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Transformation to a Socialist Market
Economy in the Peoples’ Republic of
China
Seriye Sezen *
Abstract: This article studies the transformation process of the Peoples’ Republic of China (PRC) from an economic regime based on “central planning”
to the system called a “socialist market economy”. This process can be described as the gradual transformation of a country ruled by the Communist
Party to market economy under state control. The study is carried out within
the framework of economic reforms after the characteristics of the transformation and its constitutional fundamentals are given. In this context, the
ownership regime, rural reform, administrative and fiscal decentralization,
banking reform, state enterprise reform, modification to planning, privatization in public service and direct foreign investments are analyzed. The initial
outcome attained from the study is that the transformation in the PRC should
be interpreted as the response of the Communist Party of China to the dissolution of the socialist system in the Soviet Block and globalization as well as
its endeavor to remain in power by maintaining its legitimacy. The second
result is that this transformation is carried out via a manageable, exceptionally controlled, planned, gradual and pragmatic approach and that state is still
the most powerful player of the economy despite liberalization policies. The
third outcome of the study is that the said transformation involves the basic
characteristics of the new public management approach. During the Cold War
period, the factor that ensured the world’s security was the fear-driven balance between the US and the Soviet Union. It is probable that this balance,
which deteriorated with the collapse of Soviet Union, will be struck between
the US and the Peoples’ Republic of China this time on the basis of economic
power.
Key Words: The Peoples’ Republic of China, socialist market economy, economic reform, decentralization.
The end of the 1980s witnessed the collapse of the socialist system in the Soviet Block as well as the rapid transformation of Soviet
Block countries to liberal policies both in a politic and economic
sense. The 1980s was also the period during which the Peoples’ Republic of China (PRC), another major socialist country, started to
move towards a market economy. The distinctive feature of this
*
Associate Professor, Public Administration Institute for Turkey and the Middle East.
[email protected]
TODAİE’s Review of Public Administration, Volume 1 Issue 1 March 2007, p. 31-66.
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TODAİE’s Review of Public Administration
movement in China is that China, as a socialist country, has realized a
gradual transformation in its system without making any radical
change to its political regime. This transformation has involved a very
controlled and gradual transformation to the market economy under
the leadership of the Chinese Communist Party. In order to reconcile
a market economy, which is the economic system of the capitalist regime, and the socialist regime based upon the “unalterable” power of
the Chinese Communist Party, the Chinese officials and academicians
call this structure a “socialist market economy”.
Today, the PRC is a country, which stands at the forefront and is
discussed not only in relation to its population (1.3 billion) and total
area (9.6 million sq km), but also with its rapid and stable economic
growth, foreign capital inflow and cheap goods that command the
world markets. The world is watching China’s development closely
and at the same time with concern. While international economic organizations and foreign researches pay close attention to the rapid
pace of change in China over the last three decades and the number of
studies on different aspects of this transformation increases rapidly,
the relative gap in our national academic literature is remarkable.
Yet, the PRC is a very rich and interesting field for research predominantly for economists, lawyers, business administrators and public
managers, as well as for researchers who study different disciplines
of social sciences.
This article attempts to elucidate the transformation from
planned economy to socialist market economy in the Peoples’ Republic of China. However, this attempt does not cover all phases, main
lines and results of the said transformation. Its aim is to give an overview and provide characteristics of the transformation and to analyze
the main economic reforms and their methods. While the basic method of the study is literature analysis, the writer also makes use of the
discussions she had during her visits to China in 1999, 2000 and
2006, two for study and one for academic purposes, as well as her observations.
Characteristics of Transformation
The Peoples’ Republic of China (PRC) is a multinational and unitary state, which has been governed by the Communist Party of China
since 1949. These regions,1 where an intense population of ethnic
communities lives and, which are accepted as the complementary
components of the PRC, are autonomous. Hong Kong and Macao,
1
Xingyang, Inner Mongolia, Tibet, Guangxi Zhuang, Ningxia Hui autonomous regions.
Transformation to the Socialist Market Economy
33
both special administrative regions of China that reverted to the
PRC’s rule in 1990s, are governed autonomously under the transfer
of sovereignty agreements signed with the United Kingdom and Portugal. With more than 70 million members, the Chinese Communist
Party, which was established in 1921, is the sole party in power. The
1982 Constitution defines the Peoples’ Republic of China as a socialist
state under “the peoples’ democratic dictatorship” led by the working
class and based on the alliance of workers and peasants. Today, the
Constitution still preserves the principle of devotion to MarxismLeninism and Mao Tse-tung’s thought, except that Deng Xiaoping’s
Theory, the pioneer of reforms, was appended to these principles of
devotion in the1990s.
The increasingly deepening reforms in PRC, which were initiated
in 1978 and continued for almost 30 years, are not different from
new liberal policies implemented in other developed and developing
countries with respect to various aspects. These policies, which can
be described as the transformation of functional, organizational and
operational fundamentals of the state on the basis of privatization, localization and new public management, have become increasingly
widespread in the 1990s and 2000s. Though the adopted policies are,
in essence, in line with this transformation, the China experience has
typical characteristics as to the process and functioning of reforms
and the role of state in this process. These characteristics and the
components of the reform process can be summarized as follows:
1. First of All Economic Reform: Unlike other socialist countries,
transformation in the PRC embraces the liberalization in the economy, whereas it basically discards political liberalization. The necessity of implementing political reform voiced by the leaders of the Chinese Communist Party has never gone beyond words. The Communist Party has carried out the reform process in China, where the
political regime is meticulously maintained. This has enabled the implementation of the reforms without being interrupted by political
changes. Besides, the Chinese Communist Party’s (CPC) response to
the economic development and globalization within the framework of
neoliberal policies has secured the Party’s legitimacy, thus allowing it
to remain in power. Therefore, the change, which China has undergone during almost the last 30 years and the country’s efforts to
achieve economic development, should, at the same time, be considered endeavors to find ways of maintaining its power. The rapid pace
of economic transformation and the abandonment of central planning
in the early 1990s and the official announcement of the “socialist
market economy” as the new economic policy of the country during
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the period that followed the collapse of the socialist regime in the Soviet Union and Eastern Block countries should be evaluated within
this context.
During this process, the CCP has also undergone transformation to
some extent, though it has maintained its power monopoly. The major shift is seen in the Party’s ideology. The Party has moved from
dogmatic emphasis on the Maoist version of Marxism-Leninism to a
pragmatic, market-oriented approach. Although the rhetoric of socialism has been retained (e.g., the recent emphasis on the "socialist
market economy"), the staunch anti-market, anti-private initiative,
anti-private gain focus has been removed (Montinola ao., 1995: 3). It
is alleged that blurring the distinction between socialism and capitalism and giving the utmost priority to economic development, today
the CCP is no more than ‘the Chinese Economic Development Party”,
though it still carries on the utterance of socialism (Yabuki and
Harner, 1999: 33).2
The CCP’s member profile has changed parallel to the shift in ideology. In the mid 50s, when farmers constituted 60% of party members, the values such as class struggle, public ownership, and equality
were of great importance to get party membership. In the 1990s and
the following years, during which the nature of the Party’s values
have changed, the emphasis in admission to membership started to
be placed on the economic development, rich people and confidence
in market powers (Burns, 1999: 31). In line with this development,
an increasing number of businessmen started to become the party
member. While the proportion of the CCP members among businessmen was 13% in 1993, the said rate rose to nearly 20% in 2000
(Zheng, 2004: 74 quoted from Qiang, 2001: 26). Relations between
the business world and the CCP are not one-sided. During the reform
process, the party cadres and government officials were allowed and
even encouraged to go into business. It is asserted that this development was the outcome of “allowing the capitalists to join the Party”
rather than “allowing the party members to be capitalist” (Hui, 2005:
99). This attitude was aimed at breaking down likely resistance
against radical economic reforms. For instance, in 1993 and 1995, the
proportion of the Party cadres and government officials among those
2
According to some evaluations, CCP is a social democratic party. However, Hui (2005:
100), who emphasizes that social democratic parties rely on workers’ unions in developed countries and that primary objective of these parties is to develop parliamentary democracy, says that CCP neither attempts to establish parliamentary democracy, nor does it move wealth province forward. Hui also claims that the political
structure is not shifting to democracy, but oligarchy.
Transformation to the Socialist Market Economy
35
who built up business is 36% and 24%, respectively. 3 This development provided an opportunity to the Party and government officials
to exercise public powers for personal economic interests (Zheng,
2004: 70-71). In summary, during the reform process, while organic
ties between state enterprises and the Party were broken, similar organic ties were established between the Party and the private sector.
