One of the authors of the present paper, Ivan Szelenyi (2010) reviewed the literature originating from China and claiming that China is “market socialism”. While like Kornai he also perceived China to be on its way from communism to capitalism, he drew attention to the literature on the “market socialism” thesis and advised Western scholars to be attentive to the socialist features of post-reform China, proposing that China—straddling communism and capitalism—could be seen as a hybrid economy. However, in a more recent contribution (Szelenyi and Mihályi 2020a, b), we changed our minds because we saw China reverting increasingly to communist dictatorial policies.Footnote 29
Kornai, in one of his recent, extensive writings, made an instructive distinction between the primary and secondary characteristics of economic systems. We adopt those two categories without modification, and then supplement them with a third list of additional characteristics.
So, according to Kornai (2016), the three primary characteristics of socialist systems are the:
political monopoly of a one-party state that legitimates itself with the ideology of Marxism-Leninism;
means of production controlled exclusively by public ownership;
dominant form of coordination that is bureaucratic rather than market-based.
Until 1989, that three-dimensional definition was sufficient. But the world is messy and keeps on changing. No one can say, in 2020, that China meets all three criteria fully (see Block A in Table 1), or stating the opposite, that none of the three criteria has any relevance, because China switched to the capitalist model. No doubt exists, however, that China does have widespread private ownership and several building blocks of a market economy. Nevertheless, China and her Asian satellite countries are functioning under the control of one-party systems, the ruling parties legitimate themselves in Marxist-Leninist terms, the scope of private property is limited in many ways, and the statist sector of the economy—especially in finance—still plays critical roles.
Our opinion is based partly on Chinese sources. While China specialists—like Philip Huang (2012) on the far left, Yasheng Huang (2008) on the classical liberal side, and Fan et al. (2019) more recently—see China as an integrated market, they all doubt that private property became dominant; hence, for them, the economy is not capitalist. Huang estimates that by the end of the first decade of the 21st century, 70% of non-agrarian products were still being produced by the state sector, while the IMF put the same figure at just 30%. Nevertheless, both Philip Huang and Yasheng Huang agree that the interactions between publicly owned firms are market regulated. Yasheng Huang claims that enterprise privatizations mainly took the form of various state-owned banks and corporations buying up the shares of publicly owned firms that had been put on the stock exchange. In the enterprise sector, individual private ownership exists, but it remains of secondary importance. Philip Huang (2012) also claims that the overwhelming majority of the 50 or so Chinese multinational corporations listed in the Forbes 500 were, in fact, state-owned. If that number is correct, then China created something like what a Hungarian reform-economist, Márton Tardos (1975), called a “network of holding companies” nearly a half-century ago.
We believe that at least three reasons can be found to explain why arguments that China is socialist should be seriously considered.
China has been slow to recognize private property rights and it often is doubtful whether what is being called private property actually is private.
The Chinese state is involved so intimately in economic processes that it arguably is beyond the roles usually assigned to a “developmental state”, even in its East Asian variant.
The most obvious reason: China is a one-party state wherein communist ideology (even if the emphasis increasingly is on nationalism) legitimates the party.
Let us consider the three arguments in the framework of Table 1’s 20 strong assertions. As Martin Whyte (2009) and Huang (2008, p. 31) pointed out more than 10 years ago, secure property rights usually are regarded as a major precondition for capitalism and dynamic economic development, yet China has proven to be an outlier in that respect.Footnote 30 The national Property Law was passed only in 2007 (before 2007, various limits were imposed on the number of employees domestic firms could hire), and even that law was rather restricted in scope. As such, China diverged radically from Europe’s post-communist countries, which, as far as property rights were concerned, followed the Washington consensus cookbook rather closely. Most of those countries privatized early and fast; priority was assigned to creating identifiable owners even if that meant transferring state property into the hands of former communist nomenklaturaFootnote 31 (which happened especially in Russia) or to foreign multinationals (which happened especially in Eastern and Central Europe). China followed a dual-track approach: until the late 1990s, it rejected the privatization of large state-owned enterprises (SOEs), while allowing foreign capital into the country in the form of “greenfield” investments and permitting the launching of de nouveaux domestic private firms, albeit with some limits. It is very difficult to measure personal wealth accurately in China. Some billionaires may hide it. Others, like princelings (especially the family of President Xi), may oversee large companies that formally are SOEs but could be de facto private businesses owned by their princeling-managers.
