The Key to Success: Four Decades of Reform and Opening Up

In the past four decades, the Chinese economy exhibited  exceptional performance. How did China manage these remarkable  achievements, and what experience can it share with other developing  countries in this regard?

By Hu Biliang

At  the end of 1976, China was, by and large, an agricultural country with a  hefty 82.6 percent of its population living in the countryside, the  majority in absolute poverty. After a decade of the “cultural  revolution” (1966-76) that concluded in October that year, the Chinese  economy had come to the verge of collapse, and its political system was  in disarray. It was in these circumstances that the Chinese people took a  hard look at the future of their country, and state leaders began to  redesign development strategies, policies and plans.

After  two years of deliberation and planning, and on the basis of best  practices at the community level, a package of new economic policies,  namely, reform and opening up, were unveiled at the end of 1978,  steering China onto a new development path.

In  the following four decades, the Chinese economy exhibited exceptional  performance. Its manufacturing sector is now the world’s largest in  terms of added value. Paid-in foreign direct investment has soared from  nothing to $133.7 billion, the world’s third largest; and overseas  direct investment surged from zero to $183.1 billion, second only to the  U.S.

The  2016 Global Manufacturing Competitiveness Index of Deloitte gave the  crown to China, which is the largest producer of 220 out of the 500  major industrial products, including iron and steel, coal, cement,  electrolytic aluminum and refined copper. What’s more, its hi-tech  industry has outperformed that of the U.S. in terms of added value and  export value, indicating that China is approaching the pole position in  hi-tech manufacturing.

With  agricultural value-added output accounting for merely 8.6 percent of  its 2016 GDP, China has completed its transformation from an  agricultural to a manufacturing country. And with an urbanization rate  of 57.4 percent, Chinese society has moved from the agrarian to the  urban phase.

How  did China manage these remarkable achievements, and what experience can  it share with other developing countries in this regard? These are the  questions this article tries to answer.

A path with Chinese characteristics

A  development path unique to itself, referred to in the official jargon  as socialism with Chinese characteristics. This path is, by nature,  socialist and distinctive for its indigenous traits.

The  socialist nature means it is a path to common prosperity. Though the  government encourages some citizens to get rich first, its goal has  always been to create a life of affluence for everyone. This is why the  Chinese Government has put poverty alleviation high on its agenda, and  rolled out a number of policies and measures in this regard. These  efforts have paid off—700 million Chinese have risen above absolute  poverty in the past 40 years, and the remaining 30 million are expected  to follow suit by 2020.

In  addition to poverty elimination, China has made great headway in  improving people’s livelihoods, as manifest in four aspects. First,  about 13 million urban jobs are created annually, keeping registered  unemployment rate at 4 percent over recent years. Second, access to  education has been remarkably expanded, reducing the illiteracy rate  from over 30 percent to below 3 percent in 40 years. What’s more, the  share of the labor force with higher education has surged from less than  0.5 percent to 25 percent. Third, social security has been  significantly improved, with more than 85 percent of the population  covered by a basic pension and over 95 percent carrying basic medical  insurance. Fourth, urban-rural income disparity has been on a steady  decline after peaking in the 2000-10 decade. The Gini coefficient has  also shrunk since 2008, though it still hovers above 0.45, which means a  high level of inequality.

The  socialist nature is also defined and decided by the public ownership of  land, development of state-owned enterprises and the government’s  comparatively firm control over economic activities, among others.

China’s  path of development shows unmistakable Chinese characteristics. First  of all, its political system, including its electoral system, is  different from that of Western countries. Taking into account its  history, China doesn’t adopt the “checks and balances” model that  divides government into legislative, executive and judiciary branches.  Instead it follows the centralized, unified leadership of the Communist  Party of China (CPC), with the National People’s Congress exercising the  highest state power and other political parties actively participating  in the deliberation and administration of state affairs. Second, the  government plays a bigger role in all sectors of the nation, including  boosting economic and social development. Third, the influence of  historical, cultural and traditional factors is prominent. For instance,  certain cardinal thoughts of Confucianism still hold sway over the  relationship between the rule of law and rule of virtue, the  relationship between order and rules, and the relationship between the  social network and development. State institutions and moral norms are  hence both at play in Chinese society.

Socialism  with Chinese characteristics is the choice China makes in light of its  own conditions. After decades of practice and improvements, it has  developed unique advantages in coordinating the roles of the government  and the market. The socialist system and institutions prove especially  effective in pooling labor, material and financial resources for massive  projects in national and regional development. There is, however, more  to be done to coordinate the roles of the government and the market.

