China’s and Poland’s Transition from a Planned to Market Economy and Its Implications

Before 1979, China maintained a centrally planned command economy dominated by state-owned enterprises where the government planned all that was related to the economy of the country (e.g. deciding on economic output, controlling prices, allocating resources, etc.) and keeping the country relatively isolated from the global economy. The centrally planned economy was patterned on that of the Soviet Union and was introduced in the mid of 1950. During the 1950s, all of China’s individual household farms were collectivized into large communes. To support industrial development, the central government undertook large-scale investments in the physical and human capital during the 1960s and 1970s.

As a result, by 1978 nearly three-fourths of industrial production was produced by centrally controlled, state-owned enterprises. A main goal of the Chinese government was to make its economy relatively self-sufficient. Foreign trade was mostly limited to obtaining those goods that could not be produced or obtained in China. Since most aspects of the economy were managed by the central government and the companies were focused on production goals set by the government, there were few incentives for workers to become more productive or be concerned with the quality of what they produced. Eventually the Chinese government, shortly after the death of the leader of the Chinese Communist Party Chairman Mao, decided in 1978 to break with its Soviet-style economic policies by gradually reforming the economy according to free-market principles and opening up to the West. In the reference to Poland and past world war II time, its economy was disorganized and needed a reestablishment of its industrial sector.

The communists gained control of the country by the end of the 1940’s. They adopted a Soviet-style planned economy in which mainly focused on capital-, fuel-, and material-intensive sectors (such as heavy industry and engineering) while other sectors such as agriculture, infrastructure, housing, services, and consumer goods were neglected. Private ownership was limited to handcrafts and agriculture. During the first several decades of communist control, Poland’s economy expanded and some sort of positivism was noticeable among the people. However, in the late 1970’s, Poland started to experience severe economic difficulties such as consecutive poor harvests, social unrest among the workers, increasing inflation and massive foreign debt when the lack of basic products became a part of everyday life.

1979 was the worst year for the Polish industry in their history of communist rule when the Polish economy decreased for the first time since World War II. Given these facts, economic reform was inevitable.