Revised
PoUsy Reeeuoh                 V  5
WORKING PAPEAS
TranslUon and Mro-Adgbent  J
Policy Research Department
The World Bank
October 1993
WPS 1189
Can Communist
Economies
Transform Incrementally?
China's Experience
Alan Gelb
Gary Jefferson
and
Inderjit Singh
How does China's approach to reform- incrementally remov-
ing constraints on market behavior- square with the opposing
"big bang" thesis that partial reforrn is probably worse than no
reforrn because it leaves economic agents constrained neither by
plan nor by markets? Are there rational bases for these widely
different approaches to fundamental economic change? If so,
what is transferable from China?
Policy Resarch Working Papes diseminate the findings of wok in progrsu and cnomurgc the exchange of idem among Bank staffand
all other intensted in developmnt issues. Thesepapers. distributed by theReserchAdvisory Staff cay the names ofw tauthors, reflect
only theirviews,and srould beused and cited accordingly. The findings, interpreutions, and conclusions arm the authos' own. They should
not be attributed to the Wodd Bank, its Board of Dimctor, its managament, or any of itu member countries.



4..
WPS 1189
This paper - a product of the Transition and Macro-Adjustment Division, Policy Research Dephrunent
- is part of two Bank research projects: "Enterprise Behavior: nd Economic Reforms: A Comparative
Study in Central and Eastem Europe," and "Industrial Reforn and Productivity in Chinese Enterprises"
(RPO 675-38). Copies of this paper are available free from the World Bank, 1818 H Street NW,
Washington, DC 20433. Please contact PRDITM, room N 1 1-065, extension 37471 (Revised October 1993,
49 pages).
Gelb, Jefferson, and Singh try to answer impor-        * A "big bang" is not economically necessary
tant questions: How important is the phasing of      unless justified by the need to address macroeco-
political and economic liberalization and the        nomic imbalarnces.
active (versus passive) role of the state in
reform? What lessons can be learned about              * Theie may be virtue in a decentralized,
comprehensive top-down reform as opposed to          "bottom-up" approach to reform.
experimental bottom-up reforms? About fast
versus slow liberalization and opening up of the       * Rapid privatization is not necessary for
economy? About the need to establish full            successful reform, but it is irnportant to diversify
private property rights at the beginning of          ownership and encourage the entry of new firms.
reform? About reform's implications for welfare
and distribution? Can China's excellent perfor-        * Small-scale privatization and the liberaliza-
mance be linked to particular reform measures,       tion of distribution and service sectors are likely
or does it reflect distinctive initial conditions or  to have the fastest payoff in the reform of
social and demographic factors? Is China's           property rights.
performance sustainable without more compre-
hensive transformation, or does it reflect tran-       * China's rapid growth momentum and
sicnt gains that are substantially exhausted?        macroeconomic stability cannot be sustained
Among lessons China offers are the following:        without further reforns, including the reform of
banking, taxation, and property rights.
- Partial reform can succeed in raising pro-
ductivity in agriculture and industry; industrial
productivity has grown very rapidly in the
nonstate sector but also in state enterprises.
__                                                       ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1
The Policy Research Working Paper Series dissemninate the findings of work under way in the Bank. An objective of the series
is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations. and
conclusions in these papers do not necessarily represent official Bank policy.
Produced by the Policy Research Dissemination Center



REVISED VERSION
(October 1993)
PLEASE TOSS PREVIOUS COPY
Can Communist Economies Transform
Incrementally?
China's Experience
by
Alan Gelb
Gary Jefferson
and
Indeijit Singh



