Economic Reform and the Four Modernisations

Why Deng wanted economic change

After Mao died in 1976, China's leaders faced an economy that struggled to provide sufficient food, clothing, housing and consumer goods. The Cultural Revolution had disrupted the country, while the rapid development of places such as Japan, South Korea, Hong Kong and Singapore highlighted China's economic weaknesses.

Under Mao, a centrally planned economy meant that the state directed production through targets and controlled resources. This could mobilise resources for government priorities, but producers had limited freedom to respond to customers or improve their own earnings. Deng Xiaoping, who became China's dominant leader in 1978, wanted a more productive economy and higher living standards.

At the Third Plenum in December 1978, Communist Party leaders agreed on gradual but fundamental economic reform. Deng's approach was experimental: measures could be tried in particular areas, then extended if they worked. The intention was not to abandon communism, but to make the economy work better by introducing more market incentives while retaining state control.

What the Four Modernisations meant

The Four Modernisations were a programme to improve four connected areas:

• Agriculture: increase farm production and improve the supply of food.
• Industry: make factories more productive and improve the goods they produced.
• Defence: modernise the country's armed forces.
• Science and technology: develop the knowledge and technology needed for a modern economy.

Premier Zhou Enlai had announced the programme in 1964, but the Cultural Revolution interrupted its development. Deng revived this emphasis on practical modernisation. Science and technology connected the other three areas: better knowledge and equipment could support farming, manufacturing and defence.

During 1979–1981, the government also pursued economic ‘readjustment’. It sought to expand exports, tackle shortages in areas such as transport and electricity, and give more attention to light industry rather than concentrating investment in heavy industry. Light industry produced everyday goods, so its expansion could improve people's lives more directly.

Agriculture: giving households a reason to produce more

Agricultural reform changed the organisation of work without immediately abolishing collective land ownership. Under the commune system, farming was organised collectively. The new household responsibility system allocated land to individual families, making each household responsible for meeting a delivery quota. Once that obligation was fulfilled, the family could keep the remaining produce for its own consumption or sell it.

Experiments began in 1978–1979, and the system received official support in September 1979. It created a direct connection between a household's effort and its reward. Producing more, or reducing production costs, could now improve the family's income rather than simply contribute to collective output.

Other measures reinforced this incentive. In 1979, the government increased the procurement prices it paid for farm products by over 22 per cent. Farmers' markets reopened, giving households opportunities to sell produce. Families could also specialise in particular products or undertake sidelines such as raising poultry and making handicrafts.

These changes increased agricultural output and farmers' incomes. They also gave households greater control over their working lives. However, the reform was not a transfer of land into private ownership: land remained collectively owned, and households still had delivery obligations. Its spread was gradual; nationwide dismantling of the commune structure came after this study period.

Industry: more freedom within state ownership

Industrial reform also tried to make effort and efficiency more rewarding. Experiments began with six enterprises in Sichuan in late 1978. By the end of 1981, about 80 per cent of state-owned industrial enterprises were involved in reform experiments.

Managers gained some freedom over production planning, sales, investment and the development of new products. Enterprises could produce goods outside the state plan for sale on the market. Some were allowed to retain part of their profits for reinvestment or workers' bonuses instead of handing all profits to the state.

The mechanism was similar to agricultural reform: if improved performance brought a financial reward, managers and workers had more reason to increase productivity. Greater flexibility also allowed factories to respond more closely to demand rather than merely fulfil a fixed target.

Small individual businesses, including tailors, cobblers and vendors, were permitted again. Collectively owned industrial and service enterprises were encouraged to supply more goods and help absorb unemployment among young people.

Yet reforming large factories was harder than reorganising household farming. Factories depended on other enterprises for materials and equipment, so one manager could not solve every production problem. Many managers were accustomed to following state instructions, while officials resisted surrendering control. Most importantly, state-owned enterprises were not privatised: industrial reform changed how they operated, not their ownership.

Opening China to trade and investment

Deng's reforms also moved away from the earlier emphasis on economic self-sufficiency. Trade with other countries could supply investment funds and modern technology, helping China modernise faster.

Foreign-trade procedures were eased, and Chinese enterprises gained more opportunities to negotiate with foreign firms. Four coastal Special Economic Zones—Shenzhen, Zhuhai, Shantou and Xiamen—offered special treatment to attract foreign investment. Their locations near Hong Kong and Taiwan placed them close to important commercial connections.

This opening was selective rather than a sudden removal of all controls. The zones provided places to experiment with new economic arrangements while the wider economy remained heavily influenced by the state.

How much had changed by 1981?

By 1981, reform had produced promising early results: incomes increased, food and other consumer goods became more available, and growth strengthened in sectors other than heavy industry, where investment was deliberately restrained. Farming households, factory managers and small business owners had greater opportunities to benefit from their work.

The change was therefore significant, but incomplete. Agricultural reform offered a relatively clear link between effort and reward, while industrial reform faced complicated supply relationships, inexperienced managers and official resistance. Reforms were still spreading through experiments, and state planning remained important.

The strongest judgement is that Deng had changed the direction of economic policy by 1981, rather than completed China's economic transformation. Profit, markets and foreign trade had become accepted tools for modernisation, but collective ownership, major state enterprises and Communist Party control continued.

Direction and dates

• 1964: Zhou Enlai announced the Four Modernisations.
• December 1978: Third Plenum agreed on economic reform.
• 1979–1981: readjustment, with more emphasis on exports, infrastructure and light industry.
• Aim: raise output and living standards through market incentives, without abandoning Communist rule.

Four Modernisations

Agriculture; industry; defence; science and technology.

Main policy changes

• Agriculture: household responsibility system; meet a delivery quota, then keep or sell surplus. Land remained collectively owned.
• 1979: farm procurement prices rose by over 22%; farmers' markets and household sidelines were encouraged.
• Industry: greater managerial freedom, market sales, retained profits and productivity bonuses; no privatisation of state-owned enterprises.
• By the end of 1981: about 80% of state-owned industrial enterprises participated in reform experiments.
• Opening: easier foreign trade and investment; SEZs at Shenzhen, Zhuhai, Shantou and Xiamen.

Impact and judgement by 1981

• Higher farm output and incomes; greater availability of food and consumer goods.
• More economic choice and stronger incentives to work efficiently.
• Industry changed less easily: supply dependencies, managerial habits and official resistance limited reform.
• Significant change in direction, not a completed transformation: markets expanded, but state control and collective ownership continued.