FOREWORD

China's Road towards a Socialist Market Economy– Interview with Prof. Xu Guihua

Yang Yanqing

US strategist Zbigniew Brzezinski claimed socialism had been a “grand failure” from the late 1980s to the early 1990s in his book Grand Failure:The Birth and Death of Communism in the Twentieth Century, published in 1989. Japanese-American economist Francis Fukuyama even asserted that the fall of Communism in Eastern Europe and the dissolution of the Soviet Union signaled the triumph of capitalism and “the end of history” in his book The End of History and the Last Man in 1992.

There is no need to go into detail regarding the subsequent changes that happened in China and the world. Far from collapsing as these projections claimed would happen, China quickly grew into the world's largest exporter and second-largest economy, turning the “China model” into a global buzzword. Against the background of the COVID-19 pandemic in 2020 which has thrown the whole world into recession, some Western politicians, feared by China's ability to mobilize people and resources so efficiently, are even hoping to deal with the rise of the “China model” by a deterioration in diplomatic relations with China.

Francis Fukuyama, who predicted “the end of history”, said in 2015 that the international order China was trying to build put more emphasis on the centrality of the “state”, and that this was not necessarily a bad thing. The world would inevitably move toward the rules led by China, because the country had the financial resources and power to lead the rules formulation, he said.

Looking back on over 40 years of reform and opening-up in China, it is by choosing the road of “a socialist market economy with Chinese characteristics” that the country now has such “financial resources”and “strengths”. Xu Guihua, a professor at Fudan University's School of Economics, was an early proponent of several major conceptual innovations, such as the “primary stage of socialism”, the “socialist market economy” and the “socialist stock economy”. He had a dialogue with Yang Yanqing, deputy editor-in-chief of China Business News and managing director of the Yicai Research Institute, to discuss these concepts.

I. On Primary Stage of Socialism

Yang: Today, it is hard to imagine the difficulties through the reform and opening-up as China has changed so much. In early 1987, you put forward a new interpretation of the “primary stage of socialism”. Can you explain what it meant at the time?

Xu: Our understanding of the primary stage of socialism is based on the “primary stage of the primary stage” as laid out during the 12th National Congress of the Communist Party of China in September 1982. It means we are now in the primary stage of socialism which is in the primary stage of communism. Socialism, as envisioned by our Marxism founders,was a primitive stage of communism established after a highly developed stage of capitalism. We have yet reached this stage.

I submitted a report entitled Correct Assessment of China's Social Development Stage to the former State Commission for Economic Restructuring in early 1987. The report, written in November 1986, was later included as the first chapter in this book.

Almost all socialist countries in the world had confused “socialism development in a poor and underdeveloped country” with socialism development envisaged by Karl Marx upon a prosperous and highly-developed capitalist society. As a result, socialist countries constantly found themselves struggling against the mismatch between theory and practice. These were my thoughts then.

Yang: You noted in the report that “according to the scientific foresight by Marx and Engels, commodity or money relationship should not exist in the first stage of the communism, or socialism”. However, the Soviet Union and other socialist countries which had declared the first stage of communism all embraced production and exchange of commodities and the associated social relations. People could not outrightly declare Marxist doctrine outdated or deny the practical role of commodity economy. How did you deal with such dilemmas at the time?

Xu: The major conclusion I reached in my report is that we should do away with the issue of stages of a society's development. We should get out of the mindset that we are in the primitive stage of communism, which is socialism, and go back to the stage of socialist development of backward countries. We should admit that China is still in the primary phase of socialist development of backward states when considering the country's fundamental realities and practices.

The 13th National Congress of the Communist Party of China held in October 1987 fully affirmed that China was a large nation in the East with backward productive forces, and that it had adopted a model of socialism that differed from the socialism developed based on advanced capitalism envisaged by the founders of Marxism. This determined that China would need to remain in the primary stage for a long time in order to achieve the level of industrialization, commercialization of production, socialization and modernization which many other nations had already achieved in the era of capitalism.

