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First published: May1996      print home

• Lessons of the Chinese economic reform

The most conclusive indictment of the economic policies which have devastated eastern Europe and the former Soviet Union since 1989 and 1991, is their contrast with the spectacular success of the reform of the world's second major centrally planned economy - China - a model now being increasingly applied in Vietnam and Cuba. China's success shows that the suffering inflicted upon the peoples of eastern Europe and the former USSR, under the guidance of the IMF, was totally unnecessary.

Since 1978 China has been the most rapidly growing economy in the world. Economic growth averaged 9.4 per cent a year between 1980 and 1993, and moved into double figures after 1991: 'China doubled its output per person in the ten years between 1977 and 1987, one of the shortest time periods for any country to achieve such a record. This impressive growth has in part been the result of significant increases in factor productivity in both the state and non-state sectors, a point of some importance given the well-documented failure of centrally planned socialism to raise productivity. The result is China's economy is now estimated (using purchasing power exchange rates) to be surpassed in size only by the US and Japan and there is a real possibility that China will become the world's largest economy by 2025.'1

By contrast, under the guidance of the IMF the economies of eastern Europe and, even more so, the former Soviet Union, have experienced an economic collapse unprecedented in peacetime in the modern world. In the former Soviet Union output is now less than half its level prior to capitalist economic reform - and falling. In Russia productivity declined by 22 per cent in 1992 alone.

The rise in living standards in China and rise in death rates in Russia
The driving force of China's sustained economic growth has been a vast rise in the living standards of its population (see table 1): 'In per capita terms, there have been impressive increases in living standards evidenced by a three fold increase in average consumption of meat and eggs between 1978 and 1991, by a more than doubling of living space in rural areas in the same period, and by the fact that the ultimate basic consumer good, the television set was owned by an average of one of every two rural households and by virtually every urban household in 1991.'2

By 1993, 83 per cent of city households had a washing machine, and, in Shanghai, 98 per cent of households had a refrigerator, 92 per cent a colour television, and 45 per cent a video recorder.3

As the Economist noted: 'China's economic performance in...14 years...has brought about one of the biggest improvements in human welfare anywhere at any time...By 1994 China's economy is almost sure to be four times bigger than it was in 1978; if China hits its targets, which are reasonable, by 2002 the economy will be eight times bigger than it was in 1978...

'The overall figures mask a startling rise in living standards... grain output grew by a third in six years, cotton almost trebled, oil bearing crops more than doubled, fruit production went up by a half. Real incomes in the countryside grew even more spectacularly - threefold in eight years... Between 1978 and 1991 grain consumption of the average Chinese went up by 20 per cent; seafood consumption two fold; pork consumption two and a half times; egg consumption more than three fold; edible oil and poultry consumption four fold.'4

These figures reflect a vast increase in production of food and consumer goods. China's output of black and white TVs, refrigerators, washing machines, electric fans and irons has risen from negligible levels to become the largest in the world.5

The contrast with Russia and eastern Europe could not be more stark. In Russia living standards fell by 50 per cent in 1992 alone. Far from the consumer society which many hoped capitalism would bring, output of food and consumer goods collapsed more comprehensively than any other part of the economy.

The social consequences have been horrific. The United Nations Children's Fund (Unicef) reported at the end of 1995 that 34 per cent of Russia's population had fallen below the subsistence minimum and that for men in the 20-39 age group in Russia, Ukraine and the Baltic states: 'the mortality increase due to heart, digestive and infectious diseases has taken on frightening dimensions unequalled in its magnitude in peacetime.'

Male life expectancy in Russia has fallen to just 57 years: 'By 1993 Russia's death rate had risen above even the level of low income countries. Russia's death rate now stood on a par with that of such countries as Bangladesh, Nigeria, Sudan and Togo, a dreadful testimony to the awful results of the reform process.'6

China's rapid domestic economic growth became the basis of its much publicised trade performance. Since 1979 China's exports have expanded at an annual rate of 16 per cent and moved steadily upmarket. Manufactures now make up 80 per cent of China's exports: 'The growing sophistication of Chinese products is also reflected in the shift towards exports of manufactured items from 50 per cent to 80 per cent last year... exports of machinery, electronic products and transport equipment are the fastest growing areas... capital intensive areas spawned an increase of about 86 per cent in exports of machinery and transport equipment in the first nine months of 1992, compared with 1991. Trade in these items accounted for 16 per cent of exports last year, compared with just 6 per cent in 1988.'7

Russia by contrast has seen the dollar value of its exports nearly halved, from $63 billion in 1990 to $35 billion in 1994, and been reduced to an exporter of raw materials and energy which, by 1993, made up 80 per cent of its exports.

With a Communist Party in power, China has become one of the largest recipients of foreign investment in the world - far greater than the whole of eastern Europe and the Soviet Union put together. Foreign investment is drawn into China because it is the fastest growing economy in the world - major international companies simply cannot afford to keep out. Far from representing a weakening of China's international position, this reflects its strengthening. China's economic growth gives it the leverage to demand significant transfers of technology and training from foreign investors.

Russia, on the other hand, carrying out the policies prescribed by the IMF, has faced capital flight, $2Obn a year on Western estimates, far exceeding the combined total of foreign investment and transfers from the IMF, because its economy is collapsing.

In short: 'The contrast in performance under reform policies is breathtaking. Almost every major indicator in the two countries moved in an opposite direction. At every stage of China's reform programme commentators predicted that growth would shortly run out of steam. Instead, its economic boom continued almost uninterrupted right through to the mid-1990s Moreover, the most important indicators of all, those concerned with the physical quality of life, almost all showed substantial improvement alongside the accelerated growth of output and real income. In Russia, the poor performance of Gorbachev's early years turned into a very poor performance in the later period of his rule. It became nothing less than a disaster in the 1990s. Output declined precipitously. While foreign investment poured into China, it shunned Russia. Most important of all, the indicators of the physical quality of life showed a sharp downturn with a large rise in death rates.'8

Bourgeois explanations of the Chinese economic reform
Given their consequences for such a large proportion of the world's population, explaining these contrasting economic performances should be a principal task for anyone seriously interested in improving the well-being of humanity. The IMF, for example, is perfectly aware that the contrast between Russia and China presents them with a serious political problem. Their view is that China is on route to the same destination as eastern Europe, but it has only travelled half-way and must 'catch up' by privatising and bankrupting most of its state-owned industry. In other words, they want China to emulate eastern Europe's 'success'!

Milton Friedman argues: 'Using or not using the market is not the crucial distinction. Every society, whether communist, socialist, social democratic or capitalist, uses the market. Rather the distinction is private property or no private property. Who are the participants in the market and on whose behalf are they operating? Are the participants government bureaucrats who are operating on behalf of something called the state? Or are they individuals operating directly or indirectly on their own behalf? That is why in an earlier paper delivered in China, I advocated the widest possible use not of the market but of 'free private markets'... The words 'free' and 'private' are even more important than the words 'market'. The wide use of the market that is sweeping the world is better called 'privatisation' - transferring government owned enterprises to private hands and thereby giving greater scope to the invisible hand of which Adam Smith wrote.'9

In other words, for Friedman, China's success in introducing markets within the framework of a planned economy must be rejected because it does not place private property in command.

The Wall Street Journal argues the same case even more emphatically: 'China is still a largely socialist economy... The CP in China however hasn't found a way to retreat from central planning... Priva-tisation is the obvious solution, probably it would be tantamount to bankruptcy in most cases, though some firms would yield a hefty liquidation value because of their land holdings. Yet the government has decided, on the whole, that public ownership must not be tampered with. As long as that commitment stands, China's reforms will remain blocked... the state sector still haunts the economy, and until a stake is driven through its heart, we fear an ugly reckoning lies ahead.' 10

If what concerned the Wall Street Journal, the IMF or Milton Friedman, were economic efficiency, let alone living standards, the only rational approach would be to reject the policies which brought disaster to eastern Europe and apply those which brought success in China. This is not done because for the IMF et al everything is subordinate to the irreversible and rapid restoration of capitalism - irrespective of the social and economic consequences for the peoples affected.

