China's transition from a planned economy to a market economy began at the end of 1978. When China started the process, the government did not have a well-designed ‘blueprint’, and so the approach to reform can be characterized as experimental. The process of reform has been gradual and incremental in nature and is still incomplete. In fact, China can’t be treated as a full market economy nor can it be treated as a centrally planned economy in which the Government substantially influences prices of goods or monopolises international trade. It is somewhere in between.
1) The introduction of enterprise taxation.
2) The new wage system which linked with the productivity of workers (this would give workers incentive to work harder as they’d get paid more. Getting paid more than others would motivate them further now that pay isn’t equal.)
3) A new system of banking finance for enterprise investment.
4) The decentralisation of foreign trade through a rapid increase in the number of foreign trade corporations.
Prior to 1978, prices of all major commodities were controlled by the Central Government, and those of virtually all less-important commodities were set by local governments. Price inflation barely existed prior to reform, and many prices remained fixed at the same level for decades.
Price reform has allowed the introduction of freely-operating market signals in most sectors of the economy. Liberalising prices has allowed supply to be much more responsive to demand from consumers. Price reform is now almost complete as most prices have been substantially deregulated and the state’s role in guiding or fixing prices is now minimal.
By 1994, over 90 per cent of retail prices and approximately 80 per cent of agricultural and producer goods prices were determined by the market.
Source of charts: http://www.dfat.gov.au/
Prior to 1978, China aimed at ‘self-sufficiency’: it would import only the goods it couldn’t produce locally and would export only to pay for essential imports. Trade was monopolised by centrally controlled Foreign Trade Corporations, under the control of the central Government ministries. Other trade was not permitted.
Also, exports had state controlled prices set by the Foreign Trade Corporations under the foreign trade plan. Similarly, imports were sold to domestic firms and consumers at state controlled prices.
Fortunately, the trade regime has been significantly liberalised. China’s Open Door policy has dramatically reversed the ‘self-sufficient’ position of pre-1978, welcoming foreign investment and trade. Increasingly, China’s imports and exports are being determined by market forces. The ratio of imports and exports to Gross Domestic Product is 42:100 and China is now the 10th largest trading nation.
Formal trade planning has been abolished, but a number of central foreign trade corporations and large state-owned enterprises have...