2. Gradual approach rather than shock therapy approach: Another
characteristic of the transformation in China is the progressive transformation to a market economy from a planned economy with a cautious approach. Concerns to preserve the national integrity and not to
lead to social chaos played a significant role in the choice of this approach. In this context, the Chinese experience differs from the rapid
transformation policy pursued both by Russia and Eastern Block
countries.
3. Direction of Reform; rural-to-urban: The first intervention
points of reforms were rural areas. This choice aimed to preserve political stability and national integrity and not to cause social chaos.
The other reasons for this preference were the significance of the rural population and rural economy specific to the country and the strategic approach by which the transformation would be initiated from
the weakest link of the planned economy. In other words, rather than
“biting the hardest bone”, which was under the strict control of the
planned economy, the weakest, therefore easily intervenable part of
the system was targeted (Zhaomu, 2000: 451). In the second stage,
reforms were shifted to urban from rural by the method of “surrounding cities from country” (Zhaomu, 2000: 446). The progress of
the reform in urban areas was, again, two-staged. Giving priority to
the coastal cities located in the east of the country, these cities were
transformed into almost a development base via the established special economic zones.
4. Pragmatism: In a socialist regime, how can the Chinese experience, which has built the market economy by means of this regime, be
put on a theoretical basis?4 Some of the Chinese academicians and researchers, who attempt to bring a theoretical explanation to the socialist market economy regard the “socialist market economy” itself
as a theory and accept Deng Xiaoping - the pioneer of the reforms - as
the creator of this theory. The concept on which the theory is based is
3
4
These rates rise to 40 % and 50 % at province or city level. See. (Hui, 2005: 99).
According to Amin (2005: 129), a fundamental criterion that distinguishes market socialism from pure capitalism is the ongoing public ownership in major sectors. Social
re-distribution implementations for the elimination of inequalities that accompany
the emergence of the market can be listed among the differences.
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TODAİE’s Review of Public Administration
pragmatism. According to Deng Xiaping, “it does not matter what color the cat is, so long as it catches the mouse” (Wong, 2003: 127); “the
cat, which catches the mouse is a good cat and the method that boosts
production is a good method” (Yabuki and Harner, 1999: 28). According to Deng, who considers the reforms implemented “to emancipate
the mind and seek truth from facts”, socialism can, at the same time,
improve the market economy, since the basic differences between socialism and capitalism are not “plan” or “market”. While capitalism
has its own planning, a planned economy is not equal to socialism.
Likewise, a market economy is not identical with capitalism. Both
plan and market are economic measures and factors. Socialism has
the power and ability to adopt and improve market economy
(Shaopeng, 2000: 4). Accordingly, as mentioned before, Deng Xiaoping’s theory was put into the constitution, as the thought the country
is loyal to.
5. Administrative reform based on economic reforms: Economic
reforms were followed by administrative reforms in 1980s and public
personnel reform in 1990s and 2000s within the framework of administrative reform, central government institutions, and chiefly the
institutions responsible for economic management were restructured
and the number of these institutions was reduced via mergers or abolitions. Public personnel reform, the Law on Civil Servants, which was
initiated in the 1990s and whose last step was put into force in 2006,
was seeking a new personnel system required by economic and administrative reforms need as well as new human force model. While
the economic model was transformed from a central and rigid
planned economy into the market economy, a public personnel regime, which is based on the former economic model, will be rendered
consistent with the new economic model.
6. Membership to financial institutions of the capitalist system:
The Peoples’ Republic of China has been a member of United Nations
since 1971 and is one of five permanent members of the Security
Council with veto power. Immediately after adopting the “open door”
policy at the end of the 1970s, the PRC re-became a member of World
Bank, of which it had been one of the founding members. It also became a member of International Monetary Fund (IMF) in 1980 and
started to get financial and technical assistance from both institutions. Besides the project investment and technical assistance, the
World Bank, which started its activities in the PRC in 1982, played an
important role in the establishment of reform policies via researches
and counseling (World Bank, 2004: 55). In 1981, China Investment
Bank was founded for the audit of payment of project funds extended
Transformation to the Socialist Market Economy
37
by the World Bank (Zheng, 2004: 121). Between 1981 and 2002, the
Bank gave a total of US$ 36 billion loans to China in order to support
more than 240 projects (World Bank, 2004: 113). PRC is the biggest
borrowing country from the World Bank. China is also the second
biggest borrower from International Development Association, part
of the World Bank group. Nevertheless, loans extended by World
Bank constitute only a small portion of China’s resource inflow (in
the early 1990s, 0.6 % of GDP at the most) (World Bank, 2004: 31). It
should be underlined that China’s relations with both World Bank
and IMF are quite different from the relations of the said institutions
with Turkey. The World Bank itself stresses that its relations with
China are not founded on the basis of conditions, but mutual “respect” and “equality” (World Bank, 2004: 50). Unlike other developing countries, China’s relations with IMF give a similar portrait
(Kornberg and Faust, 2005: 228).
Following nearly 15 years of negotiations, PRC has become a full
member of the World Trade Organization (WTO) in 2001. After rejecting the membership proposal in 1971, China sought to activate its
full membership in the 1980s and got the observer status in the WTO 5
in 1982 (Kornberg and Faust, 2005: 234). Membership of the WTO is
a significant step towards integrating into to the capitalist system.
The reason is that the PRC has made a commitment to cut the tariffs
imposed on agricultural and industrial products, to enhance the
transparency in trade and investment regimes, to implement a countrywide common trade policy, to open services sectors to competition
in addition to eliminating subsidies, to ease restrictions applicable to
foreign investors and to remove them in the course of time. At the
same time, this membership has allowed the government to overcome internal obstacles to further deepening of liberal reforms (Adhikari and Yang, 2002).
7. Openness to knowledge and learning and benefiting from experiences: Another characteristic of the reform process is the keen in-
terest showed in the experiences of other countries, particularly of
developing countries, and drawing lessons from these experiences. In
this context, the emphasis given to China’s role as “knowledge bank”
by the World Bank is very sensible (World Bank, 2004: 49). With the
adoption of the open door policy, besides bilateral and multilateral
relations at national level, the PRC attaches special importance to establishing relations with other countries via public institutions and
learning the experiences of them. Openness to learning other coun5
It was then called General Agreement on Tariffs and Trade.
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TODAİE’s Review of Public Administration
tries’ experiences does not connote one-to-one conveyance of these
experiences. Economic, social, geographical and cultural conditions
are taken into consideration and the policies under consideration are
implemented by adapting them to their own conditions.6
Constitutional Fundamentals of Transformation
It is possible to monitor the stages of transformation from
planned economy to a socialist market economy in China via constitutional amendments. Almost all articles of the 1954 Constitution were
amended by the 1982 Constitution, which was drawn up in order to
meet new political and economic requirements and 32 new articles
were added (Zheng, 2004: 80). To date, the 1982 Constitution has
been amended four times in 1988, 1993, 1999 and 2004. 7 The most
frequently amended article is Article 11 that governs state-economy
relations. The said article was amended in every constitutional
change.
Determining power of constitutional changes, which reflect the
projections of economic transformation, is the Chinese Communist
Party. National Peoples’ Congress, the legislative body, has effected
the constitutional changes in accordance with the decisions made at
the Party Congress. For instance, at the 13 th Party Congress held in
1987, the need for supporting the development of the private sector
to the complement to public sector growth was accepted and it took
place in the 1988 constitutional change. At the 14th Party Congress
held in 1992, the socialist market economy was accepted and this
concept was introduced to the Constitution in the 1993 amendments.
In the 15th Party Congress in 1997, private enterprises were officially
6
7
For example, the Chinese Ministry of Personnel (CMP) interruptedly maintains its
mutual relations with many countries, including Turkey, and even with various institutions of these countries (in Turkey, the cooperation with CMP was first established
by TODAİE in the early 1990s. Today, besides TODAİE, CMP is also in cooperation
with The State Personnel Department). While the CMP conveys its system to the delegations that come from these countries every year, the delegations sent by the CMP
have the opportunity of getting information about the personnel regimes of the countries they have visited. The keen interest of the members of the Chinese delegations
in the system of each country they have been visiting is remarkable. Taking the costs
of these mutual visits into account, the financial resource used for such visits are impressive. Moreover, during the preparation process of Civil Servants Law, which took
four years and, was put into effect in 2006, the personnel laws of a numerous countries, including Turkey’s Civil Servants Law No.657, was analyzed and the CMP officials are informed of the draft on new personnel law in Turkey.