As a western advisor to the Russian government put it: 'In 1992 Russia re-discovered capitalism - one of the main events of the century. Yet many people say the re-forms have failed, since inflation is still rampant. This line of thought is flawed. For the aim of the Russian reform is to change from communism to capitalism.'11

Thus the real concern was to destroy the planned economy as rapidly and irreversibly as possible, not raise living standards: 'The experience to date shows that most of us looking at the transition process beforehand paid too much attention to the need to shatter the old system, and insufficient attention to the dangers of institutional breakdown and self-reinforcing fiscal and macroeconomic collapse. Indeed, the absence of these worries from the early literature is, in retrospect, quite striking.'12

The Chinese road is rejected because its destination is not capitalism. Jeffrey Sachs and Wing Thye Woo, for example, conclude, that whatever China's successes the critical issue from a capitalist point of view is: 'The proportion of the Chinese labour force employed by state-owned units was 18 per cent in 1978 and was still 18 percent in 1992. This means that there were actually 32 million more Chinese working in state-owned units in 1992 than in 1978. The state-owned sector is not "withering away".'13

The Economist's 1995 survey of Vietnam, which is applying a variant of the Chinese economic reform, points out that after four years of annual economic growth averaging 8 per cent, the weight of the state sector in Vietnamese industrial output has increased from 33 per cent in 1990 to 40 per cent in 1994. The Economist wryly comments: 'The opening of the economy, far from weakening the state's grip, is strengthening it.'14

There is also a left version of the view that China is moving in the same direction as eastern Europe but at a different pace. In this perspective, China is either on the road to capitalism, or already capitalist, because it is departing from an implicit model (derived from Stalin, not Marx or Lenin) that a planned economy must be based on the nationalization of everything.

Even if this were the case - which it isn't - no person concerned about raising the living standards of the majority of humanity, as socialists must be, can simply dismiss the extraordinary economic performance of China over the last 18 years. Whatever its mechanisms, it is obviously preferable to the fate which has befallen Africa, India, Latin America, the Middle East, the former Soviet Union and eastern Europe. Therefore it has to be explained, not explained away.

However, the very facts which lead Sachs et al to reject the Chinese economic reform - that the state owned sector is not 'withering away' - also refute the left variant of the view that China is on the road to capitalism, albeit more slowly than eastern Europe. There has been no privatisation of large scale industry in China. Publicly owned enterprises (owned by the state and local government) continue to account for 80-85 per cent of China's industrial output. Land remains publicly owned.

Far from different applications of the same economic medicine, China's economic success derives from policies diametrically opposed to those pursued in eastern Europe at the behest of the IMF: 'At the end of this process [in China], public ownership remained a central feature of the property rights regime in every sector. The economy remained highly protected from the forces of international competition. The state remained at the center of the economic process, having fundamentally shifted its approach away from economic commands towards economic planning which worked in tandem with market forces. In every major area, China pursued a reform strategy which ran counter to the transition orthodoxy. In terms of the conventional wisdom of the late 1980s about how to reform a Stalinist system of political economy, China got all of the main policies wrong, yet it was the world's most dynamic economy in the reform period... The advice which flowed from this orthodoxy contributed substantially to the Soviet disaster. The decision not to follow it helped the Chinese achieve enormous success in their transitional programme.'15

In reality, as we shall see, it is the retention of the industrial core of the Chinese economy under public ownership and the planning which this makes possible which is the key to the success of the Chinese economic reform. Those who claim that China, the most successful economy on earth in terms of economic growth, must 'complete' its success, by adopting the policies which caused the catastrophe in eastern Europe, are living in an Alice in Wonderland world.

It is because China has been less ' successful' than eastern Europe in privatising industry and has not attempted to re-introduce capitalism that the Chinese economy has achieved a level of growth almost unprecedented in history. While eastern Europe's 'success' in this has produced economic collapse.

A second line of argument by the think tanks of international capital is that whatever its strengths, the Chinese economic reform has no relevance to Russia. Jeffrey Sachs argues that China had a potential surplus labour force in agriculture which could be transferred into new private industries, whereas in Russia the largest part of the workforce was already immobilised in state industry - making the demolition of the state sector a precondition for the development of smaller enterprises in Russia.

In fact it is far more difficult to transform unskilled peasants into manufacturing workers than to transfer workers from one sector of manufacturing to another: 'The comparison then is between the Russian task of transferring skilled urban workers to alternative manufacturing and service-sector jobs versus the Chinese task of transferring unskilled peasants to manufacturing jobs. Which is more costly? The assertion that the Russians have a more difficult task would be met with disbelief by the majority of economists who have studied the development process. It is simply not true in general, and it is even less true in a situation where, at least at the outset of reform, the Russians have a close to full employment economy while the Chinese struggled with labour surpluses. The European centrally planned economies do not need to continuously generate millions of new jobs to absorb the workers shed by inefficient producers. In that sense, a moderate growth of new firms should be able to gradually draw workers away from inefficient state firms, and produce a transition without massive amounts of socially destabilising unemployment. The ECEs have the same unexploited niches that China has, but fewer reserves of grossly under utilised labour in the countryside. Thus, a strategy of opening niches to new entrants should aid the restructuring process more rapidly than in China. From this point of view, there is a mature economy variant of the Chinese pattern of economic reform. It would certainly produce less rapid growth, but it might be a strategy of reform preferable to one that induces maximum economic dislocation.'16

In fact, as we shall see, there were fundamental similarities between the Russian and Chinese economies at the outset of reform. China's problems of feeding its enormous population given the relative shortage of agricultural land, creating tens of millions of industrial and service jobs to replace those eliminated as agricultural productivity increases, the far lower starting point in terms of living standards, technology, education, industrialisation, and so on, made reform of China's economy, potentially more, not less, difficult.

The distortions of the Chinese and Soviet command economies
The strength of the Soviet economy, and to a lesser extent China's, was that it had created an independent heavy industry and sustained over a long historical period a relatively high rate of economic growth. In fact, the USSR and Japan, and latterly China, are the only large countries in the twentieth century to significantly reduce the gap in GDP per capita between themselves and the advanced capitalist countries. (see Angus Maddison). This economic achieve-ment, which would not have been possible without the October 1917 revolution, allowed the USSR to create scientific, cultural and academic resources unmatched in any country outside the United States. The USSR became one of the only centres of machine tool production, the nucleus of investment goods industries, in the world - the others being the United States, Western Europe and Japan. These economic achievements allowed the former USSR to eradicate extremes of poverty, create welfare services, achieve a high level of education and create a military capacity far superior to Japan and Germany which had threatened it in the past. Starting at a much lower level of development China also succeeded in creating a heavy industrial sector of its economy.

But the strategy of socialism in one country - formulated by Bukharin and applied by Stalin and subsequent Soviet and Chinese leaders - that the Soviet Union, on the basis of its own resources, could create a self-contained socialist economy, also deeply distorted its economic development. Agriculture and light industry, and therefore the living standards of the working class and peasantry, were totally subordinated to heavy industry. Through forced collectivisation of agriculture in the USSR and the Commune system in China, attempts were made to eliminate the peasantry as a class. Consumer services, like shops and workshops, were grossly underdeveloped as a result of the largely successful attempts to eliminate the urban petty bourgeoisie. To take just one example, the problems of the Soviet retail system are easily understood when it is seen that only 6 per cent of the Soviet workforce was employed in retailing and wholesaling compared to 15 per cent in Germany and 22 per cent in the United States.

While the protection of industry from more advanced capitalist competition was necessary, the attempt to isolate the economies from the international division of labour was not. On the contrary, the most important single advance of the productive forces under capitalism, from which socialism must start and advance, not retreat, is precisely the international division of labour.

From these distortions flowed others - a pricing system which made rational planning impossible, shortages of consumer goods imposing an enormous burden upon women, and so on. These distortions in turn destroyed the incentive to work and to economise labour time - even where greater effort was rewarded by higher wages, there was little to buy with them.

