Chinese economic reforms of 1978

Also called: China's structural reforms · Topic: Comparative Development: India, China and Pakistan · NCERT: Class 11, Ch 8 "Comparative Development Experiences of India and its Neighbours"

Meaning

The Chinese economic reforms of 1978 were a set of step-by-step reforms that China chose on its own under Deng Xiaoping. They began with Deng's speech in December 1978 [3]. Agriculture, foreign trade and investment were reformed first, and industry second. The main tools were TVEs, competition for SOEs, dual pricing and SEZs. All of this happened inside a planned economy that was opened up slowly.

These reforms matter because they are the classic case of gradual, home-grown reform. China decided the order, speed and scope of change itself. No IMF or World Bank conditions forced it. This is why UPSC often compares them with India's reforms of 1991 and Pakistan's reforms of 1988.

Explanation

Why and how China reformed

• Problem under Mao (1949–1976): growth was slow and the economy was not modernising.
• New leadership under Deng Xiaoping changed course. The formal start was his speech in December 1978 [3].
• Home-grown, not imposed:
• China reformed on its own initiative. It was not pushed by the IMF or World Bank.
• So China could choose the order, speed and scope of its reforms.

• A country reforming in a crisis often has to open up many things at once. China did not face that pressure.

• Not a "big bang": China did not switch to free markets overnight. It grew out of the plan step by step [2][3].

• Pilot-first method (decentralised planning):
• Regional and local levels were given the power to make and carry out decisions.
• Step 1: try a reform on a small scale in a few regions [3].
• Step 2: check its economic, social and political costs.
• Step 3: only then extend it to the whole country.
• Deng called this "crossing the river by feeling the stones" [3].
• Why it helps: a failed experiment hurts only one area and can be dropped. A reform that works gathers evidence and support before it spreads.

Phase 1: agriculture, foreign trade and investment

• Commune (a large collective farm under Mao, where land and work were shared and output was pooled):
• Commune land was divided into small plots.

• The plots were given to households to use, not to own. The land stayed collectively owned.

• Household responsibility system (HRS) (each family farms its own plot and keeps the income left after paying the state): households kept all income after paying the stipulated taxes, or after delivering a fixed quota to the state.

• How the incentive worked:
  • more effort → more income for the family
  • so farmers worked harder and farmed better
  • so output rose.

• It began informally in some villages and was officially encouraged from 1979 [3].

• Higher procurement prices (the price at which the government buys crops from farmers) were paid for key crops [2].

• Results [2]:
• Farm output and productivity rose sharply.
• Rural savings and investment rose.

• Many farm workers were freed to work in new rural industries.

• SEZs (Special Economic Zones: marked-off areas with freer trade, tax and investment rules, set up to attract foreign investors):

• The first four SEZs were Shenzhen, Zhuhai, Shantou and Xiamen. The central government approved them in 1979 and they were set up in 1980 [4][3] (NCERT gives 1980).
• Foreign investors could set up wholly owned enterprises. They paid tax rates lower than even Hong Kong's [4].
• Shenzhen's population grew from about 30,000 (1979) to over 10 lakh (1 million) by the early 2000s [4]. This pace was called "Shenzhen speed" [4].
• In 1988, Hainan, a whole island province, became an SEZ.

Phase 2: industry

• Private firms were allowed to produce goods.
• Township and village enterprises (TVEs) were firms owned and run by local collectives, meaning township or village governments.
• They worked outside the central plan. They followed the market and had no official price or output controls [2][3].
• Hundreds of thousands of TVEs appeared. Most were owned by townships and villages [2].

• They were a halfway house: not private, and not run by the central state. Local officials had a direct stake in making them profitable.

• State-owned enterprises (SOEs) (firms owned by the Chinese state, like India's public sector enterprises):

• They were made to face competition from private firms and TVEs.
• They were not privatised all at once.

Dual pricing (the dual-track system) with a worked example

• Meaning: two prices for the same good.
• Plan track: farms and factories had to buy and sell fixed quantities (quotas) at government-fixed prices.

• Market track: any output above the quota was sold at market prices.

• Why it worked:

• The plan carried on at planned prices, so production did not collapse.

• A market economy grew at the margin, meaning on the extra output above the quota [3][2].

• Worked example (the numbers are only for illustration):

• A farm's quota is 100 tonnes of grain at the fixed price of ¥1/kg. The market price is ¥1.5/kg.
• Year 1: output is 120 t. 100 t is sold at the plan price and 20 t at the market price. Market share = 20 ÷ 120 = 16.7%.
• Year 5: output is 200 t and the quota is the same. 100 t goes to the plan and 100 t to the market. Market share = 100 ÷ 200 = 50%.
• Lesson:
  • The quota stays fixed while output grows, so the market-priced share keeps rising.
  • Prices are freed slowly, so there is no sudden price shock. Compare the "shock therapy" of the former USSR bloc.
  • Farmers get the higher market price only on extra output, so the incentive works where it matters.