The source for full text of the Constitution and the 1988, 1993 and 1999 amendments: Constitution of the People’s Republic of China, Fourth Edition, Foreign Languages Press, Beijing 1999; the source for the 2004 amendments:
www.npc.gov.cn/zgrdw/english/constitution/constToDetail.jsp? id=2004
Transformation to the Socialist Market Economy
39
legitimized as a significant element of the socialist market economy
and this was reflected in the constitution by he amendments of 1999
(Wong, 2003: 129).
Major constitutional changes, which are significant with respect to
the economic regulations, can be summarized as follows:
The 1988 Amendments: Article 11 of the1982 Constitution defined the individual economy of urban and rural working people operated within the limits prescribed by law, as the complement to the
socialist public economy and governed that the state would protect
the lawful rights and interests of the individual economy. Moreover,
the article stipulated that the state would guide, help and supervise
the individual economy by exercising administrative control.
In the 1988 amendments, a new paragraph was introduced to Article 11, which read that the state would permit the private sector of
the economy to exist and develop within the limits prescribed by law.
The amendment to the Article also defined the private sector of the
economy a complement to the socialist public economy. The state
would protect the lawful rights and interests of the private sector of
the economy, and would exercise guidance, supervision and control
over the private sector of the economy
The second amendment to the 1988 Constitution was related to
land utilization. The Constitution governed that land in the cities was
owned by the state, while land in the rural and suburban areas was
owned by collectives except for those portions that belonged to the
state. The Constitution also stipulated that no organization or individual might appropriate, buy, sell or lease land, or unlawfully transfer land in other ways. The 1988 amendment allowed the transfer of
the right to use land.
The 1993 Amendments: With the annexes made to the preamble
of the Constitution, it was emphasized that state was in the first stage
of socialism and that the people of China would continue to be loyal
to the peoples’ democratic dictatorship and socialist path. It was also
underlined that the people of China would carry on supporting the reforms and openness to the outside world. The highlights of the
amendments of 1993 were the introduction of the term “socialist
market economy” to the Constitution and the constitutional announcement of transformation from a planned economy to a socialist
market economy. In line with this preference, the provisions related
to the role and binding nature of plans in the economy were repealed
and the regulatory and supervisory role of the state was brought into
the foreground.
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Article 15 of the Constitution, which governed that “The state
practices planned economy on the basis of socialist public ownership.
Disturbance of socioeconomic order or disruption of the state economic plan by an organization or individual is prohibited", was
amended to "The state practices socialist market economy. The state
shall enhance economic legislation and improve macro-control of the
economy. The state shall, in accordance with the law, prohibit disturbance of the socioeconomic order by any organization or individual.”
Articles 16 and 17 that govern the administrative principles of
state and collective enterprises were amended and the binding emphasis on the unified leadership by the state and full fulfillment of
state plans during the decision-making process was repealed.
The 1999 Amendments: In 1999, the regulations in Article 11 relating to the individual economic enterprises and the private sector
economy were amended and a new concept “non-public economy”
was introduced to the Constitution. Non-public economy, which comprises individual and private sectors prescribed by law, is major
component of the state’s socialist market economy. The presentation
of the private sector, which was described as a complement to the socialist market economy, as major complement of the socialist market
economy, is of great importance.
The 2004 Amendments: In 2004, with the amendment to Article
11, the encouragement and support of the non-public sector was defined as a state task. Moreover, it was specified that the lawful property of Chinese people was inviolable. Nevertheless, the state may, in
the public interest and in accordance with law, expropriate or requisition private property for its use and shall make compensation for
the private property expropriated or requisitioned (Article 13). Besides, the state is entrusted with establishing a social security system
consistent with economic development level (Article 14).
Major Steps Towards Transformation
In the core of the transformation process in the PRC lays the
change in the social production system. In this context, it will be helpful to put emphasis on state and local enterprises - the fundamental
economic units of a socialist regime - and land ownership regime,
which is the economic factor of rural production. Before discussing
the reforms affected in this field, it will be useful to mention the ownership structure of land and economic units.
Transformation to the Socialist Market Economy
41
Land and enterprises are divided into two groups with respect to
ownership state-owned and collectively owned. State ownership denotes that the property is owned by all Chinese citizens. In collectively owned property, the owner of the property is a small community
with specific limits, which is accepted as collective. In practice, the
citizens, whether as a whole or as small collectives, did not have three
rights (sale, management and earning residual income) arising from
ownership. De facto owners of land and enterprises at local level
were local governments.8 However, the administrative units, the
owner of property, did not have all the rights on the said property.
For example, local administrations could not sell the property in their
possession. They had merely limited rights related to the management of the property. Central planning dictated the limits of these
rights. Furthermore, the residual income yielded (profit) belonged
not to the property owner, but the central management. Neither the
production team, nor the producer/farmer had the right to detain the
management or residual income. Similarly, local governments lacked
the right to keep revenues generated within their locality and the
right to decide how this revenue would be used. Provincial and county governments, like state-owned factories, submitted their profits
upward and received a budget allocation from the upper levels to
cover set operating expenses. (Oi, 1999a: 19).
Rural Reform: In China, where nearly 800-900 million of the population lives in rural places, countryside assume great importance with
respect to both their population and production unit. As mentioned
before, economic reforms had been initiated in rural areas in the early 1970s. In this context, the most radical transformation has been
made in rural production form. The system established in the 1950s,
by which land was owned by the collectives, was revoked in the
1980s. It was replaced by the “household production responsibility
system” that was based on a profit-making production by the families
by which they sold the remaining products after deducting the state’s
share. However, the said transformation in rural production was not
a consequence of the central government’s efforts. This system9,
“Down to the level of county, governments had under their jurisdiction (and therefore
‘owned’) both state and collective enterprises. Below the county, communes and brigades had collectively owned enterprises within their respective jurisdictions. Production teams, subordinate to brigades, were the legal owners of the agricultural land
and the harvest produced on thet land, as well as of any team-level enterprises.” (Oi,
1999a: 18-19).
9 Eighteen farmers from poor Xiaogang village of Anhui Province decided to share the
land among each other, which they collectively cultivated. They would sell or exchange the excess products they had produced after paying the grain tax to the prov8
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which was, at the beginning, conducted on the basis of a secret
agreement made by a group of farmers, became widespread and was
overlooked at first by the local administration and then the central
government. Though the central government tried to restrict this system to poor regions, it was obliged to legalize it in 1981 upon its actual widespreadness (Lin, 1994: 41-42). The system was based on the
leasing of land from collectives by families (OECD, 2005: 2). Still being a collective property, land is divided into parcels and then it is allocated to villagers for cultivation on long-term contracts (usually 30
years). Producers sell a portion of their products to the state institutions at a low price. They sell the remaining products to the market at
a higher price. At the beginning, this system generated a rapid
growth in agricultural productivity and rural income, leading to a
quick increase in county and village enterprises (Wong, 2003: 127).
[Though villagers can cultivate or rent these lands against a specific
fee payable to the village administration payment. But, they cannot
provide collateral for credit or to sell the lands] (OECD, 2005: 3; The
Economist, 25-31 March 2006: 3; Oi, 1999: 56). Nevertheless, the rapid rate of increase could not be maintained in the following period.
Another development in the reform process concerning the rural
labor force is the exemption of population movement from state control. Under the hukou system in China, persons who wished to migrate to another place of residence had to receive permission from
state officials. And this permission was not granted easily in order to
prevent population mobility from rural to urban, mainly to big cities.
This application was gradually loosened in the1980s and was entirely
annulled in the 1990s (Rong, 2003: 239; Oi, 1999: 58).
Administrative and Financial Decentralization: One of the characteristics of the process of transformation from planned economy to
socialist market economy in PRC is the “decentralization”. In fact, today China is accepted as one of the most decentralized countries in
the world (The Economist, 25-31 March 2006: 8). In PRC, local governments10 should not only be considered administrative units, but
ince. So, they made a secret agreement among each other in December 1978. This
system increased the production in a short time. Due to the fact that household responsibility system has not initiated by the government, but the villagers in an unofficial manner, it is widely accepted that the start of market economy in PRC was given
by farmers (Fishman, 2005: 47-48). Today, the contract signed by the farmers with
their fingerprints - taking the risk of jail, even death sentence – is on display in the
Museum of Chinese Revolution Museum in Beijing. See. (Wu, 2005: 110-111).
