Understanding the Chinese economic model

Whether you’re a “tankie” or a “globalist”, the rise of China has been one of the most remarkable success stories of the post-1991 era. From a nominal GDP per capita of a meagre $318 in 1991 to a mammoth $10262 in 2021 (a 3200% increase in 30 years), the Chinese economic model is arguably one to emulate for many countries in the global south. While many on the Left may attribute China’s rise to the “success of socialism” and those on the Right may call it “the magic of free markets”, the answer lies somewhere in the middle.

The Chinese Communist Party (CCP) states that China’s economy is a “socialist market economy” because of the nationalization of the financial sector; the existence of state-owned companies; public ownership of land; the implementation of 5-year plans; and the immense presence of worker cooperatives. Chinese commentators complain that the West attributes any success of China’s to “capitalism” while any of its failures is attributed to “socialism”.

Others, however, may state that due to free market mechanisms dictating economic output, imports, and exports; private ownership and land-leases being permitted; state-owned businesses that operate for profit; and national banks that operate overseas and charge interest, China is effectively capitalist.

As I said earlier, the answer is in the middle. China’s economic model of the “socialist market economy” actually resembles the East-Asian capitalism of Asian Tigers countries like Singapore, Taiwan, and South Korea. This approach neither fits in with Stalinist dogma of central-planning, nor does it fit in with Neoliberal dogma of free-markets and deregulation. In fact, East-Asian capitalism takes the best of both worlds while rejecting the larger idiocies of both approaches. I argue that China maintains two distinct economies: one dominant East-Asian capitalist, and one smaller market socialist.

Different forms of Capitalism and Socialism

First and foremost, it is important we define our key terms and set benchmarks for effective comparison. For the purpose of this piece we will be working with four key terms: Socialism, Market Socialism, East-Asian Capitalism, and State Capitalism.

Socialism, according to the economist Włodzimierz Brus in The Economics & Politics of Socialism, is, “the predominance of the social ownership of the means of production”. This can mean ownership by the state as a representative of the people, or direct ownership by the workers. The Chinese “socialist market economy” model mainly practices the former, and the latter usually follows the principles of market socialism. In the traditional Marxist sense socialism springs out of capitalism, leading to the abolition of private property (NOT personal property).

According to economist Phillip O’Hara, in Encyclopedia of Political Economy, market socialism is when the “Market mechanism is utilized to distribute economic output, to organize production and to allocate factor inputs. On the other hand, the economic surplus accrues to society at large rather than to a class of private (capitalist) owners, through some form of collective ownership of capital”.

Economist Seung-Wook Baek suggests that East-Asian capitalism (the likes of which are practiced by the Asian Tigers) includes “state control over finance, direct support for state-owned enterprises by the government, import substitution industrialization in heavy industry, a high dependence on export markets, and a high rate of domestic savings”. This form of capitalism is very closely related to state capitalism (in fact, I argue that China adapts the East-Asian Capitalist model and enhances the feature of State Capitalism within in it).

Marxist academic Raymond Williams, in Keywords: A Vocabulary of Culture and Society, defines state capitalism as an economic system in which the “state undertakes commercial (i.e. for-profit) economic activity and where the means of production are organized and managed as state-owned business enterprises, or where there is otherwise a dominance of corporatized government agencies (agencies organized along business-management practices) or of publicly listed corporations in which the state has controlling shares”.

Based off of these definitions, this piece will now evaluate the role of collectivization; land ownership; SOEs, private enterprises and the financial system; and worker cooperatives.

Collectivization of agriculture

Collectivization of agriculture in China began slowly in 1950 when Mao called for the organization of ‘Mutual Aid Teams’ to adopt collectivization in a “step-by-step” process. He further emphasized this in a speech in 1955, however, only 18 months later, Chinese agriculture had been almost completely collectivized. Official data suggests that by 1956, 87,3% of all farms were “Higher-Stage Agricultural Producer Cooperatives” and 8,5% were “Lower-Stage Agricultural Producer Cooperatives.”

During the Great Leap Forward, Mao went a step further and organized these collective farms under larger People’s Communes which became a level of local government under the jurisdiction of the central state. The communes contained not only agriculture but also small steel & industrial units.

Judging by the definition of socialism we can see that Chinese agriculture during the Maoist era can be classified as socialist: the land was controlled by the state and any management of the land was done by collectives. But a contentious area here is that the grain produced was for the state, with compensation to the farmers made in the form of fixed wages (as Socialism should technically include the abolition of wage labor).

Furthermore, in the orthodox Marxist sense, the material conditions for socialism must arise out of capitalism and not before it. The fall of the Qing dynasty in 1911, the warlord era and the 21-year rule of Chiang Kai-Shek under constant civil wars and Japanese invasions, did not in any way develop the productive forces for capitalism . So while Mao may have implemented socialist policies that failed drastically, it could be stated that Mao effectively abandoned orthodox Marxist thought himself, implementing what he thought was socialism before capitalism could even take root in China.

