China’s economic reforms, launched under Deng Xiaoping in 1978, followed a pragmatic, incremental approach often described as “crossing the river by feeling the stones.” Rather than adhering to a fixed blueprint, China pursued a sequential, learning-oriented process, carefully observing and adapting lessons from other countries while avoiding major mistakes. This approach unfolded in three broad stages: initial engagement with Eastern Europe, study of East Asian models such as Japan and South Korea, and, after 2001, deeper integration with the United States. Through this gradual experimentation, China developed a uniquely Chinese model of reform that combined international insights with domestic realities, laying the foundation for sustained economic transformation.
Charting a “Third Way”: China’s Early Lessons from Eastern Europe after 1978
Following 1978, China sought to reform its Soviet-style planned economy without abandoning socialism, searching for a “third way” that balanced state control with market mechanisms. In this quest, Eastern Europe—particularly Hungary, Poland, and Czechoslovakia—offered the most relevant examples, having experimented with market-oriented reforms within socialist frameworks since the 1950s and 1960s. Chinese leaders viewed these experiences as potential blueprints for adapting market principles without undermining socialist governance.
China’s initial reform blueprint drew heavily on Hungary’s 1960s program, an intermediate model combining decentralization, enterprise autonomy, and partial market pricing. However, this early attempt exposed a key limitation: the plan focused on institutional outcomes rather than the step-by-step process that had produced them. As a result, the blueprint proved difficult for Chinese policymakers, including Li Xiannian, to understand, and it was ultimately abandoned. This failure underscored the challenge of importing foreign models wholesale without accounting for local conditions.
To bridge this gap between theory and practice, China invited prominent Eastern European economists such as Poland’s Włodzimierz Brus and Czechoslovakia’s Ota Šik. Brus provided rigorous analyses of different socialist market approaches, while Šik emphasized the importance of gradualism, warning against abrupt, system-wide reforms. Their input directly informed China’s early theoretical framework, including ideas on price reform, dual-track systems, and experimental, incremental approaches to restructuring. Through this engagement, China consciously rejected the Soviet model of “shock therapy” in favor of careful, phased experimentation.
By the mid-1980s, China’s reformers were observing the stagnation and systemic difficulties emerging in Eastern European economies. These developments reinforced the need for prudence, illustrating the risks of rapid liberalization without adequate institutional support. Chinese experts recommended combining macroeconomic control with market flexibility, while domestic commodity markets began to grow. This period solidified the principle of Sinicization—adapting foreign lessons to Chinese realities—and reinforced Deng Xiaoping’s guiding metaphor of “crossing the river by feeling the stones.”
Several lessons crystallized from China’s engagement with Eastern Europe. Gradual reform was seen as a safeguard against social and economic instability, while dual-track pricing allowed markets to develop without disrupting existing structures. State-owned enterprises required “soft” budget constraints, supporting restructuring rather than collapse, and theoretical models had to be carefully adapted to local contexts. These insights provided the intellectual foundation for a uniquely Chinese path of reform.
By integrating international experiences with domestic conditions, China charted a cautious but innovative course. The country’s early reforms combined market experimentation with socialist governance, drawing heavily from Eastern European lessons yet tailored to China’s political and economic realities. This approach laid the groundwork for subsequent stages of reform and established the framework for a gradual, sequential learning process that would define China’s economic transformation for decades to come.
Navigating Reform after 1991: Lessons from the Soviet Collapse and East Asian Models
The early 1990s marked a critical phase in China’s reform trajectory, shaped by dramatic transformations abroad. The collapse of the Soviet Union in 1991 and the economic failures of Eastern Europe provided stark cautionary examples of what could go wrong when reforms were rushed or poorly sequenced. While China had already embraced gradualism, these crises underscored the importance of focusing not only on internal restructuring but also on industrial competitiveness and integration with global markets.
China closely studied the negative outcomes of Eastern Europe’s “shock therapy,” where rapid liberalization led to widespread enterprise collapse, foreign takeovers, and severe social dislocation. Economists like János Kornai advocated strict “hard budget constraints,” but their implementation across the region caused economic and social upheaval. Observing these failures reinforced China’s commitment to maintaining a controlled, gradual, and supported approach to reform, avoiding abrupt liberalization that could destabilize the country.
The Soviet Union offered further lessons. Perestroika and glasnost demonstrated the dangers of sudden economic reform combined with political liberalization. China avoided these pitfalls by maintaining political stability, implementing dual-track pricing systems, encouraging the return of skilled talent from abroad, and preserving the growth momentum created by agricultural reforms and Township and Village Enterprises (TVEs). These measures acted as buffers, enabling gradual industrialization and urbanization while sustaining social cohesion.
At the same time, China looked toward East Asian neighbors—Japan and South Korea—for practical development models. Japan’s post-war industrial miracle highlighted the role of state-guided investment and technological upgrading, while South Korea’s chaebol system and export-led growth demonstrated how sequencing development strategically could generate rapid industrialization. These models provided lessons on industrial policy, technology acquisition, and the importance of an outward-looking, export-oriented approach.
