Economic Case

China Seeks Free-Market Revolution

For more than 2000 years, China had a ‘self-reliance’ policy that caused China’s economy to lag far behind advanced economies. In 1978, China adopted a new policy of economic reforms that are transforming one of the poorest economies in the world into one of the fastest growing.

The rural economy is central to China’s economic reform because about 70 percent of its population lives in rural areas. In the past, farmers worked collectively in people’s communes. The government told the farmers what to produce and how much to produce. They could sell their products only to the state at a price fixed by the government, rather than in markets.

Under the reform system, house-holds operate in mixed world of state controls and free markets. A two-track pricing system still exists for some key goods and services, such as coal, petroleum, steel, and transportation. On the other hand, the so-called household contract responsibility system assigns land owned by the state to farmers. An annual share of profits must be paid to the government, and the state does not cover losses. Farmers, however, have the authority to decide what to produce and the price at which to sell in open markets. As a result, everyone, farmers and consumers, is noticeably better off because everyone can find and afford more food.

As farming productivity rose sharply, fewer farmers are needed to work on the land, and this surplus labor moved into emerging township and village non-state enterprises. These enterprises are mostly in light industry and are owned collectively by townships or villages. As a result, the composition of rural output changed. When reforms began, farming accounted for 70 percent of the total rural output and industry for 20 percent. Currently industry’s output share has jumped to more than 40 percent.

The march toward reform is not trouble free. An article in the Boston Globe provides additional insight into China’s economic transformation:...