The private ownership of agricultural land remains restricted or, to be more precise, banned constitutionally. Even though family farming was restored during the early 1980s, peasants did not receive titles to the lands they till. They lease land from the villages; the terms of the leases were gradually extended up to 30 years in 1984. Although leases had practically become indefinite by October 2008, still no titles were granted to private individuals. As Nuti (2019) noted fittingly, the system works like the arenda system that spread during the USSR’s New Economic Policy (NEP) of 1921–1926. Some commentators regard the October 2008 resolution of the party’s Central Committee as a landmark event (Li 2009a) since it gave full rights to farmers to subcontract, lease, exchange, or swap their land-use rights.Footnote 32 Optimists expected that the resolution would enable retiring farmers to purchase homes in urban areas, that it would improve capital flows into rural areas, and—especially during the 2008 global financial crisis when China’s exports dropped sharply—that it would increase domestic production and help China to change course from export-led industrialization to an economic growth path driven by domestic consumption. Li Cheng saw the new land reform as a step towards eliminating the hukou system, which had turned those who held rural hukou (especially migrant workers in cities with rural registration) into second- or third-class citizens. Land reform, it was hoped, might boost the income and consumption of former rural hukou registrants.
Let us now refer to Block B in Table 1, the six secondary characteristics of idealized economic systems—i.e., capitalism versus socialism. As we have noted already above, the points included there are taken directly from Kornai (2016). Today, China certainly is not a shortage economy, and direction of corruption is similar to that of market economies: it is mostly the seller who bribes the buyer (e.g., in the course of public procurement tenders). Surplus dominates the labor market and income inequality is high. Thus, in those four key aspects, China displays market economy features. The question of hard or soft budget constraints (SBCs) is difficult: many examples of both can be found. SOEs and state-run banks enjoy the benefits of SBCs, and even genuine private companies are bailed out when subvention seems essential for one political reason or another (Nuti 2019). It is not easy to assess the pace of technological change, either. In many ways, Chinese firms are extremely efficient, but at the same time, it remains true that revolutionary innovations are few and far between. Nonetheless, at least one Chinese firm (Huawei) ranks at the top of the international innovation curve, and the present COVID-19 crisis provides a chance for Beijing to come out first with an effective vaccine. The jury is out.
In Block C, we list 11 further characteristics. Here we touch on certain spheres that were never close to Kornai’s research agenda (e.g., foreign trade, monetary policy, and agriculture). We conclude that on 10 dimensions of the 11 dimensions listed, present-day China seems to closely resemble the well-known, classical socialist model. Looking at the dimensions of the analysis one by one, our judgments are not fully justified, but we believe that the overarching conclusion of Block C is convincing: China has kept many of the features of its pre-1989 version of communism.
Since 1989, Kornai has never changed his position on the political evaluation of the Chinese system. While he noted the gradual, but significant, softening of the CPC’s power monopoly, he never questioned that China is a dictatorship. Yes, it was, but it was shifting for a while towards a “non-electoral autocracy”, with term limits imposed on presidents, with significant powers allocated to the Politburo’s rather diverse executives, and some liberal legislation at least for foreign investors (and some reasonably competitive elections at the local level). We also refer to a vague, nonetheless very forceful definition Mao Zedong gave to characterize his system: “politics in command”.Footnote 33 Obviously, for the Chinese leader back then, the slogan meant the Marxist-Leninist interpretation of politics. Not all dictatorships are communist, but Mao’s “politics in command” likewise is a good self-characterization of all other types of despotism. For example, in Russia, Iran, or the Gulf monarchies, different ideologies (ethno-nationalism, tribalism, Christian traditions, Islam, or some combination of them) are equally suitable for legitimizing dictatorial regimes (Table 2).