This economic system required the suppression of democracy - because were the working class given the choice, it would have chosen economic priorities which raised, not lowered, its living standards, In the absence of both the market and any direct influence of the working class over planning, waste and corruption proliferated. This produced the characteristic disproportions of the bureaucratically centrally planned economies - in particular, a level of living standards manifestly lower than the degree of development of the economy permitted.

In the United States total individual consumption made up 68.6 per cent of the economy in 1991. In the former Soviet Union only 55 per cent of the economy was devoted to consumption. In China, in 1978 prior to economic reform, private consumption made up just 53 per cent of the economy.

This unnecessary underdevelopment of the consumer oriented sectors of the economy also undermined productivity of both labour and capital. It meant that the Soviet and Chinese economies were least developed in the most rapidly growing parts of the world economy - which are not steel, shipbuilding, etc, but consumer goods and services. Finally, this economic structure also impacted onto trade because heavy industry requires far higher levels of investment per unit of output than light industry, making it far more difficult to create industries capable of competing in the world economy.

The Chinese economic reform
To correct these structural imbalances in the Soviet and Chinese economies would have required a large shift in the economy into the production of consumer goods and services. The only rational strategy for achieving this would have been to maintain the economies' achievements, the creation of heavy industry, while correcting the distortions - by prioritising the production of food, consumer goods and services.

The vast unsatisfied demand for consumer goods in both countries could have made the necessary 'straightening out' of the distortions of the planned economy relatively painless - because it would be accompanied by rising living standards.

As one recent study put it: households in both eastern Europe and China 'found their consumption aspirations frustrated, regardless of their level of money income. Supply of many goods was erratic, shortages were common, and household members often had to queue for available supplies, in the Eastern and Central European economies and China alike. Thus there was not only a low level of real resource allocation to households, there was also substantial unsatisfied demand at prevailing income levels.

'These factors suggest that, in a sense, radical reform of systems such as these should have been "easy". The persistent lack of consumer goods means that there were many unexploited opportunities for production of consumer goods and services. Transferring even modest amounts of resources into consumer goods would increase output rapidly. Moreover, because there was such large unsatisfied demand, the "pull" of resources into consumer goods production would be strong.'17

This is what China has done since 1978 - the demand for consumer goods and services was increased, this stimulated an enormous increase in their production, which later also led to rapid growth in heavy industry not as an end in itself but to produce the inputs necessary for light industry and agriculture.

The IMF inspired economic reform in the former Soviet Union produced the opposite result. As living standards collapsed, so too did demand for consumer goods and services. Light industry and agriculture were crushed leading in turn to collapse in heavy industry as the demand for its products fell.

Thus: 'It is obvious that the ECEs did not stumble into a "virtuous circle" in the way that China did. Is this because the constituent elements of China's virtuous circle were absent in the ECEs? Surprisingly, when we turn to the actual transition process itself, we find that all the elements of China's virtuous circle were also present or potentially present in the ECEs... There seems to be nothing about China's economic structure or level of development that limits the Chinese approach to that one unique country. The ECEs could also have adopted such an approach... it is likely that these countries would have been better off had they followed an approach more similar to the one followed by China.'18

Neither the free market, nor the command economy, could correct the distortions of socialism in one country
At the outset of the economic reform in China there was a discussion about the purpose of socialist production. The Stalinist model, that the highest possible rate of capital accumulation must be maintained at the expense of the living standards of the workers and peasants, was explicitly rejected. Instead, it was recognised that too high a rate of accumulation, at the expense of consumption, reduces the efficiency of investment. This was the roadblock which the Soviet Union had run into. The neglect of consumption undermined the incentive of the workforce to produce and worsened the quality of goods, created shortages of materials and reduced the resources available for the development of agriculture and light industry. The conclusion of this debate in China in the 1970s was the precise reverse of the Stalinist orthodoxy. Agriculture was given first priority, followed by light industry and then heavy industry.

The policy of developing consumption was then implemented by scaling down investment and military spending to correct the previous imbalance in favour of heavy industry. Under the Chinese economic reform the development of consumer production and consumption was to be the driving force of the economy, with investment fixed at levels consistent with rising living standards.

However, a shift to prioritise the production of consumer goods was impossible to implement without markets. The structure of consumer supply is quite different to heavy industry, in that it requires a network of many millions of far smaller units of production. That is why the attempts to solve the problems of consumer goods production under Gorbachev failed. It is simply not possible to create a vast network of small farms, shops, workshops and consumer goods producers by administrative command. It can only be created, and linked, by a market mechanism. The development of heavy industry could be carried out under Stalin administratively because it involved the concentration of resources into a relatively small number of heavy industrial units - the small business and farm sector were taxed to the point of extinction and legally prohibited while prices were skewed to favour heavy industry. But this process cannot be run in reverse. It is impossible to administratively create millions of small consumer producers and services.

The attempt to entirely eliminate the market by bureaucratic fiat in the USSR had been an adventure. Market relations have to be progressively outgrown, not suppressed. As Trotsky put it in his critique of Stalin's first five year plan: 'The innumerable living participants in the economy, state and private, collective and individual, must serve notice of their needs and of their relative strength not only through the statistical determinations of plan commissions but by the direct pressure of supply and demand. The plan is checked, and to a consider-able degree, realised through the market. The regulation of the market itself must depend upon the tendencies that are brought out through its mechanism. The blue prints produced by the departments must demonstrate their economic efficiency through commercial calculation.'19

The market is a set of social re-lations which will 'wither away' over a long historical epoch. The attempt to abolish it administratively simply threw the Soviet economy backwards in the spheres most important for the living standards of its people.

On the other hand, the instruments of intervention into the economy created by the overthrow of capitalism in China and the Soviet Union did make possible major incursions into the operation of the international and national markets to regulate their effects and es-tablish priorities which would have been overturned by unfettered market forces. Thus in China's economic reform: 'the role of the state has been evident in mediating between world market forces and national interests - both in setting key prices (such as the exchange rate and the long-term interest rate) as well as in guiding the economy along a particular path. Whilst the market has served as a useful bench mark which has given planners useful information it has never been allowed to be an all-pervasive influence.'20

In Russia, on the other hand, after 1992 the mechanisms for protecting the domestic economy from the more powerful forces which dominate the international market economy started to be dismantled. This made impossible what Peter Nolan accurately describes as a pre-condition for successful reform - planning: 'Success in the transition was conditional upon learning how to plan.'21

The capitalist economic programme launched in Russia in January 1992 - price liberalisation, privatisation and subordinating the economy to the forces of international capital - could not solve the problem of developing the consumer sector either. The reason for this is that, under full price liberalisation, the demand for consumer goods collapsed as living standards fell, while the prices of industrial inputs, produced by larger more monopolised units, rose much more rapidly than the prices of consumer goods. Finally, whole sectors of consumer production are simply eliminated by imports from more productive economies. That is why the greatest collapse of all in the former Soviet Union has occurred in the light industrial and agricultural sectors. They are crushed between more rapidly rising industrial prices, foreign competition and collapsing consumer demand.

The IMF's policies made the distortions of the former Soviet economic structure worse not better.

The mechanism of the Chinese economic reform
Given that neither an administrative command mechanism nor full price liberalisation could correct the distortions of the command economies, what was necessary to do so? This was the problem which the Chinese economic reform solved. It maintained the output of heavy industry while simultaneously pumping resources into) creating light industry, farming and consumer services. Domestic producers were protected by tariffs on imports averaging 35 per cent (compared to an average level of 15 per cent in other developing countries). The starting point of the reform was a radical increase in the share of individual consumption in the Chinese economy - new consumer industries could only develop if there was a vast increase in demand for their products. In the three years, 1978-81, the share of individual consumption in the Chinese economy was increased from 53 per cent to 59 per cent of GDP. This was achieved administratively by reduc-ing the share of investment in the state sector by five per cent of GDP and transferring this to consumer subsidies and wage increases: '...during the first phase of Chinese reform, especially from 1979 to 1981, there were substantial reduc-tions in military industrial output, and in heavy industry as a whole. The effect of this on output was swamped by the rapid increase in consumer goods production that occurred at the same time.'22

The administratively determined increase in demand for consumer goods was then connected to the supply side, not administratively, but via a market mechanism, that is by an increase in the relative prices of food and consumer goods. At the same time the prices of the state-owned, monopoly, industrial sector were held down. As a result, over the decade from 1978, agricultural prices relative to industrial prices rose by 77 per cent, and consumer prices rose by 25 per cent compared to average prices. Unlike in the former Soviet Union and eastern Europe there was no big bang price liberalisation. This relative increase in the prices of consumer goods increased the incentive to produce them.

