Microsoft Word EcRefChina Oct06. doc

special 
type
of “mixed economy” – with more private ownership of firms than of assets, frequent 
political and bureaucratic interventions in public-sector firms, poorly developed factor 
markets (in particular financial markets), and business networks that partly replace the 
“rule of law”, although in many cases at the cost of widespread corruption.
Although the previous economic system in China has been overhauled by the economic 
reforms, there are nevertheless important continuities between the pre- and post-reform 
periods. Obvious examples are the inheritance of heavy industrial structures (in particular, 
in northern and western provinces), the collective ownership of land, the TVEs (although 
they have gradually been turned into private enterprises), the role of informal networks 
33
By way of comparison, widespread corruption in Sweden was drastically reduced in the mid-19
th
century in connection with a removal of economic regulations (including the guild system). As a result, 
the small class of well paid public-sector administrators had very little to “sell” to the private sector in 
terms of permits and regulatory concessions (Lindbeck, 1974
,
Chapt. 1). 

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25
(the 
guanxi)
, and the combination of political centralization and administrative 
decentralization in the public sector.
I:2 Economic Consequences 
We do not really know which specific elements of China’s economic reforms during 
the last quarter of a century best explain the county’s successful growth performance.
34
We can only say that the actual 
combination
of elements in the reform package, 
schematically illustrated in Figure 1, has been highly conducive to GDP growth. An 
important component of the reforms has then simply been to remove various 
institutional obstacles for economic growth, and hence release initiatives that have 
boosted the accumulation of real and human capital, and stimulated import of foreign 
technology and organization.
It is tempting, and usual, to argue that China’s growth performance has also been 
enhanced by the 
gradual 
and
 experimental
nature of the reform process. To a 
considerable extent, the process also relied on bottom-up initiatives, rather than top-
down reforms, although new political signals from central political authorities have, of 
course, kept up the thrust of the process and influenced its course. However, the 
reforms do not seem to have been based on a blueprint of a specific “final stage”, 
although new intermediate goals have been spelled out consecutively in the Five-Year 
Plans. 
Often mentioned examples of the gradualism are that agricultural reforms began as 
local initiatives before they became national policies, that the reforms in 
manufacturing were initiated only after the success of agricultural reforms, and that 
the national economy was only gradually opened to international trade and foreign 
investment.
35
As a consequence, while family farms were the most dynamic force in 
the Chinese economy during the first years of the reform process, the TVEs 
34
According to official (revised) statistics, total GDP in China is today (2005) about US
$
2.3
trillion,
and
per 
capita GDP US
$
1.700 – both measured by the official exchange rate (after the upward revision of the national 
accounts announced in December 2005). It is often asserted to be three or four times higher in terms of PPP 
calculations. Such calculations are, however, quite uncertain, not least for China (Heston, 2003).
35
According to Tseng and Zebregs (2002), the tariff rate fell from well over 50 percent in the early 
1980s to about 15 percent in 2002. Indeed, since a significant share of imports of goods subject to high 
tariffs is imported illegally, the authors argue that tariff revenues as a percentage of total imports are 
only 3 percent. Kanbur and Zhang (2005) report a fall in the tariff rate from about 15 to about 4 percent 
between 1978 and 2000.The expansion of the “special economic zones” was also gradual. 

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generated much of the dynamism during the course of the 1980s, and foreign 
enterprises were an important growth factor in the 1990s. Another important 
example of the gradualisms is that firms and households were exposed only step-by-
step to competitive markets and new price relations.
36
The delay of the contraction 
and privatization of SOEs was also an important element of the gradualism. 
It is often (realistically) argued that the gradualism mitigated tendencies to mass 
unemployment, as occurred in the former Soviet Union and Eastern Europe during 
their transitions. In other words, it is likely that the gradualist approach contributed 
to improve the synchronization of job destruction and job creation during a 
transition period.
37
An obvious disadvantage was, of course, that the expansion of 
private (and often more efficient) firms was retarded as a result, and that reforms of 
financial markets were delayed.
38
We cannot be sure, however, that gradualism will be equally successful in the future. 
First, successful reforms of factor markets, not least financial markets, often require a 
large number of comprehensive and complementary policy measures, including the build-
up of market-supporting institutions of various types. Second, there is always a risk that a 
gradualist reform process will come to a stop, since gradualism gives various interest 
groups time to build up resistance to further changes (“veto points”). By way of 
comparison, recent attempts in Western Europe to gradually deregulate product and factor 
markets have encountered such problems.
It remains to explain 
why
China chose such a pronouncedly gradualist approach to begin 
with. One reason might be that the country had recent experiences of a number of 
36
See, for instance, Lau, Qian and Roland (1998). In particular, “shock effects” of the price reforms 
were mitigated by a dual price system during a transition period, in the sense that economic agents could 
count on previously established prices for production volumes that had already been planned and 
contracted. These arrangements, however, also opened the gates for price arbitrage and corruption. 
37
Zhang (2004) reports that the average annual ratio of job destruction in SOEs recently has exceeded 
the rate of job creation only by a small margin, yielding a net employment reduction of no more than 1.4 
percent per year between 1995 and 2000 and by 2.0 percent between 1999 and 2002 – according to a 
large sampling study. 
38
By emphasizing the mitigation of unemployment rather than the promotion of microeconomic 
efficiency, some observers, such as Godoy and Stiglitz (2006), have argued that the delay of 
privatization was conducive to China’s transition to a market economy.
By way of comparison, developed countries have occasionally used the same technique to avoid an 
abrupt rise in unemployment at the time of rapid structural change, such as in connection with the 
contraction of coal, steel and shipyards industries in Western Europe in the 1960s and 1970s. 

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unsuccessful “Big Bang” reforms: the radical nationalization and collectivization after the 
Communist take-over in the late 1940s, the Great Leap Forward 1958 to 1962, and the 
Cultural Revolution from the mid-1960s to the mid-1970s. Moreover, the reformers in 
China probably did not regard a Big Bang strategy as necessary to block a subsequent 
reversal of the economic reforms. Both the authorities themselves and economic agents 
were probably confident that the new regime would continue to be in political control for 
a considerable period of time. This point is important since confidence that the reforms 
would stay, and indeed continue, is crucial for agents contemplating investment in real 
and human capital. In this sense, political stability contributed to making gradualism 
feasible.
39
The actual growth performance of the Chinese economy has been impressive regardless of 
whether we rely on the official figures of about 9.5 percent GDP growth per year since the 
start of the reforms (8.3 percent per capita), or whether we believe in somewhat more 
conservative calculations.
40
When evaluating China’s success in terms of GDP growth, it 
is, however, also important to take into account the resource costs of the chosen growth 
strategy – i.e., the