Microsoft Word EcRefChina Oct06. doc

Figure 1
Dimensions of economic systems 
3.
Centralized 
* 
* 
* 
* 
* 
Decentralized 
Markets 
4.
Administrative 
processes 
9. 
Autarky 
Internationalized 
* 
* 
* 

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In terms of Figure 1, I depict the initial (“standardized”) position in the late 1970s by the 
vertical vector of circles to the far left in the figure. This was clearly a rather consistent 
system, combining collective ownership with administrative command of production in an 
economy that was basically disconnected from international markets. Today’s position 
(2006) is schematically depicted by stars in the case of agriculture, and by squares for the 
rest of the economy. Thus, the economic reforms may be described as a movement to the 
right in all nine dimensions. More specifically, there has been a gradual shift towards 
private ownership of firms and assets and towards more decentralized decision-making 
and more reliance on markets, economic incentives and competition, as well as a shift 
from autarky to internationalization. Inconsistencies, or at least tensions, are difficult to 
avoid when reforming an entire economic system, partly because the reform measures 
move at different speeds in different dimensions of the economic system. So far, however, 
China has been able to deal with these inconsistencies rather successfully, although 
tension between different aspects of the economic system has certainly emerged. 
Needless to say, the figure is only 
illustrative
. For instance,
 
there is plenty of room for 
differing opinions about the relative magnitude of the shifts in different dimensions of the 
figure. Nevertheless, the typology may serve as a basis for discussions of the nature of the 
economic reforms. (When I see no specific reason for asserting that a shift is larger in one 
dimension than in another, the shifts are simply depicted as having the same size in both.)
It is instructive to start with the ownership dimensions (1 and 2). In the case of 
agriculture, the most characteristic feature of today’s ownership structure is a 
combination
of private ownership of firms and public ownership of the most important physical asset 
in agriculture: the land that is leased by family farms from local authorities. In the figure, 
this feature of the ownership structure in agriculture is illustrated by a much larger shift to 
the right in the first dimension than in the second.
In certain limited respects, long-term land-lease contracts give farmers almost the same 
property rights as ownership. (In rural areas today, the contracts officially last 30 years 
but are in reality often shorter.) I then refer mainly to the farmers’ control of current 
production and their right to keep the return on additional effort (since the farmer is the 
residual claimant to value added in both types of contracts). However, in contrast to 

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ownership, land-lease contracts do not give farmers the right to enjoy capital gains on 
land, to borrow with land as collateral, and to transform land into financial assets – for 
instance, to finance their own retirement or their children’s (or grandchildren’s) 
education.
5
Moreover, as emphasized by Oliver Hart (1995), leasing contracts are, in 
principle, less “complete” than ownership contracts. For instance, in the case of 
agricultural land, leasing is associated with higher uncertainty than ownership about the 
rights and duties of the farmer to invest in the quality of the land.
The land-lease contracts in China have also country-specific limitations, although the 
situation varies considerably from village to village (Rozelle and Li, 1998). In particular, 
first-hand contracts are rationed rather than sold on markets. Moreover, in many villages 
local leaders heavily regulate the second-hand market (Li, Rozelle and Huang, 2000). As 
a result, the ability of the farmer to consolidate fragmented patches of land is constrained 
in many villages, as is his ability to change the size of total input of land in the production 
process. There is also considerable uncertainty concerning property rights of land-lease 
contracts due to enforced reallocations (“readjustments”) of land holds, and the related 
risk of expropriation, in particular in connection with the re-zoning of land for other 
purposes; for a discussion of such uncertainties, see, for instance, Wen (2006). We would 
expect that the uncertainty generated by such reallocations and expropriation risks is an 
obstacle to investment in agriculture.
6
The frequent expropriation of land-tenure contracts is also a major source of social misery 
and discontent in rural areas. For instance, available estimates indicate that about 34 
million farmers (partly or completely) lost their land-lease contracts between 1987 and 
2001 due to such expropriation (UNDP, 2005, footnote 120). Thus, the combination of 
private ownership of firms and public ownership of land, with uncertain property rights, is 
problematic in Chinese agriculture – although this combination has proven to be much 
more efficient than the old system with collective farms. It remains to be seen to what 
extent new legislation (from 2003), which regulates local governments’ right to re-zone 
agricultural land, will strengthen the property rights determined by land-lease contracts.
5
There are, however, experiments in rural Suzhouh in Jiangsu Province to let farmers swap land-lease 
contracts for pensions (Zhu, 2006). 
6
Indeed, several studies find considerable effects on investment of variations across villages in the risk 
of leader-imposed readjustments of land-tenure contracts, although the consequences for the efficiency 
of farms are reported not to be large (Li et al., 2000; Jacoby et al., 2002). 

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Clearly, the move to private ownership of firms
 
has been slower in industry and services 
than in agriculture, although the process speeded up considerably in the mid-1990s. One 
important explanation for the delay in privatizing SOEs is the worries among the 
authorities about increased frictional and structural unemployment, and the related risk of 
heightened social tension. Lingering socialist ideology has probably also had an important 
effect: a desire to maintain state control over a number of large production units – 
“strategic firms” or “commanding heights” of the national economy. According to Chow 
(2006d, p. 268), the implicit party slogan in this field in the late 1990s was: “Retain the 
control of the large and let loose the small”. A more pragmatic reason for the reluctance to 
privatize large SOEs could be industrial policy ambitions: to create a number of large 
oligopolistic players on world markets in the future – along the lines, for instance, of 
French industrial policy (a point made by Nolan, 2004). Moreover, private agents may 
have been reluctant to buy SOEs with large overstaffing or weak financial position. Some 
state banks may also have resisted the privatization of firms to avoid realizing losses on 
their loan stock.
7
However, in spite of various obstacles to the privatization of SOEs, it 
seems that the bulk of aggregate production (GDP) in China today takes place in privately 
controlled firms.
8
While the shift to private ownership of