NCPA - National Center for Policy Analysis

China: A Capitalist Nation?

February 6, 2013

As a nation whose growing economic dominance has captured headlines, socialist China has increasingly opened its doors to trade. However, while China's political structure may be communist, its economy is based firmly on capitalist principles, say Ronald Coase, a Nobel laureate and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School, and Ning Wang, an assistant professor at the School of Politics and Global Studies at Arizona State University.

  • In 1976, under economic modernizer Hua Guofeng, a post-Mao reformation -- subsequently titled "the Leap Outward" -- aimed at revitalizing the state sector and saving socialism. It instituted a state-led investment-driven program of industrialization but was short-lived when Hua's successor, Chen, ended this heavy industrialization in favor of adjusting macro-level economics policies and reforming state-enterprises at the micro level.
  • Despite this central economic planning from Beijing, economic forces outside of socialism were the true catalysts to the rapid rise in economic dominance China has experienced in the last three decades.
  • These economic forces included private farming -- a departure from the previous system of communal farming under Mao's Cultural Revolution -- and township and village enterprises, which operated like real business firms that sourced their own raw materials and sold their goods outside of the state-controlled distribution system.
  • In addition to these local enterprises, private businesses were created rapidly as scores of unemployed youth, who could not find work in the country or the city, were allowed to seek self-employment.
  • Special Economic Zones were also created, which allowed localities to experiment with market-based economic activities like investing in research and development and selling on the global market.

Coase and Wang note that while the Chinese Communist Party takes credit as being the omniscient planner whose policies ushered in the new era of prosperity, the truth is that China's growth is due primarily to the economic reforms that took place outside of the realm of central planning.

While Chinese goods exist in a free market, the speed with which ideas can exist freely may dictate how quickly China evolves from its authoritarian-led capitalism to free market-based capitalism and democracy.

Source: Ronald Coase and Ning Wang, "How China Became Capitalist," Cato Institute, January/February 2013.


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