Can Communist Economies Transform Incrementally? The Experience of China

The paper analyzes the structure and phasing of China's reform programs since 1978, evaluates China's economic performance in a comparative context, and assesses the causal relationships between reforms and performance. It concludes that China's economic performance has indeed been very strong, comparable with the rapidly growing economies of East Asia. Its economy has responded positively to reforms, even though these have been partial and are still incomplete in many respects, notably in the area of property rights. Marketization, management contracting, and increased autonomy have raised the productivity of state enterprises, but the response has been largest in the so-called "nonstate" sector, which is characterized by harder budget constraints, high rates of entry and exit and considerable domestic and international competition, and which has also benefited from the "open door" policy. However, some core issues of reform socialism—state ownership of industry, excessive demands for credits and subsidies by enterprises and inadequate autonomy and accountability in the financial sector, and the macro-imbalances that result from them—remain problematic and are similar to those experienced in Eastern Europe and the FSU. These effects have been muted so far in China, because of other factors such as the rapid growth and financial deepening of the economy, but the cushioning effect of these factors is limited. The paper concludes that, while the reforms have had a favorable effect, China's growth momentum is probably not sustainable without deeper enterprise and financial reforms, and that these will inevitably require further clarification and privatization of property rights. The paper concludes by considering the political context of fast and slower reform strategies, which is seen as fundamental, and which must be borne in mind when seeking to extract lessons from China's experience for other transitional economies.