What it means
Under Mao Zedong, China's leaders wanted to catch up quickly with major industrial powers. The plan was to mobilise the huge rural population, merging farms into large people's communes and asking villagers to make steel in small backyard furnaces alongside their farming.
Output targets were set by the centre and increased repeatedly. The economics went wrong in several ways.
Farm labour was diverted to industry, so crops were left unharvested, and the steel produced in backyard furnaces was often poor quality and of little use. Communes also changed incentives, since families no longer benefited directly from the extra effort they put into their own land.
A critical problem was information, because local officials were rewarded for meeting or beating targets and so reported inflated harvests. The state then took grain based on the false figures, which left too little food in villages when real output fell.
A famine followed in the early 1960s, and estimates of the death toll vary widely but run into the tens of millions. Policy shifted away from the Great Leap by the early 1960s, with some farm land returned to household management and heavy industry targets reduced.
Economists still study the period as a case of how central planning without accurate feedback can go badly wrong. It is a standard example in discussions of incentives, forecasting and the dangers of unrealistic targets.
For business readers, the lessons travel well. When people are rewarded for hitting a number, they may report the number they are asked for rather than the truth, and decisions built on false data become worse over time.
Many modern lessons about budgeting, target setting and honest reporting echo this history. Capital allocation suffered too.
Scarce resources, from coal to labour, were pulled into projects chosen for their political appeal instead of their returns, and nobody had the freedom or the incentive to say that the numbers did not add up. Modern finance teams would call this a failure of the feedback loop between plans and results.
In practice
Real-world examples.
Example
A business school professor uses the Great Leap Forward as a case in a class on incentives. Students discuss how local officials who were rewarded for high output reported figures they knew were wrong, and then compare that with sales managers paid only on quarterly targets.
Example
An economic historian compares China's growth before 1958 with the years afterwards. She shows that output of the economy fell sharply during the campaign, and that it took several years of changed policy for the economy to recover. Her chart is used in lectures to illustrate how long it can take to repair the damage from a bad policy.
Example
An investment analyst assessing an emerging market reads about past planning failures. She decides to give less weight to official production statistics and more to independent data, such as electricity use and trade flows.
Case study
Seen in the real world.
Zenith Steelworks is an illustrative, fictional company whose new chief executive announced that output would double in a single year. Plant managers were told that bonuses depended on hitting their share of the target.
Within six months, reports showed that every plant was on track, but cash was draining out because inventory of unsold steel was piling up and quality complaints from customers were growing. The finance director discovered that some plants were recording unfinished product as sold in order to meet the target.
The board scrapped the doubling target, introduced independent stock counts and changed bonuses to reward profit and quality as well as volume. The illustrative story echoes the warning from the Great Leap Forward, that ambitious targets without honest feedback can destroy the very value they were meant to create. The finance director added that a manager who asks only for good news will usually get it, whether or not it is true.
Watch out
Common mistakes.
- Treating the Great Leap Forward as simply a failure of effort, when the main problems were design, incentives and false reporting.
- Confusing it with the later reform period that opened China's economy, which took a very different, market-oriented approach.
- Quoting a single exact casualty number, when historians' estimates differ and are best given as a range.
Questions
People also ask.
When did the Great Leap Forward happen?
It is generally dated from 1958 to around 1962, with the worst famine years in the early part of the 1960s.
What were the backyard furnaces?
They were small local furnaces set up to produce steel from scrap and household metal, and much of the output was too poor to use.
Why do economists still discuss it?
It shows how planning goals, incentives and information interact, and it is widely used as a warning about target-driven management.
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