Chapter 7

A roadside billboard of Deng Xiaoping in Shenzhen

7. Understanding Chinese Economic Reform

7.1 Radical reform: the successful cases

7.2 Radical reform: the unsuccessful cases

7.3 Gradual/partial reform: the successful cases

7.4 Gradual/partial reform: the unsuccessful cases

7.5 Whither Chinese-style reform?

Keywords:

• economic reform,

• reform strategy,

• big-bang,

• gradualism,

• radicals,

• conservatives,

• ownership reform,

• administrative decentralization,

• stakeholder

7.1 Radical reform: the successful cases

7.1.1 Agricultural reform

7.1.2 Reform of Chinese bureaucracy

StatisticProvincial governors

MinistersCity mayors or

department chiefs

County sheriffs or division

chiefsMandatory retirement age (years)

65 65 60 55

Average retirement age (years)--Before reform--After reform

6255

6458

5850

-<45

Percentage with college degree (%)--Before reform--After reform

2043

3752

1444

1145

Average tenure (years)--Pre-1982--Post-1982

6.43/6.23a

3.84/4.05a

6.564.44

--

--

Notes: By 1988, 90% of government officials above the country level were newly appointed after 1982; 60% of those government officials had college degrees. This was a result of retiring 3.4 million revolutionary veterans.

a: Governor/party secretary.Source: Li (1998, p. 394), which also gives other references.

Table 7.1 Chinese bureaucratic reform, Feb. 1982 to Sept. 1984

7.2 Radical reform: the unsuccessful cases

7.2.1 Price-release reform

7.2.2 The SOE reform during the 1990s

7.3 Gradual/partial reform: the successful cases

7.3.1 Introduction of dual-track system

7.3.2 Decentralization of authority

7.3.3 Reform of foreign exchange system

Commanded

plan

Guided

plan

Market

regulation

Plan (defined by conservatives)

Market (defined by conservatives)

Plan (defined by reformists)

Market (defined by reformists)

The art of reforming a planned economy

7.4 Gradual/partial reform: the unsuccessful cases

7.4.1 The SOE reform in the 1980s

7.4.2 Decentralization of authority in the 1980s

7.4.3 Reform of China’s banking system

The shou-fang circle: “decentralization (fang)–disorder–over-

centralization (shou)–rigidity”

• Baum (1994, pp. 5–9; pp. 369–76) offers a plausible explanation of the fang–shou cycle during 1978–93: the decentralization (fang) policy was concentrated on 1978, 1980, 1982, 1984, 1986, 1988, and 1992; while the concentralization (shou) policy was concentrated on 1979, 1981, 1983, 1985, 1987, 1989, and 1993.

• Shirk (1993), Dittmer and Wu (1993, pp. 10-12) reach a similar conclusion, sketching out four relatively complete, synchronous cycles of fang and shou during 1980 to 1989: fang predominated in 1979–80, 1984 and 1988, while shou predominated in 1981, 1985–86, 1987, and 1988–89.

7.5 Whither Chinese-style reform?

7.5.1 Political economy of reforms

7.5.2 WTO and the Chinese reform

Strategy Successful cases Unsuccessful cases

Gradual/partial approach

Dual-pricing system reform (1979-92); foreign exchange system reform (1984-)

Industrial contract system (1983; 1986); administrative decentralization (1980s- early 1990s); banking reform (1983-)

Radical approach

Agricultural reform (1980-82); bureaucratic reform (1982-84)

Price-release reform (1988-89); SOE ownership reform (1980s; 1990s)

Notes: (1) The judgment of a reform program as being ‘successful’ or ‘unsuccessful’ is based on available data and literature. (2) The terms ‘radical’ and ‘gradual/partial’ are elastically defined, since according to international standard, during the past three decades China’s all reform programs as a whole have been implemented via only but a gradual/partial approach.Source: Defined in the text.

Table 7.2 A comparison of selected reform programs

Figure 7.1 A feedback model of market-oriented reform

Case study 5

Interest groups, stakeholders and reform in China

I. Radicals and conservatives in the early reforms

II. Political, economic and cultural elites in the later reforms

Notes: (1) Each circle denotes the scope of reform that is proposed by and in favor of an elite. (2) The area that is overlapped by the three circles denotes the scope of reform that is in favor of all the three elites concerned.

Figure 7.2 Collective actions of the Chinese elites on reforms

Chapter conclusion:

The analytical narrative of the successful and unsuccessful cases of the Chinese-style reform shows that the efficiency of a reform depended upon: (i) the initial institutional conditions; (ii) the external environment; and (iii) the reform strategy. The empirical evidence suggests that a radical reform tends to be more efficient than a gradual/partial one during the early stages (the late 1970s and the early 1980s), while a gradual/partial reform tends to be more efficient than a radical (big-bang) one in the later stages. We also find that the Chinese-style reform has evolved from the collusion of the CCP radicals and conservatives to that of the political, economic and cultural elites, at the cost of retarding political reforms and of sacrificing the benefits of the rest of the people.

Suggested reading

Appleton, Simon, Lina Song, Qingjie Xia (2005). “Has China crossed the river? The evolution of wage structure in urban China during reform and retrenchment,” Journal of Comparative Economics, Volume 33, Issue 4 pp. 644-663.

Ariff, M. and Can, L. (2008). “Cost and profit efficiency of Chinese banks: A non-parametric analysis,” China Economic Review, Volume 19, Issue 2, pp. 260-273.

Bai, Chong-En, Jiangyong Lu, Zhigang Tao (2009). “How does privatization work in China?” Journal of Comparative Economics, Volume 37, Issue 3, pp. 453-470.

Baillon, Aurélien, Olivier L'Haridon and Laetitia Placido (2011). “Ambiguity Models and the China Paradoxes,” American Economic Review, Volume 101, Issue 4.

Suggested readingFleisher, Belton M., Klara Sabirianova, Xiaojun Wang (2005).

“Returns to skills and the speed of reforms: Evidence from Central and Eastern Europe, China, and Russia,” Journal of Comparative Economics, Volume 33, Issue 2, pp. 351-370.

Fu, X.(M.) and Heffernan, S. (2007). “Cost X-efficiency in China's banking sector,” China Economic Review, Volume 18, Issue 1, pp. 35-53.

Hao, C. (2006). “Development of financial intermediation and economic growth: The Chinese experience,” China Economic Review, Volume 17, Issue 4, pp. 347-362.

Huang, G. and Song, F.M. (2006). “The determinants of capital structure: Evidence from China, China Economic Review, Volume 17, Issue 1, pp. 14-36.

Jefferson, Gary H. and Thomas G. Rawski (1994). “Enterprise Reform in Chinese Industry,” Journal of Economic Perspectives, Volume 8, Issue 2.

Suggested readingJefferson, Gary H., Jian Su (2006). “Privatization and

restructuring in China: Evidence from shareholding ownership, 1995–2001,” Journal of Comparative Economics, Volume 34, Issue 1, pp. 146-166.

Liang, Q. and Teng, J.-Z. (2006). “Financial development and economic growth: Evidence from China,” China Economic Review, Volume 17, Issue 4, pp. 395-411.

McMillan, J. and B. Naughton (1992). “How to Reform a Planned Economy: Lessons from China,” Oxford Review of Economic Policy, Volume 8, Issue 1, pp. 130-143.

Yusuf, Shahid (1994). “China's Macroeconomic Performance and Management during Transition,” Journal of Economic Perspectives, Volume 8, Issue 2.

Zhang, W. (2006). “China’s SOE Reform: A Corporate Governance Perspective,” Corporate Ownership & Control, Volume 3, Issue 4, pp. 132-150.