But after the death of Mao and the end of the Cultural Revolution, things changed. Following experiments since 1979, Deng Xiaoping adopted the “Household Responsibility System” in 1981. Under this system, farmers living in a collective would divide plots of land amongst themselves for individual farming which resulted in greater productivity. When Deng institutionalized this practice, farmers were allowed to work their piece of land for profit in return for delivering a set amount of produce to the collective at a given price, and were subsequently allowed to sell the remainder of their produce on the market.

Many on the Left may point to the fact that since the land is still owned by the state and managed as a collective (even though farming is done individually), it technically isn’t decollectivization. However, as we see that farmers had the individual liberty to use their portion of the plots as they wished, and sell a major portion of their grain in the free market, The Household Responsibility System resembles moreso East Asian Capitalism with an infusion of State Capitalism, since the land is still owned by the state and the state does take some produce from the farmers while allowing them to sell in the free market. Hence, we can see that in terms of agriculture, China resembles East Asian Capitalism as it is now decollectivized.

Land ownership

Land ownership is another point put forward by Leftists when arguing that China is a socialist state, as they argue that state or public ownership of lands in China supports their argument. To an extent they are right, as rural collectives own agricultural land and the state owns urban land. However, Article 70 of China’s Property Law allows for ownership of exclusive parts within an apartment building, which endorses the individual ownership of apartments.

In fact, Article 13 of the Chinese constitution proclaims that: “the lawful private property of citizens shall be inviolable. The country shall protect in accordance with law citizens’ private property rights and inheritance rights. The country may, as necessitated by public interest, expropriate or requisition citizens’ private property and pay compensation therefore”. As socialism seeks the abolition of private property (not to be confused with personal property which Marx fully supports), China’s constitutional protection of private property cannot qualify it as a socialist country.

In opposition to this claim, some Leftists make the claim that in urban areas the land is still under Chinese state ownership and that individuals may only lease the land from the government for 70 years. However, this exact approach also exists in Singapore where the government owns all land and individuals may lease it for a period of 99 years. If leasing land from the government is “socialism”, then Singapore is socialist (which we know, it isn’t). This further proves that China’s current economic model resembles Asian Tiger countries like Singapore instead of the USSR or Maoist China.

SOEs, Private Enterprises, & Finance

A State-Owned Enterprise (SOE) is a business enterprise where the state has significant control through full, majority, or significant minority ownership; in contrast, a private enterprise is a business unit established, owned, and operated by private individuals for profit, instead of by or for any government or its agencies.

During the Maoist era of consolidation, private enterprises were eliminated and were replaced in major portion by SOEs which operated in a largely closed economy. This meant any revenue collected was given straight to the state, which then gave wages to its workers, implying that Maoist SOEs were socialist in nature.

However, the counter-argument exists that since the revenue was not being redistributed to the workers, and the workers earned wages instead, China was state-capitalist from the beginning, but in a closed economy. This follows in large part from the definition of state capitalism.

Under Deng, China opened up its economy and allowed SOEs to not only compete with domestic companies, but also foreign companies in China and foreign companies abroad. In Maoist times, the economy was closed and competition was strictly limited.

The state, over the course of time, began conducting management buyouts (allowing managers to buy shares) for SOEs that were inefficient under government control and/or started selling shares to raise more revenue while still retaining control. SOEs may be small in number at just 3.1% of total enterprises in China, but they account for close to 30% of assets in the manufacturing & service sectors in China, highlighting their major role in the economy. Their asset size has risen 589% over the last 9 years, compared to 67% for other enterprises, thus highlighting the presence of state capitalism in China.

This led to Chinese state capitalism being adapted to the East Asian capitalist model as SOEs were allowed to compete in the international market, much like what was done in other Asian Tiger countries that promoted domestic companies. Some Leftist critics may mention how the Chinese financial system is still nationalized and under complete state control (as it should be under socialism). However, Chinese banks operate as SOEs, still charge interest, and operate for profit —even in overseas markets— thus debunking this claim.

As SOEs were opened to competition, domestic and foreign private enterprises sprung up and began challenging these SOEs. These private enterprises outperformed SOEs and reduced their value added as a total share of industrial value from 57% to 34% between 1998 and 2008. This practice follows in line with the definition of East Asian capitalism as there is an explicit use of the market mechanism and private competition. Hence, it is confirmed that SOEs and private enterprises in China do not pertain to socialism or market socialism, but instead to state capitalism as an element of East Asian capitalism.

Chinese state media makes the claim that, “in Western economies, SOEs are essentially controlled by a few big capitalists backed by governments and operate to make more and more profits. In [the Chinese] socialist market economy, however, SOEs are owned by the people, and serve as an important tool for promoting modernization and safeguarding the common interests of the people”. While they are right about the West, they are wrong about China themselves.

The purpose of SOEs in the capitalist world is to “safeguard the common interests of the people” while maintaining profitability. The Brits did this with their nationalized railways; the Indians do it with their defense, energy, banking, and aviation sectors; the Singaporeans do it with telecommunications and transportation. China isn’t exempt from the laws of global capitalism, especially as it tries to expand its SOEs’ profitability with the Belt-and-Road Initiative.

