The Genesis of China’s Economic Transition

Abstract

Structural transition from an unbalanced to a balanced economy in China induced a sudden expansion in the number of TVE workers, which in turn led to a high growth in output in the 1980s. Before 1979 China adopted the Stalinist strategy and transferred a vast amount of farm surplus into state investment. This created a typical dual economy with investments concentrated on heavy industry and a vast surplus labor in agriculture. Around 1980, a reverse flow of farm surplus from the state to peasants brought both capital and investment goods to the surplus labor. It was this reverse flow that launched China’s economic transition in the early 1980s. The essence of the reverse flow was a large-scale redistribution of China’s investment (about 33% of GDP), although there was no privatization in the 1980s. This shows that China started to give up the Stalinist strategy at an opportune moment when the majority of its population was still rural. Thus, its economic transition could begin with a rapid expansion in rural industrialization, whereas in the Eastern European countries the majority of their population was already urban and industrialized when they abandoned the Stalinist strategy.