On the demand side, the population was compensated by raising, first, the level of state subsidies on consumer goods, and then, because subsidies have the defect of distorting the price structure, by phasing out subsidies and replacing them by wage increases. This is quite different from eastern Europe where 'price reform' simply removed indirect subsidies to the population's living standards. In China living standards were increased not cut.

As a result, the demand for consumer goods was increased and the economy gradually moved to a more rational pricing system reflecting real costs. At the same time the state retained the ability to intervene to limit price increases where this was considered necessary.

If the price increases paid to Chinese farmers had been passed onto the consumers, then there would have been no increase in the share of individual consumption in the economy as a whole. Instead consumers would merely have been forced to spend more on food and correspondingly less on other consumer goods. Food production would have increased but other sectors such as consumer durables, like washing machines refrigerators and televisions, would have declined, providing no overall boost to economic growth. Thus the decision in China to fully compensate the population for price increases was an indispensable condition for the success of the economic reform.

The population gained from the increased supply of consumer goods and was fully protected against the price rises. So the changes were greeted by popular support. By this mechanism a large shift in prices in favour of the consumer sector of the economy was created, stimulating a spectacular increase in their production.

Second, to allow the price change in favour of consumer goods to take effect, all prohibitions on the formation of enterprises to serve the consumer sector were removed - resulting in the forma-tion of millions of small farms, private and cooperative small businesses, shops and workshops. On this basis huge resources flowed into the consumer sector - with spectacular results, In the decade 1979-89 total agricultural production increased by 49 per cent and total food production by 45 per cent. Food production per capita of the population increased by 29 per cent.

The increase in production of higher quality foodstuffs was even more impressive, In the decade 1979-89 production of pork increased at 7.7 per cent a year, milk at 8.4 per cent a year, butter at per cent a year, eggs at 9.7 per cent a year, grapes at 17.9 per cent a year, bananas at 26.1 per cent a year and so on.

Overall the result was a long term increase in agricultural production productivity: 'The real gross value of crop output per arable acre rose by around three quarters during the reform period. The average annual real grown of net farm output per worker accelerated sharply from only 0.3 per cent between 1957 to 1978 to 4.3 per cent from 1978 to 1991'23

This shift in production was accompanied and made possible by the creation of an enormous number of new small businesses linked via the market. In the agricultural sector, where reform began, responsibility for production was transferred from collectives to individual households and purchases by contract replaced mandatory state procurement. After a number of experiments, by 1984 the household responsibility system emerged as the dominant arrange-ment. Two hundred million small farms came into existence. However, while land use was effectively privatised, landownership was not. Households contracted to use farmland for a fixed period - by 1984 the contract period was 15 years for annual crops and 50 years for tree crops. Farmer contracted to supply specified crops to the state and production over and above the contract could then be sold at market prices.

In 1988 the government legalised the existence and development of privately owned enterprises. These, particularly very small enterprises, grew rapidly. By 1986 there were 500,000 industrial en-terprises in China of which 420,000 were small or medium scale. The expansion of consumer services was equally rapid. In 1977-88 China's total workforce increased by 35 per cent, but employment in restaurants increased by 327 per cent, in retailing by 380 per cent, and in other services by 750 per cent. Total employment in these three service sectors increased from six million to 30 million - which meant an enormous increase in the quality of life for the Chinese people.

But to this day the specifically private sector accounts for a very small share of China's overall industrial output because, as we shall see, the biggest change of all was in the spectacular growth of collectively owned enterprises at village, town and city level - chiefly owned by local government structures. These, together with the small scale private sector, were able to soak up the labour released by the rapid rise in productivity in agriculture and were the basis on the supply side for meeting the mushrooming demand for more and more sophisticated consumer products.

While its starting point was a tremendous stimulus to agriculture, the overall process of the economic reform led to a further and deeper industrialisation of the country with a very large proportion of the growth of small private and collective enterprise located in the rural areas.

Thus: 'The Chinese experience is based on industrialisation; industry represented 35% of GDP in 1970 to 42% in 1990. The decline in percentage terms of agriculture, went from 38% of GDP in 1970 to 27% in 1990... The pattern of industrial growth during the 1980s has favoured light industry, much of it in collective enterprises and, to a lesser extent, private firms as compared to substantially lower, though supposedly still rapid, growth in heavy industries in state-owned enterprises '.24

Industrialisation was not confined to the urban sector: 'the share of agriculture in total village gross income declined from 69 per cent in 1978 to 36 per cent in 1992, alongside the rapid growth of the rural non-farm sector.'25

This planned increase in the weight of consumer production in the Chinese economy was only made possible by maintaining state ownership of the industrial core of the economy. That allowed the government to coordinate a shift in relative prices in favour of consumer goods. If industry had been priva-tised and prices fully liberalised - as in eastern Europe - then Chinese agriculture and consumer goods industries would have been caught in precisely the price scissors which crushed light industries and agriculture in those countries after 1989. The more monopolised heavy industries and energy producers would have raised their prices more rapidly than was possible for the farmers and consumer goods producers who were subject to much greater competition as a result of the smaller scale of their units of production and the greater ease of starting up new small firms. Thus, far from state ownership of heavy industry being a relic of the past which should be discarded as rapidly as possible, it is at the heart of the mechanism which made the Chinese economic reform a success.

The virtuous circle of the Chinese economic reform
As the consumer boom took off however, it had an increasing knock effect upon the state owned indus-trial sectors of the Chinese economy. The increased income of farmers and small businesses cre-ated a demand for rapid expansion of production of materials for con-struction, farm equipment, fertilizers and all kinds of machinery necessary for the further expansion of consumer production.

'The pace of growth of light industry accelerated sharply in the reform period. From 1978 to 1992, light industry (real gross value of output) grew at a reported rate of almost 15 percent per annum. However, in a relatively closed economy such as China's, such growth can only be sustained through simultaneous rapid growth of output from heavy industry to provide the inputs for light industrial products.

'Consequently alongside a boom in output of light industrial products often from the small-scale sector, went a simultaneous rapid growth of output from the heavy industrial sector... The real growth rate of heavy industrial output was reported to be almost 11 per cent per annum in the period 1978 to 1992... Paradoxically, an economy which had shown large heavy industry bias under the communist command system continued to require rapid growth of output from the heavy industrial sector during the reform period. The inter-sectoral relationship under reform had shifted from unbalanced heavy industry growth to balanced growth path, rather than to the emphasis of light industry to the neglect of heavy industry. Indeed, between 1978 and 1992, China's ranking in total world output shifted from fifth to fourth largest in steel, from third to first place in coal, from eighth to fifth in crude oil, from seventh to fourth in elec-tricity, and from fourth to first in cement.'26

As a result of the growth of first agriculture and then the mainly collectively owned new consumer industries, the expansion of heavy industry was also driven forward. In this sense, the Chinese experience since 1978, is superior not only to the IMF-inspired disasters in east-ern Europe and the former Soviet Union since 1989 and 1991, but also shows the ultimate dead-end of the Stalinist strategy of developing heavy industry at the expense of consumer goods and services (outside of such emergencies as war). Both are based on reducing the liv-ing standards of the working class and peasantry. The working classes of eastern Europe and the Soviet Union finally rejected the Stalinist regimes because their living standards were subordinated to a utopian project, socialism in one country, which ultimately undermined the entire functioning of the economy. Recent elections demonstrate that they are now grasping that capitalism is worse. China's experience is a practical alternative to both.

