Institutional Trends

Inheriting a Soviet-style state-owned economy, the development of Chinese government and economic institutions has been closely linked since the founding of the People's Republic in 1949. Until recently it was effectively impossible to discuss one without the other, as economic and political institutions were effectively one and the same. In recent years, however, distinctions between governmental agencies and industrial enterprises have become increasingly pronounced.

Since 1978, China has been experiencing a period of fundamental economic restructuring, involving a gradual transition from a planned economy to a socialist market economy. The Chinese economy has been gradually integrating itself into the global economic system, with changes undertaken in the following:

• the structure of ownership through the introduction of individual, private and foreign capital ownership,
• economic operations through the combination of planning and market mechanisms,
• the decentralisation of decision-making.

The ultimate target of economic restructuring is the establishment of a socialist market economy by the end of this century, through, inter alia, the development of markets, a modern enterprise system, and comprehensive reforms of the financial, tax, banking, investment and planning systems.

China has a large, well-established infrastructure for the development and production of ballistic missiles. The China Aerospace Corporation (CASC) and its subordinate development, production and test facilities are responsible for ballistic missile production, and the China National Nuclear Corporation is responsible for nuclear weapons activities.

The Chinese leadership resumed the military modernization program in early 1977, but the re-ordering of priorities in the Four Modernizations relegated national defense modernization from third to fourth place (following agriculture, industry, and science and technology). In July 1977, with the backing of moderate military leaders, Deng Xiaoping reassumed his position as PLA chief of general staff as well as his other party and state posts. Deng vigorously promoted military modernization, the further disengagement of the military from politics, and the shift in national priorities to economic development at the expense of defense.

In 1977-78 military and civilian leaders debated whether the military or the civilian economy should receive priority in allocating resources for the Four Modernizations. The military hoped for additional resources to promote its own modernization, while civilian leaders stressed the overall, balanced development of the economy, including civilian industry and science and technology. By arguing that a rapid military buildup would hinder the economy and harm the defense industrial base, civilian leaders convinced the PLA to accept the relegation of national defense to last place in the Four Modernizations. The defense budget accordingly was reduced. Nonetheless, the Chinese military and civilian leadership remained firmly committed to military modernization.

In late 1978 China initiated a policy of integrating civilian and military industry more closely in order to promote overall civilian economic development. This policy entailed civilianizing the machine-building ministries to make the defense industry more responsive to civilian control and needs; increasing defense industry production of civilian goods, particularly consumer goods; and transferring technology from the more advanced defense sector to the civilian sector of the economy. Production of civilian goods totaled 6.9 percent of total defense industry output in 1975. In 1980 it rose to 18 percent, and by 1985 it had jumped to 41.8 percent of total output. Chinese officials predicted that by 1990 about 80 percent of defense industry output would be civilian goods. The large excess capacity of the defense industry, resulting from declining orders from the PLA, made possible the rapid growth in civilian output. The defense industry manufactured a wide variety of goods for civilian use, including motor vehicles, optical equipment, television sets, electrical appliances, pharmaceuticals, and medical instruments and prostheses. Many of these products were consumer goods in high demand. For example, in 1985 the Ministry of Ordnance Industry manufactured 500,000 motorcycles, representing two-thirds of total motorcycle output, as well as 250,000 cameras, 450,000 bicycles, and 100,000 refrigerators.

Following the formulation of regulations and mechanisms for such transfers, defense industries began transferring technology to civilian industries on a large scale in the mid-1980s. Technology transfers provided defense enterprises with additional, lucrative sources of income and furnished civilian enterprises with a wide range of useful, advanced technology to modernize production. For example, the Ministry of Astronautics disseminated aerospace technology to light industry and to the petroleum, chemical engineering, machine-building, textile, communications, medical, and electronics industries.

The transformation of China's defense establishment into a system capable of independently sustaining modern armed forces was one of the major goals of the military modernization program. In the late 1970s and 1980s, defense spending remained relatively constant despite the shift in resources in favor of overall economic development. Reforms focused on reorganizing the defense research-and-development and industrial base, more closely integrating civilian and military science and industry, and selectively utilizing foreign technology. China sold arms for hard currency to provide additional funds for defense industries. The PLA continued to play its role in economic development by participating in selective construction projects, providing dualuse training, and producing most of its food needs.

The PRC's top priority through the early 1980s remained the development of its military capabilities. Commercial development was slighted as the best available Chinese resources were directed toward the development of the country's defense industries. With the rise of Deng Xiaoping, however, the Chinese shifted their focus toward a more broad-based industrial-development program.