Deng Xiaoping
Further reforms

Improving relations with the outside world was the second of two important philosophical shifts outlined in Deng's program of reform termed Gaige Kaifang (lit. Reforms and Openness). China's domestic social, political, and most notably, economic systems would undergo significant changes during Deng's time. The goals of Deng's reforms were summed up by the Four Modernizations, those of agriculture, industry, science and technology, and the military.

The strategy for achieving these aims of becoming a modern, industrial nation was the socialist market economy. Deng argued that China was in the primary stage of socialism and that the duty of the party was to perfect so-called " socialism with Chinese characteristics ", and " seek truth from facts ". (This somewhat resembles the Leninist theoretical justification of the New Economic Policy (NEP) in the 1920s, which argued that the Soviet Union had not gone deeply enough into the capitalist phase and therefore needed limited capitalism in order to fully evolve its means of production.) The "socialism with Chinese characteristics" settles a benign structure for the implementation of ethnic policy and forming a unique method of ethnic theory.

Deng's economic policy prioritized developing China's productive forces. In Deng's view, this development "is the most fundamental revolution from the viewpoint of historical development" and "oor socialism" is not socialism. His theoretical justification for allowing market forces was:

The proportion of planning to market forces is not the essential difference between socialism and capitalism. A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too. Planning and market forces are both means of controlling economic activity. The essence of socialism is liberation and development of the productive forces, elimination of exploitation and polarisation, and the ultimate achievement of prosperity for all. This concept must be made clear to the people.

Unlike Hua Guofeng, Deng believed that no policy should be rejected outright simply because it was not associated with Mao. Unlike more conservative leaders such as Chen Yun, Deng did not object to policies on the grounds that they were similar to ones that were found in capitalist nations.

This political flexibility towards the foundations of socialism is strongly supported by quotes such as:

We mustn't fear to adopt the advanced management methods applied in capitalist countries... The very essence of socialism is the liberation and development of the productive systems... Socialism and market economy are not incompatible... We should be concerned about right-wing deviations, but most of all, we must be concerned about left-wing deviations.

Although Deng provided the theoretical background and the political support to allow economic reform to occur, the general consensus amongst historians is that few of the economic reforms that Deng introduced were originated by Deng himself. Premier Zhou Enlai, for example, pioneered the Four Modernizations years before Deng. In addition, many reforms would be introduced by local leaders, often not sanctioned by central government directives. If successful and promising, these reforms would be adopted by larger and larger areas and ultimately introduced nationally. An often cited example is the household responsibility system, which was first secretly implemented by a poor rural village at the risk of being convicted as "counter-revolutionary". This experiment proved very successful. Deng openly supported it and it was later adopted nationally. Many other reforms were influenced by the experiences of the East Asian Tigers.

This was in sharp contrast to the pattern of perestroika undertaken by Mikhail Gorbachev, in which most major reforms originated with Gorbachev himself. The bottom-up approach of Deng's reforms, in contrast to the top-down approach of perestroika, was likely a key factor in the success of the former.

Deng's reforms actually included the introduction of planned, centralized management of the macro-economy by technically proficient bureaucrats, abandoning Mao's mass campaign style of economic construction. However, unlike the Soviet model, management was indirect through market mechanisms. Deng sustained Mao's legacy to the extent that he stressed the primacy of agricultural output and encouraged a significant decentralization of decision making in the rural economy teams and individual peasant households. At the local level, material incentives, rather than political appeals, were to be used to motivate the labor force, including allowing peasants to earn extra income by selling the produce of their private plots at free market value.
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