The ownership structure of the Chinese economy
The Chinese economic reform cre-ated the most rapid growth of small businesses and farms anywhere in the world, possibly ever in history. Yet there was virtually no privatisation of large scale industry: 'Unlike Eastern Europe, China has made no efforts to privatise its large state-owned sector but has relied in-stead on collective enterprises and joint ventures (with foreign partners), and private business, though the latter only accounts for a small part of the economy.'27

Public ownership remained predominant even in the rural areas. For example, in 1990 village collective organisations were responsible for ploughing more than 35 per cent of farmland, irrigated 70 per cent of the irrigated area, providing crop protection for 62 per cent of protected crops, supplying more than one third of seeds, fertilizer, insecticide and diesel-oil inputs. It is estimated that in 1992, the income generated by rural collective and cooperative organisations accounted for 45 per cent of the total income of China's rural economy.'28

Public ownership of land was a powerful countervailing force to the social inequality which inevitably accompanied elements of the market reform: 'Farmland was 'de-collectivised' in the early 1980s. This was not followed by the establishment of private property rights. Because the Chinese Communist Party wished to prevent the emergence of a landlord class, it did not permit the purchase and sale of farmland. Still in 1994, the Party 'adhered to the collective ownership of farmland'. The village community remained the owner, controlling the terms on which land was contracted out and operated by peasant households. It endeavoured to ensure that farm households had equal access to farmland... Farmland was not distributed via a free market auction, which would have helped to produce a locally unequal outcome. Rather the massively dominant form was distribution of land contracts on a locally equal per capita basis. This huge 'land reform', affecting over 800 million people, was a remarkably orderly process. It was not a disorganised land grab in which the strong members of the village squeezed out the weak... The egalitarian land reform in the 1980s tended greatly to increase socio-economic stability. It provided equality of access to the use rights of the most important asset in China's villages... It made public action easier to implement since villagers shared a common position in respect to the principal means of production. It provided a hugely egalitarian underpinning to rural, and indeed national, income distribution.'29

The system of farming and land ownership which has developed in China has made rational use of markets without creating the structure of land ownership characteristic of capitalism in either the advanced industrial countries or the countries which remain dominated by imperialism 'The distinguishing feature of China's land tenure system in the post-reform period is separation of individual user rights from other ownership rights which remain 'collective'. The right to use village land is granted to individual households. However, the village retains other rights associated with ownership. Specifically the village collective, as the delegated owner, has the right to allocate land among its members, the right to lease land to outsiders or sell land to the state, and the right to claim rent income from the land... Under the household responsibility system, peasant households are the basic units of farm production, while the village collective takes charge of manag-ing land contracts, maintaining irrigation systems, and providing peasants with equitable access to farm inputs, technologies, informa-tion, credit, and the services of farm machinery, product processing, marketing, primary education and health care.'30

In the industrial sphere, the largest scale change was not from public to private ownership, but a change in the weight of different types of publicly owned enterprises - a vast increase in the collective sector controlled by local government at village, town and city level: 'The most significant change has been the rise in the industrial output produced by the collective sector. This sector consists largely of enterprises under the administrative control or ownership of local-level government at the provincial, city, township and village levels... This sector represents ... a form of social ownership (as opposed to state ownership which is but one form of social ownership)... socially owned enterprises (ie state and collectively owned enterprises) still produce over 85 per cent of China's industrial output. Whilst growth rates may be highest in the private sector, the percentage of output this produces is still very small and the most significant quantitative change in the composition of industrial output during the reform period has been the change within the socially owned sector from the state-owned to the collective sector.' 31

Furthermore, this change occurred on the basis, not of a collapse of state-owned industry, but because the collectively owned sector in light industry grew even faster: 'The state's share of total industrial output (gross value) fell sharply during the reform, from 78 per cent in 1978 to 48 per cent in 1992. However, the share of the collectively owned sector (ie the locally publicly owned sector) rose rapidly, from 22 per cent in 1978 to 32 per cent in 1992. Thus in 1992, fourteen years after the reforms be-gan, the publicly owned sector still produced over 80 per cent of industrial output. Even in Guangdong province, much the most market oriented province in China, the publicly owned sector still in 1992 produced 68 per cent of gross industrial value. The pure private sector produced just over 5 per cent and 'other' sectors, which were mainly joint ventures, usually with public sector firms, produced just over 26 per cent of industrial output (gross value) in Guangdong. Thus, during at least the first decade of China's reforms, entrepreneurship was mainly employed in the service of some form of public enterprise.'32

The part of the state sector which was displaced by collective and private industry was precisely that producing on the smallest scale: 'the share of the non-state sector, including both the collective and latterly the individual and foreign investment sector, rose dramatically from 22 per cent in 1978 to 52 per cent in 1992. However this was almost entirely achieved at the expense of the small scale state sector. The share of the large-scale and medium scale industrial sector, which was almost wholly state-owned, remained remarkably con-stant, at around 43 per cent of output throughout the reform period.'33

This was theorised on the basis that state ownership was less efficient than a market mechanism in relation to the smaller units of production. The attempt to operate the whole of industry in the state sector prior to 1978 had simply meant that the millions of smaller scale enterprises necessary to produce consumer goods failed to develop. As a result of the economic reform: 'The rapid growth in the non-state sector's share of industrial output was largely at the expense of the small-scale state sector. The large-scale state-owned sector grew at roughly the same (ie very rapid) rate as the whole industrial sector. Indeed, the share of large scale industrial plants in total gross industrial output remained constant at around 25-26 per cent throughout the 1980s.'34

The basic industrial structure which emerged was one in which the state sector remained dominant in large-scale heavy industry, rural areas experienced rapid industrialisation driven by the development of collectively owned enterprises and the private sector grew rapidly in the smallest units of production of all.

As regards the relative weights of the collective and private sectors: 'In the 1980s it once again became legal to set up and run small businesses, and the pure private sector grew rapidly. By the early 1990s, the total number of people working in individual rural non-farm businesses had risen from negligible levels to around 47 million. However, the rural collectively-owned sector still employed a much large number of people, around 59 million in 1992.'35

By 1994 the collective sector of town and village enterprises employed 112 million people and since 1990 had created 6.5 million jobs a year, absorbing 70 per cent of the annual net addition to the rural labour force.

The 'pure private business sector was mainly small-scale 'petty commodity production'. located predominantly in non-industrial activities with small amounts of fixed assets per business. The collective sector occupied the 'commanding heights' of rural industry accounting for 63 per cent of employees in rural industry in 1992... The rural collectively owned sector was much larger than the urban one. ILS output value in 4992 was 2.2 times larger than that of the urban collective sector.' 36

Although the collective enterprises operate in a market, they do not have the characteristics of co-operatives in a capitalist economy: 'China's 'collectively' owned enterprises were not cooperatives in the normal sense of the word, namely each enterprise run by its owners. Rather, they resembled national state-owned, with the 'state' being the local community, each of which typically owned multiple enterprises.'37

The relevance of such structures to the former Soviet Union is obvious: 'If the transition orthodoxy's view of the relationship between property rights and economic incentives were correct, one would have expected that, whatever changes had taken place in the setting within which China's rural non-farm collectively-owned enterprises operated, they would still have been unable to operate successfully. Instead of stagnation, the 1980s witnessed phenomenal growth in rural non-farm industry in which the public sector was dominant. Between 1978 and 1992 total employment in the sector increased from 17 million to 63 million and the gross value of output rose by around 22 per cent per annum. The share of the township enterprise sector in China's gross material product rose from 17 per cent in 1985 to 25 per cent in 1990 exports from China's rural township enterprises rose from $1.7bn to S9.6bn. and their share of China's rapidly growing exports in-creased from 4.8 per cent to 15.2 per cent... had the export performance of a single developing country improved in such a dramatic way, teams of Western experts would have been despatched to understand the cause of the phenomenon. Yet there was little serious outside investigation of the reasons for the explosive export growth of this predominantly publicly owned sector. "38

Furthermore, the fact that these enterprises were owned by the local village and town communities meant that their surpluses could be made available for the development of welfare services locally: 'China's local authorities were able in most areas to generate revenue from the rural non-farm sector, so that they were in a better position than might have been the case with privatised small businesses to undertake community welfare expenditures of benefit to the standard of living of the whole local community.'39

The overall structure of China's industrial output by forms of ownership is shown in Table 2.