Market-oriented reform

It  is known worldwide that China would not have arrived at where it is  today without the reform first initiated by Deng Xiaoping. A key reason  as to why it has been so fruitful is because this reform has been  unwaveringly market-oriented.

In  its early years, the People’s Republic of China copied the planned  economy model of the Soviet Union, which led to increases in  productivity and national economy but also concomitant problems. It  later came to the understanding that solutions to these problems  required introducing market-based systems and institutions. China  therefore launched reform to develop the commodity economy by  stimulating the production and exchange of goods. The reform then  evolved to establish a robust market economy.

But  in the course of these shifts, China didn’t abolish the systems and  institutions of the planned economy entirely, and instead allowed the  old and new systems and institutions to coexist and supplement each  other. In this way government planning and market functioning were able  to reach relative equilibrium in a dynamic process, in which the reform  proceeded without disrupting social stability.

Forty  years on, China’s market-oriented reform has come to a new stage,  during which our goal is to deepen the reform so that the market can  play a decisive role in resource allocation. By the measure of the Index  of Economic Freedom of the Heritage Foundation, China’s economic  freedom scores 57.4 on a scale of 100 in 2017. Its score was 52 back in  1995. Today no one in China disputes the market-oriented direction of  the reform, a tour de force of the nation. Moving steadfastly in this  direction, China’s reform will yield yet more fruits.

Opening wide

China’s  achievements can also be attributed to its opening up, which has gone  through three stages thus far. The first was during the 1980s and 1990s,  when the goal was to solicit foreign investment in domestic  infrastructure and industrial projects. Due to their geographical  locations and historical and cultural heritage, coastal areas,  especially Guangdong, Fujian and Shanghai, underwent the fastest growth  during this period of time.

Guangdong,  for instance, has long maintained affinity with neighboring Hong Kong  through the close bonds between their people. After opening up kicked  off, a spate of Hong Kong businesspeople opened factories in Guangdong.  With industrial zones mushrooming across the province, a large number of  hamlets were transformed into global manufacturing bases. One of them  is Dongguan, now the world’s largest manufacturing base for electronic  products. Foreign direct investment in China peaked in the late 1990s,  securing the nation’s position as the world’s factory.

The  second stage was from China’s accession to the WTO in 2001 to 2012.  During this period it accomplished two missions—bringing its foreign  trade and investment into compliance with international rules, primarily  those of developed Western countries, and integrating itself with the  international value chain. The first enabled the nation to be better  accepted by the world at large, and the second made it an indispensable  part of the global industrial and value chains.

Increasing  integration with the world in that decade turned out to boost, rather  than impair, the international competitiveness of Chinese manufacturing.  Its value-added element surpassed that of the U.S. to be the world’s  number one, and China’s GDP exceeded that of Japan to become the world’s  second largest.

Opening  up entered the third stage in 2013, marked by the nation’s proposal of  jointly building the Silk Road Economic Belt and the 21st-Century  Maritime Silk Road. Through the Belt and Road Initiative China hopes to  bring into full play its advantages in funds, certain technologies and  human resources of certain professions to advance interconnectivity of  facilities, trade, investment, finance and people-to-people exchanges.

This  initiative is expected to boost mutual support and synchronized  development among participating countries, and hence safeguard world  peace and realize open, innovative, and inclusive development globally.  By increasing dialogues between civilizations, it aims to build a  community with a shared future for mankind and create a better tomorrow  for everyone around the world.

Focusing on growth

At  the end of 1978, China put forward a package of new thoughts on  national development. The most consequential of them was to shift the  priority of the nation and the CPC from class struggle to economic  development, which has since become the central task of CPC  organizations and governments at all levels. In the following years,  economic growth was the primary measurement of the development of a  region and performance of an official, and the catchphrase “development  is of paramount importance” appeared on placards all over the country.  It became national consensus that development, synonymous with economic  growth here, offered the solution to the problems facing China.

Seeing  that manufacturing was a strong propeller of economic growth, China’s  central and local governments put great emphasis on it. But in the  1970s, 1980s and early 1990s the country was short of money to build up  this capital-intensive sector, which requires buying equipment and land,  building factories and hiring workers. It therefore looked to foreign  investors who were looking for opportunities in the Chinese market.

