Chinese Economists on Economic Reform - Collected Works of Guo Shuqing

Guo Shuqing, China Development Research Foundation, China Development Research Foundation

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136671784
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

China Development Research Foundation is one the leading economic think tanks in China, providing a base where many leading Chinese economists have developed the details of Chinese economic reform. This book is the second of a series which makes available to an English-speaking audience the work of the individual Chinese economists who were the architects of reform. The series provides an inside view of China's economic reform, revealing the thinking of the reformers themselves, unlike many other books on China's economic reform which are written by outside observers. Guo Shuqing has made major contributions to the thinking underlying China's economic reforms and to the practical implementation of several of those reforms.

1 An exploration of reform of the
Chinese economic system ^*

(August 1984)

Economic reform is a massive social undertaking that requires thorough scientific exploration and appraisal. This article cannot and does not touch on all kinds of details. It presents views on only the most basic issues.

I. The goal

Based on our analysis of socialist production mode, our goal in reforming China’s economic system can be summarized as follows: to set up an effective socialist commodity production system. This does not imply that we declare commodity production to be the fundamental feature of a socialist economy; nor does it mean that we deny that planning is one of the main features distinguishing a socialist economy from past economic forms. The reason for highlighting ‘commodity production’ is that the biggest problem with the old economic system lies in negating and obstructing the economic form of monetized commodities. As a result, the emphasis of the new economic system must necessarily be on establishing and perfecting monetized commodities under the form of a socialist economy.

The new economic system does not mean abandoning planning. On the contrary, we must strengthen planning, and make it more scientific, more consistent with the realities of economic development, more effective in guiding economic development and less of a mere formality. It is incorrect to say that ‘economic reform simply means a little less planning and a little more market.’ The defects of the old economic system lie not in too much planning, but in the fact that the process has been unable to ensure the planned growth of the national economy. In the old planning system, as the phrase went, ‘the annual plan was being made in the whole year’; therefore the plan always lagged behind the economic process. The so-called ‘material plan aimed at planning production of material goods’ was divorced from the value relationships governing production of commodities. Human interference thereby created numerous gaps. As a result, the plan was often not achieved, or if it was achieved, it was at the cost of imbalances and inefficiencies. The innovative aspects of the new planning system are as follows. First, it is firmly based on the commodity and monetary relations, enabling price mechanism instead of material plans to play a dominant role. Second, it changes the way in which plans are made solely by State entities; instead, the State, enterprises, and local governments work together so that plans reflect the views of all and can accommodate a range of interests and demands. Third, the emphasis is shifted from short-term to medium- or long-term planning, thus improving forecasting and strategic planning. Fourth, plan implementation mainly relies on economic laws and government policies, on the roles played by various economic regulators, rather than on the old system of administrative fiat. The first of the above four points is of fundamental importance. Planning must never diverge from or disrupt the commodity and monetary relations. Rather, it must take these relations as its ultimate basis or precondition.

