In 1978, Deng Xiaoping opened the Chinese economy to increased foreign trade and investment. Under growing pressure from the international community, the bureaucracy under Deng moved towards economic reforms. This move towards capitalism was, in the words of Deng, socialism with Chinese characteristics. Market socialism is best described as a demand economy with centralized control. This hybrid system has been the impetus for the revitalization of the Chinese economy.
Superficially, this system may be deemed a success as the increase in economic freedom has led to an unparalleled expansion of economic activity. However, this system has also brought about the worst results of socialism (bureaucracy, lassitude, and corruption) and of capitalism (windfall gains and stepped-up inflation) (CIA The World Factbook 1999). The first major series of reforms were implemented in the rural sectors. Initially, the reforms called for the return of private plots of land to rural peasants.
Peasants would be allowed to enter into contracts with the collectives to farm a particular plot of land for a fixed output quota. Under these contracts peasants would be bear total responsibility for profit and loss. These peasants would turn over part of the income derived from their labor to the collective, but allowed to keep the rest (Wang). Although this system has moved Chinese agriculture from essentially subsistence farming to commercial commodity production, it is not without its drawbacks.
The Chinese peasants wholeheartedly endorsed Deng Xiaoping s slogan that was trumpeted endlessly throughout the 1980s: To get rich is glorious. The government has since struggled to collect revenues due to the collectives and has had to institute tighter monetary policies in order to control inflationary food prices. The second major series of reforms were instituted in the urban sectors. These reforms were aimed at revitalizing state-owned industrial enterprises. These reforms reform advocated separation of state ownership from operational functions.
This system of decentralized executive decision-making encouraged factory managers to set wages, determine performance standards, and accept and responsibility for profits and losses. Under the factory responsibility system, the workers and factory managers were obligated to turn over a certain amount of taxes and profits to the state (Wang). The workers were allowed to keep any profits in excess of the quotas. Although this system invigorated many sectors of industry, it too had its drawbacks.
The bureaucratic cadre exploited these reforms to ensure their own personal gain. Capitalistic crimes such as kickbacks, embezzlement, and racketeering became commonplace. Massive concessions to capitalism have been made in the name of economic reform. Nonetheless, serious problems still exist. The incompatibility of the free market system with the outdated Soviet-style planning system continues to distort the allocation of investment funds. This institutional incompatibility has led to a boom-bust cycle and placed a heavy burden on the state budget.
State factories still employ the bulk of China s 170 million strong urban workforce, as much as 80-90% of all loans made by state banks are made to state owned industries, amounting to an estimated $120 billion. Much of the borrowing from the banks is to cover the wages of state workers (Sewell). In recent years, there have been rumors of massive layoffs in state owned enterprises, and …hundreds of thousands of state workers, if not millions, have gone unpaid for months… (The Economist). To make matters worse, there has been, in recent years, a mass exodus of workers from the rural areas to the cities.
These workers come in search of work, but find that the state can do nothing for them. On one hand, if the Chinese Communist Party allows the present economic reforms to continue unimpeded, massive unemployment, inflation, and social unrest may occur. This could trigger a movement of the working class in China. On the other hand, if the Chinese Communist Party attempts to curve capitalism via tighter central economic controls, it runs the risk of repudiating Deng s model of market socialism. Only time will tell if China can continue to walk this precarious economic tightrope.