Essay: The Leap-Forward strategy adopted by China

In October 1949, the newborn People’s Republic of China immediately faced economic and social problems caused by the conflicts during World War II. Indeed, wartime damage to industry and agriculture had been substantial, and hyperinflation was raging (Naughton,2018, p.75), forcing the new communist government to choose a development strategy as soon as possible to overcome these obstacles and restore the economic power China had in the ninetieth century. However, catching up with the United Kingdom and the United States of America was an ambitious goal to achieve for a poor, agrarian economy as the Chinese one. As pointed out by Lin et al. (2003, p.62) with reference to Deepak Lal (1985), at the end of the Second World War, the mainstream theories in development economics held that the government was a powerful means to accelerate the pace of economic development, pursuing a rapid industrialization approach. Therefore, according to this widespread belief, influenced by the successful communist model of the Soviet Union, and forced by the economic embargo led by the USA, and subsequently, by the United Nations, China adopted the “Leap-Forward” Development Strategy. This plan, also known as the “Big Push Industrialization”, aimed at developing the Chinese industrial sector by channelling the maximum feasible investment into heavy industry (Naughton, 2018, p.65), through the implementation of a command-economy system which involved absolute control of the government over every aspect of the Chinese economy. The leap-forward strategy experienced periods of rapid economic growth interrupted by periods of retrenchment, due to political conflicts.
Thus, this essay will endeavour to explain the key elements, achievements and limitations of this economic strategy undertaken by Mao Zedong’s administration, arguing the impact and legacies over the following decades, focusing on the characteristics of China’s command economy and briefly on the role of state-owned enterprises, analysed through a comparison with the Soviet Union’s model.
The choice of adopting a development strategy such as the leap-forward, which features speeding up and prioritizing the development of heavy industry (Lin et al., 2003, p.35), did not meet China’s comparative advantage, as the country showed an abundance in labour force, a fundamental requirement in the development of the light-industry sector, but a shortage in capital, necessary to set up new enterprises and heavy industries. Nevertheless, the Chinese government ignored its comparative advantage confident that developing the heavy-industry sector would have accumulated enough capital to improve living standards and created more job opportunities. In fact, the leaders of the Chinese Communist Party, due to their lack of experience, believed that if they prioritized light industries or consumption industries, they would face a limited market and inadequate demand, as cited by Lin et al. (2003, p.32).
Because heavy industry is a capital- and technology-intensive sector, China had to find a solution to allow infant enterprises to grow and produce more, by implementing a command-economy system controlling every input and output necessary to achieve this goal.
Naughton (2018, p.70) listed the following four fundamental characteristics of the Chinese centrally-planned economy: the government ownership of all large factories and transportation and communication enterprises; the presence of commands, issued by planners, in charge of assigning production targets to firms and allocating resources and goods among different producers; the government control over prices; and the government control over the labour market, through a hierarchical personnel system.
Taking control over the means of production was a relative smooth transition for the Chinese Communist Party, as when it came to power in 1949, it inherited all the state-owned factories set up by the former National Resources Commission under the Nationalist administration during the Second World War, and all the heavy industries confiscated and/or started by the Japanese authorities during the occupation period in Manchuria. However, to gain absolute control over the industrial sector, in 1954-57, private enterprises were gradually transformed into joint ventures and subsequently absorbed into the state sector, and by 1957 practically all industrial enterprises were state-owned or collectively owned (Chow, 2007, p.268). Moreover, the government introduced Party secretaries at the leadership of these enterprises, depriving the former directors of their decision-making power (Lin et al, 2003, p.30).
