Six Stages of Economic Development

Here is an excerpt from Economic Lessons from 70 Years of China’s Development.

In the early years of the People’s Republic of China, the Chinese economy was dominated by agriculture and was marked by low productivity. With thirty years of development and exploration before the Reform and Opening-up, China established an independent, complete industrial system and national economic system within a relatively short period of time. In a sense, the economic development during this period laid the foundation for economic development in the following period and for China’s great transformation from an agricultural country to the world’s largest manufacturing power. More importantly, numerous explorations on economic development and reform in three decades before the Reform and Opening-up have accumulated ample experience and lessons for the Reform and Opening-up as a historic turn and for economic development and deepening reform since the Reform and Opening-up.

We divide the thirty years before the Reform and Opening-up into the following six stages: economic reform and national economic recovery after the founding of the People’s Republic of China (1949-1952); establishment of planned economy and initiation of industrialization of the country (1953-1957); reform exploration and failure of “Great Leap Forward” (1958-1960); adjustment and economic development in 1960s (1961-1965); Ten Years of Chaos and tortuous economic development (1966-1976); and economic adjustment after bringing order out of chaos (1977-1978).

1. First stage: National economic recovery after the founding of the People’s Republic of China (1949-1952)

For the Chinese economy in 1949, the level of productivity was extremely low. Though over 80% of national population was engaged in agriculture, China was not self-sufficient in food production and it had to import grain and cotton in large quantities each year. China’s agricultural output value dropped more than 20% as compared with the highest level before 1949 ; China’s industrial development was backward, its pig iron and steel output was merely 13.9% and 17.1% of the highest annual figure before liberation, and China lagged far behind the US, UK, Soviet Union and Japan at that time by output of major industrial products. With the US as an example, in 1949, the year when the People’s Republic of China was founded, American per capita output of electricity, raw coal, pig iron, steel and cotton was 141 times, 41 times, 144 times, 418 times and 8.4 times China’s corresponding figure respectively. MAO Zedong once sighed, “what can we make now? We can make tables and chairs. We can make teapots and teacups. We can grow grains, and we can grind them into flour. We can also make paper. However, we cannot make one car, one airplane, one tank or even a tractor” . What’s worse, China’s economic development was extremely imbalanced. Its industrial production was mainly concentrated in Northeast China and major eastern coastal cities, and more than 90% of power plants were concentrated in Northeast China and several major coastal cities; over 70% of knitting spindles and looms were concentrated in Shanghai, Qingdao and Tianjin; more than 75% of wool spinning was concentrated in Shanghai.

Exhibit 1 Comparison between per capita output of major products in China and in other major countries in 1949

* Includes the output of individual handicraft industry

Data source: data compilation of statistical reports on national economy: China’s National Economic Construction and People’s Life, China Statistics Press (1958), P6.

After the founding of the People’s Republic of China in 1949, against such background as blockade and embargo against China by Western countries and their control and freeze of their properties in China as well as the Korean War, the Chinese government began to adopt a common currency, rectify the financial market, confiscate bureaucratic capital and establish State-owned enterprises, stabilize commodity prices, and endeavor to resume and develop industrial and agricultural production. More specifically, in terms of agricultural recovery and development, China increased governmental investment in and material supply for agriculture, launched water conservancy projects, conducted land reform and land reclamation, opened up urban-rural communication, increased the parity rate of agricultural products, developed agricultural producers’ mutual aid teams, popularize agricultural techniques for scientific farming, and improved agricultural productivity; in terms of industrial recovery and development, China confiscated bureaucratic capital and foreign capital, established State-owned enterprises, allowed the co-existence of multiple ownership systems, respected the law of value, and mobilized the enthusiasm for production; in terms of fiscal and tax reforms, China strengthened tax collection and management, strengthened the financial management of State-owned enterprises, issued government bonds and received aids on external debts, and thus improved the country’s financial situation. In the financial aspect, China included the deposit and loan business in state planning, strengthened foreign exchange management, realized the balance of foreign exchange receipts and expenditure, and took the lead in socialist transformation and nationalization of the private financial industry. By 1949, Chinese state-owned economy had already played a leading role in such fields as finance, modern industry and transportation[1]. By 1952, China’s national economy recovered well and its industrial and agricultural output had exceeded the highest levels before liberation.