ACKNOWLEDGEMENT
The research projects on "Enterprise Behavior and Economic Reforms: A Comparative Study in Central
and Eastern Europe", and "Industrial Reforms and Productivity in Chinese Enterprises" are research
initiatives of the Transition and Macro Adjustment Division (PRDTM) of the World Bank's Policy
Research Department and managed by 1.J. Singh, Lead Economist.
These projects are being undertaken in collaboration with the following institutions: for the project
in China, The Institute of Economics of the Chinese Academy of Social Sciences (1E of CASS), The
Research Center for Rural Development of the State Council (RCRD), and The Economic Systems
Reform Institute (ESRI), all in Beijing; and for the project ii, Central and Eastern Europe, Tne London
Business School (LBS); Reforme et Ouvertures des Systemes Ecoriomiques (post) Socialistes (ROSES)
at the University of Paris; Centro de Estudos Aplicados da Universidade Cat6lica Portuguesa (UCP) in
Lisbon; The Czech Management Center (CMC) at Cela.ovice, Czech Republic; The Research Institute
of Industrial Economics of the Janus Pannonius University, Pecs (RIIE) in Budape.;t, Hungary; and the
Department of Economics at the University of L6di, in Poland.
The research projects are supported with finds generously provided by: The World Bank
Research Committee; The Japanese Grant Facility; The Portuguese Ministry of Industry and Energy; The
Ministry of Research and Space; The Ministry of Industry and Foreign Trade, and General Office of
Planning in France; and the United States Agency for International Development.
The Research Paper Series d.sseminates preliminary findings of work in progress and promotes
the exchang. of ideas among researchers and others interested in the area. The papers contain the views,
conclusions, and interpretations of the author(s) and should not be attributed to the World Bank, its Board
of Directors, its management or any of its member countries, or the sponsoring institutions or their
affiliated agencies. Due to the informality of this series and to make th,. nublication available with the
least possible delay, the papers have not been fully edited, and the World Bank accepts no responsibility
for errors.
The authors welcome any comments and suggestions. Request for permission to quote their
contents should be addressed directly to the author(s). For additional copies, please contact the Transition
and Macro Adjustment Division, room N-1 1065, World Bank, 1818 H Street, N.W., Washington. D.C.
20043, telephone (202) 473-1442, fax (202) 676-0083 or 676-0439.
The series is also possible thanks to the contributions of Donna Schaller, Vesna Petrovic, Cecilia
Guido-Spano and the leadership of Alan Gelb.



Can Comm nist Economies Transform Incrementall,?
The Experience of China.
Alan Gelb, World Bank
Gary Jefferson, Brandeis University
Inderjit Singh, World Bank'
I. SOME IMPORTANI OUESTIONS RAISED BY CHINA'S REFORMS
Reform of a communist economy entails shifting away from central planning towards largely
tnarket-based resource allocation. It also involves strengthening incentives that link material reward
to euonomic performance by moving toward private ownership and reforming management incentives
within systems that maintain extensive social ownership. Reform may also involve a political
transition to pluralism but not necessarily.
Since 1978 China has progressively introduced market forces, decentralized economic
decisionniaking and strengthened material incentives and competition. In almost all respects its
transformation has differed from the swift, comprehensive and fundamental pattern that has been
widely advocated for Easterm Europe (EE) and the former Sovie. Union (Fo. . China's reforms have
often been introduced on an experimental basis, and are sectorally and locally differentiated. They
are still incomplete - in redefining property rights, marketization, liberalizing foreign transactions and
factor markets. Rather than attempting to "cross a chasm in one leap", China has negotiated a series
of small steps, moving from planned towards market socialism while retaining an authoritarian
communist government.
The outcome of China's reforms has also been very different from the experience of Eastern
Europe and the FSU. Rather than the lackluster performance of European reform socialism through
the 1980s or the precipitous fall in output which accompanied radical reform programs after 1990,
China doubled per capita income in one decade, an outstanding achievement even when compared
1 The views expressed in this paper are those of the authors and not necessarily those of thd
World Bank. We are indebted to Dilip Ratha for excellent assistance and to Stanley Fischer, Dilip
Ratha, Tom Rawski, Klaus Schmidt-Hebbel and Martin Schrenk for helpful comments. All
shortcomings of the paper are the responsibility of the authors.



