When Deng Xiaoping unveiled his vision of economic reform to the Third Plenum of the 11th Central Committee of the Chinese Communist Party in December 1978, the Chinese economy was faltering. Reeling from a decade of stagnation during the Cultural Revolution and already falling short of the projections set forth in the 1976 10-year plan, China needed more than a new plan and the Soviet-style economic vision of Deng’s political rival, Hua Guofeng, to improve the economy. Deng’s plan was to lead the country down a road of gradual and incremental economic reform, leaving the state apparatus intact, while slowly unleashing market forces. Since that time, the most common image of China, promulgated by members of the US Congress and media, is of an unbending authoritarian regime that has grown economically but seen little substantive change.

There is often a sense that China remains an entrenched and decaying authoritarian government run by corrupt Party officials; extreme accounts depict it as an economy on the verge of collapse. However, this vision simply does not square with reality. While it is true that China remains an authoritarian one-party system, it is also the most successful case of economic reform among communist planned economy in the 20th century. Today, it is fast emerging as one of the most dynamic market economies and has grown to be the world’s sixth largest. Understanding how this change has come about requires an examination of three broad changes that have come together to shape China’s transition to capitalism: the state’s gradual recession from control over the economy, which caused a shift in economic control without privatization; the steady growth of foreign investment; and the gradual emergence of a legal-rational system to support these economic changes.

Reform Without Privatization

During the 1980s and 1990s, economists and institutional advisors from the West advocated a rapid transition to market institutions as the necessary medicine for transforming communist societies. Scholars argued that private property provides the institutional foundation of a market economy and that, therefore, communist societies making the transition to a market economy must privatize industry and other public goods. The radical members of this school argued that rapid privatization—the so-called “shock therapy” or “big bang” approach to economic reforms—was the only way to avoid costly abuses in these transitional systems.

The Chinese path has been very different. While countries like Russia have followed Western advice, such as rapidly constructing market institutions, immediately removing the state from control over the economy, and hastily privatizing property, China has taken its time in implementing institutional change. The state has gradually receded from control over the economy, cautiously experimenting with new institutions and implementing them incrementally within existing institutional arrangements. Through this gradual process of reform, China has achieved in 20 years what many developing states have taken over 50 to accomplish.

The success of gradual reform in China can be attributed to two factors. First, the gradual reforms allowed the government to retain its role as a stabilizing force in the midst of the turbulence accompanying the transition from a planned to a market economy. Institutions such as the “dual-track” system kept large state-owned enterprises partially on the plan and gave them incentives to generate extra income by selling what they could produce above the plan in China’s nascent markets. Over time, as market economic practices became more successful, the “plan” part of an enterprise’s portfolio was reduced and the “market” part grew. Enterprises were thus given the stability of a continued but gradually diminishing planned economy system as well as the time to learn to set prices, compete for contracts, and produce efficiently. Second, the government has gradually promoted ownership-like control down the government administrative hierarchy to the localities. As a result, the central government was able to give economic control to local administrators without privatization. But with economic control came accountability, and local administrators became very invested in the successful economic reform of the villages, townships, and municipalities under their jurisdictions. In a sense, as Professor Andrew Walder of Stanford University has argued, pushing economic responsibilities onto local administrators created an incentive structure much like those experienced by managers of large industrial firms.

Change From Above

Even as economic reform has proceeded gradually, the cumulative changes over two decades have been nothing short of radical. These reforms have proceeded on four levels: institutional changes instigated by the highest levels of government; firm-level institutions that reflect the legal-rational system emerging at the state level; a budding legal system that allows workers institutional backing outside of the factory and is heavily influenced by relationships with foreign investors; and the emergence of new labor markets, which allow workers the freedom and mobility to find new employment when necessary. The result of these changes has been the emergence of a legal-rational regime of labor, where the economy increasingly rests upon an infrastructure of ordered laws that workers can invoke when necessary.

Under Deng Xiaoping, Zhao Ziyang brought about radical change in China by pushing the country toward constitutionality and the rule of law to create rational economic processes. These changes, set forth ideologically as a package of reforms necessary for economic development, fundamentally altered the role of politics and the Communist Party in Chinese society. The early years of reform not only gave a great deal of autonomy to enterprise managers and small-scale entrepreneurs, but also emphasized the legal reforms that would undergird this process of change. However, by creating a body of civil and economic law, such as the 1994 Labor Law and Company Law and the 1995 National Compensation Law upon which the transforming economy would be based, the Party elites held themselves to the standards of these legal changes. Thus the rationalization of the economy led to a decline in the Party’s ability to rule over the working population.

In recent years, this process has been continued by global integration and the tendency to adopt the norms of the international community. While championing global integration and the Rule of Law, Zhu Rongji also brought about broader political and social change, just as Zhao Ziyang did in China’s first decade of economic reform. Zhu’s strategy has been to ignore questions of political reform and concentrate instead on the need to adopt economic and legal systems that will allow the country to integrate smoothly into the international community. From rhetoric on “linking up with the international community” to laws such as the 2000 Patent Law to institutions such as the State Intellectual Property Office and the Chinese International Economic Trade and Arbitration Commission, this phase of reform has been oriented toward enforcing the standards and norms of the international investment community. Thus, Zhu’s objective is to deepen all of the reforms that have been discussed above, while holding these changes to the standards of the international community.