become more diffused and are no more in the hands of the privileged few. This lowered the entry barriers for new entrants in the global market, each seeking to offer products with better quality, more features and lower costs. Choices of product have increased as a result of such competition and along with that, consumptions patterns vary and shift rapidly. These changes in today’s environment increase infinitely the amount of information that needs to be processed prior to making plans, making predictions worthless and impossible, not to mention the huge investment needed to build an extremely flexible and power information system. The huge information costs as well as the opportunity costs arising from the inflexibility once the plans have been made thus render insurmountable difficulties to the continuation of the centrally-command system.

Even if plans are well made, the execution phase presents further opportunities of complications that may bring about deviations from the plans.  Every economic agent has his vested interested that may not conform to the greater common goals. This divergence of interests may result in distortions and deviations at every link of the implementation phase.

A final problem relating to a centrally-command system is the issue of incentives and accountability. As pointed out by Wlodzimierz Brus, an exponent of the Polish school of market socialism, such issues led to defects, such as the “ratchet effect”[i], neglect of economic results, and lack of a system to hold people accountable (Wu 2005; 16).[ii]

In short, a centrally-command system had proven itself a system fraught with inefficiencies  that reflect the innate defects of a centrally-control allocation system. In times of abundant resources, such inefficiencies were masked by rapid economic growth.  However, when resources turned scarce, such innate defects overwhelmed the system and doomed it to failure. Efforts by Soviet leaders Stalin, Khrushchev and Kosygin to reform the Soviet system failed because these innate defects of the system were not addressed (Wu 2005; 20 – 24). Their experiences served as invaluable lessons to the Chinese policymakers to avoid similar pitfalls when embarking on economic reform. The deep-seated issues of high information costs, divergence of interests and lack of incentives and accountability must be addressed for the reform to be fruitful. However, that was not obvious to the Chinese policy makers during Mao’s era, without the benefits of the hindsight that policy makers today have.

Hence, before 1978, the ideological creed of state ownership as the sole basis of economic development prevented any reform that was market-based. As a result, reform was restricted to mainly decentralization during which power was delegated to the lower levels of government and to the state-run enterprises.

There were two decentralization drives which happened in 1958 with the formation of the people’s commune system in the rural areas and then again in 1970 when a large scale economic management system reform was launched under the slogan “decentralization is a revolution and the more decentralization, the greater the revolution”.

The two decentralization efforts were similar in that administrative functions were transferred to lower levels although the political situations were different. The former happened during the Great Leap Forward campaign when Mao wanted to accelerate industrial development to catch up with the West. In the case of the latter, Mao anticipated the coming of another World War and divided the country into ten cooperation regions with the objective that each had the industrial setup to develop capability for fighting its own war.

Despite the difference in objectives, both ended with similar disastrous consequences. During the Great Leap Forward campaign, millions died of starvation when fields were left unattended and farming tools were smelted to produce poor-quality steel. In the case of the 1970 decentralization, competition for resources at the local levels to go into industrialization in a big way sank local economy.

There was therefore a pattern in the administrative decentralization efforts during the first three decades of communist rule under Mao. Firstly, centralization led to stagnancy which prompted decentralization. When decentralization ended in economic chaos, recentralization ensued. The cycle of centralization, stagnancy, decentralization, chaos, and then recentralization failed simply because they were motivated by political and ideological considerations at the expense of economic efficiency. To achieve ideological and political goals, economic efficiency was often sacrificed.

Perhaps, China’s failure in reforming its system before 1978 could be rooted in the “path dependency” concept applied by Douglass C. North on institutional change. North professes that an institution’s present choice set of actions is limited by choices made in the past. Therefore, once an institution has chosen a certain path, it will evolve along a certain direction which can only lead it to a certain set of goals available only for that path. The risk is therefore as changes evolve, an institution becomes increasingly locked in by its earlier choices. The leaders of China, just after 1949, had chosen to be on a socialist path that came with inherent defects that we know today with the benefits of hindsight. Regardless of what changes it chose to make, the defects manifested themselves along the path on every choice it made and limited the effect of the change.

In fact, criticisms about the strategy of administrative decentralization were voiced as early as 1961, in an internal research report submitted by Sun Yefang, a distinguished economist. Not only did his opinions fell on deaf ears, Sun was persecuted as a revisionist just for presenting his viewpoint. According to Sun, the central issue of reform was not about the relationship between the central government and local governments. Instead, it should be about the autonomy of enterprises in the management of their operations. In other words, reform of the economic management system should focus not on the division of power among administrative authorities at different levels but on the relationship between the state and the enterprises, with the focus on empowering the enterprises so as to provide them with the incentives and motivation to shoulder the responsibilities accorded to them by the state.