The basic reason the old system created low efficiencies, tremendous waste, and unbalanced growth of different sectors was that it deviated from the laws of commodity production. Specifically, this was manifested by focusing on the product itself, the quantity produced, and the production rather than on value, quality, and demand. State ‘unified’ purchase and sale of commodities without any evaluation of market need made it seem as though ‘value’ was being taken into account when in fact it was not. This gave rise to extreme disruption of any kind of rational economic process and led to future problems. If the law of value could not function through regular means, it naturally had to be realized in indirect ways. A key feature of the old planning system was that balances could be achieved in physical goods, but not in value. Even if balances were achieved in value on the basis of the operative old fixed prices, there were still great discrepancies in actual social value. In order to meet the necessary Plan quotas of certain products, such as steel, this was often accomplished at any cost. The resulting losses could sometimes be measured by the cost of goods, but often they could not be reflected in any monetary form at all. There was little scientific merit to such indicators as the so-called ‘value of gross output,’ because they did not reflect the actual expenditure of labor. All other indicators, such as profits, net output value, and so on, were more or less the same. The reason was that prices were not determined by supply and demand in the economy; instead, mandatory practices operated beyond the reach of the economy, which meant that money was essentially powerless to effect integration of the economy. Enterprises carried out production according to the mandatory plan; products were purchased by commercial departments according to the mandatory plan. The prices employed were those fixed by the State. The State determined the amount of goods that any given enterprise was to produce, and then allocated funds to the enterprise to carry out that production. With the funds, the enterprise purchased State-designated materials. Money was merely a tool for settling accounts, a kind of tail following the process after it was done; commodities were not proactive in going out after money. The buyer had no right to make choices; instead, his role was predetermined by the State. Even the distribution of consumer goods was not through the means of a normal commodity market, since commodities were in extremely short supply. Instead, the State employed such measures as coupons for supply of consumer goods. In normal economic transactions among people, the role money had previously played was now distributed among different kinds of ‘payment’ that included allocation certificates, written orders from an authority, letters of introduction from various governmental levels, social connections, and the giving of gifts. Only through the use of such means could one ‘purchase’ one’s needs. Money not only no longer embodied value but also lost its ability to serve as a yardstick of value. Take the situation in the Soviet Union in the 1950s as an example: one ruble equaled roughly one dollar when buying food, but nine dollars when buying mechanical and electrical equipment. Never mind that the US dollar served as the primary international currency. Commodity markets were not based on comparative value as measured in money, not to mention capital markets or the foreign exchange market. Most Western economists may feel that a labor market existed in the Soviet Union and Eastern Europe that operated on the basis of a State-determined wage, but this was definitely not the case in China. In China, all factors were suspended in an abnormal state, including so-called costs, prices, salaries, profits, interest, and rents. They lost all normal significance and failed to play their normal roles. In general, the relationship between commodities and money was simply not integrated in China’s old economic system, so the commodity – monetary relationship was severely distorted. Lacking the necessary realistic basis, planning could hardly conform to reality.

The new economic system differs in that, first of all, it is reorganized strictly in accordance with how commodity production works. In socialist commodity production, the enterprise must be a relatively independent producer whether it is with respect to production technology or its relationships with society. The income distribution of both the enterprise and its employees, the production and re-production of the enterprise, the realization of its social responsibilities and obligations, must all be based on the ‘labor contribution’ it makes to society. That is to say, all these must be based on how its products meet the needs of society, as measured by the evaluation of the market. Between enterprise and the State, and among enterprises, there is no longer any non-economic form of allocation and transfer. Tax revenues and fiscal expenditures must also adopt the form of a commodity – money relationship, which eliminates any ‘flexible budget’ and ‘soft finance’ phenomena. On behalf of society, the State regulates all activities and connections among enterprises, and regulates the aggregate supply and demand of commodities and money so as to ensure the planned and orderly operation of the economy and avoid an anarchical state of production. The State also bears the responsibility for other economic functions, which are to manage and promote such public services as science and technology, education, culture, and health, to harmonize their development with the strategic planning of economic development, and to provide a suitable external environment for their growth. Specifically, we need to establish and improve socialist markets of commodities, labor, money, and foreign exchange, and bring all economic activities into the interrelated network of commodity – money relations. Macroeconomic plans should grow from the basis of these interrelationships, and should play an active role in these markets through regulating these interrelationships. The new economic system is not intended to separate the planning and the market, but to combine them organically. There should be one guiding system for all economic activity, not two. The planning will always be constrained by the market, and the market should always be regulated by the planning.