In the meantime, the agricultural sector experienced a first major land reform, consisting of a redistribution of the land owned by landlords in the past decades. According to Lippit’s analysis cited by Riskin (1987, p.77), this land reform redistributed some 13 per cent of net domestic product in 1952, increasing peasants’ per capita disposable income by a quarter. This reform was soon backed up by a new collective system replacing household agriculture. Collective farming, in fact, was made up of communes, production brigades and production teams, which experienced a rapid adhesion from 1954, when only 2% of farm households had been enrolled in cooperatives, to 1956 when around 98% of private farms followed Mao’s initiative (Naughton, 2018, p.77). Communes served as both political-administrative and economic units (Chow, 2007, p.34-35) because the central planning authority directed each commune to grow specific kinds of crops, remitting procurements to the government. As pointed out by Bramall (2009, p.220-221) collectivization made labour available in infrastructural construction and for rural industrialization, along with a speed-up in the diffusion of new seed varieties and technologies. Moreover, illiteracy and mortality levels declined significantly during the early Maoist era, supported by an increase in education and healthcare expenditures. Nevertheless, darker sides of this economic and political decision must be considered. Indeed, collective farming resulted in a lack of efficiency, because farmers were not encouraged to work harder, by being paid a fraction of the income of their work unit (Chow, 2007, p.35). Another problem arising from this new system was the misuse of farmland and low productivity due to the lack of expertise of the central planning authorities in assigning unsuitable locations for the growth of crops.
The above mentioned central planning authorities played an important role in the overall framework of economic control, as they were responsible for drawing up the Five-Year Plans, covering every aspect of the economy. In so doing, the plan replaced the market as the main mechanism for allocating and pricing goods and resources, picturing China as a command economy. China adopted this system to facilitate resource mobilization, considered a fundamental tool in the development of heavy industry. The greatest attention was paid to the development of the iron and steel, cement, electric power, petroleum, chemical and engineering industries (Eckstein, 1977, p.120). Thus, these sectors received a higher amount of inputs at lower costs as later explained in this essay. To draw precise resource-allocation plans, the State Planning Commission (SPC) had to collect information and data from each specific enterprise designated to produce a distinct product. Nevertheless, introducing large data requirements in a country with little experience in modern accounting practice was problematic, considering China’s physical features, too. Furthermore, it was common practice among enterprise’s managers to understate the productive capacity of their company to obtain lower output targets, since managers were no more driven by a profit-seeking attitude. As a result, planners had difficulties in drafting accurate plans that led to distribution inefficiency, as an enterprise could receive both more and less of given inputs than it needed (Perkins, 2014, p.47-49).
Another important task of the SPC was the assignment of output-production quotas, to be sold to and allocated by the state (Lin et al, 2003, p.55). Since 1953, farmers were also subjected to these production quotas, defined as compulsory procurements, implying a government monopoly over key agricultural goods like grain that lasted for more than 30 years although some backlash occurred during the Great Leap Forward strategy. This politically inspired but unplanned expansion (Pekins, 1987, p.46) increased communes and industries production targets, in a political atmosphere of renewed radicalism, in an attempt to reach self-reliance and catch up with market-economy countries more rapidly. In this period material incentives and free markets in the countryside, previously introduced in 1957 during a brief interval of partial economic liberalism, were once again rejected, and a new policy pushing simple technologies to be combined with advanced industrial technology was adopted (Naughton, 2018, p.80). A remarkable aspect of the administrative decentralization characterizing the Great Leap Forward, was the proliferation of medium and small-scale, labour-intensive enterprises, employing local resources and new technologies, no more provided by the Soviet-Union (Wong, 1980, p.9). Nevertheless, the increase in labour-intensive enterprises and in grain procurements resulted in a decrease in the workforce in the fields and a decrease in food supplies in rural areas as more was subtracted by the government. The shortage of food was even more exacerbated by the wastes produced by farmers and their families when eating in the mass dining halls of the communes (Chow, 2007, p.27). These factors led to a nationwide famine in 1961-62, “the largest of the twentieth century anywhere in the world”, quoting Naughton (2018, p. 82), with tens of millions of deaths.
