Reform and opening up

Based on Wikipedia: Reform and opening up

In 1978, China was one of the poorest countries on Earth. By 2016, it had become the world's largest economy. This transformation—perhaps the most dramatic economic turnaround in human history—lifted 800 million people out of extreme poverty in just four decades. To put that number in perspective, that's more than twice the entire population of the United States.

The story of how this happened begins with a funeral.

The Death That Changed Everything

Mao Zedong died in September 1976. He had ruled China for twenty-seven years, and his policies had left the country in shambles. The Great Leap Forward, his attempt to rapidly industrialize through collective farming and backyard steel furnaces, had caused a famine that killed tens of millions. The Cultural Revolution, his decade-long campaign against supposed enemies of communism, had destroyed institutions, persecuted intellectuals, and paralyzed the economy.

By the late 1970s, government officials were warning that China was about to repeat the "disaster of 1959"—code for the famines of the Great Leap Forward. Food supplies were so deficient that starvation loomed as a real possibility.

Something had to change.

Within weeks of Mao's death, his successor Hua Guofeng arrested the Gang of Four—the radical faction that had driven the Cultural Revolution—and began quietly reversing Maoist economic policies. But the real transformation came when a short, chain-smoking pragmatist named Deng Xiaoping consolidated power in December 1978.

The Architect Who Built Nothing According to Plan

Deng Xiaoping is often called the "General Architect" of China's economic reforms, but he was an unusual architect. He drew no blueprints. He had no grand master plan.

Instead, Deng described what he was doing as a "large scale experiment" requiring thorough "experimentation in practice instead of textbook knowledge." His most famous saying captured his philosophy: "It doesn't matter if a cat is black or white, as long as it catches mice." In other words, forget ideology—just find what works.

This was revolutionary thinking for a Communist Party that had spent decades insisting there was only one correct path: central planning, collective ownership, and ideological purity. Deng was essentially saying: let's try different things and see what happens.

The approach had a name: "crossing the river by feeling the stones." You don't plan your route across in advance. You take one careful step, find a stable foothold, then take another.

The Farms Come First

The first stone Deng felt for was agriculture. This made sense—most Chinese people were farmers, and they were hungry.

Under Mao, land had been organized into "people's communes"—massive collective farms where peasants worked together and shared the harvest according to government plans. The system was designed to be fair. In practice, it killed incentive. Why work harder if you get the same share regardless?

Deng's solution was elegantly simple. Instead of collective farming, families got their own plots of land. They had to sell a contracted portion of their crops to the government at a fixed price. But anything they grew beyond that quota? They could sell it themselves at market prices and keep the profit.

The effect was immediate and dramatic. Agricultural production jumped twenty-five percent between 1975 and 1985. Farmers who had barely been surviving suddenly had surplus crops and money in their pockets. The experiment worked.

This success created a template that Deng would use again and again: start small, let local officials experiment, and if something works, spread it everywhere.

Opening the Door

In December 1978, the same month he consolidated power, Deng announced something that would have been unthinkable under Mao: the "Open Door Policy." China would welcome foreign businesses.

For context, China had been essentially closed to Western investment since the Communist revolution in 1949. The very idea of foreign capitalists operating factories on Chinese soil contradicted everything the Party had taught for three decades.

But Deng was watching his neighbors. Japan had rebuilt from wartime devastation into an economic powerhouse. South Korea, Taiwan, and Singapore were booming. All of them had embraced foreign investment and export-oriented manufacturing. Meanwhile, China was stuck—its economy growing slower than these capitalist success stories despite all its revolutionary fervor.

Singapore's transformation particularly fascinated Chinese leaders. Lee Kuan Yew had taken a tiny city-state with no natural resources and turned it into one of the world's wealthiest nations. Over the following years, China would send more than 22,000 officials to Singapore to study its methods.

The Special Zones

Deng didn't open all of China at once. That would have been too risky, too chaotic, too ideologically dangerous. Instead, he created what he called Special Economic Zones—designated areas where different rules applied.

The first was Shenzhen, just across the border from Hong Kong. In January 1979, the Shekou Industrial Zone opened there, becoming what officials called the first "experimental area" to open up.

Within these zones, foreign companies could set up factories with minimal bureaucratic interference. They could import raw materials duty-free, hire workers at market wages, and export finished goods without the usual restrictions. The zones operated almost like capitalist islands within socialist China.

The slogan of Shekou captured the new mentality: "Time is Money, Efficiency is Life." This was a startling departure from Maoist thinking, which had emphasized ideological correctness over economic results. Now efficiency—a concept from the capitalist playbook—was being celebrated as life itself.

