PREFACE TO THE SECOND EDITION(1)
Upon the approval of the former publishing house, this reprinted edition of the Chinese Socialist Political Economics is undertaken jointly by Truth & Wisdom Press, an imprint of Shanghai Century Publishing Group, and Shanghai People's Press. The contents of the book remain unchanged except for four newly added articles, namely, On the Study of Public Ownership Forms (1998), Approaches for State-owned Enterprises to Adopt Modern Corporate System (1995), General Proposals for China's Securities Market Development (1992), and China's National Strategy for Economic Security (2005).
The most noticeable change is the new book title The Road to China's Socialist Market Economy, so altered to better reflect the contents and meet the challenge voiced in The Road to a Free Economy, an influential yet controversial book by Hungarian economist János Kornai. As for the second point, here is the story:
Not long after I completed Solving the Puzzle of the Century:Research Report on Plan and Market Relationship (November 1990, see the Declaration of China's Socialist Market Economy in the book), I was invited to visit the United States in early 1991, when The Road to a Free Economy, Kornai's new book, was just released in the United States. In his book, Kornai stated that all economic reforms in socialist countries were essentially trying to find a “third path”, other than the traditional planned economy or the free market economy of the West. However, by nature, the market mechanism is fundamentally based on private ownership and contradicts with public ownership, especially state ownership, and such reform efforts are doomed to fail. He concluded that the failure was evident in Poland, Hungary, China and the Soviet Union, and “the only feasible road is the free market road based upon private ownership”, or the Road to a Free Economy, according to Kornai. As a visiting scholar at the Department of Economics of Stanford University, I attended a seminar on the topic and was invited to voice my opinions as a researcher from China. I said then that many Chinese economists held great respect for Kornai, and many applauded his research on economic reforms in socialist countries. However, despite his new book being a hit in the academic circle, I found it hard to agree with some of his opinions in the book since “he went too far”. I also found his conclusion in the book somewhat premature. I wasn't sure about the prospects of the Soviet Union (USSR was still there at that time despite the turbulence in East Europe) but was quite hopeful of China's reform. The host agreed with me on this which I was quite grateful for. A few months later, I went to the East Coast and met Egon Neuberger at State University of New York, a famous professor in comparative economics. In our conversation, I briefed Professor Neuberger on China's economic reforms and achievements, and also shared my view on Kornai's new book. Professor Neuberger agreed with me and said, “With the traditional Soviet system at one end and Milton Friedman's neoliberalism at the other, the world in the future will never be at either of the two poles and will probably be somewhere in between. I lay my hopes on China's reform.” In the two academic discussions in 1991, I pulled together my studies on socialist market economy to address the challenges faced by socialist countries and their academic circles as stated by Kornai in The Road to a Free Economy.
When this book was about to republish, I saw Kornai's new autobiography, By Force of Thought,(2) at the president's office of Shanghai Century Publishing Group. According to the book, The Road to a Free Economy was originally titled A Passionate Pamphlet in the Cause of Economic Transition in Hungry, and, when the book was published in the United States, Kornai altered the title to The Road to a Free Economy – Socialist System Transformation – The Example of Hungary, to pay tribute to The Road to Serfdom by Friedrich Hayek.(3)
Hayek, an Austrian economist, is one of the most renowned figures in economic neo-liberalism. As a political philosopher, Hayek relentlessly attacked socialism. In the debate on economic calculation problem in 1920s and 1930s, Hayek argued that it was impossible for a socialist economy to have proper economic calculation (or only possible in theory, but not in practice) and therefore it was impossible to ensure efficient resource allocation. In fact, this argument had already been thoroughly challenged by other economists such as Polish economist Oskar Lange.(4) The debate is known by almost every researcher in socialist countries. However, it seems Kornai was ignoring the history and was trying hard to herald Hayek's theory as early as in 1990 – he was decidedly trying to paint himself as the successor of neo-liberalism and Hayek. In 1991, I said he “went too far”, and it seems Kornai has gone much further in the last two decades.
