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Let's consider the ways China's economy changed over the 20 years that began in 1958. Reforms in the areas of public ownership and socialist means of production gave the centrally planned economy a welcome push during this period, and the economy was able to accomplish some notable feats. But the system's inherent problems soon became evident. The entire national economy resembled one, large enterprise, with the central government functioning as head office and local governments the branches. Enterprises that should have been independent entities resembled production workshops operating under a parent company umbrella.Like a big business, the central government issued directives and passed them on to lower level departments, which in turn gave orders to the workshops. This top-down system of order-giving was unusually complicated and oftentimes led to inaccuracies. It combined production with consumption and lacked the flexibility needed to make adjustments. To an outside observer, China's national economy might have appeared orderly. But, in fact, it had already fallen into a state of rigid inefficiency.
As central planning began dragging down the national economy, the central government tried to make some policy adjustments. However, constrained by the ideology of that period and limited knowledge, the adjustments in this early phase were little more than minor patches for the framework of a planned economy. Also, measures often deviated from their original plans – and sometimes moved in the opposite direction -- when put into practice.
Later, it became evident that there was no way to root out all potential problems while reforming a centrally planned economy. On the contrary, whenever a policy adjustment was implemented by central planning's elite few, everyone in China was suddenly forced to participate, jolting the entire society. Moreover, the system lacked any sort of social safety net.
Power Transfer
During this phase, the central government started granting more administrative power to local governments. This policy marked the first major revamping of the planned economy. It was as if leaders of a parent company had granted a certain amount of managerial authority to subsidiaries. The adjustments increased competition among subsidiaries but, in essence, the system did not significantly change.
The central government was still the nation's largest enterprise, relying primarily on administrative decree to operate. It did not depend on market price signals to allocate resources based on scarcity. To a significant degree, it was extremely dependent on accurate and detailed advanced planning. Without price signals to provide objective criteria, it was difficult to assess the pros and cons of subjective planning and make rational decisions. Intrinsic shortcomings of policy, as well as problems with execution and motivational issues, contributed to varying amounts of inefficiency, waste and loss.
In 1957, based on an August 1956 resolution approved at a meeting of the Eighth National Congress of the Communist Party of China (CPC), the central government instituted reforms and granted more administrative power to local governments. The transfer of power took effect at the beginning of 1958, creating a kind of decentralized command economy.
At the same time, massive numbers of people were moving into communes. The merging and reorganization of agriculture production cooperatives and the integration of governmental administration and commune management further strengthened the government's control of the rural economy as well as the entire society. This movement became the basis for the Great Leap Forward initiated by Mao Zedong in 1958.
The policy that granted administrative authority to local governments did not match Mao Zedong's line of thinking when he raised the subject in a speech called On 10 Major Relationships. As a result, changes in the structure of domestic politics in 1957 and '58 made the idea of transferring power to local governments and enterprises politically incorrect.
Prior to the Eighth National Congress, many controlling economic bodies and state-owned enterprise (SOE) leaders had already expressed a keen interest in Yugoslavia's experiment with "enterprise autonomy," and hoped China could draw lessons. At the congress, autonomy became a hot discussion topic. But later in 1957, CPC criticism of Yugoslavia's so-called "self-governing socialism" began to grow, and the idea of granting more power to enterprises was subsequently left off the reform plan agenda for China.
Mao Zedong's On 10 Major Relationships touched on how best to grant more power to enterprises, workers and individuals in order to "muster up enthusiasm." At the time, his ideas were very similar to those found in policies in other socialist countries, which were increasing material incentives for SOE workers through a process of "de-Stalinization." By 1957, a divergence in views between CCP and the Soviet Union regarding Stalinism was becoming apparent. The Anti-Rightist Movement was well under way, and "individualism" had been deemed as harmful as opposing the CCP and socialism. The movement demanded that people "cut the fetters and fame of wealth." That put the idea of using material incentives to muster enthusiasm among individual workers in direct conflict with dominant ideology.
In this political climate, policies granting additional power and profit rights could only be implemented for the sake of local governments. So a transfer of power to local governments became the basis for reform in 1958. "Institutional reform" was defined as "transferring administrative power to lower levels." And this kind of reformist thinking had a profound influence on China's future economic development.
The Eighth Plenary Session of the CPC, which convened in September 1957, was the meeting where the Great Leap Forward was launched. At the same time, it established an "economic administrative management system" to "make rapid progress in building a solid economic foundation." A five-member working group headed by committee member Chen Yun drafted three key regulations, including directives for improving industrial and commercial administrative management systems, and for dividing the financial and administration powers of the central and local governments.
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