The international success of the Chinese economy
The driving force of China's phenomenal economic growth has been its domestic economy. It was the success of China's domestic economy which attracted foreign investment, not vice versa. As late as 1983, by which time the Chinese economy was growing at 9 per cent a year, annual foreign investment was less than S2bn. It was the priorities established in China's domestic economy which made possible the extraordinary expansion of its foreign trade and foreign investment into China.

That is the only way in which economic policy could proceed. It is not possible to apply fundametally un-integrated domestic and international economic policies. The priorities established in the domestic economy determine the resources available for international trade. The priorities established in international trade will require the corresponding allocation of resources in the domestic economy.

In this sphere too, neither the theory of socialism in one country, nor opening the economy up to the international market, could achieve the desired result - to take advantage of the international division of labour to progressively upgrade the performance of the economy.

Socialism in one country was a dead-end quite simply because it is not possible, on the basis of one country, to create a development of the productive forces superior to capitalism which is based upon an international economy. The overturn of capitalism is both possible and necessary in individual countries. However, to date capitalism has been overturned, not in the most advanced capitalist countries, but in those countries whose further development was blocked by capitalism. Without the socialist revolutions of 1917 and 1949, Russia and China would have been prey to more powerful imperialist states which would have broken them up and colonised them - just as the Ottoman empire was parcelled up between the western imperialist powers. Lenin summarised the problem: 'a backward country can easily begin because its adversary has become rotten, because its bourgeoisie is not organised, but for it to continue de-mands of that country a thousand times more circumspection, caution and endurance. It will be different in western Europe; there it will be immeasurably more difficult to begin but immeasurably easier to go on.'40

Thus the problem confronting the Russian and Chinese revolutions was that they occurred in backward countries confronting more advanced and powerful capitalist states organised in a world capitalist system of states. The only way out of this situation was for the overturn of capitalism to be extended to the more advanced capitalist economies. On the domestic economic front this meant using the levers created by the socialist revolution to raise living standards and strengthen the alliance between the working class and peasantry to act as a base of support for the extension of the revolution when and as this became necessary. That is why the original leaders of the Russian revolution gave such enormous importance to the creation and development of the Communist International.

To develop the domestic economy, however, required not national isolation but, participating in the international division of labour to the maximum possible extent on the basis of a planned and socialised economy: 'We cannot escape from capitalist encirclement by retreating into a nationally exclusive economy. Just because of its exclusiveness such an economy would be compelled to advance at an extremely slow pace, and in consequence would encounter not weaker, but stronger, pressure, not only from capitalist armies and navies ("intervention"), but above all from cheap capitalist commodities. 'The monopoly of foreign trade is a vitally necessary instrument for socialist construction, under the circumstances of a higher technological level in the capitalist countries. But the socialist economy now under construction can be defended by this monopoly only if it continues to come closer to the prevailing levels of technology, production costs, quality, and price in the world economy.

'The aim of economic management ought to be not a closed-off, self-sufficient economy, for which we would pay the price of an inevitably lower level and rate of advance, but just the opposite - an all-sided increase in our relative weight in the world economy.'41

In terms of the international relations of a non-capitalist economy, therefore: 'The greater the success of the development of the Soviet economy in the future, the more extensive foreign economic relations will have to be. The contrary theorem is even more important - it is only through a growing extension of imports and exports that the economy will be able to overcome in time the partial crises, to diminish the partial disproportions and to balance the dynamic equilibrium of the various sectors in order to assure an accelerated rate of development.'42

This is precisely what the Chinese economic reform has started to approach in the sphere of its international economic relations - a success inextricably linked to the domestic economic reform. The expansion of foreign trade has now become even faster than domestic growth. China's world export rank increased from 32nd in 1978, to 17th in 1987, to 11th in 1995.

The pattern is clear. First, it is China's economic growth, as opposed to Russia's collapse, which makes it attractive to foreign investors who are aware that, unlike in Russia, the Communist Party remains in power. China's economic growth makes it a crucial market for entire sectors of the world economy. Large international companies face a situation where if they do not invest in China they may face elimination by their competitors in the world market.

Secondly, the priority given by the Chinese economic reform to the production of consumer goods meant it focused on the sectors in which it is easiest to become internationally competitive - because they require far lower levels of capital investment than heavy industry: 'The proportion of primary product exports has been relatively small...exports have been predominantly of manufactures, 73 per cent in 1990, a considerably greater fraction than is typical in 'low income countries'. It is interesting to note the contrast with some of the east European countries. Chinese exports appear to be largely the products of light industries - one third are textiles and clothing.'43

Third, the Chinese government used its leverage, of a population numbering more than one billion in the world's most rapidly growing economy, to exact concessions from foreign investors. For example, tariffs and other measures were used to pressure foreign companies to produce consumer goods in China rather than simply importing them (as with Russia). Where part of the production of such goods was for export, raising foreign currency which could be used to upgrade China's technology, the government gave tax concessions to foreign investors. Similarly, firms competing for investment contracts in China had to offer transfers of technology, training for Chinese workers and even investment in infrastructure projects. For example: 'In order to gain access and rapidly growing China market, Boeing was required to assist the main Chinese aircraft manufacturer in Xian to successively establish a capacity to produce spare parts and then manufacture whole sections of aircraft, and finally to assist in the development of a capacity to produce complete aircraft within China.'44

Fourth, foreign investment then gave China access to international marketing networks and the know- how to improve the quality, presentation, packaging and advertising of Chinese goods - increasing its ability to export.

Fifth, once China's position as a producer of consumer goods had been transformed, the enormous demand generated for improving the infrastructure and heavy industry, provided a further impetus to foreign investment. The Wall Street Journal reported: 'Discussions about infrastructure are usually boring - until you come to China... Its infrastructure shopping list for the next decade is eye-popping: 40 airports; 114 metropolitan light railway systems; scores of ports, power plants, roads and bridges... "It's the greatest market in the whole future of the world," says Paul Donovan, president of Asea Brown Boveri Plant Systems... It's no surprise that when Shi Dazhen, China's energy minister, recently passed through Washington, some 200 representa-tives of US companies flocked to an impromptu appearance he made, and hung on his every word.'45

The Financial Times recently noted: 'China is regarded as the world's fastest growing market for new aircraft... The US company (Boeing] estimates that sales of commercial aircraft in the country in the next two decades will be worth $100bn making it the third biggest aviation market in the world after the US and Japan... the authorities are now turning their attention to improving airport facilities to cope with expected annual passenger growth of 10 per cent for the next 20 years, com-pared to a forecast worldwide increase of 5.1 per cent.'46

This situation means that, far from becoming more dependent on foreign powers or susceptible to pressure by international capitalist companies, China's economic growth is giving it the power to extract better deals from those foreign investors which it chooses to let into its economy.

Thus, on the basis of its domestic economic reform, China was able to move on to create a parallel 'virtuous circle' - increased consumer production, attraction of foreign capital, exports, improvement of quality and technology of production, greater consumer production, a wider variety of exports, and then, on the basis of thc resources generated by the first wave of development, the expansion of heavy industry and the whole infrastructure of the country. The result has been a huge surge not merely in output of the Chinese economy, but in its productivity. Far from making a virtue of isolation from the international division of labour, China has succeeded in turning it to its advantage on a colossal scale. Again, this was only possible on the basis, not of the free market, but a planned economy in which the decisive decisions are taken by the state, not private companies.