2
with other high-performing countries.2 How does this"East Asian" response to incrementally
removing constraints on market behavior square with the opposing "big bang" thesis that partial
reform is probably worse tian no reform, because it leaves economic agents constrained neither by
plan nor by maricets? Is transition economics schizophrenic?3 Or are there rational bases for such
widely differing views? If so, what is transferable from China?
China's reform experien^e therefore raises some important questions. What does it suggest
regarding:
i)    fast versus slow liberalization and opening up of the economy;
ii)    comprehensive top-down versus experimental bottom-up reforms;
iii)   the need to establish full private property rights at the beginning of reform;
iv)    the implications of reforms for welfare and distribution?
v)    Is China's performance sustainable without more comprehen.ive transformation? Or does it
reflect transient gains that are substantially exhausted?
vi)    How transferable are any lessons from China -- and what does it suggest about the phasing of
political and economic liberalization and the pattern of reform?
This paper surveys China's reforms and their economic impact against the backdrop of the
wider debate on these topics. Section II classifies China's reforms by period and by tyre of reform.
Section. III assesses China's macroeconomic and social indicators of performance in an international
context, ,;ith selected East Asian market countries and socialist countries taken as benchmarks to see
where China's performance stands out as exceptional. It also notes the possible importance of
demographic factors in performance. Section IV deepens the analysis of extensive versus intensive
growth (accumulation versus productivity), summarizing quantitative evidence from recent firm-level
studies and evaluating the changing incentive structures in the Chinese economy that would be needed
to link policies to performance. Sec.ion V summarizes recent research on the relationship between
2 For some comparisons, see World Bank (1991) pp. 11-12.
' Singh (1991) discusses schizophrenia in the context of socialist reform.



3
reforms, income distribution and poverty in China. Section VI considers the implications of partial
reforms for macroeconomic stability and the sustainability of China's economic performance.
Section VII conclt'des on lessons from China and their transferability to other reforming socialist
countries.
Data Caveat. Unlike the historic.A data for some other communist countries, Chinese output
estimates are believed to be geneially free from del'berate over-reporting. But statistical weaknesses
introduce biases in reported income and output levels and possibly in derived rates of growth.
Corrections plausibly result in much higher nominal and real output and income levels and they also
affect estimates of income distribution. The direction of bias is not always clear. This paper cannot
attempt to correct for such weaknesses but, where appropriate, it notes the implications of major
revisions.'
H. CHINA'S REFYORMS AFTER 1978
China's reforms followed almost three decades of cential planning under a comnmunist
government. In that time, the economy had evolved from an essentially peasant base to include
significant industrial capacity, largely financed out of the rural surplus. By 19', land reform had
been completed; in 1953 compulsory grain procurement and food rationing were introduced.
Collectivization followed in 1956-58. By 1978 industry accounted for 49% of national income.
Following the Soviet pattern, large state enterprises (SOEs) (78% of output) in heavy sectors (57% of
output) were emphasized. Growth was extensive, and particularly disappointing in agriculture.
Moreover, such leftist excesses as the Great Leap Forward (1958-61) and the Cultural Revolution
(1965-68) caused erratic economic performance and demographic changes; see Figure 1.
I Problem areas in Chinese data include low imputed rents and capital incomes, the valuation of
self-consumption, the construction of deflators, especially in some area of industry, and the
agricultural labor force. For discussion of the major controversy regarding the level and growth rates
of China's GDP see Keidel (1992), Ma and Garnaut (1992) and Jefferson (1991). The latter notes
that the World Bank' World Development Reports estimate China's GNP per head at $350 at the end
of the 1980s, which is LOWER than the estimates of $410 and $390 in 1976 and 1977 (made in 1978
and 1979) despite real growth rates of output per head of almost 8% in the 1978-88. Keidel suggests
a revaluation of 50% to China's yuan GDP; meanwhile, PPP estimates of China's income/head range
from three to eight times those of exchange-rate based measures.