Sun’s view failed to explain theoretically why delegating power to and sharing profit with enterprises would raise the efficiency of the national economy (Wu 2005). The missing element is the free-market environment. Or to use the “path dependency” concept again, Sun’s view involved making a different choice but still along the same path.

Indeed, current reforms went one giant step ahead of Sun’s theoretical framework of power delegation and profit sharing. Not only have the enterprises acquired autonomy that Sun suggested, economic reforms since 1978 have also created an increasingly free market environment that autonomous enterprises of different ownership types can conduct their economic activities and compete based on market forces.

Therefore, changes after 1978 were not a mere difference in choices along the same path. It was a quantum jump from one path to another which would lead it to a different set of goals and, along with it, different constraints. In other words, Chinese policy makers after 1978 have chosen to jump to a different path, from socialism to “state capitalism”. It was probably hard for Sun to imagine how far the central government, within the framework of a socialist state, was willing to go in reforming the economic management system, given the dogmatic ideological environment prevailing at the time he formed his opinions.

2.3       From Administrative Decentralization to Economic Decentralization After 1979

Or, as Wu (2005) noted, quoting Herbert Franz Schurmann and Morris Bornstein, there were two types of decentralization: economic decentralization and administrative decentralization. The former was market-oriented and focused on creating a market economy within which decisions could be made based on free market forces of supply and demand. The latter, on the other hand, worked to maintain the framework of a planned economy by improving the existing administrative measures.

Before mid-1980s, China’s economic reform was predominantly based on administrative decentralization, focusing on the various levels of government within the state apparatus. One good example of such measures is the revenue sharing system (分灶吃饭fenzaochijan) introduced in 1980. The measure brought initial benefits as it provided incentives to local officials to increase revenue collection and reduce expenditure. Over time, however, the defects of the measure became more apparent when local government introduce protectionist measures to support local industries in order to protect its revenue base, leading to the creation of a “vassal economy”.

This example illustrates another point made by Wu (2005) that in a planned economy, decentralized control produced less desirable results than centralized control. The reason being that for administrative allocation of resources to work, centralized calculations by a state planning body followed by strict enforcement of the plans are needed. Decentralized control would only result in divided leadership each with its vested interests and was therefore not ideal for a planned economy. This led the Chinese economists to the conclusion that economic decentralization, focused on creating a free market within which independent market players could make decision based on market stimulus, was the only right direction.

The evolution of the economic reforms for China therefore happened along its own path, quite independent from that taken by the countries in the West. China did not adopt the economic models of developed economies and chose to learn its own lessons, knowing very well that domestic environment was radically different and China faced a different set of constraints. China was not only different from the capitalist developed countries. It was even different from other centrally-planned socialist economies because of its history and culture as well as the different paths it had taken under Mao prior to the start of the reform in 1978. Despite so, once the lessons were learned, the direction of China’s reform was unequivocally to build a market economy. What was different were the means it chose to use to achieve that. Deng aptly summarized China’s strategy with a single phrase “Crossing the river by feeling the stones”, an approach which has evolved into what many economists named it “Beijing Consensus” today.

2.4       Market Economy with Chinese Characteristics

Notably, Chinese efforts of economic liberalization took place without political liberalization or, “democratization” embodies in Washington Consensus as prescribed by Western economists, politicians and intellectuals. This economic liberalization program without democratization is perhaps better- and more aptly-known as “Beijing Consensus”.

The advent of the financial crisis triggered by the US subprime mortgage meltdown indeed demonstrates that far from being a hindrance to economic development, a somewhat tightly managed economic system, as in the case of China, may have caused the system to have not only avoided the same problems that arose in a Laissez-faire system like that of the US, but also managed the fallouts more effectively when the crisis started.

In an increasingly integrated global environment, competition is no more between corporations but more so between governments. For Western MNCs, many are indeed already bigger than the entire economy of individual developing nations. For the latter to develop their economies, especially their local enterprises, it is hardly a level-playing ground. China has a huge-domestic market and the local companies found niches to evolve before having to compete with the MNCs after its accession to WTO in 2001.

