In an earlier Diplomat article, Bonnie Girard questions the role of the Chinese Communist Party (CCP) in China’s economic development miracle. She argues that the private sector drives Chinese economic growth, and that the state does not play a significant role in promoting China’s development. Using data from Tencent-backed Webank, which states that “‘roughly 80 percent’ of those 90 million small businesses have no credit with a bank,” she argues that the CCP plays no role in fostering China’s private businesses.
Girard’s article initiates an interesting discussion on how to assess China’s economic policy in the past 40 years. The CCP favors state-owned enterprises (SOEs) over private industries because it views the SOEs as the foundation of Chinese socialism and the party-state regime. Girard is correct that Chinese banks prefer loaning to SOEs rather than to private businesses. The Chinese legal system also gives special treatments to SOEs. This favoritism causes economic inefficiency and stifles private business growth.
Moreover, the key to China’s successful economic performance since reform and opening began is the CCP stepping away from the market. Many of China’s most signature economic policies since 1978 were corrections to Maoist era economic distortions and freed the market from ideological barriers. The Household Responsibility System, which is the dominant source of China’s agricultural production growth, returned to the thousand-year-old family farming system. The Chinese private sector only flourished after the CCP lifted a ridiculous employment restriction, which stated that hiring less than eight people is socialist and employing more than eight people is capitalist exploitation, and enshrined the protection of private ownership in the constitution.
In these cases, the CCP did not make any monumental policy innovation. Instead, it justified existing market policies in socialist acceptable terms. Had the CCP never existed, one might argue, there would be no need for these policies because the initial distortion and ideological barrier might not have existed, either.
However, Girard overlooked the CCP’s two most important contributions to China’s rapid economic growth: the Maoist legacies and a pro-growth environment. Despite the tremendous economic disaster of the 1949-1976 period, the Maoist era placed China in an advantageous position when the country started to integrate with the global economy. The public education and public health systems in the Maoist era left China with a relatively educated and healthy citizenry, which became a major reason for China’s high-speed growth after 1978. In rural areas, the “barefoot doctors” brought modern medicine to impoverished peasants for the first time in China’s history. As a result, life expectancy in China grew from 36 years in 1949 to 68 years in 1982. The literacy rate in China jumped from 20 percent in 1949 to 68 percent in 1982, including a 51 percent literacy rate for women. The “Women Emancipation” movement increased Chinese women’s labor participation rate tremendously. Besides fostering an educated and healthy population, the Maoist period also oversaw the diffusion of light industries from urban centers to rural areas. After the economic reform started, these rural factories transformed into township and village enterprises, which became the backbone of China’s market economy.
After 1978, the Chinese government constructed a pro-growth economic environment. The Chinese government invested massively in infrastructure construction. The robust infrastructure system reduces transportation costs, connects the vast Chinese market, and attracts foreign investment to China. In addition, the Chinese government adopted policies to attract foreign investment, which plays a tremendous role in China’s economic miracle by bringing jobs, technologies, and modern management skills to China. For a long time, foreign companies in China enjoyed a preferential tax rate, lower than Chinese firms. Competition among local governments to attract investment led to amicable terms for foreign firms, such as direct financial support, tax rebates, and even free factories. Furthermore, government funding in research and higher education provides China with the human resources to fuel the rapid economic growth.
Critics might argue that what the CCP did is not exceptional: The Chinese government just did the jobs that Adam Smith referred to in “The Wealth of Nations” as basic requirements for all governments. Critics can also point out the example of the Asian Dragons and argue that China might have achieved this tremendous growth without the CCP. However, many governments in the world, communist or capitalist alike, fail these basic requirements and lead their countries to economic failures. The CCP’s strong state capacity and effective policy implementation led China away from economic failure. Thus, despite its many shortcomings, the CCP deserves credit for generating impressive economic growth.