Chinas Openness To Economic Reforms

Running head: CHINA’S OPENNESS TO ECONOMIC REFORMS 1

China’s Openness to Economic Reforms

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Institutional Affiliations

CHINA’S OPENNESS TO ECONOMIC REFORMS 2

Abstract

As China becomes largely modernized and nears the economic development frontier, reforms are

inevitable given the significant changes in the economic and social structure. China’s one –state

party since time immemorial has played a significant part in setting the right leadership with

reforms that favor economic development of the country. Based on Deng Xiaoping's leadership,

he came up with efficient reforms and policies that have transformed China, thrusting it to make

substantial headway through economic development (Mello, 2015). Therefore, China adjusts its

balance between the distribution of equity income, environmental conservation costs, and social

services. Through the Communist party for China with the associated committees that have been

held, each regime has focused on economic growth with emphasis on human welfare (The

Communist Party of China, 1977). The political orientation of the country is very significant to

its economic institution and policies that are in turn used in magnifying regional and global

stability. As a result, China has established itself as a powerful economy in the world.

CHINA’S OPENNESS TO ECONOMIC REFORMS 3

China’s Openness to Economic Reforms

China has the fastest growing main economy in the world despite experiencing a rocky

path as it transformed from socialism to consumerism. With its large population, since the 18th

century, China began its struggle to reform its economy into a giant economy in the world. China

being a one party state means that its development generally depends on the leadership in place

for reforms. The time during which the communist party leader Chairman Mao Zedong, his

presidency was committed to transforming the Chinese economy from rural-based economy to a

giant based industrial economy (The Communist Party of China, 1977). During this period, the

Chinese economy was largely collectivized into huge communes with the majority of the country

resources shifting from other sectors to heavy industry. Unfortunately for the country, Mao died

in 1976 abandoning the country isolated and impoverished with economists terming the whole

efforts a failure. However, in 1978, Deng Xiaoping came into power. At the sunset of his

leadership, he established an ambitious economic reform program that was aimed at increasing

the foreign investment and growth rates in the country. The country continued its efforts of

reform the economy to an industrialized giant economy with Deng's leadership focusing on

strategies that transformational reforms. Therefore, this paper will focus on the Deng Xiaoping's

reforms and how these reforms shaped the way policy makers and economists in China work.

China's reforms towards a giant market-oriented economy around the globe began in

1978 during the Deng Xiaoping's reign, and since then economists have regarded the reforms

undertaken to be a great success. After the initiation of the new reforms in 1978, the Chinese

economy saw an average growth rate of about 9.6 percent just within the first two decades of

Deng's leadership (Bolesta, 2007). During the early 1950s after the planning system of the Soviet

Union, economic planning was introduced in China. The planning system came up with some

CHINA’S OPENNESS TO ECONOMIC REFORMS 4

economic activities that needed to be undertaken in order to advance its goals and aims. As a

result, issues of collectivism (Deng Xiaoping, 1984).

However, these strategies did not persist for long as they were brought to an end in the

late 1970s by the leader of the time Deng Xiaoping. During this time, the country started

abandoning the planning system gradually and re-embarked to a more market-oriented economy.

However, the China economy had initially been built on the foundations of the four

modernization pillars of industry, agriculture, science and technology and defense as had initially

been formed by Zhou Enlai in 1964. The cultural revolution that lasted for a decade for the

period starting from 1966 interrupted the modernization plans that had been put in place. For a

change in direction to be initiated during the time, the government and the Chinese Communist

party had to change and alter some their courses of action in order to get peoples' support (Pyo,

2009).

China underwent economic reform because of the unpopularity of the 1966-1976 cultural

revolution that engineered a change in the operations of the Chinese communist party in order to

solicit the support of the citizens. However, the instigator of this cultural revolution Chairman

Mao Zedong died in 1976 (Pyo, 2009). After Mao's demise, a gang of people tried to seize power

and buttressed the initial ruthless political movement that had been adopted by this dictatorial

leader. The firmness of the people and the party at large saw the gang losing out with leaders of

the revolution eliminated (Deng Xiaoping, 1984). Due to the support of the party leadership,

Deng Xiaoping became the Chinese leader. He immediately started strategizing for reforms to

end collectivism especially in the agricultural sector giving farmers the freedom to choose the

crop they wanted to grow and full freedom for them to sell their surplus produce for profit

(Bolesta, 2007).

