Why does China shift from planned economy to market economy ? What are the essential differences between China's market economy and those of Western Europe, the United States and Japan ?

Gao : The change should be understood in four aspects.
Fist, the old planned economy must be revamped completely because it can no longer serve the development of the productive force and has thus become a stumbling block.

Historically, the Soviet model of planned economy payed a positive role in the early stage of industrialization in China. During the First Five-Year Plan (1953-57) period, China completed the construction of 156 key projects by pooling the manpower, materials and funds throughout the country. As things stood then, it was impossible to complete such mammoth projects as the Changchun No.1 Auto Plant and the Anshan Iron and Steel Works by relying on the resources of a single locality or department.

However, under rigid state control, enterprises were turned into mere government adjuncts with no say in management ; commodity production, the law of value and the market were denied a proper role in the economy ; and in distribution egalitarianism was the rule. Thus the wind was taken out of the enterprises sails and the workers and staff were robbed of the initiative, motivation and creativeness. This situation was no better illustrated then one single example from the early days of the planned economy. Shanghai was hit by a summer heatwave and the factories badly needed to buy cooling apparatuses such as electric fans. Unable to make their own decisions for the purchases they had to get the seals of approval of 11 higher-up units. But by the time they had gone through the red-tape, the summer had passed.

Fan Jingyi : How could such a system fit the development of productivity ? What, then, accounted for the "Northeast Phenomena"? Enterprises in the northeast are all large mainstay firms under central planning. As the state control was steadily tightened up,. These enterprises became so enfeebled that some of them could not even pay the workers. Economist dubbed it the "Northeast Phenomena," which reflected the plight of virtually all large enterprises under central planning. Despite the preferential treatment and large sums of money the state had pumped into them, there was no way they could be revitalized. Why? Because they were under rigid state planning. Why are rural enterprises so alive the kicking? Because they have met the demands of economic development and attained common prosperity. Otherwise, socialism will have no vitality. What happened in some countries has long borne this out.

Gao : Secondly, practice over the last 14 years has vindicated the market-oriented reform.

Looking back on what has happened in the intervening years, we can see that wherever the market role is given full play, the economy becomes robust and the growth fast. Since reform got under way in 1979, China's gross national product (GNP) has increased at an average annual rate of 8.6 percent. The figure for Guangdong is 3 percent higher than the national average while that for the Pearl River Delta in Guangdong is 3 percent higher than the province as a whole. Why is this so ? It is because the delta region, the special economic zones there in particular, has shaken off the restraints of the planned economy and embarked on the course of market economy earlier than elsewhere resulting in strong vitality and fast growth.

The same holds in various industries. Diversity is the lifeblood for garment industry, for example, but under rigid state control, the industry fell victim to standardized production, forcing people to year virtually the same uniforms in blue, grey or black. Poking fun into this phenomenon, a cartoon depicted the Chinese as being so drably attired that, looked from behind their backs, it was difficult to tell a man from a woman. With the reform, the garment industry has been decontrolled , and international international fashion has immediately found its way into China. If garments were still made according to government plans, there would be no knowing when foreign fashion could come to China. (laughter.) Standardization is all that counts when we build machines, but in those old days Chinese-made machines were a crazy quilt of standards and specifications.

He : In the past fish were in short supply. When the limitations were lifted, China soon emerged as a major aquatic producer. Previously, each city dweller was given a ration of 250 grams of peanuts as Spring Festival refreshments. Now peanuts of all flavours are available any time one wants to buy them.

Gao : An enterprise can grow quickly only when it has shown a strong market awareness and brought the role of the market into full play. The Shoudu Iron and Steel Company recently purchased all the workshops and equipment of a steel works in California. The installations thus acquired will be upgraded and become part of a factory run jointly with Shandong Province for an annual steel output of 10 million tons. In the past 14 years of reform, the Shoudu Iron and Steel Company's annual profit has increased by 20 percent, equivalent to the company worth prior to the reform.