By combining these insights, China refined its reform strategy. Coastal special economic zones, such as Shenzhen, became laboratories for experimentation, driving exports and generating revenue to support inland development. Gradual, sequenced reform allowed policymakers to learn iteratively, balance growth with stability, and avoid the economic and social catastrophes experienced by Eastern Europe and the former Soviet Union.
By the 1990s, China had successfully charted a course that integrated cautionary lessons from the socialist collapse with proven strategies from East Asian developmental states. This approach laid the foundation for sustained industrial growth, technological upgrading, and global competitiveness, demonstrating the value of selective adaptation and carefully sequenced reform.
Harnessing Global Lessons: China’s Engagement with the United States after 2001
After joining the World Trade Organization (WTO) in 2001, China entered a new phase of reform, engaging extensively with the United States—the world leader in finance, technology, and corporate management. This engagement provided China with direct exposure to advanced markets, global supply chains, and technological ecosystems, offering practical insights into competition, innovation, and large-scale corporate organization.
Through this interaction, Chinese firms learned to adopt U.S.-style technology management, innovation practices, and corporate governance structures. Exposure to highly competitive international markets also taught China how to position its domestic industries strategically, leveraging local advantages while competing on a global scale. Importantly, China pursued selective adaptation, borrowing key lessons without fully liberalizing its economy or resorting to abrupt reforms, thereby preserving state guidance and strategic oversight.
By integrating these lessons with prior experiences from Eastern Europe, Japan, and South Korea, China developed a distinctive hybrid model. Domestically, socialist governance and gradual reform continued, while internationally, China adopted industrial policies, export-oriented strategies, and technological practices that enabled it to compete globally. This selective learning post-2001 marked a critical step in China’s long-term strategy of combining incremental domestic reform with global engagement.
Creating a Virtuous Cycle: China’s Sequential Path to Economic Growth
China’s reform experience illustrates the power of a virtuous cycle, in which initial economic success fuels further growth, consumption, and production. Rather than attempting simultaneous liberalization across all sectors, China prioritized achieving early, tangible growth, recognizing that reform efforts are most effective when built on a foundation of rising prosperity. This approach contrasts with some Western reform models, where structural changes are often attempted before creating the conditions for sustained growth, sometimes leading to economic and social disruption.
The first step in China’s virtuous cycle was agricultural reform. In the 1970s, the economy was in severe distress, and wholesale reform of state-owned enterprises (SOEs) or immediate market liberalization would have triggered collapse. Instead, China began with the household responsibility system, allowing farmers to retain surplus production. Agricultural outputs increased rapidly because production cycles for crops and livestock were short, generating income quickly. Rising rural incomes then stimulated demand for housing, building materials, and related goods, creating opportunities for the development of township and village enterprises (TVEs). These enterprises generated jobs and attracted migrant labor to towns and cities, expanding local economies.
Following the success of TVEs, China established the Shenzhen Special Economic Zone, introducing new technologies and creating concentrated growth points along the coast. The resulting tax revenues supported reforms in inland regions and gradually enabled the liberalization of state-owned enterprises. This step-by-step approach allowed each phase of reform to reinforce the next, generating a self-reinforcing cycle of growth, investment, employment, and further modernization. By sequencing reforms in this way, China demonstrated how strategic, incremental policies can create a sustainable and expanding virtuous cycle of economic development.
Beyond Flawed Theory: Psychological Warfare, Openness, and Divergent Paths of China and the Soviet Union
The collapse of the Soviet Union is often attributed to military overstretch, technological stagnation, or the inherent failure of a planned economy. Yet these explanations overlook a critical factor: the role of psychological competition between open and closed societies. A closer comparison—particularly between the Soviet bloc and China—reveals that the decisive struggle was not purely economic or military, but psychological. The fall of the Berlin Wall and the contrasting experience of Chinese overseas students illustrate how openness, confidence, and narrative power shaped radically different outcomes.
Before the fall of the Berlin Wall, Western societies portrayed themselves as free, democratic, and open, successfully attracting intellectuals and elites from the Soviet Union and Eastern Europe. This inflow of talent reinforced Western legitimacy while undermining socialist confidence. Ironically, in the contemporary era—marked by aging populations and labor shortages—many Western countries have erected new barriers to immigration, sharply restricting mobility and employment rights for newcomers from Africa, Eastern Europe, and Central America. This reversal exposes a contradiction between Western rhetoric and practice, highlighting the strategic role openness once played in psychological competition.
The Soviet Union and Eastern Europe, despite their relatively advanced technological and industrial bases, ultimately lost this competition. China, by contrast, prevailed despite being far more technologically backward at the outset of reform. China’s advantage was not cheap labor alone, but the strategic vision and confidence of its leadership. Rather than fearing openness, Chinese leaders treated it as an investment in the future. Deng Xiaoping’s decision to allow students to study abroad—despite concerns they might not return—reflected this long-term confidence. His belief that national development would naturally draw talent back proved correct, as large numbers of overseas-trained Chinese later returned to contribute to domestic growth.