In By Force of Thought, Kornai explained that the most important message from The Road to Serfdom was that there was no third road and the third road did not exist. He added that he had used hundreds of pages in The Socialist System(5) to support an idea, namely, no internal reform within a socialist system could remedy socialism itself.
In fact, the Communist Party of China and the Chinese people were working hard to explore a road of socialist market economy with Chinese characteristics, which is different from both the traditional centralized planned economy and the so-called free economy defined by neo-liberalism, or to certain extent, a “Third Road”. Unfortunately, when By Force of Thought was published in 2005 and 2006, and even when he wrote the preface for the Chinese version of the book in 2011, Kornai remained completely indifferent to the great achievements in China's socialist market economy reforms. In 1991, I called his conclusions “premature”, and now I am quite confident to claim that his ideas prove wrong and are certainly outdated.
As a member of the Communist Party of China, a Chinese citizen, and a researcher for the Party, I had completed a detailed research report on the choice of socialist market economy (1990), which coincided with the publishing of Kornai's The Road to a Free Economy. My report triggered great interest among Chinese policymakers and officials. It should be noted that my conclusion, namely China must embrace socialist market economy, was based upon China's practices in reform and opening-up, and my theories alluded to and echoed with Oskar Lange, Virlyn W. Bruse(6), and Ota Sik from Czechoslovakia(7) as well as other comparative economics researchers of the Soviet Union and East Europe. I was particularly impressed by Oskar Lange and his two important pieces of advice to socialists. The first was made in the great debate in 1920s and 1930s when Lange stated in a sarcastic tone that socialist medals should be granted to devil's advocates like Ludwig von Mises and Hayek for their constant reminder of the market issue.(8) Another advice from him was that socialists should never give up “the great legacy from Karl Marx” just as socialist countries should not neglect the importance of a price mechanism.(9) His advice has offered me enormous value throughout my academic career.
Upon the reprinting of this book, I decided to change the book title to The Road to China's Socialist Market Economy. On one hand, it hints the research and exploration on socialist economic system, which can be traced all the way back to Lange, still carries on developing and expanding; on the other hand, the book offers a direct answer to Kornai's The Road to a Free Economy, making it clear to the world that Kornai's road is not the only path for all socialist countries.
Most articles included in the book were written in late 1980s and early 1990s, in tandem with the turbulent East European reforms and the collapse of the Soviet Union. My research back then focused exclusively on the topic of how China could shift from a socialist planned economy to a socialist market economy, covering a plethora of key theoretical and practical issues on economic transformation. Here are a few issues and breakthroughs regarding China's economic transformation that I've explored during that period.
1. Correct Assessment of China's Social Development Stage (1987)
Almost all socialist countries in the world had confused “socialism development in a poor and underdeveloped country” with socialism development envisioned by Karl Marx upon a prosperous and highly-developed capitalist society. As a result, socialist countries constantly found themselves struggling against the mismatch between theory and practice. My research concludes that we must “step back” from the socialism envisioned by Marxism founders and start admitting that China was still in the primary stage of developing socialism in an underdeveloped country. In October 1987, the report at the 13th National Congress of the Communist Party of China (“CPC National Congress”) acknowledged the view that China's path to socialism starts from a country with vast land, large population and underdeveloped productive forces, which is massively different from the socialism course envisioned by Marxism founders. The fact that China was still in the primary and underdeveloped stage of socialism should not be denied or ignored. All policies, planning and measures from the Party and the government must all base upon such fact. This is CPC's creative theory on “primary stage of socialism”.(10)
The scientific definition of the “primary stage of socialism” and its theoretical breakthrough has significant implications and consequences. Guided by the new theory, restraint over the non-public sector was relaxed, allowing the non-public economy to gradually become an important component of socialist economy. A product-based economy was gradually replaced by a commodity-based one, precluding the natural adoption of market economy. It showed that the clear definition of primary stage of socialism has laid the groundwork, both in theory and in practice, for the relaxation of policies and theoretical breakthroughs and innovation, as well as the subsequent development.
