How Do You Assess the Chinese Approach to Economic Reform?

How do you assess the Chinese approach to economic reform?

The Chinese economic reform began in 1978 after the death of the revolutionary leader Mao Zedong, and it was led by the widely regarded ‘paramount leader’ of China – Deng Xiaoping. A judgement on the relative success or failure of the Chinese approach to economic reform depends on the criteria to which it is being assessed against and the time period in question – as China is still participating in the reform era. In terms of the instruments adopted, this paper argues that the approach to economic reform can be regarded as successful, due to the complementarity between the regional decentralisation and experimentation approach with China’s existing economic and institutional conditions. Whilst in terms of outcomes created, this approach to economic reform then becomes somewhat controversial, based on whether only the rate of economic growth is considered, or whether a more holistic view encompassing both growth rate and citizen welfare is also included. This paper argues that overall the Chinese approach to economic reform since 1978 can be regarded as successful, however only until the late 1990s. This is because since then, the general consensus on the importance of economic growth has broke down, and was instead being replaced by an implicit objective of maximising personal utility – filling the Chinese economy with widespread rent-seeking behaviour and in depth corruption.

To understand why the Chinese approach to economic reform should be regarded as a success, we must first understand the difficulties of reforming a command economy. Naughton (1996) defines ‘reform’ as the replacement of one coordination mechanism – an inefficient one based on administrative commands and quantitative targets – with the more efficient market-price mechanism. However economic reform is much more than this, since it necessitates the creation of new institutions and new macroeconomic relationships in addition to contemplating a method for decreasing potential resistance to reform. The Chinese central government responded to these pre-requisites by adopting a decentralised and gradualist approach, as opposed to following the Soviet Union’s ‘big bang’ method, or that suggested in the ‘standard’ Washington Consensus. Through this method the central government was not only able to tailor its policies to the needs of the Chinese institution, but was also able to efficiently addressed and solved the aforementioned issues. As a result, it can be argued that China’s decentralised and gradualist approach to reform is a success.

In the 1980s, China ranked among the poorest third of countries in the world. A little over two-thirds of the Chinese population was rural, communications and transportation infrastructure were underdeveloped, precious skills were spread thinly throughout the population, and the quality of output was poor (Naughton 1996). This relatively low level of Chinese development was not merely a function of China’s poor endowment at the starting point. As a result of the 1966 Cultural Revolution (CR), the gradual accumulation of human and administrative skills not only halted, but was reversed. Through the mid-1960s, China rapidly increased its stock of technical personnel, with the number of technicians surpassing 4% of the industrial labour force. However the paralysis of education during the CR created a steady slide in this measure, reaching a low point of only 2.6% of the industrial labour force in 1978 (Naughton 1996). Therefore even though China had a number of advantages in comparison with other less developed countries – particularly in terms of its entrepreneurial tradition, relatively high levels of literacy, and familiarity with large-scale organisations – at the onset of reform. However it still did not have the financial, auditing and other necessary skills needed to successfully create and run the fundamental institutions of a market-based system. As such, given the economic context of China at the outset of the reform era, many ‘standard’ approaches would not only have been infeasible, but would have also created devastating consequences if China were to abandon her existing institutions in a rush and copy the stylised ‘best practices’ of the Washington Consensus. Therefore in this sense, the gradualist approach was the second-best option and a more suitable regime for China’s economic conditions in 1978.

The method to which the Chinese central government addressed, and solved, the risk of experiencing resistance to reform was through decentralising her political system, and encouraging regional experimentation. The Chinese governance structure consists of a region-based multi-level hierarchy; below the central government there are four levels of sub-national governments: provincial, municipal, county and township level (Xu 2010). This unique decentralised structure originated from a mixture of inherited elements from China’s imperial governance structure, as well as the aftermath of the ensuing destructions of the 1958 Great Leap Forward (GLF) and the 1966 Cultural Revolution. As a result of these vast waves of decentralisation, at the beginning of reform, China had already established hundreds of relatively self-contained regional economies, where the sub-national governments had influence, or even direct control rights, over a substantial amount of resources such as land, firms, financial resources, energy etc. In an attempt to reduce resistance to reform from these regional governments, as well as to promote economic growth, the central government not only delegated the sub-national governments with more autonomous power. It also created stronger incentives, namely the opportunity to climb up the career ladder within the government hierarchy – as a very career-focused culture existed in China – in order to motivate the regional governments to implement, and initiate, reforms.

Starting from 1978, almost every major step on the path of reform was tried out by a few regions first before being launched nationwide (Xu 2010). A key advantage of regional experimentation was that it created a dual-track system consisting of reforming vs. non-reforming regions – which remained unchanged until the diffusion of a successfully tried out system commences. This then substantially reduced the number of losers arising from unsuccessful reforms, and hence decreased the amount of resistance to reform. This system also worked well in the sense that a successful experiment outcome not only provided information on which reform program function, but can also be used as evidence to persuade the unconvinced. An example of such a reform experiment was the Household Responsibility System (HRS) of the early 1980s. This famous land reform was first experimented by the governors of Sichuan and Anhui in 1979 before being implemented nationwide in 1980 on the basis of its substantial contribution to China’s economic growth. As a result of the HRS, between 1978 and 1984, agricultural growth reached 5.68% per year (Zhu 2012) and the change from the production-team system to HRS was also directly responsible for 49% of the output growth (Xu 2010). Therefore, political decentralisation was a successful policy for economic reform in China, because it not only created incentive for regional governments to implement and initiate reform ideas through regional experimentation. The success of the experiments also proceeded far to reduce resistance to reform and to substantially increase economic growth.

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