10 Local governments are the units that constitute the administrative levels of PRC.
Provinces, autonomous regions and the municipalities, which are under the cen-
Transformation to the Socialist Market Economy
43
also economic units. Today, the share of local government expenditures in total government expenditures is 70 %, while local government revenues constitute almost half of government revenues (Caufield, 2006: 257, quoted from China Statistical Yearbook, 2003).
These local administrations are accountable for “industrialization of
rural areas and their accord to national market” (Caulfield, 2006:
257). One of the basic functions of local governments is to run local
state enterprises. While only large-scale state enterprises are managed by central government, small and medium scale enterprises,
which comprise the majority of enterprises11, is administered by local
governments. Considering the fact that in 1993, the numerical, employment and industrial production shares of small and medium
scale enterprises among nearly 300.000 state enterprises were 95 %,
57 % and %43 (Cao et.al., 1999: 109), respectively, the role of local
governments both in the national economy and the reform process
can be better comprehended.
In fact, the PRC is not unfamiliar to the decentralization process.
The difference of the post-1980 decentralization from the previous
ones is the presence of financial incentives and its enhanced powers
on its own economic activities. Besides current decentralization,
which is based on the confidence in market mechanism, allows openness to international markets (Montinola et.al., 1995: 10).
Local enterprises constitute the spirit of the decentralization
movement in the economic reform process. In this context, the basic
policy in implementation is to improve local economy and to leave
the initiative to find out the related techniques and methods to local
governments. In the 1980s, the priority was given to the administrative decentralization and enterprises were empowered with respect
to the production, pricing, organization and employment. Moreover,
in order to ensure the operation of enterprises in compliance with
the market conditions and to enhance their administrative effectiveness, performance evaluation system was put into effect. In 1990s,
the ownership structure of enterprises were started to change (Caulfield, 2006: 260, 262). By Corporate Law, which was enacted in 1993,
individuals were allowed to own limited liability corporations (OECD,
2005a: 2). In the early 1990s, the privatization process of state started. During privatization, methods such as the direct sale of enterprises to domestic or foreign investors/companies, or transforming some
tralgovernmnet, take place at the first step of this level. These are divided into subadministrative units among each other.
11 Telecommunication, railway transportation, airlines, banks and, enterprises that
render services in the fields such as oil and petrochemicals. (Cao et.al., 1999: 109).
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enterprises into limited companies, or the sale of majority shares to
the employees, were used (Cao et.al., 1999: 110).
Decentralization was not limited to state enterprises. Local governments were authorized extensively for the management of special
economic zones, withdrawal of foreign capital and price liberalization. For instance, among total foreign investments, the ratio of those
under the provincial administration, which was 35 % in 1985, rose to
68 % in 1992 (Montinola ao., 1995: 11).
Pre-Reform Financial System: Another field, which was subject to
centralization, was financial administration and it was loosely related
to the privatization of local enterprises. In fact, pre-reform financial
system was not based on a strict centralization. It was decentralized
to a certain extent. Though the financial power was exercised by the
central government, financial liabilities and resources were distributed among local governments. The system was called “unified leadership, level-by-level management”. The concept of unified leadership
denoted that expenditure budgets of provinces were drawn up by the
central governments, while the provincial governments were granted
little autonomy with regard to this issue. “Level-by-level management
meant that the profits of enterprises run by central ministries went to
the central government, and the profits of locally run enterprises
went to local governments.” Local governments, whose revenues
were realized above their expenses, transferred surplus revenues to
the central government. Otherwise, they got assistance from the central government (Shirk, 1993: 155).12 One of the primary functions of
local governments in the Mao period, during which a tax organization
did not exist at the national level, was to collect tax on behalf of the
central government. The entire sum of revenues was accrued in the
name of the central government (Caulfield, 2006: 260).
Financial Decentralization: During the reform process, the first
step towards financial decentralization was made in the 1980s and
the old system called “eating from large saucepan” was reformed into
the new system called “eating in separate kitchens”. In the 1980s, the
central government started to distribute financial revenues among
the administrations. Under this system, the central government
shared total revenues with the provinces in accordance with an
agreement made beforehand. Similar contracts were signed between
Shirk (1993: 155) says that since central government-affiliated enterprises predominate in heavy industry, where profit ratio was low, and local government enterprises
outweigh in light industry that has a high profit ratio, most provinces sent surplus
revenues to the central government.
12
Transformation to the Socialist Market Economy
45
provinces and substate units (Zheng, 2004: 153). These contracts
demonstrated the amount of profits from taxes collected in that region to be sent to the higher unit and the amount, which would be retained by the sub-administrative unit that had generated the revenues. The said system, by which the terms and conditions of contract
were set on the basis of bargain between the province officials and
the Ministry of Finance, were applied in a flexible manner on different terms and conditions for different regions. 13
The system, which was applied until 1994, increased the fiscal
power and resources of provinces as well as the autonomy of provinces on their budgets since the central government would not impose any financial targets any more. However, at the same time, provinces would liable for their own budgets from now on due to the fact
that the central government would no longer send assistance to them
(Shirk, 1993: 166).
With the tax reform enforced in 1994, a clear distinction was
made between national and local taxes. National and local tax offices
were founded and value added tax (VAT) came into effect (Cao et.al.,
1999: 116). Moreover, in order to simplify the system, the number of
taxes was reduced to 18 from 32 (Caulfield, 2006: 261). The central
government was basically accountable for national defense, foreign
relations and the expenditures relating to the management of central
government institutions, while local governments were liable for the
expenditures of their institutions as well as the economic and social
development expenditures in their region. Taxes were divided into
three groups: central government taxes, local government taxes and
taxes shared between the central and local governments .14 Central
The system involved five different categories. For instance, in Guandong and Fujian
provinces, where the central government increased its efforts towards foreign investments, almost entire income resources were retained by provinces. Municipalities of Beijing, Tianjin and Shanghai, which took lion’s share, were subject to more restricted application. Every year, they would give a certain percentage of their total
revenues to the central government and these ratios were reviewed on annual basis.
Meanwhile, the “sharing of certain revenues” system was implemented for 16 provinces. The “sharing of certain revenues” system applicable to autonomous regions,
which used to get assistance from the central government in order to close their
chronic deficits, put into practice along with subsidy, which was fixed for five years to
be increased by 10 percent every year (Shirk, 1993: 167-168).
14 Among central government taxes are customs taxes, consumption tax, income taxes
of central government-affiliated enterprises, operation tax, profits paid by central
government enterprises, province maintenance tax, profits paid by various banks and
insurance companies and vehicle purchase tax. A portion of tax revenues of local government consists of profits transferred from local enterprises, land utilization tax,
housing ownership tax, farm land occupation tax, duty tax, agriculture tax, land ap13
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government taxes were those necessary for to protect national interests, while the taxes shared was directly related to the economic development. Nevertheless, the central government transferred a portion of tax revenues to local governments as to the amount of VAT
and consumption tax at local level. As regards the organization of tax
management, taxes shared with the central government were collected by national tax offices and local taxes by, local tax offices (http:
//www.mof.gov.cn).
In addition to these regulations, with the Budget Law, which was
enacted in 1995, strict measures were introduced to prevent both the
central government and local governments producing deficit. Among
these measures were: the prohibition of the central government from
withdrawing excess money from the Central Bank and the coverage
of its deficit from current account, the stipulation of drawing up balanced budget by local governments at every level and the enforcement of strict rules for bond issue in order to restrict the local government borrowing from the financial market (Cao et.al., 1999: 117).
Another restriction imposed on local governments was related to
bank loans. Local governments were influential in allocation and repayment of loans via the Central Bank and specialized banks. 15 The
reason was that local bank branches were under the supervision of
both the Central Bank and local government (Montinola et.al, 1995:
15). After 1994, binary supervision of the local branches of the Central Bank was abolished and their power to allocate loan allocation
was annulled (Cao et.al., 1999: 117 quoted from Xie, 1996).
In summary, considering simultaneously the regulations enacted
in financial and banking sectors, the decentralization in China can be
regarded as bringing of new public management approach to life with
its major elements, because local governments are being excluded
from the “safeguard” of the central government to a great extent and
they are expected to achieve local development and to solve their
own problems. While the system operated in favor of regions having
the capacity of attracting investments, some of the local governments
in poor regions came to the point where they could not pay the salaries of their employees. Financial problems compelled local govern-
preciation tax. The most important tax item, which is shared between the central
government and local administrations, is VAT, 75 % of which is transferred to the
central government (http: //www.mof.gov.cn).
