Session 7
Carl Riskin, China’s Political Economy: The Quest for Development since
1949, 1987, Chapters 1 and 9-14
Chapters 14 and 15
Chapter 14: Reform
1. Introduction
Since 1979, the Chinese government had begun to implement reform measures, a key theme of
which was to make greater use of the market and reduce reliance on administrative planning. But
such measures tended to conflict with one another and with the unreformed aspects of the
economy, creating as many problems as they solved.
2. Industrial Reform
The main approaches to reform of the industrial management system were:
1. Expansion of enterprise autonomy.
2. Expansion of the role of the market in guiding output and motivating producers. This was
done in recognition of the importance of commodity production in the socialist economy.
3. Handing down considerable authority over budgetary revenues and expenditures to
provinces and localities.
4. Enterprises’ use of a variety of means to break down horizontal and vertical
administrative barriers to specialization and division of labor.
5. The practice of budgeting all fixed and circulating capital free of charge was replaced by
the use of repayable bank loans bearing interest.
6. Enterprise management urged to stress material incentive schemes; develop strict
systems of work-place discipline; and promote personnel with higher levels of education
and technical training.
7. Reform of the system of incentives and property rights concerning the development and
diffusion of knowledge.
8. Price reform.
Reform efforts and resultant problems:
 Give enterprises authority over a portion of their own profits in order to provide them with
an incentive to be more innovative and responsive to the market. Problems: A very
complicated system of profit retention developed, resulting in disputes among officials at
different levels of government. Also, the central government was losing control of
investment priorities and the inflation rate.
 Enterprises began individually negotiating “profit contracts” with the state. Problem:
These contracts further complicated reform of the price structure. They aggravated
inflation and state deficit, and compromised enterprise autonomy.
 “Tax for profit” system, in which enterprises would pay a series of taxes and keep net
profits. Problem: The only substantive change the system brought was to guarantee that
the state would get at least 55 percent of enterprise profits. The system ultimately failed,
and the government switched to a pure tax collection regime beginning in 1984.
 Readjustment of the industrial and commercial tax and the introduction of a “resource”
tax on coal, oil, and metallurgical enterprises, a value-added tax, and some local taxes.
Problem: A compromised form of this plan, in which enterprises experiencing temporary
difficulties were exempted from tax, was implemented.
 Price reform. Problems: Planners restructured fixed prices to reflect relative costs and
realigned them frequently. Also, there was debate over the extent and method of
controlling prices.
 Banking reform to restore more centralized control of the money supply and to
differentiate the central bank function of the People’s Bank of China (PBC) from the new
investment functions of various specialized banks. Problem: Loss of PBC’s central
control of investment after 1979. As a result, the Industrial and Commercial Bank of
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China was established in 1984 to take over fro the PBC the handling of industrial and
commercial credit and bank deposits.
In sum, industrial reform was only partially achieved and left many problems unsolved.
3. Policy towards labor
 Attention shifted away from elected congresses of representatives of workers and staff,
towards strengthening the authority of the enterprise director and the management
committee.
 Piece rates and bonuses were the preferred methods of tying income to work.
 Large-scale open unemployment became a public issue in the late 1970s. The state no
longer guaranteed employment, even in principle.
 Growth of employment in urban collectives and in private sectors, and decrease in state
sector employment between the mid-1970s and mid-1980s.
 The Ministry of Labor in 1983 called for the hiring of contract workers rather than fullstatus employees to eliminate “iron rice bowl” lifetime employment.
 The old system, in which industrial workers per se enjoyed relative privileges, was
ending, and the industrial labor force itself was becoming highly stratified.
4. Commerce
 Goods circulation system was weak in China even under mandatory planning. Since the
onset of reform, difficulties encountered by the commercial system stemmed from the
decline of central planning, the spread of bureaucratism, the inability of state agencies to
handle goods distribution, and from the biases of socialism against trade.
 Reform concentrated on breaking the state trade monopoly and giving the market a
larger role. Specialized companies in charge of specific goods were playing a bigger role
in linking buyers and sellers.
 Administrative reform created regional economic zones organized around core cities.
This was an attempt to break down restrictions on goods circulation and planning by
permitting city governments to manage the entire surrounding prefects.
 In 1984, urban wholesale companies (state-owned) and trade centers were given the
task of facilitating direct links between producers and consumers.
 Individual and collective commercial activity has proved a lucrative alternative to farming
for many rural residents. Increasing number of people were leaving the rural labor force
to work in non-agricultural pursuits in cities by the mid-1980s.
5. Financial effects
Various reforms impacted negatively on the central government in two ways:
1. They produced a series of budget deficits.
2. They channeled an increasing proportion of investment into the hands of local
governments, which used it to complicate the planned reduction in the national
investment rate.
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Main causes of the budget deficits were: 1) Decline in profits of state enterprises; and 2)
the border war with Vietnam in 1979, additional spending required by the higher farm
procurement prices, and the additional subsidy granted urban workers to offset inflation.
Main causes of decline of direct central command of resources: 1) The proliferation of
financial resources available to localities and enterprises; 2) low efficiency and low
profitability of state enterprises; and 3) growing state price subsidies of large grain
harvests.
Decline in central control of investment priorities was due to the decentralization of
financial authority, which gave localities access to an increasing amount and variety of
funds. The result was that the center lost the ability to direct resources to key projects
and sectors.
In 1983, the central government re-imposed administrative restraints on investment to
regain control of priorities. Its measures were largely effective, and by 1984 the
government against gave up control, leading to a new boom.
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Problem with Chinese industry remains: there is excessive investment and demand in
excess of supply, which are symptoms of ineffective planning. The result has been a lack
of progress in improving indicators of efficiency.
6. Industrial performance
 Gross industrial output grew somewhat more slowly between 1978 and 1982 than it did
between 1952 and 1978 as a result of a deliberate intent to curb excessive growth in
keeping with the readjustment policy.
 The government succeeded in increasing supplies of consumer goods of various kinds to
meet the growing incomes of rural and urban households, improve living standards, and
provide incentives to workers.
Chapter 15: Conclusion
In terms of per capita income, China has made significant progress since the start of the reform
period. However, “sustaining such growth rates of income will be difficult if not impossible” (we
know in retrospect that Riskin was completely wrong!). The author argues that there is little room
for improvement in both the share of consumption in national income and in rural-sector growth.
Furthermore, the fruits of reform have been enjoyed first and foremost by “high officialdom,” or
high government cadres. The author ends with a pessimistic note, that “there had been no
substantial improvement in efficiency of industrial performance through 1984 under the reform
regime.”
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