History and Reasons for Implementation
Following the social and economic chaos of the Great Leap Forward and Cultural Revolution, Chairman Deng Xiaoping instituted a series of reforms to help reinvigorate China's failing economy. Deng Xiaoping realized that China's economic stagnation could be attributed to the highly centralized, planned economy established by Mao Zedong. He believed that if China was to become a world power, the government would have to institute market reforms. In the 1980s Deng Xiaoping initiated a program of economic reorganization aimed to make socialism more compatible with China's specific needs. China's current status as the world's second largest economy is largely credited to Deng Xiaoping's reforms.
Analysis of Model
While it may have the term socialist in it, the socialist market economy is more appropriately connected with state capitalism as opposed to pure socialism. Many of the reforms went against long held socialist doctrines that the Communist Party of China held sacred during the Mao era. Early reformist policies included: permitting private firms to operate freely from the state, opening Chinese firms to foreign investments, freeing up capital and lending institutions, reducing unnecessary regulations, and de-collectivizing agriculture. Indeed, Deng Xiaoping's reforms led to revolutionary changes in the Chinese economy that allowed it to become a globally competitive economic power. Most of the Chariman's reforms focused on subtly reducing the power of the state, while still maintaining its supremacy. As a result of the reforms, China's GDP skyrocketed from 150 billion dollars to upwards of 1.6 trillion.
In order to maintain China's ties with socialism, the Chinese economy is comprised of a wide variety of state-owned industries, mixed-enterprises, and private firms. Prior to the reforms, Chinese firms were often thoroughly disorganized and deprived of capital. However, the new policies put into place reorganized Chinese industries into Western-style joint-stock corporations, with the state having a controlling interest.
The economic reforms also changed China's approach to trade policy. During the reform period, the government cut tariffs from 56% to 15% and eliminated many harmful trade barriers. By 2001, less than 10% of imports were subject to quotas.
One of Deng Xiaoping's primary objectives was to liberalize financial markets. It had long been China's policy to limit financial interactions to the Soviet Union and other communist nations. However, China broke this policy by joining the World Trade Organization, opening the banking sector to foreign investment, and ending long held financial restrictions against many nations.
Throughout the reform period, the state gradually lost more and more control over the economy. Although the state was still very much involved, it only held absolute control over a few industries. With reduction in state control, tax revenues consequently fell, damaging China's taxation system. Many analysts believe that the shrinkage of the government's power over the economy encouraged businesses to take risks in private sector. This risk-taking and increased creativity resulted in a newly re-energized economy.
Many traditional socialists argue that China's current system is a betrayal of classical Marxism. Leftists are of the opinion that China's Socialist Market Economy is inherently contradictory as you cannot claim to be socialist while maintaining a commodity-based economy. Many on the far left argue that China has completely abandoned the cause of the working class in favor of a fast-paced, full-blown capitalist economy. Although firms are technically publicly owned, revenues are used to overpay capital owners and underpay workers.
It is also often argued that Deng Xiaoping's reforms dramatically increased inequality within China. Although China has experienced economic growth and rapid urban poverty reduction, the Gini Coefficient of China is approximately around 0.5. Additionally, the reforms have led to numerous cases of worker abuse, making China world-famous for its poor working conditions.