The China Puzzle: ''Touching Stones to Cross the River''
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PETER NOLAN The China Puzzle: ''Touching Stones to Cross the River'' Why did China perform so well in the first decade and a half of reform, despite the fact that its economic institutions and policies were gravely inadequate in relation to mainstream Western economic theory and policy? China's approach toward post-Stalinist reform con- growth, these arguments have worn thin. And now, trasts markedly with that of most other former cen- this growth presents a puzzle for mainstream eco- trally planned economies. Eastern Europe and Russia nomic theory and policy. have tried to move rapidly towards a market econ- omy ("one cut of the knife"), whereas, after Mao's The consensus view death in 1976, China adopted an incremental reform path ("touching stones to cross the river"). Many While there was a minority who dissented, rarely has observers considered China's program to be poorly there been such agreement about a fundamental issue designed. It seemed to have led to an unsatisfactory of economic policy. Several broad areas of agree- "halfway house" that was neither capitalism nor ment about basic propositions among economists socialism—an institutional framework which perpet- advising the former communist countries in the early uated bureaucratic interference in the economy and post-communist phase can be identified: was expected, therefore, to have produced poor • Market socialism cannot work. Janos Kornai results. Moreover, the Tiananmen massacre in 1989 wrote: "... the basic idea of market socialism simply was connected closely with the tensions of economic fizzled out. Yugoslavia, Hungary, China, the Soviet reform. It was widely felt that this signaled the end Union, and Poland bear witness to its fiasco. The of reform, and that China would lapse into low- time has come to look this fact in the face and aban- growth authoritarianism. don the principle of market socialism." (See The But China confounded the consensus of critical Road to a Free Economy in For Further Reading.) opinion. Even after the Tiananmen massacre, neither • Institutional reform cannot be sttccessful unless reform nor economic growth was halted. In most there is tnacroeconomic stability. important respects, the "halfway house" economy • Enterprises will not respond in desirable ways to has performed extremely well since the death of Mao market signals unless private property rights are Zedong in 1976. At each stage of the reform, critics established. argued that the reforms had run out of steam and that • Enterprises' attempts to make profits will not short-term gains had been won through "easy" insti- produce socially desirable outcomes unless prices tutional change which would damage long-term per- are determined by market forces. formance. After a decade and a half of sustained • Economic progress will be greatly inhibited PETER NOLAN is a Fellow. Director of Studies in Economics, Jesus College, Cambridge, England and Lecturer in Economics and Politics at Cambridge University. January-February 1994/Challenge 25 unless there is full integration into the world econ- Party remained in power made it impossible to imag- omy. In The Economy of the USSR: Summary and ine that the economy could perform well. China in Recommendations, the World Bank urged, "It the 1980s, like post-1968 Hungary, was regarded as a is. essential to move as rapidly as possible to a negative example for the reforming Eastern transparent and decentralized trade and exchange rate European countries and for the former USSR after system, in order to hasten the integration. into the their anti-communist revolutions. world economy." Jan S. Prybyla has written: "The sad chronicle of • The pace of the transition from central planning China's post-Mao attempt to introduce a modern eco- needs to be rapid. In the opinion of Anders Aslund, nomic system contains a useful lesson which others, "Common sense suggests that if you are sliding into notably the East Europeans, are taking to heart. The a chasm, you should jump quickly to the other lesson is that to address the economic problem in a side... and not tread cautiously. There is no theory modern way in the context of a low-calibre, ineffi- supporting a gradual switch of system." (See cient, slothful, wasteful, cronified socialist system, "Gorbachev, Perestroika, and Economic Crisis" in one must go all the way to the market system, do it For Further Reading.) quickly, and not stop anywhere on the way. To go • Democratic political instittitions are a necessary part of the way slowly, 'crossing the river while condition of success with economic reform. groping for the stones' as the Dengists put it. is to end up the creek to nowhere." The Chinese approach Property rights Market socialism was the overarching philosophy of the Chinese economic system in the 1980s, though Instead of moving rapidly toward a system in which the term "socialist