4
Neverthelss, the pre-reform period achieved some notable successes. Infrastructure had been
developed, particularly in rural areas. A working rural management system supportizig supply and
marketing had been put in place. The substantial role played by local governments in planning meant
that local implementation capacity was well-developed and also implied a less monopolistic production
structur.. ' There was a heavy industrial base on which to build. Social indicators in areas such as
health aad education were favorable, especially considering the low level of income per head.
Following an extraordinary demographic transition in the 1970s (see Figure 1), China was on the way
to having one of the lowest ratio of dependents to working-age citizens in the world.6 External
macroeconomic balance prevailed (international reserves of $4 billion exceeded the negligible foreign
debt) and, despite price controls it does not appear that a sizeable monetary overhang had developed.
The missing elements were an appropriate price structure to guide efficient resource allocation and an
effective incentive system to create strong growth ptvrformance.
China's reforms can be considered in seven categories and four time phases, as in Table 1.
The first three categozies - pice and market reform, the "open door policy" and liberalization of the
distribution system, involve tl e creation of a market price-guided incentive system to supplement and
replace planned allocation of goods. The next category involves changes in property rights, broadly
defined to include the management, as well as ownership, of assets. Acc )mpanying these reforms are
measures to decentralize resource allocation away from the center, and to create a market-supporting
financial sector. Finally, the shift from a planned tc a market economy involves policy changes to
separate out the productive side of the economy (which should respond to market forces) from the
state's role in the area of social protection.
No grand scheme underlay China's sequence of measures. Some were experimental,
sanctioned by the center only after successful local implementation. Ai0ough the rural reforms had
I This probably facilitated a competitive response to price liberalization relative to die situation,
for example, in the FSUT For more discussion of China's initial conditions, see Harrold (1992).
6 For discussion of China's demographics and policies see Tien et al (1992).



5
somewhat of a "big bang" character, urban and industrial reforms were ,.adual and piecemeal.7
The discrete reform stages are therefore necessarily somewhat of an abstraction.
Phase l: 1-83. This emphasized agricultu.e. Procurement prices for major crops were
raised sharply ani prices for above-quota output raised more sharply still. Subs.dies were increased
to help cushion the impact on consumers. The contracting of land and output quotas to rural
households proceeded rapidly on local initiative; by the time this "bottom up" experiment was
officially sanctione( in 1981, it had been adopted by almost half of the country's production teams.
Household contracting soon became universal and lease terms lengthened, promoting long-term
investments.
llhe first industrial reforms carne in the area of foreign investment. 1979 saw a Joint Venture
Law and 1980 the openiing of four special economic zones. From almost zero, foreign direct
investment would rise to exceed $3 billion ner year, mostly frorn Hong Kong. Phase I also saw the
start of v ;de ranging changes in the distribution systems that proceeded throughout the reform period.
Materials supply was progressively delinked from the plan, while retail commerce was deregulated
more rapidly.  After some informal sales of above-quota industrial goods at premium L :ices, state
enterprises were allowed to buy and sell on free markets. Meanwhile, certain key inputs remained
controlled, particularly in rural areas.
P'iase II: 1984-88. This saw the consolidation of a formal dual pricing system and the
progressive enlargement of the role of free prices: see Figure 2. The dual pricing system aimed to
have marginal decisions set by market pressures while still leavith; a measure of control over
materials and enterprise profitability to the plan. By i988 only 30% of retail sales were made at plan
prices.' Market prices exceeded plan prices by a premiu1 l which rose steadily up to 42% as
I The rural reforms still relied on quotas and state prices for intramarginal production and
management incentives through contracting and leasing, rather than outright private ownership. In
this sense, they were piecemeal and somewhat less than a "big bang".
I The share of sales at nonplan prices ;nciudes i7% d& guidance' prices which generally movec
with free prices.



