Indian Council for Research on International Economic Relations

Seminar Details

15 Dec 2005

China’s Socialist Market Economy Lessons of Success
December 15, 2005
ICRIER organized a seminar on ‘China’s Socialist Market Economy: Lessons of Success’ by Dr. Arvind Virmani on December 15, 2005. 

In the late 1930s Oskar Lange put forward the idea of ‘Market Socialism’, an economy in which assets (means of production) were owned socially (by the communist party or State), but which mimicked the supply-demand price adjustment of the competitive market economy. Aba Lerner, Lange and others then debated this issue during the 1930s. The key element that is common to ‘market socialism’ a la Lange and Lerner and ‘Socialism’ (a la Lenin and Stalin) is socialist (i.e. party) ownership and (managerial) control of assets. The key difference is market based allocations versus centrally planned allocations. 

In China, the ‘market’ element has expanded gradually since the start of the agricultural reforms in 1979 and the introduction of Urban reforms in 1984. In 1992 China publicly stated that its goal is a “socialist market economy with Chinese Characteristics.” Though China has successfully expanded the scope of the market, ‘socialist’ (communist) control of factors remains very important. An understanding of these elements is essential to an understanding of the economic performance of China. The paper starts by giving a stylised version of China’s economy in terms of the mix of socialist and market elements. This leads to an explanation of the growth performance of the Chinese economy and appropriate lessons for other countries, particularly non-socialist ones. 

The primary ‘market’ economy is in products (goods and non-infrastructure services) where even CPC controlled enterprises compete to maximise growth, as in a private corporate economy. The other market elements are external capital (into foreign invested enterprises) and external trade. Exports and FDI have played such an important role in China’s economy that its growth has been characterised as ‘export-led growth,’ and could since 1990 be characterised as ‘FDI-export led growth.’ The extent to which import trade is now free is not entirely clear, though on balance this could be put into the market category. There is also a competitive fringe of individual capitalists/private capital that operates in export production. 

The socialist planning system still operates, however, in factor markets (land, labour, capital) and infrastructure and the pricing of these inputs is used to provide (indirect) subsidies to foreign investors and domestic exporters. Cities/provinces can and do price land to any buyer at any price. The labour responsibility system determines where a person can work legally and where he cannot. The banking system has evolved little from a government department where loans are decided on the basis of provincial/national objectives and ability to repay is irrelevant (variable cost of capital). Infrastructure pricing and supply (particularly to foreign invested enterprises) is similarly decided on the basis of national/ provincial/ city objectives and can vary with enterprise. This is also true to some extent for the output of the State Owned Enterprises (SOEs) which remain subject to central department (their bosses) orders and directions. 

In moving from the ‘Socialist’ to the ‘Socialist Market’ Economy, China has borrowed aspects from the ‘Nationalist Market Economies’ of developing Japan, S. Korea and Singapore. The primary objective of the latter governments was to catch-up with the advanced countries through fast growth of average income. They therefore developed a national consensus to maximise GDP growth. The whole nation was mobilised to achieve this goal. The simplicity of this objective (growth, investment, production) made it much easier to decentralise it and ensure accountability at every level including that of the private corporate sector (Zaibatsu, Chaebol). Democratic accountability was however stronger in these countries, so that much greater attention had to be paid to democratisation of the gains from growth, and the welfare of all citizens. 

Both types of economies contrast with ‘democratic market’ economies like India that are driven primarily by democratic concerns in which the multidimensional nature of welfare maps into multiple, often contradictory, objectives. The means adopted to achieve one objective often contradict those required to achieve another resulting in cross-cutting actions. Multiple objectives lead to diffusion of accountability and provide liberal scope for pursuing ones personal goals (agency problems) as failure to achieve any one objective can always be blamed on the need to ensure another. 

Drawing on the Chinese experience, Dr Virmani recommended certain lessons for other countries namely – focus on growth orientation, modification of existing institutions in accordance with development objectives, promotion of complementary trade and FDI, adoption of flexible labour laws, rules, procedures to attract labour intensive export oriented FDI, creation of market structure that promotes competition rather than monopoly and emphasis on good governance. 

Dr. Abid Hussain, Former Ambassador to USA chaired the seminar.


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