China’s programme of economic reform has met with remarkable success.footnote1 The average annual growth rate since 1979 has been 8.8 per cent, placing China in a select group of developing countries which have achieved sustained industrial growth for over a decade. Indeed, China doubled output per person in the ten years between 1977 and 1987, one of the shortest time periods for any country to achieve such a record.footnote2 This impressive growth has in part been the result of significant increases in factor productivity in both the state and non-state sectors, a point of some importance given the well-documented failure of centrally planned socialism to raise productivity.footnote3 The result is that China’s economy is now estimated (using purchasing-power parity exchange rates) to be surpassed in size only by the us and Japan and there is a real possibility that China will become the world’s largest economy by 2025.footnote4 In per capita terms, there have been impressive increases in living standards evidenced by a threefold increase in the average consumption of meat and eggs between 1978 and 1991, by a more than doubling of the average living space per person in rural areas in the same period, and by the fact that the ultimate basic consumer good, the television set, was owned by an average of one of every two rural households and by virtually every urban household in 1991.footnote5

There have, however, also been some clear problems in the reform programme, most notably the inflationary pressures which culminated in the 25 per cent inflation of 1989, the rise in death rates, the emergence of significant environmental problems, increasing income inequality, and social disruption and unrest.footnote6 The successes outlined above, therefore, have come at a considerable cost. It is not our intention here to establish that the benefits of reform have outweighed the costs (although we believe this to be the case) but rather to analyse the spectacularly successful aspects of the reforms, most notably economic growth as measured in conventional terms. China’s success in this respect is particularly evident in comparison with the performance of most other developing countries over the same period and the economic morass which has engulfed the countries of the former Soviet bloc.

If there has been a degree of consensus over the fact of China’s economic success, however, the reasons for that success and the challenges which remain for the future are still contentious issues. In this paper, we will argue that a common approach, derived from the dominant neoclassical paradigm, which attributes China’s success exclusively to the introduction of the market mechanism and advocates large-scale privatization as the most important task of the future is highly misleading. We offer an alternative view which interprets China’s success as demonstrating the continued economic relevance of social ownership of the means of production and which highlights the role of an active local state as a centrally important feature of China’s reform programme. This is particularly evident in the industrial sector but is also found in the agricultural sector. We argue that the challenge for the future is not privatization but the cementing of market reforms within the context of an institutional framework capable of preserving and harnessing the developmental capacity of a multi-level state and the strengthening of rural collective institutions.

In the first section we briefly review the argument that China’s success can be attributed exclusively to the operation of market forces and that the future success of the reforms depends on the extent of privatization. As a necessary corrective to this view, we demonstrate in the following section that the (local) state has been an important actor in the reform process and that it has contributed significantly to economic success. Furthermore, it has done this within the context of maintaining social ownership of the means of production, which has led the local state to behave in ways which are different from, and more economically beneficial than, a capitalist alternative. We also argue in section III that collective ownership rights in land have similarly provided economic benefits in the agricultural sector. In section IV we suggest why privatization should be regarded neither as a necessary nor a sufficient condition for future economic success but instead argue that a more relevant and pressing concern is a workable division of powers between local and central state interests and the consolidation of rural collective institutions.footnote7 Even if this could be achieved, however, China’s reforms remain essentially open-ended; China’s economy and polity is clearly one undergoing rapid change in which contradictory forces are in evidence. We briefly discuss some important emerging trends by way of conclusion.

As is well known, the Chinese reforms were launched in 1979 with the aim of replacing the centrally administered allocation of resources with the increasing use of market mechanisms. The reasons why this change was thought necessary need not detain us here. What is important is that such a change was instituted and has been implemented widely. The spread of market relations can be ascertained in several ways. For example, there has been a significant reduction in the number of key commodities that are allocated centrally and, as Byrd has argued, ‘functioning markets have come into being in Chinese industry and have become increasingly important in resource allocation. . .the growing importance of the market has been intimately linked with the decline of the resource-allocation role of planning.’footnote8

The open-door policy has led to significant integration of China into the world economy and, as Lardy notes, ‘the Chinese began to adopt a more realistic exchange-rate policy and reformed the pricing of traded goods. The value of the domestic currency in trade transactions was almost cut in half near the outset of reform and this was followed by further significant devaluations in 1985, 1986, 1989 and 1990. Although progress was initially slow, by the end of the decade the domestic prices of almost all imports were based on world-market prices. . .And a growing share of exporters was able to bargain to receive domestic-currency prices that more closely approximated world prices.’footnote9 These policy changes were accompanied by a dramatic upsurge in Chinese trade and exports.

The spread of markets and the liberalization of prices were accompanied by enterprise reforms which greatly increased the decisional autonomy granted to enterprises as well as reforms which fostered the spread of private enterprises and joint ventures. The broad thrust of the reforms moved China decisively in the direction of a market (though not, we will argue, a laissez-faire capitalist) economy. In addition, the share of central government revenue and expenditure as a percentage of gdp has fallen significantly during the reform period.footnote10 In the rural economy, the commune system was abolished and the household responsibility system (hrs) instituted which permitted land leases being given to individuals for periods up to thirty years.footnote11