How the reforms built momentum and what they achieved

• How one gain led to the next:
• Household plots → higher farm incomes → a vast number of poor people became better off.
• Rural savings and freed labour → the TVE boom in rural industry [2].

• Many people gained → a strong support base for further reform.

• Political sequencing: China started where gains came quickly and were widely shared (agriculture). This made later, harder reforms, such as those for SOEs and prices, easier to push through.

• Long-run results (World Bank):
• GDP growth has averaged over 9% a year since 1978 [5].
• Almost 800 million people have been lifted out of extreme poverty since 1978 [5].

• China became the world's second-largest economy [3].

• Later steps (beyond NCERT):

• 1992: Deng made his "Southern Tour". He publicly attacked continuing "leftism" and pushed to restart reform [6].
• Socialist market economy (markets and private firms working under Communist Party control) was formally adopted in 1992-93, with the 1993 decision setting it up [3][6].
• China became the 143rd WTO member on 11 December 2001, after 15 years of accession negotiations [7]. About 1.3 billion producers and consumers joined the world trading system [7]. China became the "factory of the world".

In India

• A different trigger:
• India reformed in 1991 during a balance-of-payments crisis (the country was running short of foreign exchange to pay for imports and debts).
• IMF/World Bank conditions were attached.

• China's 1978 reforms had no such outside conditions.

• A different order:

• India's 1991 reforms focused on industry, trade and finance and left agriculture largely untouched.
• China started with farm incomes.

• This is one explanation of India's weaker rural transformation.

• SOEs and PSEs: China's SOEs are like India's public sector enterprises (PSEs). China exposed its SOEs to competition instead of selling them off all at once.

• SEZs: India also adopted the SEZ idea through the SEZ Act, 2005. This is covered in detail under industrial policy.
• Pilot-first reform: China's local experiments suggest ideas for Indian cooperative and competitive federalism, such as reform pilots in a few states and ranking states on reforms.

Don't confuse with

• India's 1991 reforms (LPG): these were driven by a crisis, carried IMF/World Bank conditions, and began with industry, trade and finance. China's 1978 reforms were home-grown and began with agriculture.
• Pakistan's 1988 reforms: these came under IMF/World Bank structural adjustment programmes. They were not chosen and sequenced by the country itself.
• Shock therapy (former USSR bloc): prices and markets were freed rapidly, all at once. China used dual pricing and pilots to free prices step by step, with no production collapse.
• TVEs vs private firms vs SOEs: TVEs were owned by local collectives (township or village governments). They were neither private firms nor central state-owned enterprises.

Prelims Hooks

• The reforms began in 1978 under Deng Xiaoping and were home-grown. Trap: India (1991) and Pakistan (1988) reformed under IMF/World Bank pressure, but China did not.
• Sequence: agriculture, foreign trade and investment came first, and industry second. Trap: "China began with industrial reform" is wrong.
• Household responsibility system: land was given for use, not ownership. It stayed collectively owned. Households kept their income after the stipulated taxes.
• Dual pricing: quota output was sold at government-fixed prices, and output above the quota at market prices.
• First four SEZs: Shenzhen, Zhuhai, Shantou and Xiamen (approved 1979, set up 1980). Hainan followed in 1988.
• "Crossing the river by feeling the stones" means gradual, pilot-first reform. China joined the WTO on 11 December 2001 as its 143rd member [7].

Mains Points

• Gradualism vs shock therapy: dual pricing and pilot-first reform let China open up without a production collapse or a price shock. The former Soviet bloc tried rapid liberalisation instead. This is useful for GS-III answers on sequencing reforms, including India's step-by-step path after 1991.
• Agriculture first builds the support base: higher farm incomes created mass gains, rural demand and savings that fed rural industry (TVEs). India's 1991 reforms skipped agriculture, which helps explain its weaker rural change. Reforms designed at home also win more local support than reforms seen as imposed by the IMF or World Bank (GS-II/III).
• Decentralisation as a reform engine: local governments tested reforms and ran TVEs, so they had a direct stake in growth. India can use this idea for cooperative and competitive federalism, for example through state-level pilots and reform rankings of states.

Related concepts

• Household allocation of commune land
• Township and village enterprises
• Dual pricing
• Decentralised planning

Read more

• China's 1978 reforms: phased, experimental and home-grown