market economy" was not enunci- private property is the dominant form of ownership, ated formally as the guiding principle of economic China was committed to experimentalism and gradu- organization until as recently as 1992. The overall alism in ownership reform in the 1980s. Transparent, framework strongly resembled that of the NEP (New legally protected, individual property rights were the Economic Policy) in the Soviet Union in the mid- exception, not the rule in all important areas of the 1920s and in China itself in the early 1950s. The old economy. Public ownership (with confused property Stalinist system of direct administrative planning was rights) was the norm. rejected decisively in favor of one in which markets In agriculture, the "decollectivization" of farmland and their related incentives were viewed as necessary was not followed by the establishment of private to effective functioning of the economy. In the property rights in land. The Chinese Communist 1980s, public enterprises were given greatly Pany (CCP) did not wish to allow the emergence of a increased independence in production, marketing, landlord class; therefore, land could not be bought and the disposal of their income. However, key and sold. Rather, the village community remained the Communist Party documents .spoke unremittingly of owner of its farmlands and controlled their opera- the economy as one in which public ownership, plan- tions. It endeavored to ensure that farm households ning, and "socialist" values were central to socio- had equal access to farmland, and obtained part of economic life. Throughout the reform period, there the Ricardian rents from the land to use for commu- has been a continual reference to the need to com- nity purposes. The relative equality in local access to bine the virtues of markets and planning—in striking farmland was a major reason for the fact that the Gini contrast to the economic ideology of post-communist coefficient of rural household income distribution countries in Eastern Europe and Russia. There, the remained so low. The rural reforms ofthe late 1970s economic functions of the state were looked upon and the early 1980s left property rights in land with hostility from the moment the Communist unclear. A commentator wrote in the Cambridge Parties were overthrown. Journal of Economics: "Every member of a village For a large number of observers of the Chinese community has a share in the property rights to the economy, this "market socialist" mixture of market land of his/her community but the share is not and plan under a system in which the Communist embodied in any tangible form, such as a title deed 26 Challenge/January-February 1994 Table 1 Share of Industrial Output ultimate management power and fmal claim on resid- (gross value) Produced in Enterprises ual income. Today, managerial authority and claims with Different Types of Ownership* on income are split between government and the enterprise itself, as well as, to a lesser extent, the 1981 1985 banking system. The uncertainty attending on the State 78.3 70.4 54.5 ownership system is putting serious obstacles in the Collective 21.0 27.7 35.7 Individual neg 0.4 5.4 way of improved performance." Bankruptcy in the Other 0.6 1.5 4.3 state sector was virtually unknown. The "soft budget • Data lor 1981 and 1985 are both at 1980 prices: data tor 1990 are at cur- constraint" was dominant, with a rapidly increasing rent prices. share of finance coming from a highly politicized Source: State Statistical Bureau, 1986 and 1991. banking system. or stock, so it seems that no one is a real owner of The rural collective sector was the fastest-growing land." Moreover, even the way land was operated part of the Chinese industrial economy in the 1980s. continued to be heavily influenced by stale instruc- The vast bulk of assets in this sector was owned by tions. The state's compulsory deliveries for some the local community, with the community's asset key products {notably grain) remained in force, so management board arranging, on the community's that providing grain for self consumption and com- behalf, the key aspects of the use of the property pulsory delivery preempted around 70 percent of under their control. The World Bank's study of this farmland. sector concluded: "[This is] an environment in which In industry, although the reforms allowed individ- ownership and property rights with respect to indus- uals to set up businesses, state policies strongly pre- trial assets are not clear and pure private ownership ferred the publicly owned sectors (for example, the is rare except in the smallest concerns... Thus, the allocation of credit, power supplies, public transport, most powerful reward for small-scale entrepreneurs and foreign exchange). Public ownership of indus- in other countries—the ability to reap large trial assets took both the "all people" (state) and the gains from the 'capitalization' of entrepreneurial "collective" (often the local community) form.