The expansion of trade, in turn, provides a significant stabilising factor in relation to China's domestic economy: 'On balance, trade was a stabilising force in China's economy. Domestic economic fluctuations - which were considerable - were dampened by the ability to run large short-term trade deficits.'47

The contrast with the 'vicious circle' into which the re-introduction of capitalism has locked Russia is dramatic. First, the break-up of the Soviet Union and the loss of markets in eastern Europe, took the Russian economy in the opposite direction to what was necessary. One of the largest single factors in Russia's economic collapse, was the retreat from an economy of 280 million people to one of 150 million.

Second, under the guidance of the IMF, Russia has become an ex-porter of raw materials and energy - whose prices relative to manu-factured goods have been falling for more than 100 years - driving the economy steadily down, not up-market and trapping it in an historical dead-end.

Third, to release energy and raw materials for export, domestic consumption was cut, by raising their prices to world levels. The price of fuel has risen three times more than the prices of the food processing industry's products and eight times more than those of light industry. This is a key factor in the unparalleled slump in Russian manufacturing industry.

Fourth, rising energy and other industrial prices, reinforced by falling living standards, led to an 85 per cent fall in output in light in-dustry between 1990 and the end of 1995, alongside a catastrophic crisis in Russian agriculture with the worst harvest in 20 years in 1995. A pricing policy was followed which favoured energy and metals, the sectors which internationally are undergoing the greatest declines in prices, and require the greatest levels of investment per unit of output, at the expense of consumer production and agriculture.

Fifth, the consequent spirally decline of its domestic economy means that, even though, Russia has had a government faithfully following the advice of the IMF for four years, it is one of the least attractive places in the world for foreign investment.

This contrast is clearly understood. It is illustrated by the regular humiliation of a Russian government dependent for its survival on assistance from the IMF whose conditions for further loans are precisely the continuation of the economic course which has produced the present situation.

Democracy, planning and the market
On the level of domestic economic policy, the Chinese bureaucracy has thus applied reforms which raised the material and cultural level of the Chinese working class. This in turn allowed the Chinese workers' state to re-cement the alliances with both the peasantry and the urban petty bourgeoisie which were shattered by the economic strategy of socialism in one country.

But, the economic reform produces new contradictions. Any major stalling of economic growth would bring these into the open.

Democracy in China meets the objective constraint of the country's overall level of development. To raise Chinese living standards to west European levels is the work of many decades even with the best conceivable economic policy.

State control of industry and planning introduced powerful levers for directing economic development but these are constrained by the real resources available to Chinese society. The market will remain for a very long time to come the only possible mechanism capable of coordinating the production of tens of millions of peasant households, small manufacturers, consumer services, shops, workshops and so on.

This situation dictates that hard choices in terms of the allocation of resources between consumption and investment, industry and agriculture, different sectors of each, infrastructure and social welfare, different regions of the country and so on, be taken on the basis of the widest possible input from the Chinese working class and peasantry. This implies, for example, that the trade unions be restored to their role of representing the views and interests Chinese workers in state enterprises, collectives and joint ventures with foreign capital. Only in this way can the different demands on economic policy be resolved in such a way as to maintain as the first priority of the raising living standards.

Second, the very success of China's economic reform was based upon achieving more correct pro-portions in the economy between consumption, agriculture and food production, light industry, services and heavy industry. The de-collectivisation of agriculture and recreation of the urban petty bourgeoisie made possible a vast increase in the production and distribution of food. Planning and state control of industry allowed a move towards rational pricing starting with changes to stimulate the production of consumer goods. The resulting devel-opment of light industry secured the alliance with the peasantry by making consumer goods and cheap inputs available to them in exchange, via a market mechanism, for food. The stimulus to agriculture and light industry allowed heavy industry to be re-integrated as a cog supplying the inputs to develop light industry and agriculture, rather than an end in itself.

But the proportions between the different sectors of the economy, the quality of their output, the levels of investment in each, have to be constantly re-appraised and altered in accordances with real economic development. This can only be done on the basis of involving the work-ing class and petty bourgeoisie in making the basic economic choices and monitoring their results. Thus, the further advance of the economy requires the ever-increasing involvement of the working class in assembling the information, making the decisions and checking the progress of their realisation. This the Chinese bureaucracy refuses to countenance.

Third, having freed itself from accountability to those it claims to represent, the bureaucracy of the Chinese Communist Party is subject to widespread corruption. Because officials cannot be held to account, they can seize privileges, are subject to bribery and can use their control of the state and economic apparatus to accumulate capital. This opens a chink in the Chinese state to international and indigenous private capital - creating a pro-capitalist wing of the bureaucracy linked to capitalist forces outside the Communist Party. Without the ability of the working class to control and purge the bureaucracy and periodic campaigns against corrupt officials are ineffective - touching only the tip of the iceberg.

Fourth, market mechanisms themselves deepen inequalities - particularly the huge differentials between regions, between urban and rural areas and also through the emergence of genuine Chinese capitalists. Such inequalities require central government action to re-distribute income to the poorest parts of the country. A critical problem is that the decentralisation of tax collection has greatly reduced the share of central government in the economy and so decreased its ability to alleviate regional inequalities. The power of the central state to overcome such centrifugal tendencies which naturally are encouraged by international capital, depends crucially on its ability to draw the population directly into making the decisions about how to redistribute resources within different regions and sectors of the economy. Without accountability to the working class, the bureaucracy is susceptible to bribery by those with the means for this, in the richer regions to resist subsidies to the less developed parts of the country and so to transfer regional and class antagonisms into the Communist Party bureaucracy itself.

Fifth, the only countervailing force to such developments would be to increase the political weight of the working class in Chinese society at every level of decision making. But, that runs up against the fact that it would undermine the privileged positions of the bureaucracy. This role of the Chinese bureaucracy in atomising the Chinese working class stores up explosive contradictions for the Chinese revolution because it weakens the most powerful force - the Chinese working class - capable of countering the pro-capitalist tendencies which must constantly re-emerge. While the success of the economic reform in raising living standards reduces the ability of imperialism to take advantage of those contradictions they remain real and will emerge with even greater violence if economic growth falters. The Chinese bureaucracy is the most important transmission belt of the pressure of international and domestic capital against the Chinese revolution.

Where is China going?
To lead the Chinese revolution to victory in 1949, the Chinese Communist Party had to break with the line of the Soviet bureaucracy which opposed a socialist revolution in China. It thereby overthrew capitalism, and ended 100 years of colonial humiliation symbolised by the former signs in Beijing parks 'no dogs or Chinese', in the most populous country on earth. What-ever their errors and subsequent crimes, Mao and the Chinese Communist Party led one of the greatest revolutions in history.

The Chinese socialist revolution was second only to the Russian revolution in the weight of the blow it struck against imperialism and in its significance for world politics. Even before its victory in 1949 the struggle led by the Chinese Communist Party was a determining factor in the outcome of the second world war because it prevented Japan from opening up a second front against the Soviet Union from the east - allowing the USSR to concentrate its forces against Hitler.

In Korea, the entry of the Chinese army into the war stunned the US and fought it to a standstill - making Korea the first war in history which the US did not win. In Vietnam, China played a crucial role in both the war against the French in 1946-54 and against the US in 1966-75.

Following the crushing defeats of the West European working class in 1923-39 the class struggle in Asia played the decisive role in the advance of international class struggle. On the most fundamental level of world politics, the period from 1949-75 was dominated by the clash between the working class and peasantry of Asia with the United States. This prevented the USA from concentrating its forces against the Soviet Union for the entire period from 1949 to 1975.

While the objective significance of the Chinese revolution was a massive extension of the interna-tional revolution, the political line of the Chinese leadership was not this, but the construction of socialism in one country. This was even more utopian for China than the Soviet Union - because China started out on a far lower level of economic development - Soviet income per head in 1928 was three and a half times greater than in China in 1952.

On the domestic level this policy led China into an economic impasse. The attempt to collectivise agriculture through the Great Leap forward resulted in agricultural production in the mid-1960s falling well below the level of 1957. The political terror and ultra-left course of the Cultural Revolution, which opened in 1966, further threw back the Chinese economy.

