Development Strategies in Rural China during the 1970s and 1980s


Anzhi Chen

August, 2018

1. Introduction


China has experienced a remarkable period of economic growth in the last 40 years. Its average growth rate of 6.7% per annum from 1978 to 2016 has successfully lifted over 700 million people out of extreme poverty. Several strategies helped China achieve rapid growth in its rural areas after shifting from a command-based economic system to a market-based economy: among the most important are the Household Responsibility System (HRS), the Dual‐track Price System (DPS), and the Township and Village enterprises (TVEs).


The Household Responsibility System was launched in the early 1980s to provide fundamental management of the collective economy as well as to satisfy the basic needs of goods and means of production in rural China. The system merged the effectiveness of unified management combined with peasants’ enthusiasm by allowing households to freely deposit or dispose of extra production after meeting the national quotas.

As a means to stimulate productivity, the Dual-Track System also allowed enterprises to sell extra output to the market after accomplishing the planned target. Chinese reformers regarded it as one pf the most efficient ways to gradually build a market-oriented economy on the base of a planned economy.

Another reform aimed at increasing productivity was the Township and Village Enterprises. Provided with modern equipment, these enterprises were run by farmers in the countryside and served as the main source for the raising of farmers’ income and stimulating rural economic development. It is worth mentioning that some transitional policies, such as the HRS and TVEs, are still used by the current Chinese government with some adjustments to keep up with economic growth, while others, such as TVEs, are fading at this stage of history.


In this article, we will first review China’s post-reform period and the advantages of those development strategies mentioned above. Then we will compare these strategies with others used by foreign countries. In the last section, we will address some challenges faced by the present Chinese government and discuss why modern Chinese development strategies are in some ways less successful.


2. Pre-Reform and Post-Reform Periods


When the People’s Republic of China (PRC) achieved independence in 1949, it faced many issues ranging from politics to economics. A shortage of capital impeded its further economic development. Moreover, its involvement in the Korea conflict - because of its foreign policy - also influenced its economic relationship with foreign countries and then intensified its isolation. Supported by the Soviet Union in the early years of the nation, its economic structure and development direction were highly influenced by Soviet ideology. Emphasizing economic independence and putting heavy industry as the priority, China wanted to achieve its dream of becoming a developed country as soon as possible in order to compete with western economies. However, these strategies proved to be ineffective in improving individual life quality and national wealth.


After the end of the Cultural Revolution in 1978, President Deng Xiaoping launched a series of reforms to adjust China’s policies to its comparative advantages in labor-intensive production, without changing its economic system from Communism to Capitalism. Deng emphasized that the means of production would still be owned by the people or the state, although the percentage of private retail trade would increase. As a result, these reforms marked a turning point in the economic development of the PRC, launching a new era of steady economic growth lasting for more than 35 years.


China’s success in its development can be attributed to the following three reasons: (1) the recognition of the importance of practice rather than doctrine among high-level officials; (2) the objective and clear understanding and grasp of China’s national conditions; (3) the strong determination on pressing ahead with reform in its economic, social and political structures. All of them contributed to China’s economic miracle at the end of the last century. But before illustrating these reasons, a review of the Pre-Reform Era is necessary for a further understanding of the motivation and determination for the upcoming reform.


A Brief Review of Pre-Reform Era


The People’s Commune System was the main economic system of agricultural production in pre-reform China. Several flaws served as the main resistance to achieving the full potential in rural regions, and eventually caused the demise of this system.


a. External Limits under the System of People’s Commune

Under the system of People’s Communes, the production team led by people’s communes and subordinate production brigades took the main responsibility for basic production. At the beginning of every year, the local government set plans and goals for people’s communes, and these plans were revised and confirmed by corresponding production teams. Then the commune kept supervising and urging forward the working process to track and measure the progress of production. Although the local governments had made thorough investigations on land structure and climate before setting the plan, production teams often insisted on their own preferred crops due to local preference or tradition, which sometimes contradicted the original plans from local government. This conflict not only affected farmers’ motivation and initiatives but also reduced the economic benefits.


b. Excessive Labor Input

During the Pre-Economic Reform Era, commune and brigade enterprises had already existed. However, due to its small-scale production, limited need for labor, and the prohibition on labor migration, a great proportion of the labor force was wasted in certain regions. As the population kept growing while production activity remained stable, an increasing labor force often led to problems in agricultural production. Meanwhile, the inflexible distribution system had to deal with the increasing number of participants in distribution, so the growth of agricultural output could experience negative growth in some places.


c. Inefficient Collective Production

Farmers who were forced to join People’s Communes had no rights to quit. Their dissatisfaction and disappointment with the current system and plans consequently had a negative impact on their enthusiasm to participate in collective production. Therefore, “dawdling along” and “laboring as a non-labor” were common situations in that period. The low efficiency ratio further pushed local government to strengthen supervision, which led to an increasing labor cost and limited effect on productivity. Slacking off had remained the main problem and was never solved until the later reforms.


d. Flawed Point System

In Pre-Reform China, the point system established after 1960 measured farmers’ workload by counting point according to their workdays. This system failed to reflect the actual input within a workday, and therefore slacking off was a widely existing phenomena in rural China back in the 1970s. Besides, each point was related to the amount of output distribute to each family. This unfair distribution system further weakened farmers’ willingness to participate in agricultural work.