On one point, however, many Leftists are right: China continues to use 5-year plans to plan its economic path forward, and this approach is incompatible with orthodox libertarian and neoliberal economics. 5-year plans were a relic of Stalin’s economics in building up the Soviet Union from an agrarian backwater to an industrial superpower in less than 12 years. But 5-year plans weren’t just limited to socialist states. In fact, the golden days of South Korea’s economic growth were conducted using 5-year plans where General Park Chung-Hee even nationalized the financial system. If these criterions qualify as “socialism”, then South Korea was socialist from 1962-1996. But we know that South Korea could not have been socialist because it was propped up as an American bulwark against the Soviet-controlled North. In fact, even the Kingdom of Bhutan makes 5-year plans.

Therefore while such plans did start with socialist developmental goals, to call them exclusively socialist would be factually incorrect. However, it would be correct to say that they are in no way neoliberal. This further confirms China’s economy to be closer to that of the Asian Tigers under East-Asian capitalism than either full-blown central-planning or the neoliberal model of the West.

Worker Cooperatives

China has an abundance of worker cooperatives, which are businesses owned and self-managed by their workers. Some famous examples include the Mondragon coop in Spain, and the Amul Dairy coop in India. This definition falls under the tent of market socialism as here, workers control the means of production while producing goods and services in a market for distribution.

It is also important to note that worker cooperatives are supported in some socialist circles, and in some non-socialist ones too. For example, Dettopant Thengadi (founder of India’s largest trade and farmer unions) explicitly supported worker cooperatives but didn’t support it as a socialist policy, but rather as a “traditional Hindu economic policy”. The famous Mondragon cooperative was also started by José María Arizmendiarrieta, a Catholic priest. But it is in China where they are seeing a great resurgence.

By encompassing a third of the rural population and handling a quarter of the agricultural produce of China, these cooperatives flourished before the Great Leap Forward nationalized all land and converted them to state collectives. However, they began to re-emerge and grow and now boast 160 million workers producing close to $320 billion worth of produce for the economy. These worker cooperatives are completely autonomous from state ownership.

Cooperatives may be agricultural, industrial and service-related, and are represented by the All-China Federation of Supply and Marketing Co-operatives (ACFSMC). These examples clearly reflect the case of market socialism within China and how it operates as a private entity within the free market, but separate from the East Asian capitalist model of the majority of the economy.

Although the numbers show that these cooperatives have considerable labor and financial strength, workers in cooperatives make up only ⅕ of China’s workforce. Furthermore, cooperatives contribute only a meagre 3.3% of economic output as they are prominent in labor-intensive industries, thus highlighting the dominance of the East Asian capitalist model.

Conclusion

China runs two distinct economies: one larger East-Asian capitalist economy, and one smaller market socialist economy. While the East-Asian capitalist economy dominates its market socialist counterpart, Chinese President Xi Jinping announced that China would seek to “achieve advanced Socialism by 2050”. The notion here is that China was, and is, in the earlier stages of “socialism” (hence they call their economic model a “Socialist Market Economy”). I personally prefer the Vietnamese description of this instead, as they call their similar economic model a “Socialist-Oriented Market Economy” which doesn’t falsely imply that they are socialist, but that they aim to achieve socialism once enough productive forces have been developed.

Effectively, China’s economy resembles more the economy of Singapore, South Korea and even Taiwan than it does of either the centrally-planned USSR or market-socialist Socialist Yugoslavia. Time after time, it has been proven that for an economy to industrialize from a poor, agrarian, or feudal economy to a strong capitalist (and even a potential socialist economy), the state needs to play a strong role with formulating industrial plans while enabling a domestic market that can consume goods and an export market that can buy the surplus. Countries like India, Vietnam, Bangladesh, and Indonesia *must* stick to this indigenous and successful approach rather than destroying state capacity by following the failed neoliberal economics of the IMF.

For many on the Left, it won’t do them harm to admit that China’s rise doesn’t have all that much to do with “socialism” and instead has more to do with East-Asian capitalism. According to Marx himself, socialism must arise from the contradictions of capitalism. For those on the Right who are brain-poisoned with the dogma of free markets and deregulation, I am very sorry to say that this approach doesn’t work for anyone except oligarchs. In the West, it has stagnated living standards and wages while exacerbating inequality and in the East it has destroyed state-capacity.

Nonetheless, China’s growth story will be taught to many children and graduate students around the world. But until China can set in legislation and mechanisms to help the domination of the market socialist economy over its East Asian capitalist counterpart, or perhaps create a new base-and-superstructure that replaces their current mode of production, China’s economy will continue to be classified as predominantly East Asian capitalist.

-by Alexei Arora

(Alexei Arora is a writer on Substack, where he covers geopolitics, elections, political economy and political theory. You can subscribe to his work here, and you can follow him on Twitter @AlexeiArora.)

(This article was first published on the author’s blog and has been reproduced here in full.)


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