Foreseeing  the multiple benefits of foreign investment including tax contribution,  job creation, rising local incomes and consequently, spending, local  governments raced to solicit foreign capital. To outmaneuver their  peers, some regions offered extra favorable policies like tax cuts or  breaks, discounted land prices or even free land. Some even went to the  extent of lowering or scrapping environmental protection requirements.

While  going after foreign investors, regional governments also jostled to woo  domestic banks for loans to local enterprises. Meanwhile, they set up  their own financing platforms to raise funds for local manufacturing and  infrastructure to stimulate economic growth.

These  efforts paid off. The economy rose briskly all over the country, with  most regions reporting GDP growth rate higher than 10 percent. A spate  of new infrastructure was completed, and manufacturing surged in both  rural and urban areas. But the side effects soon emerged. The supply of  low-priced or even free land to foreign investors led to a spike in land  development for industrial projects and a steep fall in farmlands; and  bribery was involved in many deals between local officials, foreign  investors and banks. Realizing these problems, China began to correct  its neglect of other sectors amid the frenzied pursuit of economic  growth.

Political and social stability

A  key factor behind the roaring pace of Chinese development in the past  40 years is political and social stability. It is acknowledged by both  its own citizens and people of other countries that China is a safe and  stable place. How is this possible for a country with the largest  population on the planet that consists of dozens of ethnic groups? There  are four reasons as I see it.

First,  the CPC’s centralized, unified leadership is pivotal to political  stability in China. The CPC is the sole governing party in China, and it  is under its leadership that other political parties participate in  state affairs. This structure underpins China’s political stability.  Meanwhile, through its organizations that are found in every part of the  nation and follow the same lines and rules, the CPC can execute the  effective management of society. With a history close to 100 years, the  Party has garnered rich experience in effectively governing the nation  on the basis of national conditions. It is well worth noting that  despite the mistakes it made in previous periods, such as the “cultural  revolution,” the CPC has been able to keep abreast with the times, and  is brave to correct itself, which wins it broad support among the  Chinese people.

Second,  the CPC organizations and governments at all levels give priority to  social stability. A catchphrase in China is “putting stability above  everything else.” It is a firm conviction of Chinese people that we  could accomplish nothing without a stable society. In order to ensure  social stability China has enhanced organizational work, extending  social governance organizations all the way down to neighborhoods in  both urban and rural areas. It also runs strong police and armed police  forces to deter and combat subversive elements, defending social  stability and order.

Third, China has sufficient fiscal resources to maintain stability. Financial support is always important.

Fourth,  some elements of traditional Chinese culture also contribute to social  stability. For instance, Chinese culture values harmony and amity,  advocates the golden middle way and contentment, and discourages  confrontation and extremism.

Drawing development plans

In  any of the aforementioned realms, China devises and executes feasible  plans on the basis of extensive field studies. There are plans for the  Party’s work, for the government’s work, and for work in every aspect of  society. There are long-term strategies for up to 30 years, medium-term  schemes for five years, as well as yearly and quarterly action plans.  They are all seamlessly connected, and what’s more important,  implemented to the letter, turning ideas on paper into reality through  concrete efforts.

Since  1949, China has made 13 Five-Year Plans. Each of them identifies major  problems facing the nation during that specific period of time, sets  goals for the next five years, and charts central policies and measures  for their fulfillment.

The  merit of these plans is that they keep the entire nation in the know  about the clearly defined goals of future development, how to achieve  them and how to avoid obstacles along the way. All Chinese people  therefore pool their strength to accomplish these goals. Over the 60-odd  years since the founding of the People’s Republic of China we have  surmounted many problems and marched from victory to victory in the  course of executing these plans, bringing our nation to where it stands  now.

Last  but not least, when we re-examine China’s development of the past 40  years, we should never overlook the hard work of the Chinese people. Any  talk of China’s successful experience will be pointless if not  recognizing the toils of its people. Meanwhile, the CPC is earnest to  learn. It sums up and imbibes good experience—especially good ideas—of  all humankind, makes innovations on this basis, and arms itself with  this knowledge and these ideas in practice. Xi Jinping Thought on  Socialism with Chinese Characteristics for a New Era is the latest  theoretical innovation of the Party, and will guide the Chinese people  in achieving more, and finally realizing the goal of national  rejuvenation.

The author is dean of the Emerging Markets Institute, Beijing Normal University, and a professor of economics

This article was previously published by China Today