Even during periods of food shortages, urban areas and heavy-industry enterprises were provided with inputs and resources, causing the rural areas to suffer even more. Indeed, most of agriculture outputs were surrendered to the state at low fixed prices, meaning low-income levels for peasants. The Chinese government controlled the financial system and set favourable prices for raw materials, energy and every other resource required to develop heavy industries, blindly pursuing speed at the expense of efficiency as denoted by the former vice-minister of the State Planning Commission, Xue Muqiao (1980 cited in Wang, 1982, p.12).
During the rehabilitation period in 1950, the government prioritized price stabilization through a strict control over financial flows and later perpetuated this centralization to promote heavy industry development. To achieve this goal, the Economic Planning Commission in the State Council (Chow, 2007, p.29) set low-interest rate, low wages to encourage hiring, low prices for inputs such as energy and agriculture-products while setting high prices for outputs. Moreover, domestic currency was overvalued by adopting a low-exchange-rate policy to discourage exports and to promote national imports from mainly the Soviet Union and other Eastern-European countries (Lin et al., 2003). Thus, a distorted macro-policy environment was created. The government investments in basic construction of heavy industry accounted for 85% of the total industrial investment in basic construction and 72.9% of the total agricultural and industrial investment in basic construction as reported by the National Bureau of Statistics of China (1992 cited in Lin et al., 2003, p.37). The mobilization of large sums of capital was backed up by the institution of a mono-bank system, in which the state had total control over transactions. In this way, the newborn People’s Bank of China served the functions of both a central bank, by keeping most of the enterprises’ surplus funds, and a commercial bank, by lending money to firms which needed additional short-term funds to meet their output target. Since the People’s Bank of China was state-owned, the Central Government could control the financial situation of every enterprise and reject any withdrawal, if it was not in accordance with the plan (Perkins, 2014, p.45). State-owned enterprises could receive long-term investment funds directly from the government budget, without any interest rate or obligation of repayment, resulting in huge financial state losses.
Inefficiency within enterprises also concerned the energy sector, as low prices for energy resources did not urge managers to perform considering environmental issues, and thus increasing carbon dioxide emissions and non-renewable resources consumption. These economic and financial policies played a fundamental role in promoting heavy-industry development, as data reported by Xue Muqiao (1980 cited in Wang, 1982, p.14): in 1949, light industry accounted for 22% of the gross value of industry and agriculture, and heavy industry, 8%, while the rest accounted for agriculture; by contrast, in 1979, light industry rose to 30.7%, and heavy industry soared to 39.6%, while agriculture declined to 29.7%. After the distortion of prices, state-owned industrial enterprises were extremely profitable, while agriculture seemed to be a low-return activity, urging peasants to move to urban areas (Naughton, 2018, p.70-71). Indeed, the latter beneficiated of subsidies for housing, transport and utilities, as well as of low-cost policies since large-scale industries were concentrated in urban areas and employees were subjected to the low-wage policy, which held down their purchasing power (Lin et al. 2003, p.44-45). A widening gap was present between urban wages and rural wages, and thus a more general urban-rural inequality in living standards. Even though both industrialization and agriculture grew rapidly under the First Five-Year Plan, per capita consumption (current Y) of agricultural population in 1952 was around 62, less than the national average of 76, a figure which had to be doubled to obtain the per capita consumption of the non-agricultural population, 148 (ZJN, Economic Yearbook of China, 1981, VI-25, reported in Riskin, 1987, p.241).
However, the government imposed restrictions on mobility by adopting the “hukou” system in 1958, a household registration system assigning different benefits according to the residency status. Moreover, the government exercised full control over personnel through the “nomenklatura” system, a list of urban jobs that are controlled by the Communist Party (Naughton, 2018, p. 71). By adopting this system, the Central government was responsible for the allocation of enterprise managers and employees who were no more recruited by the singular company but assigned where labour was more needed. Since the government was the job allocator, showing disrespect towards the Party could result in immediate dismissal or worse; therefore, every action was thought firstly in terms of political loyalty, and secondly in terms of the enterprise’s benefit.