15 Before 1994, 70 % of credits extended to state banks by the Central Bank were provided by local branches of the Bank (Cao ao. 1999: 117).
Transformation to the Socialist Market Economy
47
ments to privatize local enterprises,16 to employ private sector more
and more in rendering public services and to transfer local land to investors at very low cost and to sell it to real estate agents.
Comprehensive decentralization in the PRC is called “ de facto federalism” (Orban et.al., 2003: 237 quoted from Zheng, 2000: 217), or
“Chinese style federalism” due to the fact that it somewhat establishes a foundation for market-preserving federalism (Montinola et.al.,
1995; Cao et.al., 1999). According to this opinion, “market-preserving
federalism” necessitates the following conditions as regards the distribution of power and responsibility among different administration
levels:
- There is a hierarchy among the governments each of which the
scope of authority has been circumscribed. Each government is autonomous within its scope of authority.
- Sub-national governments are authorized on their local economies at the first degree.
- National government is entitled to exercise control over common
market at nationwide and to ensure the mobility of goods and factors
across sub-government jurisdictions.
- Revenue sharing among administrations is limited and borrowing by administrations is constrained so that all administrations face
hard budget constraints.
- The distribution of power and responsibility was institutionalized in order to prevent any kind of change as a result of pressures
from national government or sub-national governments (Montionola
et.al., 1995: 5).17
Citing localization, fiscal decentralization and tight budgetary restrictions as examples, writers assert that though partially, the stateTherefore, it is pointed out that the privatization experience of the PRC and the experiences of Eastern European countries and former Soviet Union s (?) display differences as regards the factors that haves led to privatization. This opinion asserts that
while province enterprises in the PRC were compelled towards privatization, the privatization in Eastern Europe and former Soviet Union was used for aggravating
budgetary restrictions on enterprises (Cao et.al., 1999: 106).
17 The economic outcomes of market preserving federalism are as follows: It led to
competition among administrations. The production factors of competition such as
labor and capital were expanded, leading the administrations to set up an appealing
environment to attract production factors. Local governments directed to a rational
fiscal management due to tight budgetary restrictions. A political ground was established for markets because of absence of political interventions that deteriorated the
operation of market due to the deactivation of central government (Montionola et.al.,
1995: 8).
16
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ments relating to the existence of market-preserving federalism in
the PRC were proved. In the meantime, Cao et.al. maintains that the
Chinese style federalism establishes an economic and political basis
for, again, a Chinese style privatization. Competitive pressures from
the private sector, accompanied by tight budgetary restrictions, imposed strong financial pressures lots of local administrations to solve
the problems of state enterprises, thus pushing them towards privatization (1999: 123).
In my opinion, bearing in mind the unitary structure of the Peoples of Republic of China and centralized political authority, defining
the decentralization in China as “federalism” is a quite “free” evaluation, which is open to debate. Furthermore, taking into account the
country’s political regime and the Chinese Communist Party’s political sovereignty, evaluating local government elements separately, despite all powers delegated to them, and the central government
stands out as a different problem. The reason is that the delegation of
power from central government to local governments does not
change the origin of power. Those who exercise these powers at local
level are, again, leading party officials.18 In the meantime, I had mentioned before that reforms aimed at legitimizing the CCP power and
preventing the demand for political change. As a matter of fact, according to Shirk, who calls this process as the “playing with provinces’ strategy of the Party, the central officials of the Party retain all official power. Yet, they delegate some of these powers to subadministrations in order to enhance the consistency of incentives
with each other, to avoid being the sole accountable body and to gain
political support. The writer also stresses that fiscal decentralization
offered the central politicians the opportunity for gaining the gratitude and political support of province officials (1993: 150).
Banking Reform: Prior to the reforms, “China’s banking system
was characterized by its singularity and administrative features”
Nevertheless, it is clear that the qualification “federalism” was accepted among academicians. For instance, a study, in which the Chinese decentralization is qualified as
“fluid federalism”, compares the PRC, the USA and Federal Germany with respect to
the management of productive enterprises, regulation of the economy, trade and
commerce, financial relations, monetary policy and labor mobility. The study concludes that the decentralization in China is more advanced compared to two federal
states. It is provinced in the study, which is based on the question “Are there lessons
derivable from the Chinese experience for all levels of managers in Federal Germany,
the USA and other countries?” that in the USA, federal government is mostly regarded
as the body, which is primarily accountable for national economy, whereas in China,
people generally believe that not central government, but local governments are primarily responsible for the economic dynamism of their region (Orban et.al., 2003).
18
Transformation to the Socialist Market Economy
49
(Shanguan, 1998: 324). The People’s Bank of China (PBC) was the
sole authority to perform all banking activities. The PBC, which was
founded in 1948, had not only assumed the role of central bank as a
national state bank, but also carried out other banking activities (savings account, non-agriculture loans, etc.). The Bank, which was organized in the county parallel to the state’s administrative division, had
branches and representative offices in factories and mines and savings units in all kinds of enterprises and public organizations (Whitaker and Shinn, 1972: 564-566). There were two other banks called
the Bank of China and Joint State-Private Bank affiliated to the Bank,
which was under direct control of central government. These two
banks were assigned with special transactions. While the Bank of
China conducted foreign exchange and foreign trade transactions,
Joint State-Private Bank, which was founded in 1952 in Shanghai following the merger of private banks, accepted savings deposits exclusively. Being under the supervision of the State Council, the activities
of the Agricultural Bank of China, which was established in 1963,
were related to the agriculture sector. The bank was assigned with
making payments in certain fields such as banking, agriculture, forestry, and irrigation in compliance with the plans, budget and policies
on behalf of state (Whitaker and Shinn, 1972: 566-567).
In 1983, the central banking system was established and the PBC
was restricted with the role of the central bank. The bank would no
longer assume the functions of specialized and commercial banks.
Starting from the end of the 1970s, specialized banks of the state
were restructured and transformed into commercial banks. Banks
were granted administrative autonomy, rendering them accountable
for their profits and losses. It was aimed to increase the profits of
banks, except the Agricultural Bank of China, via reducing their expenses (Lixin, 2000: 421-422). In 1979, Long-Term Credit Bank of Japan opened a branch in Beijing as the first financial institution in China (Lixin, 2000: 425). In the 1980s, a few foreign financial institutions were allowed to open branches only in private economic fields,
while Shanghai became the first coastal city to open to foreign banks
in 1990. As of 1999, both transactional and geographical restrictions
on foreign banks were significantly loosened (Zheng, 2004: 123).
Today, there are three types of public bank. The first one is the
Peoples’ Bank of China, which act as a central bank. The second one is
a non-profit development bank, which are trusted with implementing
special fiscal policies. For example, State Development Banks provide
loans to basic industries such as steel and oil and developing indus-
50
TODAİE’s Review of Public Administration
tries such as automotive or computer. The third one is commercial
banks19 (Orban et.al., 2003: 247-248).
In the PRC, both foreign and domestic private capital enters into
the banking sector through various ways. For example in 2005, the
shares of foreigners and private capital in 11 national joint stock
commercial banks were 14.33 % and 12.07, respectively. While the
share of state in these banks decreased in the 2002-2005 period, the
shares of domestic and foreign capital expanded (http:
//www.cbrc.gov.cn).
The PRC has assured the World Trade Organization that it would
eliminate the restrictions on the entry and operation of foreign banks
in the country. Besides, as a result of membership to the WTO, the
banking regulation and supervision duties of Peoples’ Bank of China
were delegated to a regulatory institution, which was established to
fulfill these duties (Hou and Jianying, 2006: 1-2). The Chinese Banking Regulatory Commission, which was established by the Chinese
Banking and Supervision Law enforced in 2004, exercises all powers
relating to make regulations, permissions, supervision and sanctions
in the banking sector.20 Although there is not a clear regulation stipulating the autonomy of the Commission, which operates under the
State Council, it is governed by the banking law that while fulfilling
their supervisory duties, the Commission and the supervisory officials shall be protected by Law and that the Commission shall not be
intervened by local governments, government institutions at various
levels, public organizations and individuals.21
State Enterprises Reform: State enterprises take place in the center of economic reforms. Prior to the reform, it was the Planning
Committee that decided the type and amount of products to be produced by enterprises. Enterprises did not have a voice in pre- and
post-production stages. These were determined by plans. The determining factor in the appointment of the managers of enterprises
was the relations with the Communist Party.