For many other smaller developing countries, however, their disadvantaged position is accentuated by their lack of a domestic market to provide room for growth of indigenous industries. Much of this has been discussed in great depth in many literatures on the pros and cons of globalization. But the point is that there is an increasingly greater role for government to play, not less. Government need to be more involved because the forces, especially the macro-economic ones, are too great for small companies to overcome.

Take China for example. Despite being the factory of the world, many low-cost producers at the coastal areas were hit by both inflation and higher exchange rate that ate into their profit. Many folded therefore not because of inefficiency in their production but because of macro-forces that are beyond their control. Hence, there is a role for government to play in managing such forces so that indigenous companies are not put at a disadvantage.

Governments today need to be less ideologically-oriented but more economically-oriented. It has to be so because any government that does not help to create wealth would be seen as an incapable one, without the cover and excuse provided by an ideological creed. With freely-flowing information, it is no more easy for governments to shut themselves up totally, even for rthe remaining diehard socialist states like Korea and Cuba. Unless they chose to shut themselves totally up, it is not possible for information flow to be stopped totally.

With the demise of the Soviet-led socialist bloc, the argument is no more between the ideological alternatives of whether centrally-controlled or free-market is good. Government should not be looked at from ideological perspective. In other words, the concept of ‘government’ should be ‘de-ideologized’. The role of every government, is determined increasingly not by ideology but by economics development.

Hence, the success of China’s economic development demonstrates that economic development needs to be apolitical. When Washington Consensus was proposed in 1989, China was still in the midst of reforming its SREs and it was unclear how successful China would be. Since then China has made such great progress that China Consensus has been offered as another alternative for developing countries.

The separation of politics from economics falls on the premise that the world has become an increasingly integrated one as a result of globalization. While politics is usually localized, economics has gone international or global. The separation of politics from economics therefore allows an economy to quickly integrate with the rest of the world without having to change its political system. In other words, any country can adopt a market-based economy and carry out economic reforms without switching political orientation.

Of course, China’s experience may not be applicable to all, given that there are many variables between countries. But at least, China success stands testimonial to the viability of that proposition. Also, most developing countries share many commonalities at the starting line: focus in primary industries, low productivity, low level of mechanization, absence of market, absence of financial market, illiterate population and low-skilled labour, poor institutional structural, poor private property rights, etc. In many instances, Chinese experience may still be relevant to other developing countries because of those commonalities. What remains to be studied is how China’s experience can form lessons for other developing countries to emulate.  In that regard, World Bank and IMF have an important catalytic and constructive role. The appointment of Chinese economist Lin Yifu as World Bank’s Chief Economist is a big step by World Bank towards fulfilling that role.

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[i] A ratchet is a gear that can run only forward but not backward. A ”ratchet effect” describes an enterprise’s effort to avoid higher future production quotas by making sure that current targets are not over-fulfilled.

[ii] Brus initially suggested combining centrally-planned economy with market mechanism. However, after migrating to Britain in the 1970s, Brus changed his mind and switched to supporting market-oriented reform. See Wlodzimierz Brus, “From Revisionism to Pragmatism: Sketches to a Self-Portrait of a ‘Reform Economist’ (1988),” Janos Matyas Kovacs and Marton Tardos (eds.), Reform and Transformation in Eastern Europe, London: Routledge, 1992; Wlodzimierz Brus and Kazimierz Laski, “From Marx to the Market: Socialism in Search of an Economic System,” Oxford: Clarendon Press, 1989.

1.1 Construction of a Society of New Democracy (1949 – 1953)

Contents

1.1       Construction of a Society of New Democracy (1949 – 1953)
1.2       Socialist Transformation (1952 – 1958)
1.3       Anti-Rightist Campaign (1957 – 1958)
1.4       First Economic Reform & Great Leap Forward (1958 – 1963)
1.5       Lushan Meeting & Anti-Right Deviation Campaign (1959)
1.6       Corrective Measures : Recentralizing and System of Three-Level Ownership (1960)
1.7       Practice of ‘Responsibility Plots’ & Conference of Seven Thousand Cadres (1961 – 1963)
1.8       Socialist Education Campaign (1963 – 1966)
1.9       Cultural Revolution (1966 – 1976)

Before 1949, the Chinese economy was dominated by the private sector which accounted for two-thirds of the total industrial output and more than 85 percent of total retail sales. State sector began to rise in dominance only after 1955 as a result of efforts to accelerate the pace of socialist transformation based on the Russian model.