When Deng visited Shenzhen in 1984, he praised what locals called "Shenzhen speed"—the rapid pace of development that was transforming a fishing village into a modern city. Other special zones followed: Zhuhai, Xiamen, and eventually fourteen coastal cities including Shanghai, Guangzhou, and Tianjin.

The Two-Track System

One of the cleverest aspects of China's reforms was how they avoided the all-or-nothing choices that tripped up other socialist countries.

Take price controls. Under central planning, the government set prices for everything. This created chronic shortages—if bread was priced too low, bakeries had no incentive to make more, so people lined up for hours hoping to get some before it ran out. The obvious solution was to let prices float freely based on supply and demand. But sudden price liberalization could cause chaos, inflation, and political backlash.

China's solution was a "dual-price system." State-owned factories still had to meet their planned quotas at government-set prices. But anything they produced above the quota could be sold at market prices. Citizens could buy basic goods at controlled prices if they were willing to wait in line, or pay more on the open market if they wanted immediate access.

This hybrid approach let market forces gradually expand while maintaining a safety net of controlled prices for essential goods. It was neither pure socialism nor pure capitalism. It was pragmatism.

The Battle Behind the Scenes

Not everyone in the Communist Party leadership agreed with Deng's direction. His most formidable rival was Chen Yun, considered by some the second most powerful person in China.

Chen supported some reforms but wanted to keep them on a shorter leash. His vision was what he called the "birdcage economy." The market was a bird that could fly freely—but only within a cage defined by central planning. The cage could be large or small, but there had to be a cage.

Deng wanted to keep expanding the cage until it barely mattered anymore. Chen wanted to make sure the cage never disappeared entirely.

This tension between reformers and conservatives would shape Chinese politics for decades. Chen and several other conservative leaders never even visited Shenzhen, the showcase of Deng's reforms—a silent protest against what they saw as dangerous capitalist experimentation.

The two sides struggled over the direction of reforms until Chen died in 1995, by which point the market economy was too established to reverse.

The Shock Therapy Debate

In the mid-1980s, Chinese economists debated a crucial question: how fast should price reform happen?

Some advocated "shock therapy"—sudden, comprehensive price liberalization. Rip off the bandage quickly. Yes, there would be short-term pain, but markets would adjust and the economy would emerge stronger. This approach was being advocated for socialist countries across Eastern Europe and would later be implemented in Russia with devastating results.

Others favored gradualism. Move slowly. Let people and institutions adapt. Avoid the social upheaval that sudden changes might cause.

In 1986, the gradualists won. Premier Zhao Ziyang rejected shock therapy, accepting the argument that the focus should be on "energizing enterprises" rather than radical price reform. What had started as ambitious plans for comprehensive reform was scaled back to adjustments in steel prices and partial financial reforms.

But pressure for faster reform kept building. In 1988, leaders tried more aggressive price liberalization. The result was spiraling inflation—the first China had experienced since the hyperinflation of the 1940s. People panicked. There were bank runs, local protests, and scenes of citizens frantically buying goods before prices rose further.

The government slammed on the brakes, halting price reform and focusing on austerity instead.

1989: The Crisis Point

The inflation crisis combined with rising corruption to fuel widespread discontent. In the spring of 1989, that discontent exploded into the protests at Tiananmen Square in Beijing.

Students and workers occupied the square for weeks, demanding political reform to match the economic changes. Some called for democracy. Some protested corruption. Some simply wanted more freedom.

On June 4th, the government sent in the military. The exact death toll remains unknown—estimates range from hundreds to thousands. The crackdown shocked the world and brought international condemnation.

The massacre threatened to reverse everything. Conservative leaders gained influence. Key reformers were imprisoned or exiled. Foreign investment dried up as Western countries imposed sanctions. It seemed like China's experiment with openness might be over.

The Southern Tour

For three years after Tiananmen, China's reform momentum stalled. Conservatives argued that economic liberalization had caused the unrest, that capitalism was corrupting socialist values, that the Open Door Policy should be reconsidered.

Then, in early 1992, the 87-year-old Deng Xiaoping did something unexpected. Though he held no official position anymore, he embarked on a tour of southern China—visiting Shenzhen, Zhuhai, and other special economic zones.

Officially, it was just an old man taking a trip. In reality, it was a political masterstroke.

Everywhere Deng went, he praised reform and opening up. He reaffirmed that markets and capitalism were tools, not ideological enemies. He warned against the "leftism" of those who wanted to slow down change. State media initially ignored the tour, but eventually his message spread through provincial newspapers and then nationally.