3. Moving Away from the Soviet Model


The most known characteristic of the early PRC was its command economy system. Drawing on elements borrowed from the Soviet Union’s development pattern, the early PRC’s economic system inherited its flaws as well. The command economy system assumed that the nation’s economic structure could be managed as a single company rather than as a market. The market effect was greatly underestimated as well as individual initiative. Meanwhile, economic planners had long failed to have adequate information to make thorough plans for every region. As the scale and complexity of the domestic economy increased, this issue was becoming more and more serious.


On the other hand, the Soviet Union’s national situation was very different from that of China. After WWII, the Soviet Union lacked a large labor force but had a relatively better industrial base. The central aim was to quickly develop heavy industry, not only because the process of industrialization was the advancement of technology and of the complexity of the component of capital, but also to help build a complete industrial and agricultural system and a strong military to prevent potential invasion from the western world. However, the foundation was built upon heavy industry, which determined the dominant economic and development characteristics of the Soviet Model - inefficient and extensive growth, an imbalance between military and economic spending, and between light and heavy production, and excessively centralized control. The same issues affected China in the 1970s as well.


The Soviet capital-intensive technology and development pattern was not suitable for China’s huge population base and weak industry. After the Chinese Civil War, the population of the PRC was 562.6 million, while the Soviet population was 170.6 million after World War II. With a weak industrial base, it was hard to transform the Prodrazvyorstka (an agricultural system in which the state collected the surplus grains) directly to a socialist agricultural system without trade or exchange of production. In other words, the Soviet command economy failed to elevate China to socialism within given conditions.


From an ideological perspective, there was a huge difference between the Soviet and Chinese governments. The Soviet command economy was considered to be meritocratic, which was related to Stalin’s belief in general will. On the contrary, the doctrine that “people are the actual leaders of China” had been widely recognized by the Chinese people. The contradictions in ideology between the Soviet and Chinese governments catalyzed the replacement of the command economy system in China.


After Deng Xiaoping became the new president, the highest officials soon began to prepare for a great reform in China. The premise successful reform in China was the determination of a practical and realistic ideology – “seeking truth from facts,” according to Deng in his speech Mind Emancipation, Truth and Unity. The decisive significance of the ideological line in the reform period was is the foundation of growth strategies in the 1980s and the further transition to a new market-oriented economic system. With a clear understanding of the national situation, China abandoned the command economy and gradually embraced reform.


4. Moving Towards Socialism with Chinese Characteristics


The Chinese government had a clear understanding of the national situation in the 1980s. Being aware of the flaws within their economic system, they were also capable of identifying their own comparative advantages that were critical to achieving development.


There are two factors contributing to the population advantage in the market. First, China was located at the second stage of demographic development at the beginning of the reform era: the average age was perfect for production activities and the population was increasing at a constant rate. This ensured China would have a long period of time with an adequate labor force. Second, the population base was big enough to support large-scale labor-intensive production, so an export-oriented market seemed to be promising after the “open door policy” was established.


The transition to a more labor-intensive production pattern began in the early 1980s, as a result of the Chinese government focusing on China’s demographic advantage. After the command economy was gradually replaced by the market economy, however, with the guidance form central government, a large percentage of the population entered the labor market. Adequate labor supply to China’s industry ensured a relatively low labor price, especially in rural China. The redundant laborers originally under the command economic system now served as the foundation for future growth.


However, in certain parts of rural China, village and township enterprises played a key role in development due to the missing initial funding that is necessary for purchasing equipment. Compared to those factories in suburban area, small-scale factory locating at villages was in an inferior position for its distance to consumers and lack of capital. They were collectively owned by villages and towns and invested in by both local governments and rural farmers. And therefore, it was half personally-owned and half  commonly-owned. This flexible model effectively dealt with the financial issue so that streamlined production could become feasible in some rural factories.


Moreover, the national and state administrative organs, their staff and people’s government at all levels had a relatively strong executive capacity. A highly efficient administrative management system that allowed central government to learn from its errors. Orders from the Central Committee were effectively given to local government and put into practice. Directed by the ideology “seeking truth from facts,” the Chinese Government was able to test their reforms first in selected regions. Local officials would then report the outcome back to the central government, which then decided whether the test program would be put into practice.