Table 1 : Guiding ideology, model of growth, critical events before 1978 and their impacts on the evolution of organizations.

	Before 1979
Guiding Ideology / Model of Growth	49 – 76 Egalitarian ideology 49 – 56 Soviet Style Centrally-planned economic system.1 53 – 56 “General Guideline for the Transition Period” – Guiding principle for Socialist Transformation 58 – 63 “To surpass Britain in three years and to surpass America in ten years” – Great Leap Forward
Main Events / Efforts / Initiatives	Agrarian Reform (48 – 52) Korean War (50 – 53) First Five-Year Plan (1953 – 57) Socialist Transformation (52 – 58)2 from New Democracy to socialism Socialist transformation of agriculture (1952 – 58) Mutual-aid and co-operation campaign (52 – 55) Cooperative Transformation Campaign (1955 – 57) People’s Communes Campaign (1958) Socialist transformation of private handicraft industry (1953 – 1956) Socialist transformation of capitalist industry and commerce (1954 – 1856) “Letting a hundred flowers blossom and a hundred schools of thought contend” (56 – 57) Anti-Rightist campaign (57) Great Leap Forward (1958 – 63) First economic reform  (1958) Administrative Decentralization (1958) First Go-communism craze (58) Lushan Meeting and Anti-Right Deviation Campaign (59) Second Go-communism craze (60 – 61) Three-year Natural Disaster (60 – 62) (also known as “three-year period of hardships”) Correction of errors from Great Leap Forward (60) Recentralization (1960) Size of people’s communes reduced.  Production team became the basic accounting unit. (1960) ‘Responsibility Plot’ implemented in Anhui and other locations, against Mao’s objection. (1961) Conference of Seven Thousand Cadres. Mao took responsibility for his mistakes. (62) Socialist Education Campaign (63 – 66) Cultural Revolution (66 – 76) Second Administrative Decentralization (70 – 71) Passing of Mao. End of Cultural Revolution. (1976)
Evolution of SOEs 国有企业的进化	Focused especially on heavy industries, especially for production of military equipments.
Evolution of Collectives 集体企业的进化	–
Evolution of Private Enterprises 私有企业的进化	–
Evolution of FIEs 外资企业的进化	Non-existence
Key Regulatory Changes	–

Notes

1.     Soviet model of socialist command economy under Stalin was similar to Lenin’s theory of “State Syndicate”. Lenin likened a socialist economy to a super enterprise (i.e. a ‘State Syndicate’) monopolized by the state and state ownership was regarded as the sole economic base for socialism. (Wu 2005, Pg. 4) 苏联史大林时代列宁式的中央集权制度
2.     Under the guidance of “General Line for the Transition Period” adopted in 1953, this was completed in three phases. Socialist transformation of agriculture [农业社会主义改造(53 – 56)], socialist transformation of private handicrafts industry [手工业社会主义改造(53 – 56)] , and socialist transformation of capitalist industry and commerce [资本主义工商业的社会主义改造(54 – 56)].

The plan for the reconstruction of China was decided during the Seventh National Congress of the CPC in 1945 before the founding of the new state. It was dictated that realization of socialism should take two steps. First, there would be three years of preparation in the recovery period before another ten to fifteen years of construction of the society of New Democracy. This was to be followed by a transition towards the formation of a socialist society.

Under the leadership of Mao, Agrarian Reform was started in 1948 and was completed by 1952. By then, each rural resident had been allotted a share of land. Interestingly, according to Wu (2005), Mao was not against the concept of capitalism before the founding of the new China based on his thoughts outlined in two of his papers. In his 1940 essay entitled “On New Democracy”, he asserted that the economic base for the new democratic society would be a mixed economy which included a private capitalist sector that “cannot dominate the livelihood of the people” and the condition that big banks and the big industrial and commercial enterprises owned by the state. In another paper “On Coalition Government” which he delivered at the Seventh National Congress of the CPC in 1945, he stated that in the new democratic society, capitalism should have adequate room for development. What he objected was not domestic capitalism but foreign imperialism and domestic feudalism. He further professed that “development of capitalism in a vast scale under the New Democratic regime has no harm but only benefit”.