The southern tour broke the conservative blockade. Reform was back on track—and this time, it would accelerate.

The 1990s: Going Global

After the southern tour, change came rapidly. Stock exchanges opened in Shanghai and Shenzhen in 1990, creating a capital market system where Chinese companies could raise money from investors. State-owned enterprises, which had been protected despite their inefficiency, faced privatization or restructuring.

China joined the Asia-Pacific Economic Cooperation forum in 1991, signaling its intention to integrate with the global economy. The ultimate goal was membership in the World Trade Organization, the club of nations that set the rules for international commerce.

Joining the World Trade Organization required years of negotiation. China had to agree to open its markets, protect intellectual property, and follow international trade rules. In 2001, after fifteen years of talks, China finally became a member.

The impact was transformative. Foreign companies that had been cautious about investing in China now flooded in, attracted by the certainty of international trade rules and the vast potential of the Chinese market. Chinese manufacturers gained access to global supply chains. By 2005, the private sector accounted for seventy percent of China's gross domestic product.

The Numbers Tell the Story

The statistics of China's transformation are almost too large to comprehend.

In 1978, China's economy was worth about 150 billion dollars. By 2024, it had grown to 18.74 trillion dollars—an increase of more than one hundred fold.

From 1978 to 2013, the economy grew at an average rate of 9.5 percent per year. To appreciate what this means: at that rate, an economy doubles in size every seven and a half years. The United States, by comparison, averages around two to three percent growth.

In 2010, China overtook Japan to become the world's second-largest economy by nominal gross domestic product. In 2016, measured by purchasing power parity—a method that adjusts for different price levels between countries—China surpassed the United States as the world's largest economy.

Most importantly, 800 million people escaped extreme poverty between 1978 and 2018. China went from a country where most people struggled to feed themselves to an upper-middle income nation where a new middle class buys cars, takes vacations, and sends their children to university.

What Made It Work?

Economists still debate why China succeeded where other socialist countries failed to reform. Several factors seem crucial.

First, the bottom-up approach. Instead of designing reforms in Beijing and imposing them nationwide, China let local officials experiment. Those who developed successful programs received praise and promotion. Those who failed faced few penalties for trying. This created a laboratory of thousands of local experiments, with the best ideas spreading organically.

This contrasted sharply with the Soviet Union's Perestroika reforms under Mikhail Gorbachev, which tried to restructure the entire economy from the top down. The Soviet approach proved too rigid, too sudden, and ultimately contributed to the collapse of the system it was trying to save.

Second, sequencing mattered. China reformed agriculture first, creating immediate improvements in people's lives and generating support for further change. It opened special economic zones before opening the whole country, learning lessons from contained experiments before scaling up. It delayed the most difficult reforms—like privatizing large state enterprises—until the economy was stronger.

Third, China maintained political stability, for better or worse. The Communist Party kept control throughout the reform process. This allowed for policy continuity and discouraged the wild swings that plagued other transitioning economies. It also meant reform happened without political liberalization—a bargain that critics see as trading freedom for prosperity.

The Conservative Turn

By the 2000s, a new generation of leaders began pulling back on some reforms. Under President Hu Jintao and Premier Wen Jiabao, the government took a more conservative approach, regulating and controlling the economy more heavily after 2005.

Some of this was a response to problems that rapid growth had created: pollution, inequality, corruption, and social tensions. Some reflected a belief that the state sector should maintain control over strategic industries like banking and energy.

The phrase "reform and opening up" remained official doctrine—it was even written into the Constitution in 1999—but the balance between market forces and state control tilted back toward state control.

The Legacy

Reform and opening up fundamentally transformed China and reshaped the global economy. China became the world's manufacturing powerhouse, producing everything from smartphones to solar panels. Its demand for raw materials drove economic booms from Australia to Brazil. Its cheap exports changed consumer prices around the world.

The transformation also raised uncomfortable questions. Could economic liberalization continue indefinitely without political liberalization? What happens when an authoritarian system creates a wealthy, educated middle class? How does the world deal with a superpower that plays by different rules?

These questions remain unresolved. What seems clear is that December 1978, when a chain-smoking pragmatist consolidated power and began letting a thousand experiments bloom, was one of the pivotal moments in modern history. The decisions made in those years still shape our world today.

Deng Xiaoping died in 1997, just months before Hong Kong returned to Chinese sovereignty—another milestone in China's rise. He never saw China overtake Japan or challenge America for economic supremacy. But the transformation he set in motion continues, for better and worse, to unfold.