2. China's Socialist Market Economy (1990)
As changes swept East Europe and the former Soviet bloc, the West was dominated by views believing that socialism had failed and neo-liberalism was set to prevail. It was against this background that I completed the research report on the choice and development of socialist market economy in November 1990, using both theories and practices to prove that it's necessary and inevitable for China to embrace market economy. However, with regard to the model, I made it clear that China should not adopt a free market economy but a state-led market economy, or a road to socialist market economy with Chinese characteristics most suited to Chinese reality.
I started my report with the two “major theoretical breakthroughs”– “the primary stage of socialism” and “the commodity economy with plan”, and then went on to argue the necessity and inevitability of market economy. By dispelling “market-phobia”, I tried to clear various ideological and theoretical obstacles and concerns. I cited the achievements in the first decade of China's reform and opening-up to prove the tremendous and “magic” power of market. “What we've done is ahead of what we are thinking,” I wrote. The history has provided us “a unique chance to move towards a state-led market economy by deliberate choice and step-by-step progress”, and “our choice will decide the fate of socialism.”
Then, I highlighted a few points of the proposed state-led market economy model, with reference to other countries:
(1) State maintains centralized power to a large extent. As China is a big country with underdeveloped market conditions, centralized power of the state is necessary.
(2) State controls great economic resources, as opposed to the “market socialism” in Yugoslavia where the economic function of the state and state-owned economy were abandoned.
(3) State adopts effective control measures, as opposed to neo-liberalism which opposes macro-control by state and necessary state intervention.
(4) The role of planned adjustment is not fully denied. However, planned adjustments must go through trial and error in a market system to gradually reach “functional integration of planned and market economy”and to set up a consistent market adjustment mechanism with plan factors.
(5) Public ownership must be the leading form. China's market economy is based upon public ownership (especially in forms of socialist country ownership and state-owned assets) and coexists with other ownership.
(6) Market economy is the fundamental structure of the national economy, and the economic foundation is a market economy with market mechanisms and adjustments.
The report ended with a statement: “Learning to manage a market economy, especially a modern market economy, is the most serious and pressing political and economic task for a proletariat party, communists, Marxists and all socialists. Our success in accomplishing this task of historic significance will silence the bourgeoisie and their politicians and thinkers.” The report continued, “For China, as long as we hold clear objectives, stand firm and seize the opportunity in the last decade of the 20th century to develop state-led market economy, we will surely see the revitalization and rising of our nation, as well as a golden age of socialism in early 21st century, or no later than mid-21st century!”
Deng Xiaoping's South Tour in the spring of 1992 put an end to the debate whether socialism can be compatible with a market system, and China's market-oriented reforms started to boom. In October that year, the 14th CPC National Congress, in accordance with Deng's instructions, made a decision of historic significance that China's economic reform is to develop “a socialist market economy”. The following Constitution amendment also acknowledged in Article 15 that “the State practises socialist market economy”. Since then, China's socialist market economy started to grow in a rapid, steady and sound manner.
3. Feasible Socialist Joint-stock System (1986–1990)
In developing a socialist market economy, the biggest challenge lies in the attitude towards public ownership, especially the possibility of the coexistence of state ownership and market economy, which is crucial to whether socialism and market economy can be integrated. Therefore, in years of following China's reform and opening-up, I have devoted a great deal of time and efforts to understand, explore and address the issue, which is the biggest, most complex and inevitable challenge in China's socialist market economy development.
As early as in the joint-stock reform pilots in Shanghai in mid 1980s, I was involved in the research, study and theoretical exploration for the pilot reform program as a member in the “socialist joint-stock research group”, an advisory team for the municipal government. In my article entitled Feasible Socialist Joint-stock System in 1990, I suggested that “the implementation of shareholding system can be regarded as a breakthrough and a window of opportunity for reforming all property relations in state ownership and other forms of public ownership”. The article put forward an analytical framework for property ownership and eight specific proposals for reform, including the following with regard to state ownership reform:set up State-owned Asset Supervision and Administration Bureau (or Commission) as well as state-owned investment and holding companies to be in charge of state-owned asset management and value growth;along with the independence of state-owned assets, adopt the “horizontal dissection” and “vertical dissection” of state-owned assets to ensure asset diversification; adjust and reform property ownership based on the existing categorization of state-owned enterprises. Building on this basis, the joint-stock system reform can be implemented as an effective enterprise organizational structure to ensure the integration and compatibility of state ownership and market economy.
