China’s five-year plans avoid problems inherent in Western, Soviet systems

By John Ross Source:Global Times Published: 2015-8-2 22:48:02

In October, a Plenary Session of the Central Committee of the Communist Party of China (CPC) will discuss China's next five-year plan, offering an opportunity to analyze such plans' role within China's economy.

China's 37 years of reform and opening-up achieved the fastest improvement in living standards in a major country in human history. From 1978 to the latest available data, real annual average Chinese household consumption rose 7.7 percent. Total consumption, including education and health, rose 8.0 percent. And average annual economic growth of 9.8 percent over that period was the most rapid in history. 

As China's "socialist market economy" achieved this unmatched improvement in human living conditions, it is this system that must be analyzed. Its difference from both the Western model and the old Soviet five-year plan system explains why China's economic development has been more rapid than either.

China has a socialist market economy, not a market economy as is sometimes imprecisely stated, and it has structural differences from Western economies.

China's economic structure differs from the West in the State ownership of China's largest companies. But simultaneously the largest part of China's economy is not so large scale, socially interconnected, or State owned. China has billionaires and tens of millions of small and medium-sized companies while its agriculture is based on small household farms.

In the West's mixed economy the private sector dominates. In contrast, in China the CPC's Central Committee in November 2013 reaffirmed: "We must unswervingly… persist in the dominant position of public ownership."

But China's economic structure is different from the old Soviet model, in which the private sector was tiny, with even agriculture and local shops being state owned. Even in terms of the USSR's Marxist ideology there was no justification for State ownership of small scale, non-socialized companies and such ownership de-motivated those working in them.

The majority of China's economy is not State owned, and China's five-year plans set only a few key macro-economic targets, such as overall growth rate, guidance on investment and consumption, and industrial priorities. Within these parameters, market mechanisms operate.

China's macro-economic structure also explains its more rapid economic growth than the West, and avoidance of crises such as the post-2008 recession.

The dominance of private companies in the West means there are no automatic mechanisms for ensuring that companies invest even when profitability is high. US company operating surpluses rose from 20 percent of its economy in 1980 to 26 percent in 2013, while private fixed investment fell from 19 percent to 15 percent. Larry Fink, head of BlackRock, the world's largest asset manager, noted: "Corporate leaders … responded with actions that could deliver immediate returns to shareholders … while under-investing in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth." US government appeals for greater private investment lacked mechanisms to enforce this. Falling investment culminated in recession in the US.

Western economists such as J.M. Keynes foresaw such dangers, noting: "The duty of ordering the current volume of investment cannot safely be left in private hands." But the West's privately dominated economy has no mechanisms to control the investment level.

In contrast, if required, China's State-owned sector can be instructed to invest. As the Wall Street Journal noted: "Most economies can pull two levers to bolster growth: fiscal and monetary. China has a third option. The National Development and Reform Commission can accelerate the flow of investment."

China's five-year plans - by setting certain key economic parameters but using market mechanisms within these - avoid the problems of both Soviet and Western systems, explaining China's economic outperformance of both.

The author is a senior fellow with the Chongyang Institute for Financial Studies at the Renmin University of China, and former director of Economic and Business Policy for London.

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