At one time, not so long ago, market socialism was a laughable idea, considered almost as an oxymoron. The two words, market socialism, conveyed a classic case of mutual contradiction. Among the most important requirements of establishing a Marxist socialist system were the two that pertained to abolition of private property and the replacement of capitalist free market by central planning. In fact, it was a single requirement, the first led to the second because when every asset is owned by the state there is no need for market to buy and sale. In spite of this cardinal Marxist tenet remnants of capitalist market remained after the establishment of Marxist socialist states e.g., in Russia during the New Economic Plan (NEP) covering 1928-1934 under Lenin. This was abolished after Stalin came to power.
In China, too, property was kept for a while under private, collective and state ownership after the communist revolution in 1948. Beginning in 1954 at the start of the First Five Year Plan, China allowed state-private ownership in large-scale industries. In wholesale trades state and joint state-private commerce accounted for ninety seven per cent of total turnover. After 1958, joint state-private trades were merged with state owned enterprises. In agriculture cooperatives shot up to 96 per cent in 1956 from 14 per cent the previous year. By 1958, however, all agricultural land owned by cooperatives were converted into state-owned communes. But in the case of large-scale industries state ownership began right after the victory of revolution in 1948. Though a similar case was made out for joint or cooperative ownership during the interim period for the industrial sector also, it did not happen. More than in the case of Russia after October Revolution tension prevailed over the issue of complete state ownership of all assets in China, giving rise to two 'lines' among party leaders in respect of Marxist transformation of the economy. The struggle between the two lines continued with varying degrees of intensity and ferocity till 1978 when, after the death of Mao Tze Dung, the moderniser 'line' won the struggle. Their version of economy that has come to be known as socialist market economy is now firmly entrenched. The Great Modernization Reform Programme that began in 1978 divided ownership of assets in all sectors in one or all of the following three categories: (a) private, (b) cooperative-collective and (c) state. Along with this division of the assets by ownership categories, rules and regulations were issued by the state planning authority. Because of the relationship of market with state through planning and other regulatory mechanisms, the economic system initiated under the Great Modernisation Reform Programme of 1978 differed from any other state. The market in China is not the same as in a capitalist system, nor is 'socialism' as comprehensive and all powerful as postulated by Marxist doctrine. The Chinese socialist market economy resembles very much the social democratic system in Europe except for the fact that in the latter case there is no central planning and rule by a single party.
The division of the economy into private, collective and state-owned sectors and the guidance by central planning and market has not been easy and operationally smooth. According to many observers the economic management that emerged after 1978 does not always combine the best of both the systems i.e., free market and centrally planned socialism.
In spite of operational problems of day to day nature, the system of socialist market economy has worked reasonably well since it began its journey in 1978 in the agricultural sector and from 1982 in the rest of the economy. Though at a slow rate, the economy has grown steadily, gaining strength and momentum. The growth momentum was sustained to a degree that allowed the economy to register a growth rate of over 8 per cent annually for successive decades until recently. The Chinese socialist market economy has become such a formidable engine of growth that it has overtaken Japan, becoming the number two economic power in the world.
Chaina's Great Modernisation Reform Programme started with social contract given to farmers under which they could keep the surplus produce after giving a fixed quantity to the state. This acted as a great incentive to the farmers who had earlier belonged to communes. They produced so much that the government decided to make them owners, dividing up the land under communes in 1982. The loss in production due to difficulties in mechanised operation was made up through diversification of crops and farmers' engagement in side-line business and small-scale industries. The productive energy released in the rural sector was tremendous and it spread all over the economy.
After the successful completion of reforms in the rural economy the Chinese government policy makers turned to industries and financial institutions. Keeping the large-scale and strategic industries and financial institutions under state-ownership the rest of the establishments in these sectors was privatised. Almost simultaneously, foreign companies were invited for investment in joint ventures with the Chinese. Renowned foreign firms made a beeline for China and arrived in droves, attracted by the huge market and cheap labour. They brought with them the latest know-how and the state of the art technology. Opening up of a stock market in Shanghai, in addition to the existing one in Hong Kong, gave additional incentive to foreign investors who could raise equity capital locally. By pegging Chinese currency renmenbi to dollar, the exchange rate was kept stable, adding another incentive to foreign investors.
Buoyed up by rapid growth of the economy that posted over 4 per cent growth of GDP beginning from 1980, the economy went from strength to strength exceeding 8 per cent growth rate for successive years after 2015. Only recently, in 2019, the growth rate declined below 6 per cent because of global recession and slapping of huge amount of tariff across a large number of Chinese products by the Trump administration. With Corona Virus outbreak, the Chinese stopped making GDP growth rate forecast in 2020.
When the Modernisation Reforms Programme started in 1980 (1978 in agriculture) China's GDP was estimated at 9624000 million yen. In 1987 the government fixed the target of doubling GDP by the end of 1980s. The next target was to quadruple the 1980s GDP by the end of twentieth century which was achieved in 1995, well before the deadline. The process of completing operationalistion of the socialist market economy was completed in 2010. The Chinese authorities expected that the economy would become mature and stable, delivering a steady rate of growth with low inflation by 2020. The Covid-19 outbreak has put that goal on hold for the present.
Since the Modernistion Programme started, a few problems have emerged that may slow down the growth of the Chinese economy unless addressed effectively. Firstly, some of the public sector enterprises have become inefficient in the use of resources, particularly funds from state-owned banks. Secondly, state-owned banks give preferential treatment to state-owned enterprises, ignoring the genuine needs of the private sector enterprises. Thirdly, central planning is yet to be effective in rationally determining allocation of resources and fixing of targets between the public and private sector enterprises. Fourthly, the requirement of sharing technological information with Chinese counterparts has invited criticism from foreign investors. Fifthly, there are occasional allegations, mostly from Americans, about currency manipulation by the Peoples Bank of China to gain export advantage. Finally, the huge foreign exchange reserves built up over the years, earned with surplus in current account, have made China the target of envy and criticism by its trading partners, particularly America.
The Chinese reforms programmes to modernise the economy has succeeded by and large, with a few rough patches here and there, as mentioned above. It proved its resilience during the Asian Financial Crisis in 1997 when the exchange rate of renmenbi was kept stable which was instrumental in helping the affected Asian economies to recover. But the very success of China's economic reforms has bred its problems because of adverse reaction from other countries, particularly America. In trade negotiations Trump administration repeatedly stressed the need to dismantle the planning mechanism that provides subsidies to state-owned enterprises and credit at concessionary rates. The stand-off continues. China's socialist market economy has become a juggernaut that has overtaken almost everything. The other participants in the global economic order want to see China become a market socialist country like social democracy that will produce a level playing field for all. It remains to be seen what happens after the Covid-19 crisis is over and a new global economic architecture is put in place, replacing the presently battered one.