The First Decade of Economic Reform - the 1980s

The aim of the reformers Deng Xiaoping 邓小平 (1904-1997) and Chen Yun 陈云 (1905-1995) in 1978 was mainly to ameliorate the living conditions of the people, and thus regaining confidence in the competence and legitimacy of the ruling party (Ding 1994: 3). Yet there was no blueprint for the reformers how to reach this goal, and the outcome of their measures was difficult to predict. The most important steps in the beginning were to reduce the power of the State Planning Commission (Guojia Jihua Weiyuanhui 国家计划委员会, short Guojia jiwei 国家计委) and to give economic decision into the hands of ordinary people. In this way, more competition would arise in individual markets, production would increase, and people would be motivated to work for their own benefit. The reforms were not introduced all at once, like in the Soviet Union, but only gradually and locally, in order to test their effects, and eventually roll back in case of failure - not the least in order to mute or accomodate potential opponents to reform. The initiative of many reform ideas came from the grassroots, and was implemented on a larger scale when proved as successful and pragmatic.

A distinctive side effect of the reform agenda was the thorough reduction of political campaigns—barring a few exceptions like the campaign against spiritual pollution (qingchu jingshen wuran 清除精神污染) 1982-1983. Ideology ceased to play a role for a great part of the reform era.

The reforms were a top-down project and initiated by high leaders with huge credibility. They had observed that the Stalinist-style economy of the early 1950s, the ill-planned Great Leap, and the re-Stalinization under Hua Guofeng had contributed but little to economic growth. Peasants still worked in huge people's communes (renmin gongshe 人民公社) without incentives for engagement, and the main focus of industrial policy was lying in heavy industries, while the National Planning Commission critically neglected the production of items for daily life and consumption.

The first measure was the dissolution of the people's communes and conclude contracts on production targets with individual farmers (baochan daohu 包产到户) - yet the soil remained in the hand of the communes or collectives. Workshops and industrial enterprises of the people's communes were transformed into township and village enterprises (TVE, xiangzhen qiye 乡镇企业) whose management was laid into the hands of individuals or collectives. The TVE project was tested in Wenzhou 温州, Zhejiang. Individual farmers and small enterprises were allowed to act entrepreneurially, which means they delivered their production target to the local governments at prices determined by the plan, while surplus production could be sold on the markets at market prices. Thus a dual price system (jiage shuanggui zhi 价格双轨制) was adopted which solved shortages on the market but also curbed hyperinflation. It was abolished in 1994. Prices for important materials like coal, oil, and steel were still subject to planned prices.

In the late 1970s, agriculture contributed to 37% of the GDP as effected by 65% of the national employees (Ebbers 2019: 51). The de-collectization was aimed at raising production and the living conditions of the peasantry. The outcome was astonishing. Production did not just double in short time, but the huge increase was possible with less workforce, thus setting free the labour force of millions of peasants who migrated to the cities to take up work in factories. In the first half decade of the reform, nearly 50 million migrant workers moved to the industrial sector (Ebbers 2019: 51), most of them to collective- or private-run TVEs, which manufactured labour-intensive consumer goods for the domestic market, and soon for export. TVEs, restricted by their meagre budgets, were generally more productive and competitive than the large state-owned enterprises (SOE), and constituted a challenge for the latter.

The second great measure of the agenda of reform and opening was the creation in 1979 of Special Economic Zones (SEZ, jingji tequ 经济特区), namely Shenzhen 深圳, Zhuhai 珠海, and Shantou 汕头 in the province of Guangdong, and Xiamen 厦门 in Fujian, where foreign enterprises were allowed to invest under favourable conditions and would transfer technological knowledge to China.

In the countryside, the procurement targets of agricultural production were reduced, government procurement prices raised, and prices for produce above the government procurement level lifted substantially. Farmers were highly motivated under these circumstances, and agricultural production skyrocketed. Problems of grain supply that were often experienced during the Maoist era were history. Farmers were also left decision over how to invest their labour, and many of them began to work in TVEs, at least temporarily. The production output of the latter boosted and supplied markets with light-industry products many of which had been scarce in earlier times. Apart from excellently serving market demands, the TVEs became competitors for state-owned enterprises (SOE, guoying qiye 国营企业) and so created incitements to raise quality of products and improve management conditions.

