What were the overall development strategies in the pre reform period and in the reform period of the PRC? How do these strategies compare in terms of their achievements and the problems that arose?

After 1949, the PRC abandoned the traditional household-based, “bottom-heavy” economy, and set out to utilise the Soviet Union’s socialist industrial strategy through direct government control. The traditional economy consisted of high labour-intensive productivity of agriculture, which although produced high levels of output, the opportunity for new investments and technology advances to further output was stagnated. This led to planners neglecting the labour-intensive sector and instead poured resources into capital-intensive factories.
During the years of 1949-1979, China pursued a vision of socialism, labelled as the “Big Push Industrialisation” which gave overwhelming priority to maximising investment in the heavy industry. As part of this, China adopted a “command economy” system which led to the creation of State Owned Enterprises (SOE), of which the government owned and controlled all large factories, transportation and communication enterprises. The introduction of agricultural collectives meant that land and farm production were held by government commands. Planners assigned production targets to firms and allocated resources and goods among different producers. The government controlled the price system, allocating high prices to products of industry (owned by government) and low prices to products of agriculture (owned by peasants). As a result, prices no longer reflected market demand and supply. This distorted price system meant that SOEs were extremely profitable despite being inefficient. This system however, provided the fiscal capacity needed to mobilise resources for the Big Push.
Over the long term, China’s investment rates were high and rising. Most investment went to industry, of which 80% was in heavy industry. Between 1952 and 1978, industrial output grew at an average annual rate of 11.5%. Moreover, industry’s share of total GDP climbed steadily over the same period from 18% to 44%, while agriculture’s share declined from 51% to 28% - as the government neglected labour-intensive productivity. With the creation of entire new industries, Chinese economic growth finally started to make significant improvements - the Big Push strategy seemed to be working.
However, the Big Push also had a number of shortcomings. Due to the single-minded pursuit of industrial development, consumption was severely neglected. Consumption per capita grew by only 2.3% per year. The urban-rural differential was significant, in which urban grew at 3% whereas rural only grew at 1.8%. Thus by 1978, per capita consumption in urban areas had slightly more than doubled, but rural per capita consumption was only 58% higher than in 1952 thereby further exacerbating the urban-rural divide.
As the economy started focusing on capital intensive heavy industry, services were neglected and there was little demand for labour, thus forming a second major weakness of the development strategy - slow employment creation. Although total labour force grew by 191 million, growth of the modern industrial and service sectors only absorbed 37% of this. As a result, unemployment, especially in rural areas, remained a serious problem.
The last main drawback of the Big Push strategy was the technological demands that industrial investment brought. Plants were often large and complex to construct, requiring several years to build. This meant that the economic returns were low and capital was tied up for long-periods without any gain in economic output. There were also many numerous cases of Chinese factories that never fully ramped up mass production of complex processes. For example, the rural unemployed were put to work in “backyard steel furnaces” as part of the Great Leap Forward in 1958, but were not fully trained in this type of area, and so encountered problems with complex processes and produced bad quality steel.
As a result, the industrial growth rate decelerated from 17% to 8% per year in the pre-reform period. By concentrating on the heavy industry and neglecting the labour-intensive light industry, the Chinese were pouring scarce resources into complex projects while ignoring opportunities to exploit relatively “easy” projects. This resulted to the Great Chinese Famine in 1960, in which declining harvests and local food shortages led to about 30 million deaths. Although “social consumption” such as education and health grew rapidly during the Socialist period, the Great Famine mocked this statement and the irrational decisions of the Great Leap Forward destroyed what could and should have been China’s proudest achievement.
The reform, which took place between 1979 and 2002, graduated in three stages: the first stage was the reformation of the planning system (1979-93); the second stage was the building of the market system (1994-2001); and the third stage was the integration to the global economy (2002 present).
The first stage was initiated by giving priority to agricultural reform in which led to the introduction of a “household responsibility system”. This gave households control of the right of land and 100% marginal revenue retention. As a result, grain output increased by over 30% from 1978 to 1984, thus eliminating the shortage of food. Rural reforms had been achieved with little economic or social disruption, largely because of the dual-track system being adopted. This implied a two-tier pricing system and also consisted of markets being introduced into nearly every area, ownership being diversified, and competition being created. This process allowed low barriers to entry and market forces to grow.
By 1993, the Chinese economy had expanded so sufficiently – which caused inflation and corruption – that the pattern of reform had “grown out of the plan.” This led to a shift in policy-makers’ decisions to build a firmer institutional basis for the developing market. This included ending the dual-track system, recentralising fiscal resources, and using austerity measures in order to reduce inflation. The main accomplishments of this phase have been the remaking of the institutional setup to make it compatible with a market economy, the dramatic shrinkage of the state sector, and the creation of conditions enabling fair competition among all market participants.
By the end of 2001, China joined the WTO, which limited China’s ability to protect large sections of the economy from international competition. However, the accession ensured an increase in foreign investment, whilst also making them more competitive as an exporter to industrialised countries. For example, Coca-Cola and Pepsi had basically taken over the entire soft drink market in China but contributed to accelerated growth between 2003 and 2006. However, problems were also created as the inequality gap increased – as some private businesses turned bankrupt as competition became fierce – which led to further corruption and social unrest.
These shifts in orientation need to be reinforced by effective policies that bring the benefits of growth more inclusively to a broader swath of the population. While the process of openness to the market, intensified by the accession to the WTO, is driving the creation of a more productive and competitive economy, it also increases the urgency for China to provide effective policies to ease the transition of millions out of obsolete, low-productivity jobs, and speed their finding of productive roles in the emerging economy. In conclusion, only if the benefits of reform are broadly spread will China be able to make the next step to a highly functioning market economy.