Microsoft Word EcRefChina Oct06. doc

I. The Nature and Economic Consequences of the Economic Reforms 
 
I:1 
The Reforms
The sequence of the economic reforms in China is well known by now
. 
The reforms 
started with spontaneous, mainly local reorganization in 
agriculture 
in the late 
1970s, resulting in greater autonomy for individual collective farms, as well as for 
those working there. These arrangements were codified and further developed in 
accordance with the so-called Household Responsibility System in 1978/79 and the 
replacement of collective farms with family farms in the early 1980s.
2
In 
industry
, the reforms began in the early 1980s (also rather spontaneously) with an 
expansion of collective industrial firms in rural areas, so-called Township and 
Village Enterprises (TVEs), initiated by local political leaders.
3
Indeed, the TVEs 
became the most vital part of the manufacture sector in China from the early 1980s 
to the early 1990s. The economic reform process continued with central policy 
decisions to increase the autonomy of individual state-owned enterprises, SOEs, in 
particular as a result of the so-called Contract Responsibility System initiated in the 
mid-1980s. 
These three developments – the shift from agricultural collectives to household 
farms, the expansion of TVEs, and the reorganization of individual SOEs – 
constitute 
the starting point
for a gradual overhaul of the entire economic system in 
China. The reform process continued with the privatization of a large number of 
small and medium-sized SOEs, the entry and expansion of domestic and foreign 
private firms (the latter, to begin with, in Special Economic Zones, SEZs), a 
gradually more private character of the originally collective industrial firms
4
and the 
2
See, for instance, Zhou (1996) and Johnson (1996 and 1998).
3
These firms grew out from so called Commune Brigade Enterprises, formed in the connection with the 
“Great Leap Forward” and the “Cultural Revolution”. These firms originally took over industrial 
production from agriculture communes. 
4
In geographical areas with “government-centered” ownership regimes, the TVEs continued to be 
collectively owned for a prolonged period of time, although increasingly operated by hired managers 
under various incentive contracts. By contrast, in municipalities with “entrepreneur-centered regimes”, 
such as in the coastal areas of southeastern China, TVEs were privatized at an early stage of the reform 
period, and private individuals have dominated the creation of new firms (Oi and Walder, 1999). 

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liberalization of international trade. While the reforms of the SOEs, in the beginning 
were limited to reorganizations, from the mid-1990s layoffs of workers and 
privatization became dominating features of the reform process in this sector. 
Moreover, today (indeed from the mid-1990s), most TVEs, although still often 
called “collective”, are basically private firms – partnerships, unincorporated 
business or producers’ cooperatives. (The label “collective” is often presumed to 
make them ideologically more acceptable and better treated by public authorities 
and credit institutes; see, for instance, IFC, 2000.)
Since the economic reforms are best characterized as a change of the economic 
system, it is useful to analyze them in the context of a typology of economic 
systems.
 
Following a previous paper of mine (Lindbeck, 1975), I will regard an 
economic system as a multi-dimensional phenomenon, defined here in terms of a 
nine-dimensional vector; see Figure 1. The 
first
two
dimensions concern the 
ownership of firms and assets, respectively – contrasting public (government) and 
private ownership. The 
third
dimension deals with the choice between centralized 
and decentralized economic decision-making, and the 
fourth
with the related choice 
between administrative processes and market mechanisms for transmitting 
information, coordinating economic decisions, and distributing goods and services 
among households. The 
fifth 
and 
sixth 
dimensions concern the extent to which 
economic behavior is influenced by non-economic motives and economic 
incentives, respectively – in the case of individuals as well as firms. The 
seventh
and 
eighth
dimensions refer to one crucial aspect of the relation between the 
economic agents within the domestic economy: the role of competition. The 
ninth 
dimension, finally, concerns the relations between domestic economic agents and 
the outside world, contrasting autarkic and internationally integrated 
(“internationalized”) economic systems.

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5.
firms
firms 
2. of assets 
of assets 
Public 
ownership 
Non- 
economic 
motives 
Coope- 
ration/ 
collusion 
Private ownership 
Economic 
incentives 
Competition 
* 
6.
individuals
individuals 
1. of firms 
of firms 
7. 
firms firms 
8. 
individuals
individuals 
*
O
China before 1978
Chinese non-agriculture sectors today 
Chinese agriculture today