Exhibit 2 Economic growth of China’s economic sectors in 1950-1952 (Unit: %)

Data source: WU Chengming and DONG Zhikai (both chief editors): The Economic History of the People’s Republic of China (1949-1952), China Social Sciences Press 2010

2. Second stage: The establishment of the command economy and initiation of industrialization of the country (1953-1957)

At the initial stage of establishment of the planned economy[2], China was highly consistent with Soviet Union in many aspects including setup of economic sectors and economic system. Within four years between the second half of 1952 and the end of 1956, China completed the transformation to state-planned economy and established a national economic system based on public ownership. By 1956, 96.3% of all farmers across the country joined cooperatives (including mutual aid teams, elementary cooperatives and advanced cooperatives), more than 90% of handicraftsmen joined cooperatives, and the transition from enterprises to public ownership was realized through public-private joint management and peaceful purchase. On economic system, the concentration of economic power, financial power and goods distribution power in central government was realized at this stage by eliminating economic commissions of five major administrative regions. For economic construction during the “First Five-Year Plan” period[3], with focus on construction aid projects of former Soviet Union and Eastern European countries[4], China gave priority to the development of heavy industries like energy, metallurgical, mechanical and chemical. For investment and accumulation, based on the “price scissors” marked by “agriculture supporting industry”, the annual average accumulation rate of agriculture exceeded 30% and forced transfer was thus realized.

In the process of copying the former Soviet Union’s socialist planned economic model, the Chinese government also made reflections and explorations and attempts aimed at improvements. At the final stage of the “First Five-Year Plan” period, the number of enterprises directly under central government increased from 2,800 in 1953 to 9,300 in 1957. For production and construction planning, central and local departments simply went on their own ways and there was imbalanced and disconnected development among departments. For distribution of financial power, through power centralization, financial power attributable to central government was 75%, while financial power attributable to local governments was 25%. As a consequence, numerous phenomena appeared, such as very limited financial power for local governments, lack of funds for local construction, reduced efficiency of goods distribution, and too limited autonomy of enterprises in human, financial and material resources as well as production, supply and marketing. All this affected the initiative of local governments and enterprises. Incompleteness of information and excessive government intervention resulting from high planning of the former Soviet Union’s socialist planned economy hindered the economic development. Around the Eighth National Congress of the CPC in 1956, China began the adjustment of its economic system.

According to MAO Zedong’s speech “On the Ten Major Relationships” delivered in 1956, the power of local governments and enterprises should be enlarged appropriately. As for the relationship between planning and market, CHEN Yun described it as the relationship between “main body” and “supplement” at that time with the following notion: “… the situation of our socialist economy will be like this: … planned production is the main body of industrial and agricultural production, while free production that changes with the market and within the confines of state planning supplements planned production”[5]. On implementation methods of plans, hierarchical management plans was explored and adopted. According to the Preliminary Opinions of the State Planning Commission on the Issue concerning Hierarchical Management of Plans (Draft) in May 1956, “plans issued with approval of the State Council fall into indicative indexes, adjustable indexes and reference indexes.” This notion increased the flexibility of planning and enabled local governments and enterprises to make adjustments to a large extent in line with actual circumstances. In 1957, the Party Central Committee and the State Council passed three documents including Provisions on Improving the Industrial Management System, Provisions on Improving the Commercial Management System and Provisions on Improving the Fiscal Management System. According to those documents, some enterprises and public institutions other than large-sized backbone enterprises in heavy industries may be delegated to local governments depending on different conditions so that certain explorations could be made on reasonably enlarging the power of local governments and enterprises. In the meantime, the authority of enterprises for internal management was appropriately expanded, indicative indexes were reduced, and corporate profits were split between the state and the enterprises. Reform requirements raised in 1957 included: delegating the relationship of administrative subordination of enterprises appropriately to provincial regions; enlarging the financial power of local governments and enterprises; expanding the authority of local governments on goods distribution; expanding the authority of local governments and enterprises on planning management (cutting the number of indicative industrial indexes from 12 to 4, and delegating the profit index to provincial regions instead of specific enterprises); carrying out the hierarchical management of prices. Those reflections and improvement explorations on the former Soviet Union’s socialist planned economy should be in accordance with actual economic conditions at that time. Unfortunately, all those efforts went to the other extreme in the ensuing “Great Leap Forward” Movement.