This confidence stood in stark contrast to the Soviet approach. After World War II, the construction of the Berlin Wall symbolized a defensive response to talent outflows. While understandable given Cold War pressures, it was rooted in a flawed application of Western economic equilibrium theory, which assumed that capital and talent would flow toward resource-scarce regions. In reality, postwar history showed the opposite: developing countries experienced persistent brain drain as skilled individuals migrated to developed economies. By attempting to seal itself off, the Soviet Union reinforced stagnation and psychological decline rather than reversing these flows.
China’s different trajectory demonstrates how escaping a flawed theoretical framework can reshape outcomes. By embracing openness, tolerating temporary imbalances, and trusting in long-term development, China neutralized the psychological warfare that had destabilized the socialist bloc. The divergence between Soviet isolation and Chinese openness ultimately determined their contrasting fates, underscoring that confidence, narrative control, and strategic patience can be as decisive as economic structure or technology in global competition.
Two Structural Disadvantages: Why the Soviet System Faltered and China Adapted
Russian scholars and policymakers have often summarized the failure of the Soviet economic transition in two interrelated observations: the planned economy persisted for too long, and the Soviet Union lacked external market-oriented reference points comparable to Hong Kong and Taiwan. Together, these structural disadvantages severely constrained Russia’s ability to adapt when it finally attempted to reintroduce market mechanisms, especially in contrast to China’s reform experience.
The prolonged dominance of the planned economy in the Soviet Union erased practical knowledge of how markets function. By the time reforms were attempted, generations with experience in private enterprise, finance, and commerce had disappeared. When markets were suddenly reopened, almost no one knew how to conduct business, forcing the entire system to learn from scratch. China’s situation was markedly different. Its market economy had been interrupted for a much shorter period, and individuals with pre-1949 commercial experience were still alive. Figures such as Rong Yiren, heir to the prominent Rong business family, were able to return to public life and help rebuild market institutions, exemplified by his role in founding CITIC after the Cultural Revolution.
Equally important was the absence of Soviet counterparts to Hong Kong and Taiwan. China benefited enormously from these two economies, which served as living laboratories of market capitalism and provided practical guidance during the reform era. Hong Kong, as a global financial center comparable to London or New York, offered deep expertise in international finance, regulation, and capital markets. Chinese officials routinely trained there, gaining firsthand exposure to global financial practices that the Soviet Union lacked entirely. By contrast, Soviet economists were confined almost exclusively to Marxist theory; when reforms began in the late 1980s, even top specialists had to start from Adam Smith, with little understanding of modern finance or international economic competition.
Hong Kong and Taiwan also played a critical advisory role in China’s institutional design. Market regulations were often discussed in advance with investors from these regions, who, due to cultural and familial ties, offered candid advice and helped Chinese policymakers avoid costly mistakes. This contrasted sharply with Russia’s reliance on foreign consultants, whose prescriptions were often accepted uncritically and sometimes proved destabilizing. The establishment of the Shenzhen Stock Exchange, for example, benefited directly from Hong Kong expertise, notably through advisors such as Sun Hung Kai Properties, allowing China to bypass many early missteps.
Finally, Hong Kong and Taiwan were indispensable sources of early foreign investment. In the 1980s and 1990s, when Western capital remained cautious about China’s reform environment, investors from these regions—often motivated by cultural affinity and long-term confidence—took the lead. Their investments demonstrated the viability of China’s reforms and paved the way for broader international participation. It was only after China’s accession to the WTO that investment from Europe and the United States surpassed that from Hong Kong and Taiwan. In contrast, the Soviet Union lacked such transitional partners, leaving its reforms exposed, abrupt, and ultimately unsustainable.
The Bottom Line
China’s reform trajectory can be understood as a layered and sequential learning process that carefully absorbed international experience while avoiding costly mistakes. From 1978 through the late 1980s, Eastern Europe offered theoretical and institutional reference points for gradual reform, dual-track pricing, and continued state support for enterprises. After 1991, the collapse of the Soviet Union and Eastern European economies provided powerful negative lessons, while Japan and South Korea supplied practical models of industrial policy, export-led growth, and sequenced modernization. Following its WTO accession in 2001, China drew selectively from the United States, adopting advanced technologies, management practices, and global competitive strategies to operate effectively on the world stage.
Rather than copying any single model wholesale, China adapted both successes and failures to its own conditions, maintaining political stability while sustaining economic growth. In comparative perspective, China’s system blends Soviet-style ambition, East Asian industrial planning, and U.S.-style market dynamism in a distinctive configuration—more state-guided than Japan or South Korea, more adaptive than the former Soviet Union, and more strategically unified than India. This layered learning process ultimately enabled China not only to follow existing models, but to incrementally surpass them, emerging as a global economic power.