Two new articles in the reprinted edition, namely On the Study of Public Ownership Forms, which further argues that joint-stock system and joint-stock cooperative system are the best ways to implement public ownership; and Approaches for State-owned Enterprises to Adopt Modern Corporate System which emphasizes that state-owned enterprises, in process of ownership reform, must embrace modern corporate system by regulating internal governance structure, further specify property right relations, improve corporate governance structure, and tighten contractual restraints, all in order to maximize economic profits and efficiency of the state-owned assets and property rights, and ensure the effective integration and compatibility with market economy.
Based upon China's experiences and relevant studies on state-owned sector reform, the 16th CPC National Congress in November 2002 decided to “introduce the joint-stock system to develop a mixed sector of the economy”.(11) In October 2003, the Third Plenary Session of the 16th CPC Central Committee decided that “we must be dedicated to developing a mixed ownership economy with state capital, collective capital and non-public capital to realize multi-source investment structure and to cement joint-stock system as the main form in the implementation of public ownership.”(12) This signaled that the Party and the country have found a way to deepen state sector reform, essentially by ensuring joint-stock system as the major approach to implement public ownership (including state ownership). It also meant that, although we have a long way ahead of us, as long as we carry on down the right path, it will surely lead to even greater progress and achievements.
Now we can declare to the world with confidence and pride that China has found the solution to the “puzzle of the century”, namely whether state ownership can coexist and stay compatible with market economy in a socialist country. We are also envisioning greater success and a magnificent future for China's socialist market economy.
4. On Great International Economic Circulation (1988)
The center of the debate lies in how to understand and deal with the relationship between domestic and international markets in a correct manner, upon which domestic and overseas development strategies can be developed accordingly, making it a vital and inevitable question which demands an answer.
Soon after the “Great Circulation” concept was put forward, I made a response by voicing in an article(13) the following opinions regarding the theory of Great International Economic Circulation:
(1) In addition to the great international circulation theory, I proposed that both domestic circulation and international circulation are vital for China, and in fact, China should mainly rely on its domestic market.“Domestic circulation, or the domestic market, should be the key. As a big country, China cannot afford to neglect its market at home.” I argued.
(2) To center on domestic circulation, China “must improve the agricultural infrastructure and meet the huge demands in rural areas”. As China's vast rural areas provide industry and national economy in general with an expansive domestic market, we can ensure a shared boom of“agricultural and industrial production”.
(3) “A solid domestic market can provide a stable and strong foundation for China to participate in international economic circulation,” and “China can make better use of its comparative advantages for greater returns.”
(4) Labor-intensive production mentioned in the “great circulation” has its own flaws. Instead, China “should push ahead industrial development in a multi-tiered manner”. Otherwise, it's hard for China to transform from a polarized economy to a mature developed economy with industrialization and steady growth.
(5) At the same time, we need to “open up on all fronts and diversify export structure” in order to “avoid being subject to significant market impact due to a less than diverse market and international economic fluctuations”.
5. Sannong Issue: Top Priority for China (2005)
The issue of integrating public ownership with market economy is not only about state ownership coexisting with market economy, but also the compatibility of “collective ownership” in rural areas, a major component of public ownership, and market economy.
Over the past years, my research has always been focused on China's agriculture, farmers and rural area issues, and I have spared no efforts in calling for reform in rural land ownership reform(14). The key finding of this paper is: the issue of farmers is the key, and the fundamental issue for farmers is land. A key priority in addressing China's Sannong issue is to reform China's land ownership system. In my article, I made the following proposals: re-design the rural land collective ownership system; give all land right (except for the ultimate ownership)(15) to farmers once and for all in a quantifiable manner.(16) Rights to rural land can be priced, marketed and circulated in forms of own operation, subcontract, lease, capital input and loan collateral – in other words, farmers can freely trade their rural land rights. By doing so, rights to rural land, or rural land use rights, can bring farmers a significant amount of assets and wealth. Farmers then can monetize their rights of rural land to enjoy “property income”. Meanwhile, it will bring a series of unexpected and enormous economic and social gains. As I wrote in my article, “It's another significant institutional reform and innovation in rural China that bears little cost but can generate significant and positive economic and social influence – as the household contract responsibility system that once greatly boosted agricultural productivity and rural economy, the reform is also expected to effectively address the challenging Sannong issue and to provide a solid foundation for a new round of sustained and rapid economic development.”