During this stage, the “First Five-Year Plan” was over-fulfilled. In 1957, China’s gross output value of industry and agriculture reached RMB124.1 billion, up 67.8% as compared with 1952; the gross output value of agriculture grew at an average annual   rate of 4.5%, and the gross output value of industry grew at an average annual rate of 18%; the economic structure was relatively coordinated; the gross railway mileage grew 22% as compared with 1952; rural income grew 30% as compared with 1952; consumption grew 34.2%; due to rapidly developing medical and health services, and China began to establish a medical health system covering the whole country, and its number of hospital beds grew 200%; China’s level of science, technology and culture improved quickly, and the number of colleges and universities increased 230%[6].

Exhibit 3 China’s fixed asset investment in1953-1957 (Unit: %)

Data source: China Statistical Yearbook (1984), WU Li (chief editor): The Economic History of the People’s Republic of China (expanded edition), China Times and Economic Press (2010).

Exhibit 4 The growth of China’s industrial and agricultural production in 1953-1957 (Unit: %)

Data source: China Statistical Yearbook (1984), WU Li (chief editor): The Economic History of the People’s Republic of China (expanded edition), China Times and Economic Press (2010).

3. Third stage:  The Great Leap Forward (1958-1960)

In May 1958, the convening of the Second Session of the Eighth National Congress of the Communist Party of China (CPC) and the adoption of the general line for socialist construction[7] marked the beginning of the Great Leap Forward Movement. The core of the “Great Leap Forward” exploration was devolution, and China hoped to make one step forward through power devolution and find a better, quicker path of national development than Soviet Union and Eastern Europe while putting into practice 1957 reform scheme. However, under the influence of the “left-leaning” thoughts, those exploration efforts deviated from the correct principle provided in 1957 reform plan in many aspects. Although a series of central conferences starting from the end of 1958 wished to correct some policy mistakes, all such efforts ended at the “Lushan Conference” in 1959. And the New Leap Forward in 1960 further worsened China’s economic situation. The Great Leap Forward Movement during this period brought major setbacks to the national economic development and also provided valuable, profound lessons for China’s economic adjustment and reform in the following years.

The “Great Leap Forward” exploration was focused on enlarging local power and mainly involved the devolution of the power of enterprise administration, reduction of tax categories, devolution of taxing power, and devolution of power to banking institutions, thus inappropriately expanding the power of local governments on planning, infrastructure construction, financial, material and labor resources and providing objective institutional conditions for the “Great Leap Forward” disaster. Against the background of “Great Leap Forward”, both central and local governments generally adopted the “three account books” system[8]. As a consequence, various departments and various local governments raised targets at every level during plan implementation and relevant plans were seriously divorced from China’s actual economic development levels. Many provinces were required to establish their independent industrial system and promote the “communist wind.” It was required that industry should grow at an annual average rate of 53% and agriculture should grow at an annual average rate of 30%. Under the influence of “overambitious targets” and “boasting style”, especially with the conditions of devolving power and increasing financial and material resources available to local governments since 1957, local governments increased infrastructure investments in succession and tried to establish their independent industrial systems. Due to excessively quick investment in heavy industries and serious wastage due to repeated construction, the economic structure became seriously imbalanced. By 1960, the proportion of heavy industry in the gross output value of industry and agriculture rose sharply to 52.1%.

In cities, shops and teams of collective commerce were integrated into state-run commerce, and handicraft cooperatives were transformed into local state-run factories and cooperative factories. Additionally, the administration of 88% of enterprises directly under central management including many large-sized backbone enterprises in heavy industries was devolved to local governments. In the meantime, China used to consider the practice of expanding enterprises’ administration authority, reducing indicative indexes and granting enterprises certain power on staff assignment. However, such idea was not fully realized due to prevalent practices including raising targets at every level, administrative orders and arbitrary orders. And the movement-type devolution of the power of enterprise management marked by excessively quick and hasty operation caused chaos to the production and operation of enterprises.

