China's 20th Party Congress: What The Country Needs To Catch Up With The US

As the Chinese Communist Party (CCP) convenes to determine the direction of the world's second-largest economy for the next five years, it should carefully review the policies that have saved the country from the fate of the Soviet Union.

There was a time when China's economy was on the brink of collapse, mired in economic stagnation, poverty and starvation under a centralized communist regime. That was in the decades previous to 1978 when the CCP assumed the role of the proprietor.

Then, it practically owned and managed every resource, including the "work unit," the place where people lived and worked as Nobel Prize winner Xin Xinjian graphically describes in A Man's Journal: "The great and mighty nation, moreover, ranked below the Party and, needless to say, the place where persons worked, were paid, and ate their meals — the work unit — belonged to the Party."

The CCP implemented the role of proprietor with a Central Plan. It allocated economic resources to "units," state-owned enterprises (SOEs) and people communes (PCs). Central planners appointed SOEs management, set goals and priorities and closely monitored their performance.

Unfortunately for the CCP, this model didn't work. Its role as a grand proprietor proved far too difficult for a single political organization to execute. Moreover, the management of SOEs and PCs was denied the freedom, incentives and expertise to allocate resources efficiently and effectively to alternative uses set by central planners.

Thus, the country descended into unrest and chaos that followed the Great Leap Forward and the atrocities of the Cultural Revolution.

Eventually, the CCP had to make a difficult choice: Either stick with centralization and follow the fate of its Soviet Union counterpart or loosen up its grip on the economic system while maintaining control over the political system.

Fortunately, CCP leadership went with the second choice with the invention of "the responsibility system." That's a new agricultural system that allows farmers to dissolve the PCs, divide the land, use it for their gain and pay rent to the local governments — in essence, placing households at the core of the agricultural economy, as it has been the case for centuries before the communist rule.

Beginning at the Xiaogang Village, this experiment spread around the country, lifting agricultural production and saving the country from another famine.

Eventually, the responsibility system expanded into free enterprise zones, turning the CPC from proprietor to landlord. It leased resources to a new class of capitalists, mostly its members, letting them allocate these resources as they deemed profitable in partnership with foreign companies. They brought in the new technologies the country needed.

The CCP's landlord role proved far less difficult to execute than that of the proprietor, as land tenants assumed the freedom and the incentives to place economic resources into better use, fostering the economic growth the country very much needed.

A dose of decentralization and incentives injected into a communist system unleashed people's animal spirits for wealth creation, turning China into the world's second-largest economy.

To catch up with the U.S., China needs much more than a dose of incentives and foreign technology. It needs the economic freedom to innovate, requiring a pro-market regime nurtured by a pro-market political party.

Otherwise, it runs the risk of following the fate of the former Soviet Union, which has been avoided thus far.