A particularly stern government control on State-Owned Enterprises (SOEs) was exercised through the enterprise director and the Party committee’s secretary, respectively in charge of monitoring the performance of managers and supervising the company’s productivity. Thus, each factory experienced a division of authority, which led to a decrease in efficiency aggravated by low material incentives for managers to maximize profit. Neither employees received any form of material bonuses, discouraging higher level of work efficiency and quality improvement. Moreover, urban employees were paid a fixed wage, irrespective of their performance, and could not be fired, as the central government was responsible for job allocation (Lin et al., 2003, p.87). In addition to the lack of a labour market and the lack of incentives, the autarkic economy of China did not expose its enterprises to the influence of foreign companies, preventing competitiveness on the market. This decision was made to protect infant factories from the lower prices offered by market companies, but at the same time, it neglected Chinese enterprises the possibility to improve their product quality by learning from their competitors and content the market demand of brand new goods (Chow, 2007, p.29-31). Moreover, as Shirk (1993, p.31) pointed out, Chinese enterprises became multifunctional units performing both economic and social functions with the introduction of the “iron rice bowl” employment system, according to which every company had the responsibility to provide its workers and their families with housing, welfare and school education. Obviously, performing these tasks affected the enterprises’ efficiency and budget, slowing down the production. Chinese government exercised a strict control over personnel, in contrast with the Soviet Union, characterized instead, by the presence of material incentives and a labour market. Another determinant factor in Chinese enterprises’ inefficiency was the poor quality of administrative and managerial manpower since Mao Zedong “always favoured political loyalists over the professionally competent when appointing people to economic posts”, quoting Lee (1991 cited in Shirk, 1993, p.33). While the Soviet Union presented highly educated directors leading its companies and following managerial rules, without the interference of political authorities.
In conclusion, the Leap-Forward strategy adopted by China focused on maximizing the flow of resource into industrialization (Naughton, 2018, p.89), in particular into heavy industries, to build a solid base for future development. Following the policy of “readjustment, consolidation, restructuring and improvement”, the ruling Chinese Communist Party opted for an autarkic economy aiming at self-reliance and self-sufficiency, through limited trade with foreign countries, carried out only by the government institutions, and a deeply-rooted control over every aspect of the economy present in the Plan.
The government took control over the means of production, over the allocation of inputs and resources, over prices and financial flows, and over labour. As Xue Muqiao (1980 cited in Wang, 1982, p.3-4) mentioned, during the rehabilitation period China’s economy grew at a rapid rate, laying the foundation for a more modern economic structure. In this time frame, a large nationalization of industries and a collectivization of farms were accomplished, resulting in a slow increase of peasants’ income-level, without levelling off, however, the urban-rural inequality. Over time this situation changed due to political choices of favouring the urban areas where most of the enterprises were located, or due to natural catastrophes such as the famine of 1961. In terms of human development, the Communist Party achieved high results regarding the rate of mortality and illiteracy during the early Maoist era (Bramall, 2009, p.104-105), although the country experienced a stagnation with the Great Leap Forward.
The distortion of prices applied to facilitate heavy-industry development neglected quality improvement, consumption, and the growth of services which declined from 29% of GDP to 24%, between 1952 and 1978 (Naughton, 2018, p.90). Moreover, unemployment remained a major subject on the political agenda, since the growth of the modern capital-intensive industrial sector absorbed only 37% of the increase in the labour force (Naughton, 2018, p.91).
In this panorama of central planning and price regulations, the state covered all production cost of SOEs, which remitted all their revenues to the state, assuming a central role in the economy (Lin et al., 2003, p.70). However, SOEs experienced problems of inefficiency due to lack of incentives, lack of labour and product market and agency problems related to the presence of a Party secretary supervising the manager’s performance.
Although the flow of resources into basic health and education was significant as Naughton outlined (2018, p.92), the Leap-Forward Strategy resulted in many setbacks and backlashes, which forced the following government in 1978 to adopt a more market-oriented economy.