In order to arrive at an organic unity of plan and market, in principle we must totally discard the mandatory planning system. Taking into account the necessity of undergoing a transition in implementing reforms, however, at the beginning we will have to retain mandatory planning, temporarily, for a small number of products. We need to make clear that this is an expedient measure, however, undertaken out of necessity. In time, this kind of planning will be eliminated altogether. At the same time, in principle we must abolish the price system determined by administrative fiat, since only flexible pricing, in keeping with supply and demand, can replace mandatory planning and become a key variable in economic decision-making. Nonetheless, in the initial stages of reform, we will need to retain fixed prices for some products. Price reform must be carried out concurrently with tax reform, or we cannot be assured of any fiscal revenues. We also need to clarify the percentages of profits to be retained by enterprises, in order to assure that the enterprise benefits. Price reform must also be carried out concurrently with wage system reform, for upward adjustments in prices absolutely must not diverge from wage-earning ability. We have seen the lessons that Yugoslavia and Poland learned in this regard, and also witnessed the successful experience in Hungary. Even if we do not reform the wage system right away, we need to modify wage structures and standards. Prices and taxes must be resolved in a systemic manner, however, for simply making adjustments without undertaking major reform will not work in these arenas. In the long run, wages should follow along the same course. Likewise, we must also reform credit and investment, foreign trade and exchange rates, and the system of economic organizations, although in the early stages we may simply have to adopt moderate measures. In brief, in order to reach the goal, we must make it clear that, although we are taking temporary expedient measures, in the end we have to thoroughly reform the old system.

The Soviet Union and Eastern European countries chose different goals in their economic reforms. Yugoslavia adopted a market economy under ‘worker’s self-rule’. Poland, after 1982, and Hungary, chose an organic combination of central planning and market mechanism. The Soviet Union chose a mandatory planned economy that had the added feature of material incentives (an improved-upon central authority system). The first two types have one thing in common, which is to reject the old system and fully develop the relationship between commodities and money. The theoretical basis for this is that a socialist economy is a commodity economy. The last type retains major elements of the old system, while expanding the commodity – money relations for some products. The theoretical rationale for this is that the socialist economy is an ‘incomplete commodity economy,’ or a ‘half-commodity economy.’ We cannot select a system similar to that of Yugoslavia, because that system lacks the ability to control macroeconomic planning. Nor can we choose the Soviet model, for it has been proven that such reforms will not result in any fundamental change and will therefore not find a lasting solution. Nevertheless, some people hold that the relatively stable increase in the Soviet economy proves that its reform is effective. In fact, this is not the case. The Soviet Union enjoys incomparable natural resources that change the equation and that guarantee sustained and extensive growth. These include oil, coal and gold resources that far exceed ours. The highly militarized economy of the Soviet Union also stimulates and sustains continued development of heavy industry, so that its economy is not immediately impacted by uneven development of different sectors. These two considerations alone are sufficient to alleviate and divert internal economic contradictions. In these two respects, we cannot and should not try to match the Soviet Union. To conclude, we cannot choose goals similar to those of the Soviet Union in undertaking our own reform. The situation in Hungary also differs from that in China. Hungarian agriculture approaches that of developed countries and is mainly managed by cooperatives. Hungary’s industrial modernization far exceeds that of China, while its population and land area are much smaller. Hungary naturally should have a higher degree of economic concentration and, being smaller, the country can apply a more stringent unified and coordinated national plan. China, in contrast, has a lower level of development, with more varied economic forms and multiple modes of operation; generally speaking, the degree of the economic decentralization should be higher. We need to take these differences into account when setting the goals. China’s circumstances preclude us from simply copying the models of other countries.

From start to finish, we must have a clear goal in mind as we proceed along the process of reform. The reforms in both Yugoslavia (1965) and Hungary (1968 and 1980) had clear-cut objectives. In contrast, reform objectives in East Germany in the 1960s were not only unclear but kept on changing. Some aspects went quite far, such as allowing industrial prices to float; other aspects did not change at all and retained the old planning system. Eventually this put the economy into chaos and the country had to give up reform altogether and restore the old system in the early 1970s. The economic reforms in Poland from 1973 to 1979 put forth objectives of improving planning and strengthening market mechanism, but the original plan was abandoned midway through the process. Things that were easy to change were reformed, such as wages, bonuses, and distribution of profits. Things that were harder to reform were not changed at all, such as pricing. When it became necessary to alter prices, the country soon faced a socioeconomic crisis. We should learn from all these lessons. The basic goals of the economic reform must be clear, and we must never abandon or alter them in the process of reform, under any pretext or justification. If we do, the reform is bound to fail.

