China - An Evolving Market Economy - A Review of Reform Experience


WP/92/89-EA

China: An Evolving Market Economy--A Review of Reform
Experience by Michael Bell and Kalpana Kochhar

For three decades after the 1949 revolution, China pursued socialist
economic development based on self-reliance and the centrally directed
allocation of resources. In the late 1970s, China's policymakers recognized
the untenability of this approach and began to overhaul the economic system.

They undertook the reforms without a detailed blueprint under a style
that was generally incremental and experimental. Despite the absence of a
blueprint, the authorities recognized the importance of the market and the
strength of individual incentives to stimulate production. At the same
time, their resistance to widespread private ownership led to a search for
solutions that simulated the institutions of a market economy while
retaining public ownership.

A key element of reform involved gradually opening China to the rest of
the world, which policymakers viewed as a means of acquiring modern
technology. In the area of domestic reform, China first experimented in the
rural areas, and then, when new mechanisms were successful, extended the
reforms to other sectors. Partly for this reason, progress in the various
areas of reform has not been uniform.

There can be little doubt that the reforms had a positive effect on
China's economic performance. In contrast with other reforming countries,
where output collapsed, unemployment rose, and real incomes declined,
China's output growth accelerated and living standards improved, in some
cases dramatically. However, the gradual approach and the resultant
incompleteness of reform perpetuated some distortions and contributed to
pronounced macroeconomic cycles marked by inflation and external
disequilibrium. Because indirect instruments were ineffective for
macroeconomic management, the authorities reverted to administrative means
to contain excess demand, thereby slowing the pace of reforms.

China's reform experience differs from that of other countries
undertaking structural reform for a number of reasons, including favorable
initial macroeconomic conditions; continuation of the prereform political
order; a very small external debt burden; and the benefit of having
withdrawn from the CMEA arrangements many years earlier. Thus, the
favorable results of China's reform to date cannot necessarily be
attributed wholly to the more gradual approach that it has followed.

Beginning in early 1992, the pace of reform accelerated markedly,
indicating the onset of a new stage in China's reform efforts. Detailed
analysis of developments during 1992, including the decisions of the
Fourteenth Party Congress in October 1992, will be the subject of a further
study.