6
maicroeconomic dem.and pressures intensified in the course of decentralization.' By 1985 75 % of
state comznercial companies had been sold or leased to prisqte owners; by 1990 hordes of private and
cooperative firms, aw well as joint ventures, had entered the commercial system.  ..t the s&ne time,
the yuan was devalued and a variety of other measures was introduced with the intention of opening
up international trade to market forces on a limited basis.
Phase ZI saw two important reforms in the area of industrial property rights. Rural Township
and Village Enterprises (TVEs) actually had their roins in earlier progra.r of rura' industrialization,
but in 1984 local governments were given permission to pursue a TVE-ba:ed development strategy to
help absorb labor released by the agricultural reforms. Together with &rowth of urban collectives, the
explosion of TVE activity resulted in progressive diversification of industriai ownership away from
the SOEs in favor of the so-called "nonstate" sector, although most of this was still within the public
domain: see Figure 3,10
The second major industrial reform in Phase II was the adoptioni after 1987 of the contract
management responsibility system. Performance contracts with ;nterprise managers specified profit
remittance, productivity and sometimes innovation targets. 'To increase the range of management
discretion, a!l new workers after 1986 were to 'e hired on a contract system, thus raising, at least
theoretically, the possibil,ty of dismissal.
Decentralizing management and progressively introducing market forces made little sense,
however, in an environment where all industrial profits were remitted tJ the state. Phase II therefore
saw an important series of reforms to decentralize resource alloca.ion away from government. These
included reform of enterprise taxation in 1984-85, which replaced remittances by negotiated profits
taxes. In 1986, central governmeijt entered into a "fiscal contract responsibility system" with local
governments, which had in fact long been responsible for the collection of almost all taxes. As
I Zou (1992) traces out the evolution of the duai pricing system using a sample of 253 state firms
and urban collectives; the latter sold and purchased a higher share of goods at market prices than the
former.
10 Only about 10% of China's industry is individually owned or.joint-venture. The bulk of the
"nonstate" sector consists of urban collectives and firms owned by local governments. The concepts
of ownership and property, rights are not well developed in China's legal code.



7
discussed later, resource decentralization was more effective than txpectcdl. qnd this led to a sharp
drop in revenies and overheating of the eccnomy.
Finally, initial steps were taken in Phase II to lay the basis for a commercial financial
system but this was iihnit-d by the puartial nature of other reforms, in particular, if ownership.
Further development, this time of stock markets on a limited bas3s, dia not take place urntil some
years later.
Ehact III: 1989290. Macroecnnomic stabilization and the political crackdown following
Tiananmen Square involved the temporary reimposition of a range of direct centrols. Plan prices
began to be adjusted towards market levels Go as to start to merge the two price systems into ona (see
Figure 2).
Phase III a'so saw the acceleration of .rade and payments reform. Progressive devaluations in
iThas s, I and 11 had depreciated the real exchange rate relative to the dollar by over 50%: see Figure
4. As domestic demand was reined in, exports responded. Foreign exchange trading centers were
opened, and the black market premium fell, to a minimum of only 7% in 1991. By then, about one
third of international transactions were takin.g place at the parallel market rate.
Phase IV: 1991 onwards. marked a return to active reforms with further marketization
(including growth of final markets) and decentralization. There was also significant reduction in
redundant labor in the state sector and some privatization of state enterprises. Growth picked up,
with some signs of overheating. Social-sector reforms began in areas such as health a.. housing,
though on a cautious and experimental basis.
Comparison with Reforms in EE and the FSIJ. Space does not permit a detailed comparison
of China's reform process with those of EE and the FS'l."' Considering rre-l190 Poland and
Hungary, there ar ;ndecd similarities but also some important differences. C;iina's opening-up to
trade and foreign investment, its massive de-collectivization of agricultur.., liberalization of the
I Fischer and Gelb (1991) and Gelb and Gray (1991) consider the phasing of European-style
transtormation programs. Bruno (1992) reviews stabilization programs.