His stance began to shift, however, by 1949 just before the founding of People’s Republic of China (PROC), when he declared that the contradiction between the proletariat and the bourgeoisie had become the main domestic contradiction. During the initial years after the founding of PROC, however, because of the Agrarian Reform (1948 – 52) and the Korean War (1950 – 53), Mao reckoned that the timing was not right for an all-out attack on capitalism. In 1952, with the Agrarian Reform and the Korean War drawing to a close, Mao proposed the transformation from New Democracy to socialism immediately and dictated that the bourgeoisie as well as capitalist industry and commerce should be eliminated. Given the size of the country, however, he estimated that the completion of the process would take ten to fifteen years.

In June 1953, Mao put forth the “General Line for the Transition Period” which proposed making socialist ownership of the means of production the only economic base for China within a timeframe of fifteen years.  This was to be achieved by expanding state ownership and changing private ownership into either collective or state ownership. The proposal was accepted formally as the guiding principle for the party in August 1953.

1.2       Socialist Transformation (1952 – 1958)

Under that guiding principle, China embarked on its socialist transformation process along three lines: socialist transformation of agriculture (1952 – 58), socialist transformation of private handicrafts industry (1953 – 56), and socialist transformation of capitalist industry and commerce (1954 – 56).

In the long history of China, agricultural production for the Chinese had always been a household affair with family forming the basic social and economic cell of the agrarian society. There was a natural division of labour within the family unit with the elders making decisions while the rest carrying out the work with minimum supervision. All these helped to reduce measurement, supervision and transaction costs. Under the leadership of the Mao, however, the system of family farming was set to undergo fundamental change with the launch of the socialist transformation of agriculture in October 1952. It was declared that starting in December 1952, unified purchase and marketing (统购统销 tonggou tongxiao) of grain was to be implemented nationwide. Under that arrangement, all surplus grain would be purchased by the state at a state-stipulated price. However, because the compulsory price was lower than the market price, government met strong resistance from the farmers during the execution of the plan. The problem was accentuated by the fact that there were tens of millions of independent rural households which made control extremely tedious. There were mutual aid and cooperatives but these were elementary organizations that farmers could freely join and withdraw. Because of their voluntary nature, such cooperative numbered few. It was difficult for the government to implement unified purchasing and marketing of agricultural products. There was therefore a need to organize the farmers in order to exert better control over them. In 1955, the Cooperative Transformation Campaign was launched by Mao to turn these elementary mutual aid cooperatives into quasi-state-owned “advanced cooperative”. This time, participation was no more voluntary. By the end of 1955, five hundred advanced cooperatives came into being. Their member household accounted for 3.45% of the total number of rural household. Two years later, in 1957, the transformation from family farm system to advanced cooperatives was complete. All the 120 million rural household belonged to one of the 753 000 advanced cooperatives found all over China (Wu 2005, p.101).

Despite the astounding success of the transformation, there were still deficiencies in the advanced cooperative system. Each cooperative was relatively small with only one to two hundred households. More importantly, their organization was separate from the grassroots leadership making them difficult to control. In order to exercise effective leadership over the advanced cooperative, it was decided by the CCCPC on March 30 1958 that the cooperatives be consolidated into larger ones which Liu Shaoqi called communes.  For the party to have better control over the communes, the management of the communes would be integrated with government administration. In July the same year, the People’s Communes Campaign was launched nationwide to organize people’s communes on a large scale. The process was completed by October 1958. More than 740,000 advanced cooperatives had been reorganized into 26,000 people’s communes, with, on average, 28.5 advanced cooperatives merged into one people’s commune and more than 4,500 rural households in each commune. The entire rural China had switched over from the loosely organized voluntary elementary cooperatives to compulsory advanced cooperatives and finally to the integrated people’s commune system within only three years (i.e. 1955 – 1958). Altogether, there were more than 2600 people’s communes each with an average of 28.5 advanced cooperatives  comprising of 4,500 rural households. Within each commune, production brigades (later called administrative districts) were established as units of production management and economic accounting.

What was impressive of the campaign was not only the scale of the exercise. It was also the speed with which the task was completed and the orderliness of the transition, despite requiring the people to make great personal sacrifices by giving up their assets and rights. More than anything else, it demonstrated the absolute faith of the people in its leaders.[1]

What was Mao’s objective in wanting to change from a loosely organized producers’ cooperative to a highly structured commune system, one may ask? Following Stalin’s model, Mao wanted to pursue industrialization at a rapid pace with priority given to heavy industry. This was to be done however, without first developing a light industry and hence without a strong economic base upon which the heavy industry could be built on. It was therefore impossible to create value first using light industry and the value could then by used to exchange for grain and agricultural raw materials needed for the development of heavy industry. There was a need to collect agricultural products from farmers using coercive methods. Without other methods of raising funds, such as using foreign borrowings, the adoption of a command economic model with state ownership was therefore inevitable and necessary. Given that China was still an agrarian country, the exploitation of the agricultural sector and the hapless farmers, in the name of national development, was inevitable.

