China's Economic Reform

China underwent a vast economic reform in 1978. The government loosened its control of all productive assets, and encouraged the formation of private businesses. It invested in educating its workforce and improving its factories. Furthermore, it liberalized foreign investment and trade. These strategies have proven productive, and living standards have improved nationwide.

In 1949, the Communist party gained control in China. That year, the economy was hard hit by war and civil unrest. The situation did not greatly improve in the ensuing years. Under communist rule, the economy barely grew from 1952 to 1977. Both industry and agriculture made little, if any, progress during the Cultural Revolution. Grain production did not grow more than the amount needed to account for population growth. The per capita supply of grain and the three main oils (rapeseed, sesame and grain) dropped in supply. Forty percent of the grain supply for cities was imported from abroad and peasants consumed less grain than before.

From 1957 through 1977, the peasants' incomes rose minimally. At the same time, their standard of living improved, as a result of improved hygiene in food preparation and use of boiled drinking water. Life expectancy and literacy levels rose.

One bright spot in the pre-reform era was industrial production. China had some of the highest output levels in the world for coal, oil, steel, cement and fertilizer. The high production level came at the cost of other sectors. During the early Communist period, between 24 and 40 percent of the national income was invested in production.

Deng Xiaoping spearheaded economic reforms, beginning with agriculture, after he wrested power from the Maoists. In 1978, when he initiated his program, food supplies were so low that official feared the onset of famine. Deng introduced the Household Responsibility System, in which land was taken from collective communes and given to farmers as private plots. After paying a share to the state, farmers could retain the produce of their lands. As a result, farmers' living standards rose and agricultural production was stimulated.

In urban industry, officials introduced a dual price system. State-owned industries were permitted to sell products that were made after they reached their quotas, and citizens could buy commodities at both state-set prices and free market prices, avoiding problems of shortages. Additionally, private businesses were granted license to operate, supplementing industrial output.

Deng also opened the market to foreigners. Special economic zones that were free of governmental regulations encouraged foreign investment. New influxes of money were an impetus to growth.

From 1984 to 1993, Deng Xiaoping continued along the same route. State enterprises that performed poorly were privatized, and the government continued to loosen its control of private businesses. The state decentralized management, allowing local leaders of provinces to increase economic growth in novel ways.

During this period, the reforms were threatened by popular discontent with rising prices, symbolized by the mass protests at Tiananmen Square. Conservative opposition forces tried to reverse many of the reforms, to no avail. Deng continued to privatize business and even reopened the Shanghai Stock Exchange after 40 years of inactivity. By 1999, China's government acknowledged the private economy as an important component of the socialist market economy.

Economists have hailed China's economic reform as being greatly successful. In post-1978 China, real growth averaged more than 9 percent. Several factors contributed to this achievement, including significant growth in the country's capital assets, such as machinery, communications systems and factories. The staggeringly large number of Chinese workers also made a huge difference. Yet the strongest driver appears to have been a noticeable change in worker efficiency, or productivity.

Chinese productivity increased annually by 3.9 percent from 1979 to 1994. The increase is not coincidental, as Deng's reforms included financial incentives to work more efficiently. Family farms, small private businesses and rural collective enterprises were all offered profit incentives. Both factory owners and small producers invested more of their revenues into improving their business' performance, eager for the opportunity to hold on to their profits.

The move from agriculture to manufacturing also had a drastic effect on China's economy. Four in five Chinese employees worked in agriculture before the reforms were enacted. New property rights in the countryside induced many workers to form non-agricultural businesses in rural areas. By 1994, only one in two Chinese worked in agriculture, the rest having left for more profitable occupations.

Another important component of growth related to the reforms is the autonomy granted to business managers. They gained the ability to set their own production goals, and to reward good workers and fire bad ones. Their ability to set up private businesses created jobs, brought new consumer products to the market and increased tax revenues.

China's Economic Reform: Selected full-text books and articles

Towards a Labour Market in China By John Knight; Lina Song Oxford University Press, 2005
Principal Agent Theory and Private Property Rights in China's Economic Reform By Yung, Ping China: An International Journal, Vol. 7, No. 1, March 2009
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