8
distribution system and growth of nonstate industry iv 'olved a far stronger commnitment to
narketizatio.i and domestic competition. On the other hand, it maintained central planning and a
distinctive two-price system.
The most cbvious differences between China's policies and those of East European countries
aflter 199 include the partial nature of its price and trade liberalization, its incomplete reform of
property rights, and the quite different phasing of macroeconomric stabilization and structural reforms.
The initial core of most EE reform programs involved macrostabilizatinn which was partly effected
through the liberalization of prices and markets. In Ch-na, however, the need for a stabilization
phase (which during 1988-91 involved some regression from liberalization) follow  from the
implementation of its sistemic reform program."2 China's price and trade liberalizatior. also
coirncided with, rather than preceded, ownership diversification and liber0lizdion of the distribution
system. -3
III. CHINA'S PERFORMAi '.E IN A COMPARATIVE CONTEXT
Tables 2 and 3 show selected economic and social data for China and (i) India, similarly
large, and low-income, but with a (regulated) market economy and a democratic polity; (ii) Korea,
Tqdonesia, Thailand and the province of Taiwan, considered as high-performing East Asian market
economies; and (iii) Hungary, Poland, Soviet Union (FSU) and Yugoslavia, which developed under
central planning and one party regimes and which also implemented decentralizing reforms.
Now rich Is China?. It has long been recognized that exchange-rate based (Atlas) methods of
calculating income per capita understate "real" levels for many countries. From Table 2, the
divergence between these two measures is especially large for China, which appears by the 1980s ?s
12 The closest analog in Europe and the FSU is the phase of fiscal distress that has followed the
post-reform collapse of enterprise profits and tax revenues. See, for example, Schaffer (1992).
13 By 1985, when the share of state-fixed prices in retail sales had fallen to 50%, state enterprises
produced less than 40% of goods sold on retail markets and nonstate industry produced almost 40%
of industrial output. Some of this was due to the pre-reform structure of China's economy, but it also
reflected progressive ownership (iiversification oefore that date.



9
more a middle-income, than a poor, country, and to have outstripped India in PPP terms. This
perspective should be born in mind when comparing social statistics.
H}ow fast has China grown? In contrast to the dismal 1960s, China boosted its growth rate
dramatically in the 1970s and 1980s, to iO% in the latter period, eclipsing India's efforts and
matching the performance of the East Asian comparators. The socialist comparators stagnated before
experiencing a sharp output loss after 1989. Population growth slowed in China as in East Asia, to
well below Indian levels but still far above rates in the socialist comparators.'4
Did growth reflect accumulation or efficiency? Table 2 shows investment rates and rough
derived efficiency measures (the inverse of the incremental capital/output ratio). China appears as a
high-investment country which boosted its efficiency from low levels to those characteristic of East
Asia. The contrast with India, and with the collapse of efficiency in the socialist comparators, is
marked. China's investment was overwhelmingly financed through domestic savings: by the 1990s its
net foreign debt was only 3% of GDP compared with 2% for India and 53% for socialist
comparators.
China's investment rates are, probably biased upwards, however, by gross understatement of
GDP levels. Applying a uniform level correction based on Keidel(1992) lowers them by almost one
third. The effect would be to boost efficiency, to well above the East Asian comparator levels in the
reform period.
How fast has China opened its economy? As shown, China's export growth rates in the
1980s compare with those of the East Asian countries in the 1960s and 1970s. Its trade ratio, too,
has risen sharply, especially for so large a country, but it is difficult to assess its openness from
trade/(;DP measures because of the uncertainty of the denominator."5
14 China's PPP growth rates are close to those of its Atlas GNP per head; for the other countries
PPP income per head grows rather more slowly than Atlas income per head.
'5 China's ratio of exports plus imports to GDP rose from 7% in the 1960s to 21% by the 1980s
and 33% in the 90s. Of perhaps more importance than this ratio, China's export mix also diversified
and moved towards more sophisticated products. In contrast, the European countries, locked in the
CMEA system, experierced "technical export regression towards primary products. See Gelb and