Industry and Trade Bank, Agriculture Bank, the Bank of China, which conducts foreign exchange and foreign trade transcactions and Reconstruction Bank that renders
services to big enterprises are among these banks (Orban et.al., 2003: 248).
20 The Commission is composed of eight members, a chairman, four vice-chairman, two
assistants to the chairman and a commisioner of discipline investigation. The Commission has a large county organization consisting of 16 service buildings as well as
30 bureaus in administrative units such as provinces, municipalities and perefectures
(http: //www.cbrc.gov.cn/mod_en01).
21 For Banking Regulation and Supervision Law, see. (http://www.cbrc.gov.
cn/mod_en00).
19
Transformation to the Socialist Market Economy
51
The primary objective of the state enterprises reform was to
break the ties between the government and the enterprise, granting
more autonomy to the enterprises in their production and management, and consequently, to ensure the establishment of a system,
which would operate consistent with the market economy in a competitive manner. The policies formulated towards this objective can
be summarized as granting autonomy to the enterprises, reducing
their number, decomposing the management and ownership structures, empowering the managers, shifting production areas from light
industry to heavy industry, pursuing a selective supporting policy,
moving to mixed ownership and weakening the social facilities significantly.
However, these policies were implemented progressively in compliance with the general principle of the reform. For this purpose, at
first, the reform was effected in the limited number of enterprises of a
pilot region and then was spread out according to the results. For example, industrial reform was first tested in six enterprises opted in
Sichuan Province with the aim of ensuring self-management and expanding the enterprise. A further 100 enterprises participated in the
implementation following the results obtained from the former one.
Similar implementations were simultaneously carried out in other
provinces and were progressively widespreaded countrywide. This
implementation is defined by Deng Xiaoping as “wading the river by
touching cobbles” (Shaopeng, 2000: 10).
In the beginning, the number of products, which were subject to
plans with respect to both production and prices, were gradually reduced and at last, the type, amount and marketing of products were
started to determine by market conditions. 22 Efforts were initiated
towards breaking organic ties between the government and enterprises. Enterprises would be administered by professional managers
provided that public ownership is preserved and the harmonization
of marketing and operation systems with the market economy would
be ensured.
In the 1980s, the autonomy of the enterprises were enhanced and
they were empowered with the management of products, production
sale, pricing, staff employment, personnel system, fees and bonus distribution and the settlement of inter-organizational structure. However, according to Amin (2005: 135), cutting off resources transFor instance, the number of agricultural product subject to planning declined from
25 to 9 between 1979-1993, while the number of industrial products was reduced
from 120 to 36 between the 1980-1993 period (Lixin, 2000: 396-397).
22
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TODAİE’s Review of Public Administration
ferred to enterprises from the central government, while increasing
the administrative autonomy has compelled these enterprises to resolve their financial problems by borrowing from the market.
While the production areas of state enterprises were shifted from
food and light industry to heavy industry, the support policy was
changed as well. Instead of supporting all enterprises, large-scale enterprises having the competitive power, which could adapt to the
market economy, were started to support. In 1997, in compliance
with the strategy of “protecting the big and giving way to the small”,
big enterprises were incorporated, while small enterprises were liquidated through bankruptcy, merging them with large enterprises,
the transfer of their ownership or management to private sector. By
the end of 2000, 635.000 small enterprises were privatized. According to the results of first national economic census, in 2001-2005, the
number of state enterprises fell to 192.000 by a 48% decline, while
the number of collective joint ownership decreased by 46% to reduce
to 456 thousand. Meanwhile, the number of private enterprises
reached 1.98 million by a 49 % increase (http: //english.gov.cn) In
line with the decline in number, the share of state enterprises in the
industrial production decreased gradually. The ratio of state enterprises in gross industrial production, which was 70% in the end1970s, became merely 24% in 2000, during which public enterprise
was basically limited with big strategic industry (Wong, 2003: 129).
The number of individuals employed by enterprises was reduced by
30 million between 1998 and 2002 (World Bank, 2004: 14).
During the planned economy period, state enterprises were not
only economic institutions, but they also functioned as social institutions - a “mini social state”. Social assistance provided by the state to
the state employees via enterprises ranged from cheap housing or
free health services, to retirement pension or transportation and allocations. While enterprises transferred all their profits to the state, all
expenditures were met by the state (Gu, 2001: 130-133). Another
aim and outcome of state enterprises reform was to cease the operation of enterprises as a “mini social state”. Enterprises, whose powers
end responsibilities relating to financial resources and human force
were enhanced, were compelled to meet their social expenditures
from their own resources. The number of employees of enterprises
was also reduced. Thus, they were prevented from being institutions
that absorbed human force. For example, in 1998, the number of individuals employed by enterprises was reduced by about 25 million
compared to 1995 during which the number of enterprises was
291.000 (Shulian, 2000: 113-114).
Transformation to the Socialist Market Economy
53
Change in Planning: The PRC, which had moved to central planning in the 1950s, put its first five-year plan into effect in 1953. State
Planning Commission (SPC), which was established in 1952 with the
transformation to central planning, turned out to be the most powerful economic bureaucracy, the approval authority for almost all big
projects and investments (Yabuki and Harner, 1999: 224). During the
reform process, the content and the binding nature of plans were
progressively weakened. After the initiation of liberalization, the
number of products within the scope of plan was gradually reduced
and with the transformation from centrally planned economy to the
market economy by constitutional change in 1993, determining and
binding nature of plans in economic and social life was officially terminated. In spite of the fact that five-year plans are still drawn up,23
Wong (2003: 130) says that these plans merely function as some sort
of perspective plan or a rough indicator of government policies. Even
though it is beyond dispute that intervention areas of plans are quite
restricted compared to the past, this fact should not be perceived as
the complete distraction of China from its planning tradition and
practice. When the targets of plans are analyzed, it is seen that the
policies of “progressive” reform process are based on a plan that
these policies guide the process at macro level.
The weakening of central planning also resulted in the loss of
power and the importance of the State Planning Commission (SPC),
the planning organization. The SPC, which was restructured under
the name of the State Development and Planning Commission in
1998, was entrusted with the tasks of regulating management functions merely at macro level, long-term development planning and
maintaining general economic balance (Worthley and Tsao, 1999:
573). With the loss of ground in central planning during the process
of transformation to the market economy, the SPC also lost its power
and authority and State Economic Commission (SEC), which was established in 1956, became the leading commission of the new economic order and most powers of the SPC were transferred to SEC,
which was named the State Economic and Trade Commission SETC).
In this period, the SETC acted as basic bureaucratic tool of the government in effecting economic reforms (Yabuki and Harner, 1999:
226).
Privatization in Public Services: As in most countries, privatization
practices in the PRC were not limited to state enterprises. Before all
else, services fields such as health and education were opened to the
23
Today, eleven plans that cover the 2006-2010 period are in practice.
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market and private hospitals and private education institutions have
started to provide services.24
Since the PRC was founded, services such as water, electricity, gas
and heating, postal services, communication, collective transportation, drainage, sewerage, garbage annihilation, road and bridge construction were under the monopoly of the state. Under this system,
which state acted as policy-maker, implementer and supervisor, services were carried out on basis of low price and high subsidies. Starting from the 1990s, the said traditional method was abandoned and a
new system, which was based on the reduction or removal of subsidies and cost-oriented pricing, was introduced (China Ministry of
Personnel, 2005: 6). As of the second half of the 1990s, the services
were progressively and widespreadly contracted to domestic and
foreign corporations via methods such as the build-operate-transfer
model (BOT) or the transfer of right to operate.25 For the first time, in
1994, a private company undertook the project of building a bridge in
Quanzhou city of Fujian province via BOT method (He, 2005: 7). Major methods of rendering basic public services via the private sector
are as follows (China Ministry of Personnel, 2005: 10-12):
Build-Operate-Transfer (BOT): It is a form of project financing,
wherein a private entity receives a franchise from the public sector to
finance, design, construct, and operate a facility for a specified period,
usually for 25-40 years, after which ownership is transferred back to
the public sector. This model is widely used especially in carrying out
public infrastructure projects (construction of urban water supply,
public transportation and road construction). For example, a 90 milToday, the number of private higher education institutions, which were founded in
the 1980s, reached 1300. 25 of these institutions are in the status of university ( China Daily Special Supplement, 9 June 2006: 11).