6. Explorations and Thoughts on China's Capital Market (1992–2008)
A capital market is the “lifeblood” to economic development and is an indispensable component of the market system. Its fundamental role is to seek optimal allocation of resources. China's joint-stock reform to revitalize the state-owned sector and the whole public ownership economy is in need of a capital market, mainly a stock market. I've included a new article upon the reprinting of the book, General Proposals for China's Securities Market Development, which was published first in 1992 on the development of a securities market in China. Drawing from experiences of overseas markets and based upon China's own conditions, the article puts forward a comprehensive and systematical proposal and implementing plan for developing a securities market in China, in particular a stock market.
In 2008, China was hit by two financial crises: the international financial crisis triggered by US subprime loans, and a domestic stock market crisis. As for the international financial “tsunami”, I noted in the Afterword of the book that China should “steadily push ahead financial reform and opening-up to gain a competitive edge in the international finance system”. I wrote that we must “learn from the past lessons of others and our own”, and “the failing of neo-liberalism free market economy does not mean the end of market economy”. “In term of China's socialist market economy development, we have to deepen market-oriented reforms” with the focus on building up “a mature financial market (including a stock market) and an efficient financial system”, and China must “improve our service and professional capabilities to enhance long-term financial competitiveness”, I stated. At the end of the chapter, I emphasized the need to “seize the current favorable opportunity to effectively attract excellent financial talents” and “Just as China recruited Tsien Hsueshen in 1950s to develop China's own nuclear weapon system, we have to concentrate resources to gain an advantageous position in international financial system and to make an appropriate foreign financial strategy for the effective prevention of international financial risks to safeguard China's financial and economic security. We can dance in the international financial tide to combine financial capital with industrial capital, virtual economy with real economy, in a way to make China a super economic power underpinned by great financial strength and economic strength.” That's what I have been longing to see for years, and an objective worth pursuing in developing a socialist market economy.
7. China's Strategies and Policies for Economic Security (2001)
This chapter, written in 2001, is a new addition in the reprinted edition. In the context of globalization, knowledge economy and information age as well as a new post-cold war perspective of national security, there are new requirements now for China to make good use of both domestic and international markets and resources to mitigate financial risks and safeguard national economic security. It's a test of the adaptability and resilience of China's socialist market economic system, and it's a challenge for Chinese policymakers and people to stand firm and carry on the success story amid a complicated and changing world – China must handle the new waves of challenges in a careful manner to avoid being overwhelmed and maintain its pioneering and leading position in the world.
8. New Changes and Innovations in Economic Methodology (2001)
This chapter is an excerpt from an international policymaking advisory report completed in 2001. It begins with the following statement: “The 21st century is full of changes and uncertainties with technology, economy, politics and international relations all in transformation. The world is witnessing an unprecedented information revolution empowered by digital and internet technologies, a revolution set to profoundly change the way of production, work and living of human beings. Human beings are upgrading rapidly from an industrial society to an information society, marking the dawning of an information-based, knowledge-centered and globalized era.”The paper continues, “Despite being deeply involved in the globalization, China's economic and cultural development is far from fully integrated with other parts of the world – China has to change its theoretical paradigm, perspectives and ways of thinking to keep up with the time.” “The post-Cold War international political and economic situation has undergone tremendous changes, and human civilization is at a crossroads. We need to use our own wisdom to discern the direction in the future, to face the new era in a new spirit, and to deal with globalized issues with a new theoretical paradigm and perspective.” The theme and key message of the chapter is that this new way of thinking is not only a requirement for economics researchers but also for all citizens, especially the decision makers.