Yang: As one of the first scholars to propose the concept “primary stage of socialism”, what can you tell us about its scientific definition, theoretical breakthrough and innovative significance?

Xu: The primary stage of socialism has great significance that cannot be underestimated. It led to relaxing of the policy on private sectors and other economic areas and nurtured a leap forward in various kinds of opening-up policies, so as to enable the transformation of the economy from a product-oriented one to a commodity-oriented one. This would make the later choose a market economy entirely rational. The contradiction between theory and practice that bothered socialist states for decades was easily resolved. The corresponding breakthroughs set the theoretical foundations and rational premises for lowering the threshold for a series of reform and opening-up policies, enabling their smooth implementation and paving the way for sustainable development.

II. About Socialist Market Economy

Yang: Another difficulty of theoretical breakthroughs following the“primary stage of socialism” is the relationship between the planned economy, which is centralized, and the market economy. How did you solve this issue? The background at that time is almost all Eastern European nations chose the so-called path of free market economy on the basis of privatization and the former Soviet Union was about to dissolve. What noticeable differences are there between China's socialist market economy and market economies in Western nations?

Xu: In November 1990, I completed a research report entitled Solving the Puzzle of the Century: Research Report on Plan and Market Relationship, which became the second chapter in this book.

The report argued that it was both necessary and inevitable that China chose the market economy both in theory and in practice. China's market economy is based on Marxism's theory of states, which emphasizes public ownership, especially socialist state ownership and state-owned assets. This can be seen in its institutional traits and the co-existence of multiple economic ownership structure, unlike those economies whose theoretical foundation lies in economic liberalism.

Yang: What obstacles did you encounter when proposing the market economy in 1990?

Xu: Market economy was a controversial issue in China at that time. When I introduced the main ideas in my report at a seminar, an old professor suddenly stood up and said, “Xu Guihua, let me help prevent you from turning to a market economy”. I immediately stood up and responded,“Thank you, sir, for your concern about my position. This really shows a strong teacher-student bond between us”.

The State Commission for Economic Restructuring held an international seminar on comparing a central planned economy and market economy in November 1990. I was invited to the seminar and delivered a speech. I talked about the socialist market economy in four respects: what is a market economy, why a market economy is necessary, what kind of market economy we need and how history gives us a rare opportunity to make a choice.

Just as I was saying “only when China makes it possible to make a choice on its own initiative and avoid being forced to make a choice”, I noticed that my time was up. So I concluded “that's all I have to say”, but Chen Jinhua, the then director of the State Commission for Economic Restructuring, asked me to continue. So, I continued and explained that the active choice for China was to go along with the tide of history and major trends and choose a market economy.

Yang: Jin Zhi, the then deputy director of the research office of the Shanghai Society of Economic System Reform, wrote that the report caused a big stir in the State Commission for Economic Restructuring, the national seminar on the economic system restructuring theory and the annual meeting of the economic system restructuring research society in 1991.

Xu: Yes. My report did cause a big stir. It was published as part of a collection of essays from the seminar called the 1991 National Economic System Reform Papers.

The role of academics is to actively propose advice and suggestions. In 1992, Deng Xiaoping, the chief architect of China's economic reform,affirmed the socialist market economy in his Southern Tour speeches. The 14th National Congress of the Communist Party of China decreed in October 1992 that the goal of China's economic system reform was to establish a socialist market economy.

III. On Socialist Stock Economy

Yang: I remember that you had many conflicting views when Hungarian economist Janos Kornai published the book The Road to a Free Economy.

Xu: I was a visiting scholar at Stanford University when the English version of the book was released in the spring of 1991. It caused a huge sensation not only in the US but also in many Western countries.

Kornai's basic view is that socialist countries have tried for decades through economic system reforms to seek a third way that is both different from the traditional central planned economy and from the Western free market economy. The market mechanism, however, is the natural regulator of the private economy and the natural way that the private economy exists. It is simply incompatible with public ownership. Therefore, people can never introduce market mechanisms while maintaining public ownership, especially state ownership. Thus, Kornai concluded that the reforms had failed in Poland, Hungary, the Soviet Union and China, and the only way out was to take the road of a privatized free market economy, which he called the “road to a free economy”.

