Strategies and Process of the Market Transition in China since 1978

In 1978, the Chinese leadership abandoned the command-economy model and launched a transition process towards a market economy. The main motivation of accelerating economic growth and development was to avoid the same economic collapse that the Soviet Union had suffered after starting simultaneously broad political (glasnost’) and economic reforms (perestrojka).

Even if the Chinese economy experienced a miraculous growth period in the 1980s, dysfunctions in the economic system led to several undesired outcomes. Further institutional change and reform have therefore been necessary. China experienced alternating times of advance and stagnation during the reform period, and the market transition is still not complete. Moreover, the leadership has still not achieved a consensus about the ultimate goal of transition and reform. In one word, there is no single "Chinese model" of economic development. The Chinese economy, dubbed "socialist market economy" (shehuizhuyi shichang jingji 社会主义市场经济, 1993), is neither a full-scale capitalist one, as often said, nor are there specific and constitutive traits of "socialism". It is instead often called a system of "state capitalism" (guojia zibenzhuyi 国家资本主义) in order to express the dominant role of the Party-state over the economy.

The idea of the "Four Modernizations" (si ge xiandaihua 四个现代化), namely the modernization of agriculture, industry, military, and science and technology, first brought up in this form by Prime Minister Zhou Enlai 周恩来 (1898-1976, in office 1949-1976) in 1963, accompanied the whole reform process, and seems basically to be completed in all four points by now. General Secretary Xi Jinping 习近平 (b. 1953, in office since 2012) explained during the 3rd Plenary Session of the 18th Central Comittee in November 2013 that the "fifth modernization" (di wu ge xiandaihua 第五个现代化) was a modern type of governance (zhili 治理) to replace the traditional way of 'rule' (guanli 管理). During the 1989 democracy movement, Wei Jingsheng 魏京生 (b. 1950) had urged to introduce democracy (minzhu 民主) as the "fifth modernization".

The basic situation in which reform and opening (gaige kaifang 改革开放) were begun in 1978 was a full-scale "command economy" (planned economy, jihua jingji 计划经济) with practically no private business, all urban enterprises being state-owned without any jurisdiction over management decisions and functioning "more like government departments than business firms" (Naughton 2018: 96). Prices were fixed by the planning commissions (jihua weiyuanhui 计划委员会), and China was totally isolated from the world market. The Maoist paradigm of individual commitment for the good of the collective was still adhered to, and poverty was regarded as a regular and normal situation on the road to communism.

The question why reforms were initiated in 1978 must be seen in the political context. After Mao Zedong's 毛泽东 (1893-1976) passing away and the purge of the leftist group in the Politbureau, Hua Guofeng 华国锋 (1921-2008) rose to the position of chairman. Yet his rise was owed to senile Mao, and he did not have a sufficient number of supporters. The internal strife in the leadership of the Communist Party of China (CPC) was resolved by the ascendency of reformers. Moreover, the general public was much in favour of changes in political economy. When the new leadership called back students from the countryside in 1978 to re-enter universities, the educational elite was won over for reform. As an external factor, the economic rise of Japan in the 1960s and that of the Four Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan) in the 1970s provided for China a template to follow. Their formula was a combination of private agriculture, export-oriented industry, state-control of the financial system, and good human development indicators (education, health, infrastructure).