CHINA’S OPENNESS TO ECONOMIC REFORMS 5

Secondly, policy makers and economic planners had from experience observed that the

planning system was hard to control and inefficient economically. This can be attributed to the

writing that was made by economic and policy makers that were made in the 1970s. However,

the comprehension of the weakness of the planning system varied among policy makers. Thirdly,

the neighboring economies that had adopted the more market-oriented economies were

performing excellently as compared to the planning system. The neighboring economies that had

adopted the market-oriented systems included Taiwan South Korea, Hong Kong, and Singapore.

The performances registered by these economies reinforced the desire and demand for reforms.

Lastly, through the suffering that the Chinese people had gone through as a result of the

system, they direly desired the market-oriented reform and wholly supported it. The Chinese

people had severely experienced the economic consequences of central planning mostly through

shortages and limited varieties of consumer goods and low-quality products. Citizens had to

Kowtow to the sellers of goods through waiting in long queues at least to get what was needed.

To get what was essential to them, some consumers had to use personal connections or go

through the back door.

Premised on these reasons, reform to the Chinese economy seemed inevitable.

Furthermore, some human factors also favored the initiation of the economic reforms. This can

majorly be expounded by the unfolding of events after the demise of Mao who had already

designated a successor in Hua Guofeng as the Chairman of the Communist Party. Before trying

to reform the system, Deng Xiaoping, however, took over the leadership of the Communist Party

(The Communist Party of China, 1977). The leadership of Deng was termed pertinent to the

transformational phase that the country was to undergo. With the support that the people were

willing to give the incoming leadership just to see the necessary reforms are undertaken, acted as

CHINA’S OPENNESS TO ECONOMIC REFORMS 6

an ignition to the for the initiation of change. This, however, meant that any leader that could be

selected could have just initiated the desired changes although maybe the changes could have

been to the level that Deng Xiaoping had attained.

Effects of the Economic Reforms to Economic Players and Policy Makers in China

Agriculture under the household responsibility system

In the agricultural sector, household responsibility system in agriculture was adopted.

Initially, Mao had introduced a collective farming system in his 1958 Great Leap Forward

movement under the commune system was practiced. In this system, farmers were supposed to

work in teams of forty farmers a condition that did not motivate or reward the hardworking

farmers as all farmer of the group shared the additional output that resulted from additional

efforts of any individual farmers (Lardy, 2015). Farmers realized that farming separately would

lead to higher agricultural output and at the same time deliver the required produce to the

procurement system.

After reforming in the sector, the teams were reorganized by redistributing the land to

individual households for separate farming with each household getting a reward for additional

labor after delivering output amount for delivery to the central procurement agencies. After Deng

recognizing the advantages accrued from this system, he adopted this system as a national policy.

The system increased output levels all over the country and farmers became richer. Food supply

in the country was significantly increased changing the ideologies of the Communist party

members to support market-oriented economy (Mello, 2015)

State-owned enterprises

CHINA’S OPENNESS TO ECONOMIC REFORMS 7

To effect this, a number of institutional changes were adopted systematically by

according state enterprises some level of autonomy regarding production, marketing and

investment decisions instead of just conducting operations under a centralized planning system.

Two years after piloting this reform, enterprises that were given the autonomy contributed to a

45 percent increase in total output of all the industrial enterprises (Mello, 2015). The second

phase of the reform involved financial independency that allowed enterprises to keep earnings as

profits after paying taxes to the government rather than the generated revenue belonging to the

state. The third reform implemented was the responsibility system that allowed the enterprises to

keep the remaining profits after surrendering the fixed amount to the controlling agency (Lardy,

2015).

In 1987, another reform was implemented, contract responsibility system that permitted

enterprises to keep the remaining profit after paying fixed tax to be able to distribute it to the

staff and for capital investment (World Bank, 2008). This further led to the expansion of the

economy (The Research Department of Party Literature, Central Committee of the Communist

Party of China, 1991).

Open-Door Policy

In this policy, foreign investment and foreign trade are encouraged. Initially, the Chinese

economy was closed, but after the Deng Xiaoping's actions, the economy became open

increasing foreign trade from 7 percent in 1978 to 25 percent in 1987. By 1998, the volume of

foreign trade further increased by 12 percent to a total of 37 percent of the Gross Domestic

product (GDP). In the administration of foreign trade, a number of institutional reforms were

introduced beginning with the strict control of imports and exports (World Bank, 2008). Under

CHINA’S OPENNESS TO ECONOMIC REFORMS 8

this reform, special treatment was accorded to exporting enterprises to encourage exports. These

enterprises were also allowed to retain part of the foreign exchange and special access types of

loans for short term and long term capital expansion (The Research Department of Party

Literature, Central Committee of the Communist Party of China, 1991).