Meanwhile, the socialist transformation of private handicrafts industry began in 1953. In October 1955, Mao turned to the owners of private industry and commerce, urging them to be ready for communism. Under the exhortation of Mao, private enterprise owners applied to the state for ‘socialist transformation” by switching to joint state-private ownership. By 1956, the transformation from New Democracy to socialism was complete. What was intended to be a fifteen year process took over three years (i.e. 1953 – 1956) to accomplish.

1.3       Anti-Rightist Campaign (1957 – 1958)

Despite the success in the transformation, inherent defects of the centrally planned economy soon began to emerge. For instance, the enterprises’ loss of autonomy resulted in noticeably decline of managerial initiative as well as a fall in the quality of products and services.

In Mao’s 1956 “On the Ten Major Relationships” speech, he summarized the defects of the system as over-centralization of power in the central authorities resulting in too little flexibility on the ground. To launch a rectification campaign against bureaucratism and factionalism within the party, Mao began to promote the policy of “letting a hundred flowers blossom and a hundred schools of thought contend” (百花齐放 百家争鸣 baihua qifang, baijia zhengrmng) during the autumn of 1956 to the spring of 1957. The public was invited to air their views freely.

Over the next two months, many unsuspecting intellectuals and officials voiced their opinions and criticisms. By the middle of 1957, the Chinese leadership was shocked by the criticisms against the party and socialism and ordered an all-out crackdown of these outspoken “bourgeois Rightists” in a campaign known as the “Anti-Rightist Campaign” (反右运动 fanyou yundong). Within a year, about 550,000 “Rightists” were persecuted.

More importantly, after Mao display of intolerance over criticisms, few dared to speak out against his policies thus sowing the seeds of calamities for the disastrous Great Leap Forward campaign that followed.

1.4       First Economic Reform & Great Leap Forward (1958 – 1963)

In 1958, in an effort to remedy the situation of sluggish economic growth, China embarked on its first economic reform. The central theme of the reform program was administrative decentralization so that power could be delegated to the lower levels of government. Reform measures implemented included the transferring of power relating to planning, control of enterprises, allocation of state resources, review and approval of capital construction projects, finance administration including tax collection and credit administration, and labour administration.

Unfortunately, the success of the socialist transformation and the transition to people’s commune system did not produce the desired results which Mao. Together with the reform program of administrative decentralization, however, the socialist transformation and the people’s commune system laid the institutional groundwork for Mao’s next campaign – Great Leap Forward – which was launched at the end of 1957 guided by the slogan “Surpass Britain in three years and to surpass America in ten years“.

In the rural areas, however, many serious problems were beginning to emerge as a result of the switch over to people’s communes. The administrative decentralization also led to large increase in number of capital construction projects supported by a huge increase in SRE employees. As an indication of the extent of the craze, the number of projects in any single year from 1958 to 1960 was more than the total number of projects initiated during the entire First Five-Year Plan period (1953 – 1957). During the same three-year period, fixed asset investments were 71% more than the total during the First Five-Year Plan period. The number of SREs employees increased from 24.51 million at the end of 1957 to 59.69 million by the end of 1960. The uncontrolled burst of activities led to wasteful consumption of huge resources and deteriorating efficiency. The economy was thrown into disarray even though local officials were reporting record-breaking production figures which were later found to be untrue.

In addition, Mao’s call to for China to surpass the West led to the first go-communism craze characterized by the tendency to exaggerate, the tendency to be authoritarian, the tendency to give arbitrary orders, and the tendency for cadres to behave as the privileged. All these did great harm to farmers. In response to Mao’s call to increase production of steel, for example, members of the commune even melted farming tools only to produce steel that were of low grade and usable. Cadres exaggerated the output results when production actually declined.