10
How fast asc China monetized?   China's low inflation during the 60's and 70's was due to
price controls but it also contained inflation to East Asian levels through the period of price
liberalization - a marked contrast to European reform socialist experience.'6 From the Table,
financial deepening proceeded apace in China through the reforms, even as most prices were
liberalized. There was therefore probably no appreciable "monetary overhang" at the start of the
reforms. The range of assets available to the population, while widening somewhat, is still limitel,
and this may also have encouraged financial asset accumulation as incomes rose.
Do social indicators confirm that there has been rapid development in China?. Whatever the
controversies surrounding output data, it is harder to dispute the many social indicators that measure
improvements in the quality of life. From Table 3, life expectancy has risen and infant mortality
fallen to levels characteristic of far richer countries. The extraordinarily rapid decline in birth rates
shown in Figure 1 has reduced the age dependency ratio sharply." The decline in birth rates is
related to other factors, including female labor force participation and education (especially of
women). Female participation in the labor force has always been high in China, and it has largely
closed the gender education gap, completely at primary levels.
Do social policies account for economic success? Most of China's favorable social indicators
primarily reflect policies in the pre-reform period, and an interesting question is the extent to which
these have contributed to post-reform economic performance. In addition to the broad issue of the
importance of human capital formation for growth, one may wonder about the impact of sharp
demographic transition on growth. This is a controversial topic beyond the scope of this paper. In
contrast with previous analyses, some recent studies in the 1980s do suggest the emergence of a
negative relationship between population and GDP growth rates. There is at least one study, due to
Barlow (1992) that suggests that a sudden reduction in fertility rates raises output growth considerably
Gray (1991) Annex 1.
16 Schmidt-Hebbel (1992) considers the relationship between money overhang, price liberalization
and inflation in China and other socialist countries. China's financialization ratios, like the trade and
investment ratios, may be biased upwards by the understatement of yuan GDP.
7 However, the age dependency rate will increase sharply with the ageing of the population, to
one of the highest levels in the world as the ageing population profile comes to resemble that of Japan
and Korea.



11
over the next twelve years. Extrapolating his results to China would suggest a remarkably large
impact of the fertility declines of the 1970s on China's growth in the 1980s. Barlow's results seem
extreme and are certainly not uncontested. But even if greatly discounted, they suggest the possible
explanatory power of China's demographic transition of the 1970s in boosting an otherwise sound
economic response to systemic reforms to stellar proportions in the 1980s.11
A Summing Up. Precise judgments on China's income level and economic characteristics
confront data problems, but its economic performance in the reform period resembles that of the
dynamic East Asian comparators. In social dimensions, China is a real outlier, suggesting the
success of its basic needs strategy. The contribution of the social dimen3ion to growth over the last
15 years is difficult to assess, but may be considerable.
IV. INTENSIVE VERSUS EXTENSIVE FACTORS IN CHINA'S PERFORMANCE
The growth accounting exercise in Table 4 shows that growth and its sources have varied
significantly by subperiod in China. Factor accumulation has accounted for most growth, but
beginning with Phase I of the reforms in the late 1970s and continuing through Phase II, TFP rose at
2.8-3.8 percent. The phase of macroeconon.ic stabilization in Phase III caused a sharp reduction in
growth during 1989-91 which in turn led to stagnant or even declining residual productivity. In 1992
growth rates ihave returned to their pre-1989 double-digit levels.
Table 5 shows the large structural change in sectoral shares of Gross Social Product (GSP) and
also, within industry by ownersnip type, that accompanied reform. After falling as China
industrialized, agriculture's share of GSP rose through Phase I and declined thereafter. Meanwhile,
industrial ownership diversified considerably.
11 For reviews of this area see Srinivasan (1992), Blanchet (1992), Kelley and Schmidt(1992),
and references cited therein. Barlow (1992) suggests that a sudden reduction of fertility causing a
permanent reduction of about one percentage point in the annual net birth rate will cause output to be
higher by 21 % at the end of 12 years. By this standard, China's decline in fertility would have
aceounted for an increase in -eal output of 42% at the end of 12 years! Barlow's coefficients seem
unreasonably high - for one thing, there is insufficient cross-country evidence of the large response in
intermediate variables, such as savings and female participation rates, t.at would be needed to
produce so large a growth response to the demographic transition: for more discussion, see Kelley
and Schmidt (1992).



