Why Did the Communist Party Reform in China, But Not in the Soviet Union ? The Political Economy of Agricultural Transition Scott Rozelle* and Johan F.M. Swinnen** Version: January 10, 2007 Abstract The dramatic transition from Communism to market economies across Asia and Europe started in the Chinese countryside in the 1970s. Since then more than a billion of people, many of them very poor, have been affected by radical reforms in agriculture. However, there are enormous differences in the reform strategies that countries have chosen. This paper presents a set of arguments to explain why countries have chosen different reform policies. * University of California, Davis and Stanford University ** The World Bank and University of Leuven (KUL) Why Did the Communist Party Reform in China, But Not in the Soviet Union ? The Political Economy of Agricultural Transition The emergence of China as a global economic powerhouse, the uncertain path of Russia towards a market economy, and the integration of ten Central and Eastern European countries into the European Union (EU) have occupied the minds and agendas of many policy-makers, business leaders and scholars all over the globe at the end of the twentieth and the beginning of the twenty-first century. Two to three decades ago these developments were unimaginable. The leaders of the Soviet Block and China at that time were clearly committed to Socialist ideology and designed their economies to be insulated from the world. Since the 1980s, however, China, Vietnam, Hungary, Poland, Russia and more than 25 other nations have emerged from their Socialist cocoons. While not all have succeeded, many have transformed the fabric of their economies. Several have achieved high rates of growth. One of the most interesting observations is that the winners and the losers have all taken fairly distinct paths to where they are today. The path and the choices that put them there likely will have implications for where they are going in the coming years. In many senses, however, the developments have been so fast and the impact of the changes so vast that they have taken the world by surprise and we do not fully understand them. In briefest terms, the developments we want to explain began in the countryside of China in the late 1970s. Until then, a large share of the globe, from the center of Europe to much of East Asia, was under Communist rule, controlling the lives of more than 1.5 billion people and affecting those of many more in other countries. In 1978 China embarked on its economic reform path by introducing the household responsibility system (HRS) in agriculture (Perkins, 1988). A few years later, Vietnam followed (Wurfel, 1993; Pingali and Xuan, 1992). Both countries reduced price distortions and reallocated key land rights from 1 collective farms to rural households (Sicular, 1988a). In the initial years, however, market forces played little role (Putterman, 1993). Nevertheless, the impact was dramatic. Productivity and incomes in both countries soared (Lin, 1992). The reforms lifted hundreds of millions of rural households out of dire poverty (World Bank, 1992). Economists praise the Chinese reforms as the ‘biggest antipoverty program the world has ever seen’ (McMillan 2002: 94) and claim that the reform policies—however partial—have led to ‘the greatest increase in economic well-being within a 15-year period in all of history’ (Fischer 1994: 131). Other communist regimes could have followed this path in the wake of China’s moves in the late 1970s and early 1980s. However, they generally did not. While a series of more timid reforms were tried out in the former Soviet Union during the late 1970s and early 1980s, nothing of the changes like those in China followed either policy-wise or implementation-wise (Gray, 1990). In fact, if anything Communist governments during the 1980s remained stubbornly committed to their decades-old Socialist prescriptions. Performance during the 1970s and 1980s continued to worsen (Johnson and Brooks, 1983). Although reform outside of East Asia was slow in coming, when it did, change came in a hurry. Around 10 years after the start of China’s reforms, leaders in many nations of Central and Eastern Europe (CEE) and the former Soviet Union (FSU) began to dismantle Socialism and liberalize their economies (Macours and Swinnen, 2002). After the reform movement started, however, leaders in many nations accelerated their actions, implementing a bold series of policies that sought to rationalize prices, increase incentives through a variety ways of restoring property rights and modify the institutions of exchange within which residents lived and worked. In a few years the reformers pushed a policy agenda that often went far beyond the reforms that had been implemented in China and Vietnam (Green and Vokes, 1998). Although output and incomes in some of these nations collapsed in the first 2 few years of reform, productivity often began to rise and within three to five years, output and incomes in many nations began to grow. In terms of their reform strategies, there were also major differences among the CEE and FSU nations. In fact, even though leaders of most nations announced wide ranging changes, in many FSU nations, in particular, reforms were implemented in a much more piecemeal fashion (Brooks and Nash, 2002). Subsidies and price controls remained, assets were distributed in ways in which property rights were not clear and there was little commitment to dismantling state-run distribution and processing channels. In most of these nations the reforms were disappointing. Output fell and poverty increased until the end of the 1990s. While the record on what happened and the effects of those reforms are now fairly well understood (Roland, 2000; Rozelle and Swinnen, 2004), it is less clear why the decisions were made in the ways that they were. If price changes, rights reforms and market emergence led to growth, why did leaders in many transitioning nations not choose to follow such a comprehensive prescription? More explicitly, why was it leaders in China decided to implement their reforms gradually while those in CEE did so all at once? Why was it that leaders in CEE undertook a broad spectrum of reforms while those in many nations of the FSU did not? And even more fundamentally, why is it that the policies were implemented by the leaders of some Communist regimes while in others it took a major regime shift for policies to gain momentum? More generally, there is much less of an understanding of why decisions were made in the way that they were. In our opinion, when thinking about what additional lessons need to be drawn from the experience of transitioning nations, we believe that these are among the most critical of questions. The goal of this paper is to explore some of these questions. However, the brevity of a single paper precludes doing so in a comprehensive fashion. Therefore, based on the 3 approaches and findings that are contained in the literature, including our own previous work, we draw on some of the generally accepted findings in the literature and begin to provide answers to these questions about why leaders in one set of countries took one path while those another set took a different road. Because the number of nations, the complexities of the policies and the timing of reforms differ so substantially, we necessarily must even further limit the scope of our inquiry. We primarily restrict our attention to three broad questions: Why was the Communist government in China able to guide the reform process while it took a regime change in Russia (and in most of CEE and the other CIS nations) to start the reforms? Why did the market liberalization and other reforms happen so fast in some nations and happen only gradually in others? Why did the choice of property rights reform in land and farm restructuring differ so dramatically from nation to nation? Even restricting the analysis to address these three questions, however, is an ambitious task and needs to be narrowed further. While we recognize that there certainly are other factors that influenced the decisions, we focus on four general categories of determinants: a.) initial technological differences in farming practices and the environment within which farming occurs; b.) differences in wealth and the structures of the economies; c.) the ways the different governments are organized—especially focusing on the degree of decentralization; and d.) the historical legacy of Socialism. Why did the Communist Party reform in China, but not in the Soviet Union? Radical reforms under the Communist regimes could only occur when there was simultaneously strong grassroots support for the reforms and support at the top of the Communist Party (Swinnen and Rozelle, 2006). If support from both above and below is not there, it is likely that the policy efforts will succumb to inertia, foot-dragging and resistance 4 from those that are not in favour of reform. For example, reform failed in China in the 1960s because there was no support by the leadership for radical decollectivization demanded by households at the grassroots level (Lardy, 1983). Reform failed in Russia in the 1970s because there was neither grassroots nor leadership support for radical changes (Brada and Wadekin, 1988). Agricultural reform failed in the 1980s in Russia because the reform proposals from the top of the Communist leadership under Gorbachev were not supported at the farm level (Gray 1990). Only in China at the end of the 1970s and the early 1980s was there a confluence of interests in favour of radical reforms at the top and at the grassroots, from both farm households and local officials (Yang, 1996).