Written by: Muhammad Umar Farooq
Posted on: February 01, 2023 | 
| 中文
Deng Xiaoping and Mao Zedong in 1960
In 1978, Chinese leader Deng Xiaoping embarked on a series of economic reforms that would change China forever. Dubbed "reform and opening up," these policies liberalised the country’s economy and helped spur its rapid growth. Over the next four decades, China’s economy would grow to become the second largest in the world, behind only the United States.
The man behind the reforms, Deng Xiaoping, born in 1904, was son of a poor peasant from the Sichuan Province. He joined the Chinese Communist Party (CCP) in the 1920s and quickly rose through the ranks, becoming one of the party’s leading figures. After the death of Mao Zedong and the end of the Cultural Revolution, Deng emerged as China’s paramount leader and set about reforming the Chinese economy. He gained the support of the CCP and the people by espousing the four modernizations: agriculture, industry, science and technology, and defence. Deng was pragmatic, eschewing ideology for the sake of economic growth. He saw the potential for industry, embraced the idea of free markets and private enterprise, and opened up the country to foreign investors. He also reformed the legal system and increased the autonomy of local governments.
Deng Xiaoping during the Chinese Revolution, 1949
Deng envisioned an environment conducive to the realisation of its dream of economic modernization. This vision was pillared on four requirements, i.e., unanimity of thought on issues of national interest, internal stability, meritocracy and a contingent of officials with both an "unswerving socialist orientation’ and ‘professional knowledge and competence’. By strictly following these four principles, he sent a clear message to the world that China is safe and ready for foreign direct investment.
Zhou Enlai (left), Deng Xiaoping (centre) and Zhu De (right) watching a show in June, 1964
Prior to Deng’s reforms, the Chinese economy was largely based on state-run enterprises and was burdened by inefficiencies and bureaucracy. The government did control prices, wages, and production quotas, stifling growth and entrepreneurship. Deng realised that the only way forward was to embrace change and open up the economy to market forces. This was a risky move, as it challenged the existing Soviet style system and ideologies of the CPC. However, it was a risk worth taking.
Mao Zedong and Deng Xiaoping
Reforming state-owned enterprises was vital for the complete transition from a closed to a more open economy. These enterprises had a significant say in overall economic policies. The contribution to China’s total industrial output by these enterprises in 1978 was a whopping 77.6%, but after the reforms, it decreased to 28.8% in 1996. The period between 1978 and 1984 was marked by wide-scale decentralisation, in order to equate the responsibility of enterprises with power. The Sichuan Provincial Government launched a pilot project in October 1978, in which six selected enterprises were given incentives to produce more than their quotas. Those enterprises were thus allowed to keep a portion of profits in those cases in which they produced more than their quota of production, and they enjoyed complete freedom regarding spending that amount for the collective good.
This initiative was a great success. Seeing this, the State Council released the 'Provisions on Enlarging the Decision-Making Ability for the Operation and Management of State-Run Industrial Enterprises’, in order to encourage local enterprises to increase their production. One year after the launch of the pilot project in Sichuan, 4,200 enterprises were incentivized under this initiative, and this number kept on increasing to the point that in 1980, these enterprises accounted for 60% of the national budgeted industrial output, and 70% of national industrial profits.
Industrialization in China has spurred economic growth
The period between 1984 and 1992 was marked by innovation and efficiency in the practices of enterprises. In 1984, "Provisional Regulations on Expanding the Autonomy of Enterprises" were promulgated, which gave birth to the "Dual-Track System," which means that the enterprises were given the incentive to produce more than their set quotas. If any enterprise used to produce more than their quota, then the extra amount was sold at market price, which was way too high compared to the state prices. Moreover, enterprises were given the freedom to make decisions regarding human resource management.
Former US president Gerald Ford and his wife met Deng Xiaoping in Beijing in 1975
At the same time, the profit tax was introduced to replace profit remittance. Before this new system, the government assigned factories overall production targets and taxes, so there was no economic incentive to increase efficiency. But now, the responsibility for profits and losses rested with the managers. The profits that managers used to retain after remitting taxes, fuelled efficiency. The promulgation of the "Regulations Concerning Deepening Enterprises Reform and Increasing Enterprise Vitality" in 1986, and the "Provisional Regulations Concerning the Contract Operational Responsibility System in State-owned Industrial Enterprises" in 1988, also marked this stage. These regulations altered the relationship between the state and enterprises from an administrative to a contractual one.
The social and economic impact of the first two stages of reform, slowed the process of transitioning from the closed economy of China into an open one. Inflation and unemployment were on the rise. Deng advised the party to concentrate on economics more than ideology, saying, "It does not matter if a cat is black or white; as long as it catches mice, it is a good cat." The share of State-Owned Enterprises (SOEs)' profits in gross domestic output were falling dramatically. So, the government started restructuring SOEs in 1996. Millions of employees had to be laid off, and privatisation was done. After 1996, SOEs' profit as a share of GDP started to increase.
Le Quan of Singapore welcomes Deng in Singapore
The impact of Deng’s reforms was dramatic and far-reaching. Within a few years of the reforms, the Chinese economy had nearly quadrupled in size, with GDP per capita rising from USD206 in 1978 to USD 795 in 2001. This target would have appeared unrealistic to anyone paying close attention to the Chinese economy at the time, and it ran counter to Deng's dictum, namely, crossing the river by feeling the stones. Poverty levels had fallen from 65 percent in 1981 to just 10 percent in 2001. Foreign investment had grown rapidly, with direct foreign investment jumping from USD 200 million in 1979 to over USD 60 billion in 2004. China had also become an integral part of global markets, joining the World Trade Organization in 2001, and becoming a major import-export partner for many countries.
Deng Xiaoping with his wife
Deng’s model of economic liberalization is a beacon of light for the economically underperforming countries like Pakistan. It is only through a broad vision heralded by a great leader, efficient implementation of policies, and meritocracy that a country can rise to the top, emerging from the abyss of wilderness, and China’s success story is a case in point.
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