At the same time, as a result of the efforts to raise steel production, grain output declined by 15% in 1959 and then by another 10% in 1960. Because of the poor harvest, consumption per capita of rural grain in both the cities and rural areas dropped 19.5% from 203 kilograms in 1957 to 163.5 kilograms in 1960. Grain consumption per capita in rural areas dropped by an even greater margin of 23.4%. While malnutrition was prevalent in the urban areas, death from starvation numbered tens of millions in the rural areas. Officially, however, the death was attributed to natural calamities and this period of time (1960 to 1962) was known as “three years of natural calamities” (三年自然灾害 sannian ziran zaihai).[2]

1.5       Lushan Meeting & Anti-Right Deviation Campaign (1959)

In fact, it was already clear by 1959 that drastic measures had to be taken to redress the rapidly deteriorating situation. At the meeting of the Political Bureau and the Eighth Plenary Session of the Eighth CCCPC convened in Lushan (the Lushan Meeting) that year, leaders discussed measures to correct the “Left deviation”. Mao concluded that there had been over-delegation of powers and proposed taking back those powers. However, in response to criticism from Peng Dehuai, a member of the Political Bureau, Mao switched the theme of the meeting to opposing right deviation. The ensuing Anti-Right Deviation Campaign (反右倾运动 fanyouqing yundong) led to the continuation of the Great Leap Forward, accentuating the worsening the economic crisis. Between 1960 and 1961, the practice of extreme egalitarianism characterized by indiscriminate, unpaid-for transfer of resources among collectives at the same level or different levels led to the second go-communism craze.

1.6       Corrective Measures : Recentralizing and System of Three-Level Ownership (1960)

Corrective measures were also taken in the fall of 1960 with the implementation of the policy of “readjustment, consolidation, reinforcement, and upgrading“. In fact, rural fairs were reopened by the autumn of 1959. In the summer of 1960, private plots were restored and public canteens dissolved. Besides recentralizing the administration of government functions, enterprises that were transferred to local governments were also brought back under the central control and many were reorganized. Small iron and steel mills started during the campaign were dismantled and the workers were let go.

Meanwhile, changes were also made to the commune system in the rural areas. To increase accountability of results and to improve productivity, the size of the people’s communes was reduced and a system of three-level ownership, with the production team (instead of the production brigade) as the basic accounting unit, was instituted. The number of communes increased from 26 000 to 75 000 now that each was of smaller.[3] After 1961, commune members were allowed to operate small private plots and small-scale household production on the sideline. Temporary employment of surplus rural labours in the cities was also allowed.

From 1962 onwards, production teams, each comprising of twenty to thirty household similar to the earlier elementary producers’ cooperative, became the norm. The in-effect reversal to the elementary producers’ cooperative system happened just as quickly as the transition from the elementary producers’ cooperative to the integrated people’s commune system.

Despite the adjustments, however, the agricultural operation system and rural policies of the government still remained unfavorable to the development of productivity in the rural areas. There were several major problems for agricultural production as a result of the Cooperative Transformation Campaign and the People’s Communes Campaign.

Firstly, farmers lost control over issues like what to produce and how much to produce, even though they were the best to decide based on their understanding of the soil conditions and the changing weather patterns. After production plans were made by the governments, farmers had no choice but to passively accept them.

Secondly, farmers lost the claim to the surplus of their labour. The state implemented unified purchase and marketing through state-owned commercial enterprises and quasi-state-owned “supply and marketing cooperatives (公销合作社 gongxiao hezuoshe). These agencies extracted all surplus value during the process by offering a low unified purchase price. At the same time, farmers were allowed only limited rural fair trading while long-distance transport of goods for sale was forbidden.

Next, with the work-point system, measurement of effort was difficult and supervision cost was high. Free-riding was common especially when there were many households in the production brigade. Many commune members turned up for work but did little actual work since turning up was already enough to earn work-point and extra efforts were not amply rewarded. As a result of this lack of incentive and motivation for work, productivity plummeted.

Finally, the integration of government administration with commune management greatly limited farmers’ freedom of mobility. Farmers were laden by restrictive measures such as the residence registration system, the grain coupon system, and the grain rationing system. These policies restricted farmers’ freedom of mobility and prevent full-utilization of rural human capital.

In short, the farmers were short-changed by a leadership which supposedly had liberated them from the exploitative landlords and warlords. For all the hard work, farmers received extremely low income. From 1957 to 1978, the annual net income per capita increased merely from RMB 73.37 to RMW 133.57. That works out to an average increase of less than RMB 3 per year. If the increases in commodity prices were factored into the calculation, the actual annual increase in rural per capital income was a meager sum of RMB 1. From 1952 to 1978, 62.6% to 90.6% of the exports comprised of agricultural and their processed goods. As Wu concluded, most of the income created by farmers ended up with the state.

