China’s Growth under Socialism and

under Transition
Shrey-
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Ishika -
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 China (From 1950 to 1978)
• China, under the leadership of Chairman Mao Zedong, maintained a centrally planned, or
command, economy.
• China maintained policies that kept the economy very poor, stagnant, centrally controlled, vastly
inefficient, and relatively isolated from the global economy.
• A large share of the country's economic output was directed and controlled by the state, which set
production goals, controlled prices, and allocated resources throughout most of the economy.
• During the 1950s, all of China's individual household farms were collectivized into large communes. 
•  To support rapid industrialization, the central government undertook large-scale investments in
physical and human capital during the 1960s and 1970s. As a result, by 1978 nearly three-fourths of
industrial production was produced by centrally controlled, state-owned enterprises (SOEs),
according to centrally planned output targets. Private enterprises and foreign-invested firms were
generally barred. A central goal of the Chinese government was to make China's economy relatively
self-sufficient.
• Foreign trade was generally limited to obtaining those goods that could not be made or obtained in
China. Such policies created distortions in the economy.
• Since most aspects of the economy were managed and run by the central government, there were no
market mechanisms to efficiently allocate resources, and thus there were few incentives for firms,
workers, and farmers to become more productive or be concerned with the quality of what they
produced (since they were mainly focused on production goals set by the government).
• From 1950 to 1973, Chinese real GDP per capita grew at a rate of 2.9% per year on average(claimed
by Chinese economists, albeit with major fluctuations stemming from the Great Leap Forward and
the Cultural Revolution. 
• The economy suffered significant economic downturns during the leadership of Chairman Mao
Zedong, including during the Great Leap Forward from 1958 to 1962 (which led to a massive
famine and reportedly the deaths of up to 45 million people) and the Cultural Revolution from 1966
to 1976 (which caused widespread political chaos and greatly disrupted the economy).
• In 1978, food supplies and production had become so deficient that government officials were
warning that China was about to repeat the "disaster of 1959.
• From 1950 to 1978, China's per capita GDP on a purchasing power parity (PPP) basis, a common
measurement of a country's living standards, doubled. However, from 1958 to 1962, Chinese living
standards fell by 20.3%, and from 1966 to 1968, they dropped by 9.6%.
• In addition, the growth in Chinese living standards paled in comparison to those in the West, such as
Japan, as indicated in Figure 2.
Reform of the Economic System, Beginning in 1979

• In the eleventh central committee in December 1978, the party makers decided to undertake
a program of gradual but fundamental economic system.
• They conclude that the centrally planned economy of Maoist version was complete failure
to produce efficient economic growth and had led China to fall behind not only to the
industrialized nations of the west but also to the new industrial powers of the Asia being
Japan, the Republic of Korea, Singapore, Taiwan and Hong Kong.
• The purpose of policy makers was not to abandon communism but was to make it
work better and efficient. They did this by substantially increasing the role of
market mechanisms in the system and by reducing not eliminating government
planning and direct control
 The Period of Readjustment, 1979-81

