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Economy

The Ingredients of China’s Reform and Opening-Up Success

Jan 10 , 2019
  • Sourabh Gupta

    Senior Fellow, Institute for China-America Studies

Forty years ago last month, a defining event of the second half of the 20th century transpired in Beijing – one whose ramifications continue to reverberate to this day. 

From December 18-22, 1978, at its third plenum of the Eleventh Central Committee, the Communist Party of China broke with the prevailing orthodoxy and launched the country on an unprecedented journey of reform, opening-up and “socialist modernization.” The prevailing orthodoxy, the “two whatevers” policy - whatever Mao had decided would remain valid, none of Mao’s directives should be overturned - was Hua Guofeng’s, Mao’s dour successor’s, instrument to legitimize his rule. Deng Xiaoping skillfully bypassed this orthodoxy by building a political coalition around the argument that while one should always “seek truth from facts”, as per Mao Zedong Thought, “practice [should be] the sole criterion of the truth.” Pragmatism, not ideological blinkers, would become the order of the day, and reality, not received dogma, the ideological basis to test the correctness of policy. Having dismantled the ideological underpinnings of the ancient regime by deftly arraying Mao’s “truth from facts” dictum to undercut Hua’s “two whatevers” policy, Deng set about unleashing the Four Modernizations - that of agriculture, industry, science and technology, and national defense. The rest, as they say, is history.

Earlier last week, President Xi Jinping paid tribute to the perspicuity of Deng’s vision and wisdom in his 40th anniversary address of the Reform and Opening Up by restating that “there is no end to the development of practice” and that “constantly promot[ing] theoretical innovation based on practice” was paramount. Reality as a test of the correctness of policy will continue to rule the day. 

The success of China’s astonishing third plenum-inspired reforms have been ascribed to a variety of factors.

The institutionalization of power competition and orderly succession within a broader framework of oligarchic collective leadership (which Deng introduced) allowed the Party to move beyond the acute personality and ideology-based clashes  that had convulsed the body-politic during the later Mao Zedong years. Ironically, some of these institutionalized norms, particularly the senior leadership retirement age and ‘up-or-out after two terms’ rule, are now being relaxed. More broadly, the steady separation of Party and state that Deng had set in train is being reversed. However, it is instructive to note that Deng foresaw no relaxation of the Party’s absolute dominance over the political system. The “four cardinal principles” articulating this dominance were forcefully restated mere months after the plenum.

The third plenum communique’s injunction that “small plots of land for private use by commune members, their domestic side-occupations … are necessary adjuncts of the socialist system and must not be interfered with” aligned incentives with the production structure and unleashed a burst of creativity in the countryside. More to the point, the experimental dual-track price and, later, enterprise reforms eschewed the “big bang” approach to structural reform and instead created constituencies for reform that were capable of overcoming a host of lesser inefficiencies associated with imperfect markets, price distortions, and institutional shortcomings. 

Equally, the opening of China’s eastern seaboard to foreign trade and investment enabled China to profit handsomely from its comparative advantage-based factor endowments. For an unbroken civilization as brilliant as China, that there was no dishonor in producing footwear and children’s toys as a means to haul itself up by its bootstraps was admirable in itself. As the supply chains of foreign-invested and export-oriented enterprises too root on Chinese soil, an ever-increasing share of parts and components began to be sourced domestically – such that China now retains a lock over the development of these supply chains in medium-technology intensive industries within global manufacturing.

The imperative for an enabling external environment, featuring foremost a symbiotic relationship with the U.S., should not be dismissed. It is not a coincidence that the announcement of the normalization of U.S.-China ties preceded the opening of the third plenum by two days. And aside from the outbreak of short but bitter armed hostilities with Vietnam in 1979 (on land) and 1988 (at sea), there have been no inter-state wars involving China.   

Fundamentally, however, two factors were key to the success of the third plenum-inspired reforms: first, the success of the Party’s reform process was dependent on the legitimacy of the Party’s incumbency, and as such the consensus for reform was broader, deeper, and more durable. And secondly, the Party’s fiscal and managerial decentralization-led reforms, which struck the right balance between central control and local initiative, were embedded in historical patterns of growth, development, and regime stability. Imperial China, too, had been a regionally segmented economic entity held together by the center’s iron control over personnel transfers and promotions. This historically-rooted top-down control prevented the virus of patron-client politics from infecting the system while motivated provincial officials were able to tailor solutions to local developmental challenges – in turn, increasing productivity-led growth while also enhancing their career prospects at higher levels of government.

Looking ahead, the nation and Party stand on the cusp of a transition – or “new historical starting point” as Xi would have it - just as consequential, and challenging, as it was four decades ago.

From an economic standpoint, the East Asian growth model has not been conducive to countries aspiring to make the shift from manufacturing and investment-led growth to services and consumption-led growth. Each high-growth, manufacturing-intensive economy that has attempted it, notably Japan and South Korea, suffered a significant slowdown. Politically, middle income status and the growing sophistication of a rapidly-rising and propertied middle class has not been conducive to domestic stability in authoritarian, late-developing societies. No East Asian society (barring the small city-states) that has traversed the perilous thoroughfare from $10,000 per capita to $20,000 per capita income has come away with its original political system unscathed. South Korea and Taiwan witnessed dramatic pro-democracy ructions. The relationship with Washington enabled Beijing to replicate American prosperity and strength, and this has incentivized Beijing to keep the U.S. close. But this relationship is in jeopardy today. 

There is nothing foreordained about China’s – and the Party’s – future. China is liberalizing its foreign inward investment and services regimes at an earlier level of development than Japan or South Korea ever attempted. The collective leadership decision-making structure of the upper echelons of the Party are markedly different from the charismatic, one-person military dictatorships of Seoul and Taipei at the time. The Trump administration’s unprecedented enforcement actions against Beijing could well produce a reform of China’s foreign investment and joint venture regime that is as thorough as the late-1990s reform of its trading regime - and thereby bind the two countries in a symbiotic trade and investment relationship for the next three decades.

One thing is certain though: so long as China continues to seek “truth from facts” and more importantly makes “practice the sole criterion of the truth,” its astonishing economic re-opening to the world – this time on the Chinese peoples’ terms (unlike in the mid-19th century), will continue to serve the country handsomely well into the 21st century.

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