Zhang Liqun, Department of Macroeconomic Research of DRC

Research Report No. 157, 2005

I. Analysis and Evaluation of the Mode of Economic Growth during the Period of Planned Economy and Industrial Take-Off

The planned mode of economic growth lasted roughly from 1952 to 1978. In terms of the economic system, the basic feature of this mode was that it was associated with a highly centralized planned economy. In terms of mode of development, it emphasized the development of heavy industry and the industries of the means of production. It also emphasized the independent building of a relatively complete industrial manufacturing system.

The overall efficiency of this mode of economic growth can be examined from two angles. One is to examine the level of all-factor productivity and the other the contribution of this mode of growth to the process of China’s industrialization and modernization. In accordance with the afore-said framework for quantitative analysis, some economists[1] calculated the level of all-factor productivity of China’s state-owned industrial enterprises for the 1953-1978 period (as the state-owned sector and the industrial sector during this period constituted the principal part of the national economy, the above analysis can be approximately regarded as an analysis of the overall efficiency of economic growth). In their calculation, the value of α (expressed as the weightsof definite capital and labor in concrete analysis) was worked out through estimation based on a measuring model. Specifically, the weight of capital was 0.582 and that of labor was 0.418. The equation of factor demand took profit maximization and full competition as premises. The all-factor productivity was expressed as the contribution of technological advance to economic growth. The result of calculation was that the average annual growth rate of the net industrial output value of all state-owned independently-accounted industrial enterprises during the 1953-1978 period was 10.71 percent. Specifically, the contribution rates of capital input, labor input and all-factor productivity (defined as technological advance in this analysis) were respectively 63 percent, 28 percent and 9 percent. Overall, the efficiency of economic growth was not high. But this growth played an irreplaceable historical role in pushing forward industrialization and modernization. Under the then prevailing circumstances, there could be no industrial take-off without this mode of economic growth. It would also be impossible to form a relatively complete industrial manufacturing system, to produce atomic bombs, missiles, satellites and other sophisticated products, and to rank China among world major powers with increased overall national strength. And without these foundations, it would be unthinkable for China to reform and open up and to comprehensively push forward the process of industrialization and modernization. We may say that during this historical period, the Chinese people laid a historic foundation for their country’s independence and all-round economic prosperity by living a frugal life and by working hard. One can never overestimate its historical value.

The above analysis indicates that a mode of economic growth is an objective product of historical evolution. The efficiency is manifested not only in the process of growth, but also in the value of this growth in that historical period.

Discussions on this mode of growth began precisely from evaluating the efficiency of economic growth. This was also the starting point to push forward the change of this mode of growth. In the mid-1950s, economists and economic workers began to see and analyze the drawbacks of the planned economy that ignored the law of value and the importance of efficiency. They urged to pay attention to the problem of sparing no expense in productive activities. They discussed the necessity of and methods for changing the extensive road of development. They put forward the idea that the system of the planned economy should be reformed according to the law of value. In the 1960s, they introduced the concepts of "extensional growth" and "intensional growth"from the then Soviet Union and analyzed the pros and cons of the two concepts. Proceeding from there, they made a further analysis of the low efficiency of economic growth under the system of planned economy. In all these discussions, they began to notice the efficiency of capital and labor use in the process of economic growth and formed the concepts of extensive, intensive, extensional and intensional economic growth. From our current understanding, these features are determined by the specific mode of system and the specific mode of development. The root-cause of sparing no expense lay in the system of planned economy; emphasizing the launch of new projects was necessitated by the objective demand of industrial take-off. From the perspective of historical evolution, the eventual force to change the mode of economic growth characterized by the planned economy and industrial take-off was from the inherent contradictions of the mode of system and the mode of development.

II. Analysis and Evaluation of the Mode of Economic Growth during the Period of Moving from the Planned Economy to a Market Economy and Adjusting the Structure of Production

This period lasted roughly from 1978 to 1995. The basic features of this period were the gradual transition from the planned economy to a market economy in terms of economic system and the growing dependence on market mechanisms to rectify the structure of social production arising from leapfrog development in terms of the mode of economic development.

The transition from the planned economy to a market economy and the ensuing adjustment of the structure of production were a result of the accumulated contradictions between the development of social productive forces and the relations of production. The transition and adjustment were also indispensable forms required to solve these contradictions. Therefore, they were an objective inevitability of history.

The mode of economic growth during this period began to emphasize economic accounting and market demand. As this period coincided with China’s reform and opening up, the increase in productivity arising from advances in system, mechanism and technology was highly noticeable. Accordingly, the increase in efficiency from the perspectives of the combination and use of factors of production was also exceptionally tangible. The World Bank estimated that during the 1978-1995 period, the contribution rate of China’s all-factor productivity to economic growth was 43 percent. Zheng Jinghai and Hu Angang estimated that the average annual growth rate of all-factor productivity during this period was 4.64 percent and its contribution rate to economic growth was 47.3 percent. Compared with that in the 1952-1978 period, this contribution rate was more than 30 percentage points higher.

After the mid-1980s, economists made deeper discussions on the mode of economic growth in light of the chronic problems associated with China’s handling of the relationship between speed and efficiency in its economic development and in light of the dramatic fluctuations in development speed and serious inflation. Many scholars wrote papers to advocate that the "quantitative" economy should be replaced with a "qualitative" economy, that the "speed mode of economic growth" should be replaced with a"structural mode of growth", and that the "expending" mode of growth should be replaced with an"efficiency" mode of growth. Some papers used positive analysis to describe and diagnose the history of China’s extensive mode of economic development. All these discussions focused on how economic growth manifested itself in the use of resources. They failed to profoundly analyze the inherent links between these forms of resource use and the mode of economic growth. We should note that in the course of the formation of this mode of economic growth, both the structure of system and the structure of production underwent extremely drastic changes, and that the rectification by market mechanisms of the relations between production and consumption and of the structure of production was exceptionally violent. This state of affairs led to the characteristics of the use of resources such as high input, high output and low-level rapid expansion. The form of resource use was an expression of the inherent characteristics of this mode of growth and also an outcome of the changes in systems and structures. It was an objective inevitability. What was truly noteworthy was the inherent contradictions of this transitional economic system and mode of development, which represented the fundamental cause for the mode of economic growth to change further.

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[1]Li Yining, Qin Wanshun&JinYunhui: China’s Economic Growth and Fluctuations, China Planning Publishing House, 1993