Ten secrets to China’s reform success story

The third is the household contract responsibility system. It is a system unique to rural areas in China, for it motivates farmers to produce. Previously, China opted for the people’s commune system, where the state assumed all profits and losses. Such a system dampened farmers’ enthusiasm for work, because no matter how much they produced, they couldn’t lay their hands on the profits.

After the household contract responsibility system was adopted, arable land became collectively owned, but farmers had the right to use them for 30 years. They were each assigned a production quota by the government. Anything they grew beyond that quota could be sold in the market, with the profits going to their own pockets. During the subsequent five years, farmers’ income increased by 16 percent each year.

Overhauls of the old system

The fourth is boosting reform through opening up.

Take Shenzhen for instance. As a city near Hongkong, its opening introduced market mechanisms, which in turn facilitated overhauls of the old system. What sets China’s reform apart from those of the former Soviet Union and eastern European countries is that it was carried out on the premise that conditions were ripe and the path was correct. As a result, we could use market performance indicators to determine whether reforms were a success. Reforms involve adjustment of relations between interest groups. Only by bringing in market mechanisms can reforms be properly undertaken.

The circumstances surrounding China’s opening up was that the world was right in the middle of a global economic boom. The technological revolution in the wake of the Second World War engendered many new technologies and industries, mostly in developed countries. But when they began to compete on cost in the 1970s and 1980s, labor costs surged, resulting in a relocation of certain industries. China launched its reforms at that time. For over two decades, we offered preferential treatment such as Most Favored Nation benefits to foreign enterprises. Many of them thus were able to establish industrial chains in China.

To China, opening-up policies created a tremendous number of jobs. Two hundred and seventy million rural dwellers migrated to cities for employment. Consequently, agricultural production expanded in tandem with urban consumption.

Since its entry into the World Trade Organization, China has been growing at a rate faster than ever. If opening up the coastal cities was the first round in China’s reform, then joining the WTO was the second. And a third can be expected with the Belt and Road Initiative.

The fifth is the establishment of industrial parks. Over the past 40 years, various industrial parks cropped up in China, from special economic zones in the early days, to industrial parks, export processing zones, free trade zones and high-tech parks in the years that followed. It can be said that industrial parks propped up the development of Chinese cities and manufacturing.

From the economic standpoint, the industrial park is a simplified form of urbanization. An underdeveloped country has a low rate of urbanization. In 1978, China’s urbanization rate was 18.6 percent. However, luring substantial foreign investments required infrastructure, such as road, water and electricity supply. All these could not have been created in one fell swoop. One feasible way was to build industrial parks with roads, electricity and running water inside, so as to meet the minimum requirement for foreign companies to invest in China.

Leasing of land

The sixth is the leasing of land. In 1978, China’s per capita GDP was no more than US$200, but the country managed to inject substantial funds into investment and city construction. How?

The leasing of land should take some credit. It granted people the right to use state- and collectively owned land — at a charge — for a given period of time. The country and local cities amassed an estimated 40 trillion yuan (US$5.8 trillion) from the leasing of land.

The Pudong New Area is the best example. It acquired its initial development capital from the leasing of land. After that, the stock exchange, futures exchange, foreign exchange market, gold exchange and petroleum exchange were set up. The city’s financial sector started to take off and enabled Shanghai to become the fledgling financial center as we know it.

The seventh is the unbalanced development model. That is, some regions and people get to become rich first and then help others grow. China’s development started from its eastern coastal areas, where conditions were the most favorable and transportation costs the lowest. Then the development of central and western regions came along.

The eighth is the fiscal responsibility and tax-sharing system. Before 1978, all the profits generated by state-owned enterprises were handed over to the central government, and the central government maintained a tight grip over revenue and expenditure.

Then this highly centralized system was changed into the fiscal contract system. Local authorities remitted a fixed amount of revenue to the central government. Revenue beyond that amount could be retained by the local governments. Although the fiscal contract system promoted growth and living standards in many regions, it led to unintended problems. Some provinces, especially less open ones in central and western regions, remained poor. It was difficult for the central government to make fiscal transfers with limited revenue.

In 1994, China started to replace the fiscal responsibility system with a tax-sharing system. Under the new system, the central government’s revenue grew proportionally with local governments’ revenue. It ensures that the local governments stay motivated and helps swell the coffers of the central government.

The ninth is the burgeoning of private economy. Private economy is a major force in liberating people’s minds and promoting reforms. Over the past 40 years, China’s private sector started from nothing, endured hardships and grew stronger. Today, it contributes to over 60 percent of our GDP, 50 percent of tax, 70 percent of new technologies and 80 percent of employment. Without the private sector, China wouldn’t have become the world’s second largest economy.

The tenth is the incremental reform. Unlike Poland and the former Soviet Union, which implemented radical reforms, China’s reform proceeded step by step, a process Deng Xiaoping referred to as “crossing the river by feeling the stones.” This has become the overriding methodology for China’s reforms. Since market economy was something completely new for us, serious mistakes would happen if we made too rash a move. Therefore, we implemented reforms gradually, trying to figure out which policies worked and gaining experience along the way.

The author is the president of the Shanghai Federation of Social Science Associations and former president of the Shanghai Academy of Social Sciences. Shanghai Daily staff writer Cao Xinyu translated this article from the Chinese.