The Sino-Soviet split from 1960 - whose negative consequences for the international class struggle cannot be over-stated - was a logical outcome of the strategy of socialism in one country. Each bureaucracy could argue that the Soviet bureauc-racy could not tolerate an independ-ent political leadership within the international communist movement because it would legitimise alter-native views within the USSR. In 1960 it unilaterally withdrew its economic aid and advisors from China - at a time when China was the country most threatened by the military build-up of US imperialism.

The Soviet Union then paid a colossal price for Krushchev and Brezhnev's bureaucratic chauvin-ism. Following, the initial ultra- left turn of the cultural revolution, in the 1970s the Chinese bureaucracy made a sharp right turn in foreign policy to increasing alliance with the United States. If, from 1949 to 1975 the greatest weight applied against imperialism had been the struggle of the Asian workers and peasants, from 1975 the greatest relief provided to imperialism was the de-railing of that struggle by the right wing turn of the Chinese bureaucracy. This culminated in the Chinese invasion of Vietnam and the military tension along the Soviet/Chinese border - including the establishment of a line of US lis-tening posts in China.

In the second world war and through to 1975 the Chinese revo-lution and its extension in Asia had prevented imperialism concentrat-ing its forces against the Soviet Union, The consequences of the Sino-Soviet split after 1975, by undermining the class struggle in Asia, allowed the US to re-orient to cracking the Soviet economy via Reagan's military build-up. That led to Gorbachev's assumption of power and the crisis which ensued.

The US alignment with China was purely for the purpose of disposing of its principal military opponent - the USSR. This has not yet been achieved. Every poll demonstrates that the great majority of the Russian population rejects the capitalist economic course embarked upon from January 1992. If democracy is maintained in Russia, that economic course is going to be overturned. However, if capitalism were to triumph in Russia, the con-sequences for China would be grave.

Russia is the only country in the world with the military capability to destroy the United States. If that counter-weight to the US were to be removed, the US would back up its demands on China by the threat and even the use of military force. The US gunboat diplomacy, with the despatch of two aircraft carrier battle groups to Taiwan at the beginning of March is just a foretaste of what is to come.

In strictly military terms China is no match for the United States - it possesses just a handful of nuclear missiles capable of reaching the US. Japan's perspective is equally clear. While it could never stand up to the Soviet Union militarily. It has a simple strategy vis a vis China - the acquisition of nuclear weapons to counter Chi-na's advantage in population.

Thus from the point of view of the international positions of both China and the USSR the political results of socialism in one country have proven to be as disastrous as the economic distortions it produced. They have helped put the Russian revolution in even greater peril than Hitler's invasion in 1941 and, if the Russian revolution is overcome, they will expose China as the next non-capitalist domino which the United States and its allies will seek to overturn. The benefits to imperialism of the re-conquest of China for capital would far outweigh the temporary losses which would result for individual capitalist companies.

China and Russia
It is therefore on the field of foreign policy that the reactionary role of the Chinese bureaucracy is most clear. The right wing course of collaboration with US imperialism was maintained from the mid-1970s through to China's refusal to use its veto in the UN Security Council to block either the Gulf war or the NATO intervention in the former Yugoslavia. However, as we have seen, that policy merely allows the US to bring forward its preparations to tighten its military noose around China itself.

US imperialism's nightmare, however, is that in the event of a defeat for Yeltsin in Russia, there could be a realignment between China and a government overturning capitalist economic policy in Russia. A non-capitalist Russia would rapidly draw back together large parts of the former Soviet Union. It remains militarily powerful enough to vastly reduce the US nuclear threat to China. Its economy would not merely benefit from the lessons of the Chinese economic reform, but also has the potential in many fields to complement and gain from economic exchange with China.

There were signs prior to 1991 that the Chinese leadership were moving in that direction - to Washington's extreme displeasure. In Russia, it is argued that alliance with China is the only possible counter-weight to NATO expansion into eastern Europe. Imperialism will do everything in its power to stop such a rapprochement between China and Russia - including military threats. But that does not mean that it will be able to prevent it. That would signify that the most damaging division in the international workers' movement in the entire post-war period had been overcome - with immense positive consequences for the entire international class struggle.

Conclusion
The contrast between China, eastern Europe and the former USSR shows that it is possible to reform a centraIly planned economy without creating either the economic collapse caused by the attempt to restore capitalism or returning to the distortions which destroyed popular support for the command economy created under Stalin and Brezhnev.

These conclusions have explosive political implications in the former USSR. In the former Soviet Union and Eastern Europe hundreds of millions of people have, in the space of six years, been reduced to desperate poverty. Simultaneously, large parts of the capitalist third world, notably Africa, have suffered an economic and social holocaust over the last decade.

In China, by contrast, the largest population in the world has enjoyed rapidly rising living standards for 17 years. Anyone, who does not see the necessity to explain such facts has lost touch with the issues which determine the quality of life for the majority of the earth's population.

China shows how one of the poorest countries in the world, having overturned capitalism, can develop its economy at a pace al-most unprecedented in history. This means that the peoples of the former Soviet Union are going to understand, not merely that they were tied to when they were told that capitalism would bring prosperity and democracy (that is already understood), but also that their immense suffering was entirely unnecessary. The explosive political potential of that under-standing was illustrated in Russia's December 1995 parliamentary election.

A reversal of the capitalist economic policy in Russia would have im-mense attractive power to Ukraine, Belarus and other former Soviet states whose economies have been even more devastated since 1992. It would start to reverse the entire course of world history which followed from the events of 1989 and 1991 in eastern Europe and the USSR. Finally, it would pose the possibility, not the certainty given the role of the Chinese bureaucracy, of a realignment of China with a non-capitalist Russia - the greatest blow which imperialism could conceivably suffer at the close of the twentieth century. Every socialist, amid oppressed person, in the world has a direct interest in doing everything they can to con-tribute to such an outcome.

Footnotes
1 Paul Bowles and Xiao-yuan Dong, 'Current successes and future challenges in China's economic reform', New Left Review 208. p49
2 Ibid p49
3 Wall Street Journal, 13 December 1993
4 Economist, China Survey, November 1992
5 China's Rise, Russia's Fall, Nolan. Macmillan 1995, p2lO
6 Nolan, p22
7 Financial Times 16 January 1993
8 Nolan, p303
9 Cited in Bowles and Dong, p54.
10 Wall Street Journal, 3 February 1994
11 Layard, 1993, pp 15-16, quoted in Nolan, p269.
12 'Reforming a planned economy: Is China unique?' in 'From Reform to Growth: China and other countries in transition in Asia and Central and Eastern Europe, Naughton, OECD l 994, p70
13 Jeffrey Sachs and Wing Thye Woo, 'Understanding recent reform experiences of China, Eastern Europe and Russia' in 'From Reform to Growth: China and other countries in transition in Asia and Central and Eastern Europe, Naughton, OECD 1994, p25
14 Economist 1995
15 Nolan, pp8-9
16 Naughton. p68
17 Naughton. p50
18 Naughton. p70
19 Trotsky, 'The Soviet economy in danger'. Writings 1932, p274
20 Bowles and Dong, p67
21 Nolan, p4
22 Naughton, p66
23 Nolan, pl99
24 E Gerrard Adams, 'Economic transition in China: What makes China different', in 'From Reform to Growth', p2l9
25 Nolan, pl99
26 Nolan, p207
27 Adams, p2l6
28 Bowles and Dong, p65
29 Nolan, ppl9l and 200
30 Bowles, p64
31 Bowles, p55
32 Nolan, p175
33 Nolan, p205
34 Nolan, p2l7
35 Nolan, p218
36 Nolan, p2l9
37 Nolan, p2l9
38 Nolan. p22l-2
39 Nolan, p222
40 Lenin, Collected Works, Vol. 27, p29l
41 Trotsky, 'The platform of the left opposition', in 'The Challenge of the Left Opposition 1926-27. pp 334-336
42 'Trotsky, 'Successes of socialism arid the dangers of adventurism', Writings 1930/31, 104
43 Adams, p222
44 Nolan, pl88
45 Wall Street Journal, 13 December 1994
46 Financial Times, 31 January 1996 47 Naughton, p66