My peers in domestic economics and I all respect Kornai very much, and many of his insights on economic system reforms in socialist countries have had a good impact on our country. But I disagree with this view. China is still exploring. How can one say for sure that its reforms have failed?

A few months later, I went to the East Coast and met the comparative economist Egon Neuberger at the State University of New York. We talked about Kornai's new book. I expressed my opinion and explained China's achievements in reform and opening-up. I said that according to my research, China should choose a state-led market economy over a neoliberalism one. Neuberger fully agreed and said, “With the traditional Soviet system at one end and Milton Friedman's neoliberalism at the other, the world in the future will never be at either of the two poles and will probably be somewhere in between. I lay my hopes on China's reform.”

Yang: After the general course of a socialist market economy was decided upon, there were still many specific reforms to be promoted. The joint-stock system was an important breakthrough in property rights and corporate reforms at that time, and the starting point of modern corporate governance in China. Can you talk more about them?

Xu: In a research report on the socialist market economy in November 1990, I wrote: “The most critical thing is to make state-owned companies compatible with market operations. One possibility is a joint-stock system which can be gradually implemented. The state can hold shares in companies where necessary. Joint-stock companies with a majority state ownership or public ownership of equity belong to the category of public ownership. With the joint-stock system, the owner has the ultimate ownership of assets while the company's board of directors possesses the legal powers. The company is recognized as an independent legal entity and civil subject in a more complete sense, which is good for market-oriented operations and resource allocation.”

In addition, in the article Feasible Socialist Joint-stock System published in the sixth issue of Jianghai Academic Journal in 1990, I made it clear:“Implementation of the joint-stock system provides a chance to reform property rights in China's state-owned system and other public ownership systems. …To develop a socialist market economy, we must have completely independent market players, and carry out joint-stock reform which redefines and adjusts property rights to transform all enterprises, including state-owned enterprises, into autonomous, self-financing and independent producers and operators.”

The reason why I can respond confidently and clearly is because I have studied and analyzed the joint-stock system for a long time, since the early 1980s. I have already grasped the key to the question of whether state ownership is compatible with the market economy.

You can also refer to the third chapter entitled Feasible Socialist Joint-stock System of this book which explains how public ownership, especially state ownership, achieves an effective integration with the market economy through system reforms, joint-stock systems and modern corporate system to ensure a highly efficient operation of public ownership, especially state ownership, and the smooth development of the market economy.

In November 2002, the 16th National Congress of the Communist Party of China pointed out to introduce the joint-stock system to develop a mixed sector of the economy. In October 2003, the Third Plenary Session of the 16th Central Committee of the Communist Party of China further clarified that China must vigorously develop a mixed ownership economy of state-owned capital, collective capital and non-public capital, and it should diversify investment entities and make the joint-stock system a major form of public ownership.

Yang: Looking back on 40 years of reform and opening-up, the emancipation of the mind is extremely important and difficult. What would you say to young people looking to contribute to academic research?

Xu: China's economic reform was achieved following a major theoretical breakthrough. This brought about the transformation of the reality of an Eastern power with backward productivity, and we chose a socialist market economy as the direction and goal of economic reform. We found a way through the reform of the property rights system, joint-stock system and the modern corporate system, making public ownership, especially state ownership, compatible with the market economy, and in this way ensuring the successful transformation and smooth development from the socialist central planned economy to the socialist market economy and enabling the socialist market economy to embark on a path of sustained and healthy development.

General Secretary Xi Jinping stated that China must have confidence in its theories, systems, path and culture. This is neither a slogan nor blind confidence. It has real meaning. We must have a high degree of awareness and fully understand the extreme importance of theoretical breakthroughs and innovations. We, together with China economic studies, are incredibly lucky to live through an exceptional period of over 40 years of economic reform and opening-up. China's 40 years of reform and development practice also urge us to bring forth insightful and innovative theories worthy of this great period that can stand the test of time.

July 2020, Shanghai