25 In the early 2005, a document titled “Remarks on the Encouragement, Support and
Guidance to Individual, Private and Other Non-Public Economies”, which was published by State Council, is the most comprehensive, systematic and lucid political
document relating to the development of private sector since the beginning of openness to abroad. The goal of the said document, which is believed to aim at fulfilling
the WTO stipulations, is to further remove the impediments to private sector development, to establish equality among market players and to ensure fair competition.
The document clearly emphasizes the necessity of applying the principle of equal access to the market and equal treatment in the market to the private market economy
and allowing private sector enter the sectors not prohibited by laws. It is also stated
in the document that the entry of private sector into the electricity, telecommunication, railways, civil aviation and oil sectors, services sectors such as gas and heating,
collective transportation, sewage and garbage annihilation, infrastructure services
sector, social sectors such as education, health, scientific researches and defense industry and technology should especially be allowed (China Ministry of Personnel,
2005: 5).
24
Transformation to the Socialist Market Economy
55
lion Yuan worth of garbage power plant will be constructed by a private enterprise in Wenzhou province. After being operated for 25
years, it will be transferred back to the public sector.
Transfer-Operate-Transfer: In this model, the private enterprise,
which purchases the operation right of a constructed facility of state,
operates it for a specified period on a contractual basis. At the end of
the said period, the facility is transferred back to the public sector.
This model is widely used too.
Sale of Public Shares: In this method, which involves the sale of
publicly owned enterprises' shares to the private or foreign investment institutions, the percentage of shares sold ranges between 25%
and 70%. For example, in 2002, the shares of five public companies
(energy, water, gas, public transportation and food companies) ranging between 25% and 60% were sold by international tender in
Shenzhen state.
Contract/Tender Model: This system, which is based on the assignment of a public service to a private enterprise or enterprises
against a specified fee, is the most widely used method. Garbage collection, street cleaning, public buildings cleaning, municipal facility
maintenance and repairs, parks management and performance evaluation are among the services, for which the contractual model is
most widely used.
The privatization of both public services and enterprises has
brought along certain problems such as damage to public interest,
corruption, and private monopolies. Especially some local province,
which try to overcome financial difficulties by this way and to achieve
regional political success, fail to display necessary meticulousness in
selecting projects, supervising investments and establishing standards for services (China Ministry of Personnel, 2005: 13-14).
Foreign Direct Investments: Legal arrangement that allows the inflow of foreign direct investments (FDI) went into effect in 1979
(Dullien, 2005: 127). In the following years, the PRC took a number of
measures in order to increase FDI.26 Special economic zones and industrial parks, where environmental arrangement and infrastructure
are better than other regions of the country, were established for foreign investors. In these regions, tax exceptions and different policies
26Joerg
Wuttke, the vice-governor of European Trade Chamber in the PRC, who has
been doing business there for 16 years, asserts that the process of establishing business in the PRC is shorter compared to the other countries. He says that while the
said process takes 41 days in the PRC, this period of time is 152 days in Brazil, 89
days in India and in his own country Germany 45 days (www.oecdobserver.org).
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TODAİE’s Review of Public Administration
such as relatively liberal foreign trade regime were applied in order
to attract foreign capital (Taube and Öğütçü, 2002: 22).
One of the methods used by the PRC in attracting especially foreign capital and foreign technology during the reform process was
“special economic zones” (SEZs), “economic development zones”
(EDZs), “open coastal cities” and “free harbor” implementations. With
these implementations, an exceptional tax system was applied to the
enterprises in the zones declared as SEZs and EDZs with the aim of
attracting foreign investments. Moreover, local administrators were
granted large autonomy with respect to economic regulations and
more flexible export and import policies were implemented (Zhaoumu, 2000: 447). The said zones became a kind of laboratory for the
implementation of reforms and acted as a bridge between national
and international markets.27 Besides, the domestic labor force gained
the experience of the new economic system and its operation in these
zones, which were utilized to attract foreign capital, technology and
human force with the aim of developing an economy consistent with
exports. The experience acquired by the domestic labor force was
used as a reference in the restructuring of national economy (Fulin,
2000: 335). Special economic zones were first established in four
places in 1979 by the decision of the CCP Central Committee and the
State Council.28 In 1984, 14 coastal cities29 and Hainan Island were declared as open coastal cities (Yabuki, 1995: 245). SEZs, EDZs, open
coastal cities and free harbor practices were progressively expanded
in the 1980s and 1990s, thus major cities were opened to foreign investments. Today, these zones compete with each other to attract investments. 30 Similar to the other implementations, a progressive approach was applied in this practice in conformity with the general
tendency of reform.31
Deng Xiaoping defines special economic zones as the windows of technology, management, capital and the PRC’s foreign policies (Yabuki, 1995: 245).
28 Shenzhen, Zhuhai and Shantou in the Guangdong province and Xiamen in Fujian
province are the first special economic zones.
29 Among these coastal cities are Tianjin, Shanghai, Guangzhou, Zhanjiang and Beihai.
30 For instance, Tianjin, Shanghai, Xian and Zhuhai cities competed for the investment
of the Airbus firm, which would make its first outside-Europe investment in the PRC.
In the end, the firm decided to make its investment in Tianjin as it had the most suitable conditions. The said facilities, which will contribute to the know-how of the national aviation industry, will manufacture four jet aircrafts until 2011 (China Daily, 9
June 2006: 1).
31 For example, economic development zone in Bohai region of Tianjin municipality,
which is one of 14 EDZs, has been established on a of 33 km2 area. It has been decided that the said area, where there are 4.000 foreign capital-enterprises, 100, of
which are internationl companies such as Toyota, Motorola, 280.000 are employer
27
Transformation to the Socialist Market Economy
57
Various Results of Transformation
In the early-1980s, the PRC mapped out a three-stage, long-term
development strategy: resolving hunger and clothing problems, diminishing poverty, to increase gross national product and income per
capita four folds at the end of the 20th century and to join the group of
medium developed countries in the mid-21st century. Today, the PRC
has attained the first two targets. With the same growth rate, the PRC
is expected to reach the level of medium-upper income developing
countries defined by World Bank until 2020 (Bi, 2005: 109-110).
Economic Growth: The most concrete and discussed item among
the Chinese economic reforms is related to economic growth. 32 In
1979-2000, annual real economic growth rate was 9.6%. The economy grew by 8% in 2000, 7.3% in 2001 and 7.5% in 2002. The said
rate growth is predicted to continue. Such a growth represents the
most permanent and rapid economic transformation of world economy in the last 50 years (OECD, 2005a: 2). The Chinese economy has
been affected less by global economic contractions thanks to its large
volume and population. Though 80% of growth stemmed from domestic demand, this fact does not point to the insignifance of foreign
demands. In fact, the Chinese economy has become more reliable on
exports growth. In the last two decades, the rate of increase in exports is 15%. The reason is that the volume of Chinese exports
ranked sixth in the world in 2002 (Wong, 2003: 111-113) and third
in 2007. The foreign exchange reserve, which was US$ 818,9 billion in
2005 (National Bureau of Statistics of China, 2006), reached US$ 1
trillion at the end of 2006. Today, the PRC is the world's largest foreign currency depositor (www.chinatoday.com).33
The Change in the Economic Components: While the share of industrial and services sector expanded, both economic and demographic share of the agriculture sector receded. During the 19702000 period, the share of the agriculture sector in the economy declined from 40% to 16%, while the proportion of those who earn
their living from agriculture fell from 81% to 50%. In the meantime,
the proportion of rural citizens decreased from 83% to 64%. Nevertheless, the rural economy employs 475 million people (World Bank,
and 70.000 mobile phones were manufactured merely in 2005, will to expand to
2270 km2 during the ‘11th five-year plan’ period.
32 The growth rate in the period prior to reform (the 1952-1978 period) was also high.
The rate of growth in this period is around 6.2% according to Amin (2005: 131) and
5.7% according to Wong (2003: 132).
33 Foreign exchange reserve of the PRC corresponds to six-fold of its short-term debts
and more than 1/5 of global reserve (The Economist, 28 October 2006: 91).
58
TODAİE’s Review of Public Administration
2004: 59). In 2003, the share of agriculture in the GDP was 14.6%,
while the shares of the industrial sector and the agricultural sector
were 52.3% and 33.1%, respectively (OECD, 2004: 6).