In rural areas, the people’s commune movement was carried out across the country. By the end of 1958, a total of 740,000 agricultural cooperatives throughout the country were changed into 26,000 people’s communes through reorganization and combination, and farmer households integrated into people’s communes accounted for 99% of all farmer households in China. At the administrative level, township governments were removed, and “integration of government administration with commune management” was put into practice. The “equalitarianism and indiscriminate transfer of resources”[9] and “communist wind” which involved devolving the administration of rural finance and trade to communes and unpaid appropriate of capital goods severely disturbed normal production order; elimination of commune members’ private plots and farming and sideline industries and one-sided emphasis on “large in size and collective in nature”[10] weakened the economic autonomy. The practice of eating from the same pot impaired the farmers’ enthusiasm for production. China’s gross output value of agriculture in 1959 fell 13.6% from the previous year, and its 1960 figure fell 12.6% from the 1959 level. The lives of rural and urban people encountered great difficulties.

Financially speaking, due to “Great Leap Forward” and people’s commune movement, China suffered fiscal deficit for four consecutive years (1958-1961). The total size of fiscal deficits in those four years represented about 10% of fiscal revenue within the same period, pointing to an extremely bad financial situation; due to lack of macro control on overall scale, bank credit was out of control and inflationary pressure was huge, which further lowered the living standard of both urban and rural residents.

Data source: China Statistical Yearbook (1983, 1984)

4. Fourth stage: Economic adjustment after the Great Leap Forward (1961-1965)

From September 30, 1960, the Party Central Committee and State Council raised the eight-character guideline, i.e., “adjustment, consolidation, enrichment, improvement”, and worked out a relatively reasonable 1961 annual plan on the basis of that guideline. At the “Seven Thousand Cadres Conference” in 1962, China further summarized lessons on economic development since 1958, adjusted the people’s commune policy, and adopted the three-level ownership system. The central government also adjusted the previous policies of devolving too much power to local governments and made endeavors to control the macroeconomic scale and plan. In 1962-1963, it seemed that the factory manager responsibility system was tried out; in terms of industrial construction, 14 sets of complete equipment were imported and advanced technologies in fields like petrochemical and energy were introduced.

The policy core during this period was “adjustment.” To be specific, it could be divided into two phases: the first phase was “rectifying deviations”; and the second phase involved new reform attempts when economic situation turned for the better.

Phase 1: limiting local governments’ fixed asset investment and eliminating the system of raising targets at every level; regaining the enterprises and powers excessively devolved during the “Great Leap Forward” period, with significant investments put under management of central government and no longer devolved to local governments, and overall investment size to be controlled by central government; without prejudice to the leading role of the ownership by the whole people, appropriately recovering and developing the collective economy, permitting the existence of individual economy in urban and rural areas, restoring private plots for commune members and family sideline production; opening village fairs, carrying out market regulation under the guidance of state planning, and bringing into play the role of economic measures including price, taxation and credit.

Phase 2: delegating 19 non-industrial infrastructure investments to local governments for specific arrangement, with 20% of plan targets set aside for arrangement by local governments; reducing the number of categories of industrial products under management of the State Planning Commission from 340 to 63; appropriately expanding independent decision-making power on enterprise finance; running 11 national industrial trusts on an experimental basis which belonged to various ministries and commissions; with respect to the methods of managing enterprises according to economic rules, overcoming previous malpractices including the Party carrying out government administration in lieu of organs of state power, intervening in daily enterprise operation regardless of economic accounting and profit/loss, organizing and exploring specialized, socialized mass production; with adjustment as a start, paying attention to economic legislation and supervision by enacting management regulations, such as 60-Article Regulations for Agriculture, 70-Article Regulations for Industry, 40-Article Regulations for Commerce, 6-Article Regulations for Finance, and 6-Article Regulations for Banks.