According to Wu (2005), because of its total control over the production, distribution, and pricing of agricultural products, the state had been able to extract a huge portion of its revenue from agriculture since the 1950s. Based on his research, the agricultural sector provided RMB 434 billion for industrialization. This huge amount came from RMB 98 billion of tax revenue plus RMB 512 billion of the price scissors between industrial and agricultural products minus the RMB 176 billion which the state invested in the sector. What was even sadder was that those surplus values extracted from the farmers were squandered in one political campaign after another, and in the process, driving the nation into social pandemonium and further economic chaos.

Because of their traditionally weak social position, peasants bore the brunt of the catastrophic policies implemented by the central government in the rural agricultural sector. As mentioned, Great Leap Forward and People’s Communes Campaign led to disastrous consequences, resulting in the death of millions during 1960 to 1962.

In response to the disastrous government policies, there were three waves[4] of efforts by farmers to practice “Contracting output quota to each household” (包产到户 baochan daohu – a term that is similar in practice to the household responsibility system implemented after 1979). However, the attempts by the peasants were suppressed by the central government which pronounced that these practices constituted efforts to restore capitalism.

1.7       Practice of ‘Responsibility Plots’ & Conference of Seven Thousand Cadres (1961 – 1963)

Even though the disastrous consequences of the Great Leap Forward and the People’s Communes Campaign forced Mao agreed to the system of “three-level ownership with the production team as the basic accounting unit“, he explicitly objected to the idea of contracting output to each household, regarding it as going against the principle of socialist collective economic organizations. Despite his objections, Anhui Province adopted the practice of “fixing output quota for each plot and designating responsibility for each person“. By March 1961, 39.3 percent of the total number of production teams in Anhui Province had implemented the practice of “responsibility plots“.

Anhui Provincial Committee of the CPC was criticized by Mao in 1962 for supporting the farmers to in the adoption of the practice of “responsibility plots”. But the leaders of Anhui were not the only ones in support of the contracting output quota to household. Leaders like Deng Xiaoping and Chen Yun voiced their support for it. To make his point, Deng quoted a saying by farmers in Anhui Province that “black or yellow, all are good cats so long as they catch mice”.

Meanwhile, in January 1962, at the “Conference of Seven Thousand Cadres”, Mao himself took responsibility for his mistakes in the Great Leap Forward campaign. The economy finally recovered by 1963.

1.8       Socialist Education Campaign (1963 – 1966)

Mao’s objection to responsibility plots stood on his conviction that contracting output quota to household would result in class polarization leading to the resumption of class struggle. The returning of the contract responsibility system in some parts of China led him to believe that serious class struggle had occurred in rural China. This belief prompted him decision to carry out a large-scale socialist education campaign across the nation. The campaign, lasting from 1963 to 1966, became the prelude to yet another even more tumultuous political campaign – the Cultural Revolution, plunging the already impoverished China and drained-out Chinese into another decade of extreme personal suffering and great social upheaval.

1.9       Cultural Revolution (1966 – 1976)

Pending.

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[1] Some would claim that the motivation could be more of fear that was commonly associated with a centrally command socialist system and police state. That was unlikely as China had just began its reconstruction and political campaigns such as Great Leap Forward and Cultural Revolution had yet to take place. The motivation was therefore likely to be reverence and (blind) faith rather than fear. To many Chinese, it was the communists who had succeeded in driving out the corrupt Nationalists and the foreign imperialists. Many aspired China to be great and strong again so that the humiliating history of semi-colonialism of China by foreign powers would not be repeated again.

[2] Some translated it as “Three-year Period of Hardship” (Wu 2005, p.102).

[3] Compared to using production team as basic unit of accounting, production brigade is less productive because there were more households and people in a brigade than in a team. In a bigger group, free-riding was easier to take place. By changing to using production team as the basic accounting unit, this problem of supervision and measurement of work was mitigated, though not eliminated. By 1962, after the disastrous consequences of the Great Leap Forward became obvious, the production team was made to be the basic accounting unit. With a small group of households in a production team, it is easier to account for efforts i.e. free riding became more difficult. As a result of the change, productivity went up.

[4] The three waves happened in 1956 (following the establishment of advanced cooperatives), in 1959 (following the founding of the people’s commune system), and in 1962 (following the havoc of the second go-communism craze in 1960 – 1961) (Wu 2005 Pg 105).