Inflow of Foreign Investments: Today, the PRC attracts most foreign capital. During the 1998-2001 periods, the annual rate of increase in foreign direct investments is averagely 30%. The PRC attracts most foreign direct investments (FDI) among developing countries. In world ranking, the PRC comes second after the USA. Foreign
investments that flowed into the country between 1979-1990 correspond to 10% of world’s total FDI and 39% of total FDI that flow in
developing countries (OECD, 2000: 4). At the end of 2002, total FDI in
the PRC reached US$ 446 billion (Wong, 2003: 113). Today, 80% of
the world’s largest 500 companies have investments in the PRC
(Wong, 2003: 113 quoted from The Standart (Hong Kong)). Nevertheless, the high rate of foreign investment should not be perceived
as easy flow of foreign capital in the country. Foreign capital policy
pursued in the PRC is based on the principle of mutual interest and
bargain made for this purpose. That is to say, the purpose is to ensure
the benefiting of the country from the inflow of foreign country, as
much as the foreign capital itself (technology transfer, know-how,
cloning, spare parts imports, local suppliers, etc).34
Although the volume of foreign investments is large, the number
of origin countries is limited. While 50% of investments come from
chiefly from Hong Kong as well as Taiwan, Singapore and Malaysia,
the share of each of the developed economies such as European Union, the USA and Japan is less than 10% (Taube and Öğütçü, 2002:
22).
Deepening of Development Gap Among Regions and Rural-Urban:
Transformation from planned economy to market economy has
gradually turned the PRC into a country of conflicts and inequalities.
In the PRC, rich coastal cities and poor inner provinces, rich enterprisers and unemployed masses coexist (Pye, 1999: 15). Economic
reforms have deepened the development gap between coastal regions located in the east of the country and inner regions (See. Table
1). For example, while the income per capita in urban areas was 1.85
times that in rural areas in the mid-1980s, it was 3.2 times in 2004
(OECD, 2005: 4). While income per capita in the coastal provinces
For example, main parts and the assembly of more than 3.000 aircrafts of Boeing
firm all over the world, which has % 65 share in the PRC, were provided by the Chinese firms. Boeing is predicted to buy aircraft parts worth of US$ 1.3 billion from
China until 2010 (Fishman, 2005: 227).
34
Transformation to the Socialist Market Economy
59
and cities exceeds the national average as they develop and open
abroad, income per capita in inner and western regions remains below the national average (Wong, 2003: 117).
Inequality is not specific to regions. The rural-urban gap is also
wide in income distribution. At the end of 2005, while net annual income per household was US$ 407 in rural areas, it was US$ 1311 in
urban regions. Moreover, 23.65 million rural people live in poverty
(annual income below US$ 85), while the number of low-income
people in rural regions is 40.67 million (annual income US$ 86-118)
(National Bureau of Statistics of China, 2006).
Table 1. GNP Per Person by Provinces (2005)
GNP (US$)
Provinces and Municipalities
>4000
Beijing, Shanghai, Tianjin,
3000-4000
Jiangsu, Zhejiang, Guangdong
2000-2999
Liaoning, Shandong, Fujian
1500-1999
Xingyang, Inner Mongolia, Heilongjiang, Jilin,
Hebei, Shanxi
1000-1499
1000<
Tibet, Qinghai, Ningxia, Shaanxi, Henan, Anhui,
Jiangxi, Hunan, Guangxi, Hubei, Chongoing, Sichuan,
Hainan
Gansu, Yunnan, Guizhou
Source: The Economist, 25- 31 March 2006: 4
Foreign investments in the country deepen the inter-regional inequality as well. While inner and western regions do not attract foreign investments, a large portion of current foreign direct investments were made in rich coastal regions. Until 2000, while 86% of
FDIs was made in coastal regions, the rate of FDIs made in the central
region and western region were merely 9% and 5%, respectively
(Kreutzberger, 2002: 85). 50% of foreign investments that were
made in coastal regions flew to three provinces (Guangdong, Jiangsu,
Fujian) (Hugonnier, 2002: 115).
Poverty and Corruption: Today, the PRC moves from being a society based on ideology, equality and values to a society, which is based
on individual gain and interest. Liberal policies have created a new
class in the country and changed consumption patterns to a great extent. The said class, whose income level and luxurious consumption
expenditures is high and which has adopted a western style of living,
is in minority. In the cities surrounded by skyscrapers, bicycles, the
60
TODAİE’s Review of Public Administration
symbol of the country, are increasingly being replaced by luxury cars.
On the other hand, some people live in poverty or at the minimum living standard income level. Though the proportion of ruralpopulation having a daily income under 1 US dollar declined from
31.3% in 1990-2000 to 11.5%, today 30 million people live in poverty
in rural regions, while 20 million people live at the minimum living
standard income level in the cities (Bi, 2005: 105-106). The new social structure based on individual gain and interest has substantially
boosted corruption as well. It is notable that among those involved in
corruption are some top-level officials of the Communist Party and
public bureaucracy.
Internal Immigration: Reforms led to a rapid rural-urban immigration. Due to the removal of impediments to population movement and
poverty in rural areas, individuals move to the provinces where there
is more job opportunities compared to rural areas. Today, the number of rural origin labor force that work in provinces is 120 million.
The said number is predicted to reach 300 million in 2020 (China
Daily, 12 June 2006: 2).
Conclusion
The PRC’s economic success is neither as simple as which can be
explained merely by the superiority of huge and cheap labor force,
nor is a miracle. Undoubtedly, a large labor force army, which does
not have the power to bargain and accordingly, low cost are the significant superiority of the PRC. However, transforming this potential
into superiority and sustaining the said superiority depend on good
manageability.
The characteristics of the Chinese reforms are that they are manageable, sustainable and are based on long-term strategies and plans.
The authoritarian and permanent nature of the PRC’s political regime
is a significant factor in maintaining the reforms. Progressive implementation of reforms taking into account the conditions specific to
the country is another remarkable characteristic. The results of rapid
transformation in the Soviet Bloc have become influential both in the
acceleration of transformations by the Communist Party and the
adoption of reforms by the Chinese people because of the fear of experiencing similar chaos. The Chinese Communist Party sought to
keep up its monopoly power by preserving its legitimacy. For this
purpose, the Party led the transformation in both on its own initiative
and in the light of facts and could be able to transform its policies
within the framework of these developments. The Party was able to
maintain its sovereignty as long as it could display flexibility. It has
Transformation to the Socialist Market Economy
61
also evolved during this process and changed its ideology and member structure. Giving up development based on central planning and
public ownership, it adopted a controlled market economy where
public ownership still preserved its leading role. The Party eliminated
likely inner resistance in the very beginning and prevented any
movements towards new political power by ensuring the party members would take efficient roles in the new economic system.
Reform was not initiated concurrently with all its dimensions at
national level. Besides, pressures for change did not come from central government but local administrations. Different attempts were
initiated simultaneously in different local administrations. Implementations were expanded in compliance with the results of these attempts and in the last stage they were converted into national policies. Each local government, special economic zone and development
zone functioned as laboratories for these implementations. Instead of
suppressing them, the Communist Party and central government
transformed these into national policy. Thus it preserved its legitimacy and made use of these methods.
All elements stipulated by the new public management understanding, such as decentralization, decentralized budget, delegation,
employment in compliance with market conditions, appear to have
been put into practice. Yet, the state ruled by the Communist Party
has been managing the process as the most powerful actor. This fact
is a significant characteristic that distinguishes the Chinese experience from the liberalization process experienced in many countries in
the last 30 years. Though door to “confidence in the market” is gradually being opened partly, this confidence is not still at the level that
ensures opening the door wide. Nevertheless, it is clear that the obligations brought by the membership of the WTO will further force the
door open and the state’s power in the economy will gradually weaken. Development gaps between regions, unfair income distribution
and elimination of corruption and poverty are the country’s priorities
and grave problems. The success to be achieved in settling these issues will determine the future of both the Chinese Communist Party
and the Peoples’ of Republic of China.
If it is admitted that we live in a globalization era, the most important product of globalization must be the Peoples’ Republic of
China. While the USA, the sovereign power of globalization, is the
largest borrower of world, foreign exchange reserves of the PRC
amounts to US$ 1 trillion, which is more than the USA debts. The economic and political advance development to be achieved by the PRC
not only closely concerns the economies of all countries, but also in-
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TODAİE’s Review of Public Administration
ternational balances. As it is known, during the Cold War, world security was depended on the fear-oriented balance between the USA and
the Soviet Union. It is highly probable that the said balance, which has
changed with the collapse of Soviet Union, will be established between the USA and the PRC, this time on the basis of economic power.
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