The economic adjustment during this period was not simple recovery of economic system at the final stage of “First Five-Year Plan”, but was intended to attach importance to the application of market rules and protect the initiative and enthusiasm of enterprises and farmers while centralizing economic power and paying attention to macroeconomic control. The economic adjustment started from 1961 and achieved remarkable economic results despite political movements in 1963-1965, such as, “Four Clean-ups”, “Anti-Revisionism” and “War Preparation.” As compared with 1957, China’s gross output value of industry and agriculture grew 80% in 1965. Among others, gross output value of industry grew 99%, and the gross output value of agriculture grew 55%. The economic structure was adjusted and improved, and the ratio of agriculture, light industry and heavy industry was adjusted to 4:3:3 by 1965. However, it cannot be denied that the results of economic adjustment were often suppressed by “leftist” wrong thinking, and over-centralization malpractices (e.g., some government departments regaining the administration of too many enterprises, excessive centralization of goods distribution, very limited decision-making power of enterprises) remained.

5. Fifth stage: Ten Years of the Culture Revolution (1966-1976)

From 1965 onwards, given international environment then, the priority of China’s economic work shifted to preparation for war. The “Great Cultural Revolution”, which broke out in 1966, negated numerous correct practices in 17 years after the founding of the People’s Republic of China. With class struggle as the key link, China pursued a self-contained, self-sufficient system of local governments unrealistically. Against the political background of “overthrowing direct and exclusive control of enterprises by the ministry concerned” and criticizing the so-called “restoration of capitalism”, China further devolved relevant powers once again and carried out “pauper’s transition to higher stage of collectivization” and “cutting the tail of capitalism.” Within a very short period of time around 1970, the power of administration of over 2,600 enterprises directly under central management including large-sized backbone enterprises like Ansteel and Daqing was delegated to local governments, and the all-round contract systems for goods distribution and finance were tried out to enlarge the powers of local governments. Good practices or entities resumed during the adjustment period (e.g., urban and rural individual economy, commune members’ private plots and family sideline production, and limited application of market regulation and economic measures under the guidance of plans) were removed or negated, or become stagnant even if they were allowed to stay; equalitarianism; trusts run as an experiment during the adjustment period were criticized as revisionism, and problems like regional & departmental segmentation, “large and all inclusive”, “small and all inclusive” blind production and repeated construction became more serious and prevalent.

The years of 1966-1968 were the climax of the “Great Cultural Revolution”, during which time the national economic development was hit hard. In 1969-1970, due to relatively stable political situation, the Chinese economy recovered to some extent. In 1972-1973, economic adjustment reaped some good results. However, China’s economy was adversely affected by the strengthening of the “Gang of Four” force at the Tenth National Congress of CPC and the following “Condemning Lin Biao and Confucian” Movement. In 1975, DENG Xiaoping presided over the work of central government and conducted the rectification of industry, agriculture, science and education with support from MAO Zedong. As a result, China’s national economy developed to some degree.

On the whole, during the period of Ten Years of Chaos, economic benefits of enterprises declined sharply and economic fluctuations were extremely high; although industry developed to some extent, the industrial structure was seriously imbalanced. The growth rate of output value of heavy industry exceeded that of light industry, while the growth rate of light industry exceeded that of agriculture. The people’s living standard was stagnant.

Exhibit 6 The growth of output value of China’s industry and agriculture in 1953-1957 (Unit: 100 Million RMB)

Data source: China Statistical Yearbook (1983, 1984)

6. Sixth stage: Re-establishing economic order (1977-1978)

After bringing order out of chaos, the central government set about economic adjustment and achieved certain results, but some problems still existed and generally included the following: first, high-target planning persisted; second, the policy of “Learning from Dazai in Agriculture” prevalent during the Great Cultural Revolution continued; third, the situation was misjudged and the goal of “agricultural mechanization” was set; fourth, the level of socialization of people’s communes was still emphasized and was used as the basis for upgrading of accounting units; fifth, taxation was simplified and central government’s financial power was weakened.

In view of all this, China started discussions on confounding thoughts existing in economic sphere during this period. Those discussions mainly revolved around such issues as whether distribution according to work was required, whether the development of socialist commodity economy should be encouraged, whether science and technology are part of the productive forces and whether people should respect the law of value and act according to objective law. It should be noted that all those discussions in the economic field developed in the direction of “emancipating the mind, seeking truth from facts”, which lay a solid foundation on economic thoughts for the ensuing Discussion on “Truth Norm.”