Similar to the Soviet Union, private entrepreneurship and market activity was much more widespread the regime or foreign observers/scholars tended to acknowledge.
By comparison, the Soviet Union’s “second economy” was also estimated at 10-20% of their GDP
The USSR’s planned economy gave rise to a massive, unofficial “second economy” that arguably kept the system functional. Some estimate it at 10-20% of GNP. At the core were ~tens of thousands of underground factories operating inside state factories, using them as cover.
As a coping strategy, enterprise managers developed what has been termed “The Four B’s” of the shadow economy: Bartering, Black makets, Bribes, and Blat (i.e., guanxi / connections).
The USSR was full of legal, semi-legal, and illicit market activity—and this is well known. https://tandfonline.com/doi/pdf/10.1080/09668137708411106
But for some reason, a previous generation of China scholarship reliably overstated the success of post-1949 strangulation of market activity and entrepreneurship. Likely leading to an exaggeration of the 1978 disjuncture. (see p. 35: https://dash.harvard.edu/entities/publication/dcd50bcd-cfc8-4da3-9ca6-147f93958052…)
These estimates of China’s shadow economy from 1960 to 1980 are derived in large part from work by Adam K. Frost in his doctoral dissertation, Speculation and Profiteering: The Entrepreneurial Transformation of Socialist China (2021) and a co-authored China Quarterly paper, Markets Under Mao (2024). The dissertation (figure 14) estimates annual monetary values of prosecuted underground activity at the national level, derived bottom-up from a wide sample of gazetteers and officially prosecuted cases of “speculation and profiteering” （投机倒把）across several localities. To construct this national dataset of prosecuted illicit activity, Frost manually coded over 1,800 observations from more than 200 local gazetteers across China. He then scaled the reported fines and seizures using extremely detailed sets of cases assembled on Chun’an county (Zhejiang) and Zhenjiang city (Jiangsu). Frost estimates the total value of *prosecuted* illicit economic activity by adjusting reported fines and seizures upward, since they represented only about half of the actual value of goods involved in his case studies. He then scales this figure further to account for the fact that “speculation and profiteering” cases were only a subset of all prosecuted economic crimes. The China Quarterly article further develops a simple way to estimate total shadow market activity based on prosecuted illicit economy activity by modeling risk-adjusted behavior of entrepreneurs (i.e. how much money they need to justify the risks of fines.. or worse). The authors calculate that a most conservative estimate—assuming no risk premium and 50% transaction costs—suggests prosecuted cases would capture just 1/15 of total underground activity (the same fraction Frost calculates in his dissertation). A moderately relaxed estimate, incorporating a 10% expected profit threshold and 75% transaction costs, implies that observed cases would have represented only 1/66 of the total. Applying these multipliers to the national-level data from the dissertation allows for a year-by-year estimate of total size of the second economy. (I also add in a 1/30 scenario). Note that these estimates are still likely quite conservative, as they are based around illicit activity in the tertiary sector, and substantial illicit / market activity in agriculture and industry is still likely missing (the Soviets, for example, had a well-developed system of intra-industry illicit activity). This just goes to show how much China’s Net Material Product (NMP) system was likely under calculating China’s GDP—whether or not NBS would have had the capacity to better calculate under Mao is anyone’s guess. Of course, the data is imperfect and the estimates are just educated guesses. Given the chaos of the early years of the CR, it is hard to know if the shadow economy drop is just a matter of less enforcement capacity or actual fall in activity. GDP numbers are from NBS. Dr. Frost’s dissertation and China Quarterly paper are both available online for free: Dissertation link: https://dash.harvard.edu/entities/publication/dcd50bcd-cfc8-4da3-9ca6-147f93958052… China quarterly link: https://cambridge.org/core/journals/china-quarterly/article/markets-under-mao-measuring-underground-activity-in-the-early-prc/FCED40169CCA6DEEF21B48012BC4D38C