For example, the Chinese Government first tested the Household Responsibility System in Fengyang, Xiaogang - a relatively isolated village in the middle of China -,and then generalized it to adapt to different situations in different regions. The strategy of a dual-track price system was first tested in Wenzhou, a town in Zhejiang Province, which now is one of the most dynamic regions in China. The massive number of tests applied to different regions was done before they were put into practice, which helped improve the success rate.


From another perspective, the Great Chinese Famine from 1959 to 1961 caused massive damage to China’s development due to the Great Leap Forward, and the following Cultural Revolution worsened the situation. Before 1978, more than two thirds of the population lived on less than one dollar per day. With such great pressure from widespread poverty and an extremely low-income level, the Chinese Government regarded this problem as an opportunity to start the reform. The central government was aware of the flaws of the command economic system and had a strong determination to gradually abolish it. Although the reform radically changed income distribution and further hurt the vested interest groups, the Chinese Government still was determined to reform in its first 15 years.


5. Challenges Faced by Contemporary China


Decades of growth have passed and the Chinese Government has shifted its goal from lifting China’s GDP as much as possible to developing a more sustainable pattern. To maintain the growth rate at a relatively stable level, the central government has to keep reforming and innovating the existing institutions to meet the new requirements and goals. In rural China, the exposed problems have pushed the central government to deepen the reform.


The interregional and intraregional income gap has kept rising after the beginning of the reform. The slogan “the richer bringing along the less rich” has not really been implemented, especially in the agricultural sector. After 2000, regional development imbalances are still rising. In different agricultural regions, due to the different distance to resources and markets, the production cost is varied, especially between the east and the south. In addition, the production pattern can also be different: capital-intensive and labor-intensive production have different benefits per labor unit and different productivity.

Within regions, inequality is also rising. Research shows that farmers’ growth of income is decelerating, and the food price is decreasing, and therefore the total revenue per farmer does not increase even though the total output increases. Another widely acknowledged question is about the gap between urban and rural income. Local government concentrates on urban development more than rural development, which further exacerbates this income inequality.


Although the Chinese Government has made great efforts to tackle the economic issues in rural development, such as abolishing taxation and establishing price floors on certain agricultural products, it still faces several marginal problems. On the one hand, these strategies encourage farmers to produce as much as possible. However, in a perfect competitive and almost saturated market, farmers lack the incentives to produce more. On the other hand, environmental regulations are sometimes ignored, so that environmental pollution is becoming more and more serious, thus hampering genuine economic growth and triggering a public health crisis.


In addition, conflicts between the central government and local administrations emerged.  Local governments’ lack of implementation capability now seems to be one of the main barriers slowing down further reform. The basic administrative offices now have a relatively loose structure compared to before, especially in the selection and promotion system, and therefore the implementation capability has decreased on such a large scale that some experts even allege that “the communist party has lost the ‘grass roots.’” This directly resulted in less pilot tests and the resistance efforts from squirearchy and township entrepreneurs.

Some reform strategies now appear to be less successful than those in the past because the central government fails to learn from errors that once could be tracked by local government. Therefore, these strategies are less recognized by the majority when they cannot produce the expected results.


6. Conclusion


Looking back to the past reform and development, the Chinese Government has achieved their goal of lifting GDP to an unprecedented high level and providing  assurance of basic economic rights for every citizen. There is no doubt that such great achievement should be attributed to the successful reform.


China had been trapped in an excessively centralized political system after the Chinese Civil War, and the command economic system slowed the economic growth of post-war China. Its relationship with the Soviet Union on the one hand ensured China’s development of its own industrial base, with a large amount of direct or indirect foreign aid, but it also led China to inherit multiple flaws in the Soviet Model as well: (1) external limits from the central government; (2) excessive labor input brought by strong regulation on migration; and (3) an inefficient collective production system, with its dysfunctional point system. However, with a clear understanding of its flaws, the Chinese Government under the administration of Deng Xiaoping started the reform, following the doctrine of “seeking truth from facts.” It successfully identified the comparative advantages within the domestic situation and pushed the implementation of reform policies with a strong determination. Finally, they moved away from the Soviet Model and started the following 40-year reform.

However, reform in China is still faced with significant challenges: (1) income inequality is still increasing; (2) the domestic market is approaching saturation; (3) a sustainable development pattern has not yet been achieved; and (4) the conflict between central and local government still exists. With all these difficult issues, it is hard for the current Chinese government to continue its past miracles and achieve a unique sustainable development pattern.

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