• Under this reform key imbalances in the economy were to be corrected and a foundation
was to be laid for a well-planned modernization drive.
• The major goals of the readjustment process were to expand exports rapidly; overcome key
deficiencies in transportation, communications, coal, iron, steel, building materials, and
electric power; and redress the imbalance between light and heavy industry by increasing
the growth rate of light industry and reducing investment in heavy industry.
• Agricultural production was stimulated in 1979 by an increase of over 22 percent in the
procurement prices paid for farm products.
The Contract Responsibility System
• The most successful reform policy, the contract responsibility system of production in
agriculture, was suggested by the government in 1979 as a way for poor rural units in
mountainous or arid areas to increase their incomes.
• The responsibility system allowed individual farm families to work a piece of land for profit
in return for delivering a set amount of produce to the collective at a given price.
• This arrangement created strong incentives for farmers to reduce production costs and
increase productivity. Soon after its introduction the responsibility system was adopted by
numerous farm units in all sorts of areas.
• In industry, the main policy innovations increased the autonomy of
enterprise managers, reduced emphasis on planned quotas, allowed
enterprises to produce goods outside the plan for sale on the market, and
permitted enterprises to experiment with the use of bonuses to reward
higher productivity.
• The government also actively encouraged the establishment of collectively
owned and operated industrial and service enterprises as a means of soaking
up some of the unemployment among young people and at the same time
helping to increase supplies of light industrial products.
• Individual enterprise--true capitalism--also was allowed and Foreign-trade
procedures were greatly eased, allowing individual enterprises and
administrative departments outside the Ministry of Foreign Trade  to engage
in direct negotiations with foreign firms.
• A wide range of cooperation, trading, and credit arrangements with foreign
firms were legalized so that China could enter the mainstream of
international trade.
REFORM AND OPENING, BEGINNING IN
1982
• The period of readjustment produced promising results, increasing incomes substantially;
raising the availability of food, housing, and other consumer goods; and generating strong
rates of growth in all sectors except heavy industry, which was intentionally restrained.
• In agriculture the contract responsibility system was adopted as the organizational norm for
the entire country, and the commune structure was largely dismantled. By the end of 1984,
approximately 98 percent of all farm households were under the responsibility system, and
all but a handful of communes had been dissolved.
• The role of free markets for farm produce was further expanded and, with increased
marketing possibilities and rising productivity, farm incomes rose rapidly.
• The practice of remitting taxes on profits and retaining the balance became universal
by 1985, increasing the incentive for enterprises to maximize profits and substantially
adding to their autonomy.
• As of 1987 the interest rate charged on such loans was still too low to serve as a
check on unproductive investments, but the mechanism was in place.
• The role of foreign trade under the economic reforms increased far beyond its
importance in any previous period. Before the reform period, the combined value of
imports and exports had seldom exceeded 10 percent of national income. In 1980 it
was 15 percent, in 1984 it was 21 percent, and in 1986 it reached 35 percent. Unlike
earlier periods, when China was committed to trying to achieve self-sufficiency,
under Deng Xiaoping foreign trade was regarded as an important source of
investment funds and modern technology. As a result, restrictions on trade were
loosened further in the mid-1980s, and foreign investment was legalized.
• The most conspicuous symbols of the new status of foreign trade were the four
coastal special economic zones, which were created in 1979.
• Three of the four zones--the cities of Shenzhen, Zhuhai, and Shantou--were located
in Guangdong Province, close to Hong Kong. The fourth, Xiamen, in Fujian
Province, was directly across the strait from Taiwan. These zones were to create
productive exchanges between foreign firms with advanced technology and major
Chinese economic networks.
• In 1980s, Private entrepreneurship and freemarket activities were legalized and
encouraged.
• By 1987 the state-owned system of commercial agencies and retail outlets coexisted
with a rapidly growing private with a wider range of consumption choices for chinese
citizens than at any previous time.
• Although the reform program achieved impressive successes, it also gave rise to
several serious problems. One problem was the challenge to party authority presented
by the principles of free market activity.
• Another was wave of crime, corruption, and--in the minds of many older people--
moral deterioration caused by the looser economic and political climate. These
concerns played a role in the political struggle that culminated in party general
secretary Hu Yaobang's forced resignation in 1987.
CONCLUSION
• Research on economic development has suggested a significant role for capital investment
in economic growth and a sizable portion of China's growth
• Capital formation alone accounted for over 65% of pre-1978 growth with labor adding
another 17% together they accounted for only 58% of the post 1978 growth
boom ,productivity increases made up the rest
• Higher productivity has performed the newest economic miracle in Asia
• Pre and post 978 indicates market oriented reforms were critical in creating this
productivity boom
• Reforms raised economic efficiency by introducing profit incentive to rural collective
enterprises.
• Profit incentive appears to have had a further positive effect in private capital market
• China has successfully moved millions of workers off farms and into factories without
creating an urban crisis
• China’s strong productivity along with 1978 market oriented reforms is leading cause of
China's unprecedent economic performance
 Scatter graph of the People's Republic of China's GDP between years 1952 to 2005,
based on publicly available nominal GDP data published by the People's Republic of
China and compiled by Hitotsubashi University (Japan) and confirmed by economic
indicator statistics from the World Bank
Per capita GDP of China and India, in constant 1990 dollars.

*Data from Maddison Project Database January 2013

 REFERENCES
•https://www.everycrsreport.com/reports/RL33534.html#_
Toc12530835
•http://countrystudies.us/china/92.htm
•https://www.imf.org/EXTERNAL/PUBS/FT/ISSUES8/INDEX.HTM
Thank You!