The Price System

The primal aim of this reform was to decontrol the centrally determined prices by the

central government to all the prices to be self-regulating through the market forces of demand

and supply. This was important for all the businesses in the economy since in the absence of the

market determined prices; state enterprises fail to get the correct market signals affecting the

company’s ability to do its calculations to determine the choice of inputs and hence planning for

outputs (Roland, 2008). This reform allows enterprises to purchase extra inputs and their

increase outputs selling above the quota at prices determined by the market forces (Fleisher &

Renard, 2011). Other reforms that were undertaken by the Deng included the social welfare

system, economic and social infrastructure, the banking and financial sector, and development of

the Non-state sectors (Tisdell, 2008).

Success of the Chinese Economic Reform

The prosperity of the China’s economic reform was partially measured by the rapid

economic growth in the real GDP. The GDP od the economy was able to increase by 9.5 within a

span of just two decades (Roland, 2008). The reforms were successful because the fundamental

elements of the economy were successfully introduced and adopted by the government (Tisdell,

2008). Secondly, the reforms succeeded due to the huge human capital. Human capital was

embedded in the culture of the country providing an assured market for the produced products.

CHINA’S OPENNESS TO ECONOMIC REFORMS 9

Thirdly, the Chinese leaders were competent in conducting economic reforms. Deng Xiaoping

demonstrated able leadership that thrusts the country's economy to a new level (Fleisher &

Renard, 2011).

To sum up, Economic reforms in China consisted of substantial changes in the economic

institutions towards a market economy. The economic reforms have led to significant increases

in economic growth through increased GDP through increased productivity through hardworking

and motivated citizens and enterprises increasing the foreign direct investment and international

trade. Economic reforms have been very pertinent to the economy of China by increasing food

security, increasing foreign direct investment, international trade and increasing the per capita

income of farmers as the household responsibility system was able to increase the individual

efforts of farmers increasing surpluses and thus farmer income. The reforms that were introduced

and enacted by Zeng Xiaoping since 1978 have been adopted and modified across the period to

suit the demands of the economy. Policy makers and other economic players have relied on this

reforms while making changes or decisions.

CHINA’S OPENNESS TO ECONOMIC REFORMS 10

References

Bolesta, A. (2007). China as a development state. Montenegrin Journal of Economics 5(2), 105-

111.

Deng Xiaoping. (1984). “Build Socialism with Chinese Characteristics." The Research

Department of Party Literature, Central Committee of the Communist Party of China

(1991) Major Documents of the People's Republic of China – Selected Important

Documents since the Third Plenary Session of the Eleventh Central Committee of the

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Press, Beijing.

Fleisher, B., &Renard, M. (2011). Symposium: Thirty Years of Reforms: What About

Capitalism in China? China Economic Review, 22(4), 627.

http://dx.doi.org/10.1016/j.chieco.2011.09.003

Lardy, N. (2015). China’s economic reforms and growth prospects. China Economic Journal,

8(2), 95-108. http://dx.doi.org/10.1080/17538963.2015.1061247

Mello, C. (2015). De dia Deng Xiaoping, de noite Deng Lijun: música e memóriaemPlataforma.

Significação: Revista De Cultura Audiovisual, 42(43), 146.

http://dx.doi.org/10.11606/issn.2316-7114.sig.2015.96619

Pyo, M-C. (2009). China: Aiming for 8% growth despite the financial crisis. SERI Quarterly

2(2), 43-49.

CHINA’S OPENNESS TO ECONOMIC REFORMS 11

Roland, G. (2008). Fast-moving and slow-moving institutions. In J. Kornai, L.Máltyás and G.

Roland, (eds.) Institutional Change and Economic Behavior. Palgrave Macmillan,

Basingstoke, UK and New York.

The Communist Party of China. (1977). The Eleventh National Congress of the Communist

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The Research Department of Party Literature, Central Committee of the Communist Party of

China. (1991). Major Documents of the People’s Republic of China – Selected Important

Documents since the Third Plenary Session of the Eleventh Central Committee of the

Communist Party of China (December 1978 and November 1989). Foreign Languages

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Tisdell, C. (2008). Thirty years of economic reform and openness in China: Retrospect and

prospect. Economic Theory, Applications and Issues Working Paper No. 51, School of

Economics, The University of Queensland, Brisbane.

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