That's all I would like to share with you. The political economics of a transitioning China is not a grand theory, but it offers an extensive coverage of what's happening in China.
Today, we must tell people at home and abroad, especially the young generation, that the Chinese economy's transition from a planned economy to a market one under the leadership of the Communist Party of China is a history-defining experience. It's a declaration to the world: socialism is not dead. At least in China, socialism has gained new momentum. However, we must also acknowledge the arduous path of this transition and the hardship we have experienced on the way. The debate about which model to choose, namely the neo-liberalism free market economy or the socialist market economy, a seemingly theoretical argument, is in fact a serious struggle about fate and a crucial choice to make for the path ahead. At the turning point of history, the breakthrough from conventional wisdom and the emergence of new guidance theories can be vital for the future. As such, we must recognize the value of theory, and the extreme importance of theoretical breakthroughs and innovation. Marxism has a basic concept that all theories come from practices, and at the same time, theory, a summary and conclusion of practices, is always higher than practices as it can guide practices and point the right direction. As a researcher, I share the luck with many other economists who have witnessed China's reform and opening-up practices in the three decades. However, we are also required to draw theories from the fertile soil of practices to contribute to theoretical innovation, to make its due contribution as it's the historical responsibility and mission for a communist researcher. As for me, I am honored to participate in the study of China's transition from a planned economy to a socialist market one. I always use this analogue to describe my understanding of my research: Like a drop of water in the sea, which will evaporate instantaneously on its own, my research is only valuable when being put into the context of this great course of China's socialist market economy development.
That ends what I would like to say upon the reprinting of this book.
Xu Guihua
November 8, 2013
Fudan University, Shanghai
(1)This is the preface to the second edition of the Chinese version.
(2)The full name of the book is By Force of Thought: Irregular Memoirs of An Intellectual Journey, and the Chinese version of the book was published by Shanghai People's Press in 2013; the Hungarian version of the book was published by Osiris Press in 2005. The revised English version was published by MIT Press in 2006.
(3)János Kornai: By Force of Thought, Chin. ed., Shanghai People's Press, Shanghai, 2013, p. 360.
(4)Xu Guihua: “On Lange's Market Simulation Model”, World Economic Papers 1990, Vol. II, December 1990.
(5)The book was published in 1992.
(6)Xu Guihua: “Review of Bruse's Decentralization Model”, An Initial Exploration of Comparative Socialist Economy Theories, Chin. ed., Shanghai Social Sciences Press, Shanghai, March 1992.
(7)Xu Guihua: “Review of Sik's Macro-Distribution Plan”, An Initial Exploration of Comparative Socialist Economic Theories, Chin. ed., Shanghai Social Sciences Press, Shanghai, March 1992.
(8)See article “Declaration of China's Socialist Market Economy” in this book under Chapter II.
(9)Oskar Lange Poland, Socialist Economics.
(10)Deng Xiaoping pointed out that “the report [of the Twelfth Central Committee] to the Thirteenth National Congress of our Party represents a collective effort, concentrating the wisdom of thousands of people” and that “the political report to the Thirteenth National Party Congress was approved by the congress, and not a single word of it can be changed”. Selected Works of Deng Xiaoping, Vol. III, Eng. ed., Foreign Languages Press, Beijing, 1994, p. 253, 288.
(11)Documents at the 16th National Congress of the Communist Party of China, Eng. ed., Foreign Languages Press, Beijing, 2002, p. 31.
(12)CPC Central Committee's Decision on Several Issues of Improving Socialist Market Economy, Chin. ed., People's Press, Beijing, 2003, p. 14.
(13)“Thoughts on China's Marching into International Economic World”, published in Liberation Daily on March 2, 1988, and “Strategic Thinking on Domestic-International Circulation and Integration”on the fourth issue of World Economic Papers in 1988.
(14)See Afterword of this book.
(15)Including the rights to occupy, use, distribute and gain, or briefly referred to as use right.
(16)Different from land privatization, the ultimate ownership remains in hands of rural collectives, thus preventing any losses in collective-owned assets for farmers still collectively own land.