If the state kept a tight hand on everything, how could enterprises be vigorous ? When they were under strict control, many state-owned enterprises were losing money. Now some small enterprises have emerged from oblivion to become household names. For example, by advertising its Wahaha-brand children's nutritional tonic on the radio every day, a 10-square-meter school-run workshop with a 140,000-yuan investment in Hangzhou has increased its annual sales to 250 million yuan and grosses a yearly profit of 40 million yuan. Not many large and medium-sized enterprises in China can win that much profit. The Hangzhou workshop is a survivor of market competition. Operating independent of state planning, without buying a single kilogram of raw material at the relatively low state fixed price, the managers pinned their hope on the market. Pandering to every parent's concern for the children's health, they came up with the Wahaha-brand tonic, which immediately came to stay in the market.

Tong: Parents are willing to spend more for their children's sake.
Gao : China has pumped huge investment into stateowned canning factories and provided them with materials at fixed state prices. These factories keep producing the same canned food year in and year out regardless of market changes. It is no surprise that they are losing money. In the past, half of the national budget was used to subsidize money-losing enterprises. Would socialism go bankrupt if the government kept providing subsidies ? (laughter.) Therefore, the 10-square-meter Hangzhou workshop annexed a medium-sized cannery because the latter, having been in the red for many years, could no longer stand on its own. The market is inexorable, and it is only proper to rely on the market to adjust the industrial structure when the state plans to shut, suspend, merge or transfer some enterprises, more often than not they will raise their conditions. They would insist that their staff be properly placed and given better jobs and that not a single penny be docked from their wages and bonuses. Can industrial restructuring be carried through this way ? Relying singlehandedly on government instructions gets nowhere, whereas the market gets things done relentlessly. Judging from what has happened in the reform over the last 14 years, taking the market economy road is obviously a sensible choice.

Ma : China's 14 years of reform is in essence a gradual transition from planned economy to market economy. Everybody has felt the changes caused by the transition. On the ever of the anti-government Tiananmen riot in 1989, I was invited to teach in Saga University in Japan. Before leaving, I went shopping but was not satisfied with the results. Thus I spent a lot of money on buying goods after I arrived in Japan. But when I returned a year later, I found that tremendous changes had taken place on the home market. Commodities sold in Japan were already available in China at a cheaper prices. I regretted spending so much money in Japan and carrying so many things home. (laughter.) In the past Japanese visitor were reluctant to buy Chinese products because their poor quality. China-made Western-suits, for example, were often not stylish. Now things have changed. Last month, when a Japanese friend came to Beijing, went on a shopping spree, having found woollen sweaters and suits produced by joint ventures had famous foreign brands and were of top quality and much cheaper than in Japan.

Gao : Thirdly, China cannot do without market economy for future development.

In the past, we tried tooth and nail to stop repetitive production, construction and import every year, but to no avail. Why ? Because under planned economy, there was neither competition nor pressure, and nobody cared because it was, after all, the government who footed the bills. Provincial governors and mayors vied with each other for central planning departments permissions to undertake as many construction projects as possible, because such a permission meant more output value and profits and higher prestige. That is why more than 120 motor companies and 620 motor assembly works. (laughter.) In market competition, it is the survival of the fittest, and many knotty problems are easily solved.

He : Another problem involves product quality. I don't mean to deny the effectiveness of government circulars, the "Month of Quality" or sending reporters across the country to expose the quality problem. But the fundamental solution lies in market competition. Poor product quality disgraces an enterprise and Costs the workers their jobs. So isn't quality something that cannot be neglected ?

Gao : Finally, market economy has become the order of the day as China opens itself to the rest of the world and is about to regain its GATT membership. The reason is simple : In a world where market economy holds sway, China can hardly become part of it if it sticks to its planned economy. In that case you can't even cross the threshold. (laughter.)

In April 1992, I attendant an international symposium for a comparative study of various economic systems sponsored by the United Nations in London. It turned out to be a meeting of representatives from 14 countries under planned economy, including China Viet Nam, Laos, the Commonwealth of independent States, and some East European and African countries. At the meeting, no one spoke well of the old planned economy and every one agreed that reform must be carried out. Of course, the ways and means for the reform are different for each country. I had the honour to be the first speaker, and everybody spoke highly of China's reform.

Tong : The last point is important. The modern market economy is a global phenomenon. Without the global market, China, with its 1.1 billion population, can hardly succeed in its modernization drive, while the world cannot do without the Chinese market. Only when the market of various countries have fully developed can the world achieve common prosperity. No wonder a foreign reporter commented that "the development of market economy in China is an even of world significance."