II. The path

The paths of reform will naturally vary with differences in each country’s economy and politics, as well as their guiding ideologies and goals. It is absolutely without question that we must choose a path that fits the actual situation of China; given the existing system and reform needs, we cannot follow the path of any other country. The following discusses the ‘path’ of China’s reform from different perspectives.

1. Economic-system reform and economic development

Reform inevitably involves a transitional period. During this period, especially in its early stages, it is understandable that the rate of economic growth might decline. Since China’s reform started late and also had to confront the damage caused by 10 years of domestic turmoil, numerous acute problems that had accumulated in the national economy now have to be resolved. If they are not, the development goals for this century will be impacted, and domestic political stability and the people’s confidence in reform will also be affected. Internationally, the rise of high-tech industries promises a new economic leap forward in developed countries. If we do not raise the economic level as quickly as possible, we will find that we are increasingly forced into a passive position.

The situation therefore requires that we maintain a fairly high level of economic growth. At the same time, we face disadvantages that lie mainly in the inescapable problems involved when replacing an old system with a new one. For example, we have to restrain investment in infrastructure in the early stages so as to make adequate preparations for reform. We also have advantages. Our enterprises have tremendous latent potential for fast growth, given their current technological backwardness, underemployment, and low efficiency. The chances for rapid increase in the standard of living and for developing education, science, and technology are also quite good. Improving these aspects will, in terms of the fundamentals, be beneficial in promoting economic growth. In analyzing these things, we can see that there may be temporary contradictions between reform and growth. Under the current circumstances, we should take reform as primary and the prerequisite for solving problems. We should avoid unrealistic and precipitous advances; we should maintain a growth rate that is moderate and appropriate.

2. Economic-system reform versus structural adjustment and
changes in development strategy

China’s economic structure has been irrational for a long time. Numerous problems exist, whether you are talking about the structure of industries, products, technologies, or the structures of enterprises and regional development. Although great efforts have been made since 1979 in adjusting these structural issues, we have not really fundamentally solved any problems. Development strategies have evolved in recent years, from focusing on extensive expanded reproduction to intensive expanded reproduction, from extensive growth to intensive growth, from a closed economy to an open economy, from solely valuing traditional industries to fully valuing emerging industries. The efforts have been impressive but are far from enough. Whether or not we can resolve fundamental issues relating to economic structure and development strategy depends entirely on whether or not we can be successful in the comprehensive economic-system reform. If we do not change the old economic system, we will never eliminate the problems derived from it. Temporary or partial adjustments cannot have a fundamental impact, as shown by the experience of Eastern European countries as well as China. Economic reform will adapt production to domestic and foreign markets, providing an essential prerequisite for economic growth that is modernized, optimized, and more in proportion. Rationalizing our economic structure and our strategies will also be beneficial in spurring systemic reform. We must fulfill these two tasks simultaneously during the process of the reform. The view that we should separate them by finishing one task ahead of the other is untenable. Under the current circumstances, however, we must give top priority to reform.

3. Economic-system reform versus political-system reform

In Yugoslavia, economic and political reform proceeded mostly in tandem, although each had its distinct phases. Before 1980, Hungary generally sought to advance economic reforms while evading reform of the country’s political structure. Economics and politics are inseparable, however, something that is especially true in socialist societies. Even in Hungary, reform of the economic system had political support during both preparation and execution. For example, the rise of so-called Kadarism in the 1950s, the rise of better-educated and more professionalized cadres in the 1960s, and the decentralization of authority and limiting of national-level institutions were all politically influenced. Due to circumstances unique to Hungary, however, problems with the country’s political structure remained unresolved as reform of the economic system proceeded. Things changed dramatically after 1980, when Hungary declared that the next phase of reform would focus on what it called an ‘organizational system,’ which allowed most enterprises to elect and recruit managers by themselves, to establish Business Management Committees, to promote democratic procedures, and so on. The situation is different in China. In the initial stages of reform, the Party’s Central Committee proposed carrying out economic reform together with political reform, and building a modern socialist country with a high degree of democracy. In recent years, concurrent with economic reform, we have made certain achievements in political reform: for example, the restoration and development of the principl...