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Economies in Transition: Gradualism in the People's Republic of China

In the late 1970s the Chinese Communist Party (CCP) came to view market reforms as essential to China's modernization. Under the leadership of Deng Xiaoping, a policy of gradualism was adopted to methodically explore market-oriented alternatives to central planning and government control over the economy. Deng referred to this gradualist approach as “crossing the river by feeling for the stones.”[1] Gradualism produced a dualtrack economic system. One track, considered the economic mainstream during the late 1970s and 1980s, consisted of China's existing planned economy, also called the state sector. The second track consisted of a series of market-oriented experiments.

The household responsibility system was the most significant of these early marketbased reforms. This system encouraged peasants to lease agricultural land from the government, work the land, and sell some of their output to the state at a fixed price. Peasants were free to sell the remainder of their crops on the open market for a profit. These market incentives increased the productivity of labor and encouraged the CCP to proceed to the next stone, the expansion of township and village enterprises (TVEs). TVEs are profit-making firms in rural regions that are owned or financed mainly by local governments. After an initial flurry of TVE activity in the late 1970s and early 1980s, interest in TVEs waned during the 1990s and 2000s.[2]

Market reforms also enabled China to become a major player in the global economy. During the 1980s, for example, the Chinese government created free trade zones (FTZs) in a number of China's eastern cities. Goods assembled or otherwise processed within these special zones could be exported duty free to other countries. Other reforms reduced government regulations on private firms, which encouraged the creation of joint ventures (JVs) between Chinese and foreign firms and the founding of wholly owned foreign enterprises (WOFEs). Promarket reforms soon made China the top recipient of FDI in the developing world. In 2011 alone inflows of FDI to China hit $124 billion. In that same year China overtook the United States as the world's top exporter of goods and services. China exported $2.2 trillion in goods and services compared to $2.1 trillion by the United States. In addition, China's gross domestic product (GDP) measured in current U.S. dollars hit $7.3 trillion in 2011, second only to that of the United States ($15 trillion).[3]

Market-oriented reforms in China increased agricultural output and promoted economic growth in recent decades

Market-oriented reforms in China increased agricultural output and promoted economic growth in recent decades. (Hung Chung)

Significant obstacles to China's economic transition remain as this economic giant guides its dual-track economy into the twenty-first century. One challenge is the country's uneven development, which has traditionally favored eastern China over western China and urban areas over rural interests in the countryside. Second, China's safety net of social programs is inadequate to meet the people's needs, especially in rural areas and among the large “floating population” of migrant workers. Third, inefficient SOEs dominate major industries such as energy, a situation that requires costly government subsidies to these public firms. Fourth, while China can expand the supply of goods it creates, it cannot control the demand for its output in domestic or global markets. Recent economic slowdowns in China and in the global economy have pinched consumer demand for goods in major industries such as real estate and automobiles. Finally, the Chinese Communist Party's monopoly on political power sometimes creates an unfair and inefficient environment for business activity, including risky loans from China's state-controlled banks. The CCP's stranglehold on political power also poses an unsettling question—can an economic system striving to become more open and free co-exist with a one-party political system?

  • [1] H. E. Liu Xiaoming, “Crossing the River by Feeling for the Stones,” Ministry of Foreign Affairs of the People’s Republic of China (Beijing, China)
  • [2] International Labour Organization (ILO), “Development of Township and Village Enterprises,” China: Promoting Safety and Health in Township and Village Enterprises (Bangkok, Thailand: ILO Regional Office for Asia and the Pacific, 1998), 6-8; Richard Hirschler, “China’s Experience with Transition: What Is Behind Its Stunning Success?” Transition Newsletter 13, no. 3 (May–June, 2002): 5-7; Embassy of the People’s Republic of China in the United Kingdom, “The Development of China’s Agriculture,”
  • [3] WTO, “Table 1.7: Leading Exporters and Importers of World Merchandise Trade, 2011,” and “Table 1.9: Leading Exporters and Importers in World Trade in Commercial Services, 2011,” International Trade Statistics, 2012, 26, 28; UNCTAD, “Annex Table 1.1: FDI Flows, by Region and Economy, 2006–2011,” World Investment Report 2012 (New York: UNCTAD, 2012), 172; World Bank, “Data: GDP (current US$),” World Development Indicators, 2012
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