In the second half of the 1980, Prime Minister (1980-1987) and General Secretary (1987-1989) Zhao Ziyang 赵紫阳 (1919-2005) took over the helm of the reform project. He followed a cautious and consensual agenda. Zhao introduced markets wherever feasible, with a focus on agriculture and industry, led enterprises to "grow out of the plan" with a dual strategy (market and plan side by side), and preferred particularistic contracts (tailor-made, case-related) with powerful incentives for all actors, including individual production targets and taxes. Market competition was created by lowering barriers of market entrance for players, yet without enforcing the privatization of SOE. Zhao accepted an inflationary economy and the loss of central-government funds by decentralizing authority over finances. This helped individual provinces to take measures of their own to increase economic output. Zhao's main goal was to intensify economic "reform without producing losers" (mei you shujia de gaige 没有输家的改革).

This slogan reflected the achievements of the first decade of reform policy. Household consumption was rising fast by the increased income of rural and urban households. The economic growth of the 1980s can be led back to the emergence of domestic markets and domestic consumption.

The dual-track system of the 1980s concerned several levels and constellations. It meant the co-existence of two coordination mechanisms, namely plan and market, and thus does not only refer to markets and prices, but also to management methods inside enterprises. SOEs had the obligation to meet the demands of the plan, but were free to make business with non-state enterprises beyond the requirements of the plan. On the markets, the planners of the government gave gradually free control over the prices of consumer goods. Over the course of the decade, the amount of beyond-plan products increased, and the plan target shrank to a minor part of the production output of SOEs. The government decided that the part of the production produced for the plan might serve as a kind of tax surrogate, and the prices paid for it as a kind of subsidy for enterprises (Naughton 2018: 106). Zhao Ziyang's approach had practically abolished the profit retention system (lirun fenpei zhidu 利润分配制度) and replaced it by enterprise-specific corporate income tax (qiye suode shui 企业所得税) (Jackson 1992: 105).

Instead of promoting privatization of SOEs, managers were given freedom in managerial decisions, and were rewarded for better performance. It was a conscious decision of the dual-track policy not to throw all types of management (be it firms or prices) together, but to disarticulate different types of organization. SOEs were embedded in a triangular relationship with banks and the government. This structure has been helping SOEs to make stand against the competition by private TVEs. The main problems of the early reform-period SOEs were inapt management procedures and the obligation to provide the "iron ricebowl" (tie fanwan 铁饭碗) to their employees. The triangular relation was of great importance for the survival of many loss-making SOEs the bankrupcy of which would have damaged the reputation and careers of many a local Party cadre. Even provincial leaders would have faced problems of self-sufficiency if larger SOEs had went bankrupt. In the early 1990s therefore, 87% of all bank loans served to keep afloat SOEs (Ebbers 2019: 53).

The outcomes of these measures were formidable, but not able to eliminate the distortions of the existing economic system, with the result that resources were flowing to grey zones and created imbalances in income distribution. The leadership of the CPC continued, and still continues today, to prefer a gradualist approach in reform and tries to preserve institutions where possible, particularly if these possess expertise in certain fields. The reason for this approach is to minimize opposition to reform (Naughton 2018: 100).

The government of the late 1980s decided to cut short spending and let it to the growing markets to care for investment funds. This was possible because with the excellent development of the economy, the saving rate increased substantially and allowed banks to disburse loans to investors.

Throughout the 1980s there were several macroeconomic cycles with ups and downs and increased and reduced intensification of reform policies. Each boom was accompanied with inflationary tendencies, the worst of which occurred in late 1988, with 28% (Naughton 2018: 109). It hit workers and employees with fix incomes the hardest and the government therefore cut back investment and reimposed price controls over certain goods. The economic crisis of late 1988 transformed into a political one in early summer 1989, expressed by the famous Tian'anmen protests.