12
Productivity growth has varied significantly across sectors as well as over time: Table 6
summarizes various resf.Jts. TFP growth in agriculture appears to have soared from negative levels to
account for much of the vapid growth after 1978. According to Lin et al (1993) almost half of the
42.2 percent growth of output in the cropping sector in 1978-84 was driven by productivity change
due to reforms. Specifically, almost all of the productivity growth was attributable to the changes
resulting from the introduction of the household responsibility system."9 TFP measures for
agriculture as a whole are not available for the most recent period but if we assume that labor
pr'ductivity growth is somewhat higher than TFP growth the 3 percent rate of labor productivity
growth during 1984-88 implies that TFP declined relative to 1978-84 but remained well above its pre-
reform levels.'
Chen et al (1988) find that from 1978-85, TFP in state industry (SOE  at 5.2 percent,
far above the estimated level of about one percent in the previous two decades. !efl-rson, Rawski
and Zheng (JRZ, 1992) investigate TFP growth with capital, labor and intermediate innuts: during
1980-88 their single factor productivity rose at rates of 2.1, 5.2 and 2.1 percent respectively. A
measure of TFP growth formed by any linear combination of these rates would yield a composite rate
of productivity growth somewhere within this range. They estimate TFP growth of 2.40 percent in
1980-88, 1.80 percent during 1980-84 and 3.01 percent during 1984-88.
Using the same procedures JRZ (1992) estimate TFP growth for the collective industry (urban
collectives and TVEs established at or above the township level) at 4.63 percent for the period 1980-
88. For the subperiods, collective sector TFP rose at rates of 3.45 dur,ng 1980-84 and 5.86 during
1984-88.
These data sbow a consistent pattern of higher productivity growth during the reform period.
While TFP in non-state industry rose more rapidly than in the SOEs, productivity in state industry
19 McMillan et al (1989) estimate that three-quarter of the measured productivity increase was
due to changes in the incentive system associated with the household responsibility system and the
remainder to price increases.
I Rawski suggests, however, that agricuirurai iabor force may nave been systematically
overestimated in recent years. If so, TFP may have continued at higher rates.



13
rose at rates that had been unachieved since the early 1950s.21 There are biases in these figures,'
but these are unlikely to overturn these broad conclusions.
Productivity Levels by Ownership Type Table 7, based on the JRZ calculations shows that,
while TFP in China's TVEs and SOEs was approximately equal in 1980, by 1988 the TVE sector had
achieved a clear productivity level margin over the state-owned enterprises. Preliminary results from
disaggregated analysis show a somewhat more mixed picture however.'
In order to give some perspective to the productivity growth performance of Chinese industry,
Table 8 summarizes estimates of TFP from various sourcas. Prior to the reforms, Chinese industrial
TFP growth compared with that of Turkey, Yugoslavia and India during the 1960s and 1970s, but
after reforms it accelerated to a range comparable to that of East Asian NICs during the 1960s.
21 These results for state industry are consistent with Beck and Bohnet (undated), Zou (1992),
based on a sample of 254 enterprises, and other studies which properly deflate the capital stock and
remove non-production inputs of capital and labor.
I Output deflators are biased downward thus leading to excessively high reports of industrial
output growth. In the state sector, the principal source of this bias in the 1980s was product
innovation. When a new product is introduced, as ter other pre *icts, enterprises are expected to
report industrial output in both current and 1980 prices. As a .iiatter of practice (and because there
may be no comparable product with a known i980 price) they often used the price posted at the time
the product was introduced in lieu of the 1980 price. This introduces systematic bias into measures of
GVIO in 1980 prices, particularly in industries within which new product innovation is widespread.
Jefferson (1991) suggests that these biases may run from virtually zero in industries in which there is
little product innovation, such as oil and gas production to as high at 7.8 percent in the electrical
machinery industry where during 1980-85, thre annual rate of growth was reported to be 25 percent.
Overall, he estimates upward bias from spurious accounting procedures associated with new product
innovation to be in the vicinity of one percent. Rawski (1992a) discusses bias in the output deflators
available for the collective sector. They may equal or even exceed that for state industry, but do not
change the qualitative finding of rapid productivity growth within that sector.
13 A comparison of levels and rates of growth of TFP in SOEs and TVEs in seven two-digit
enterprises shows TVE productivity in 1989 ;o be higher in construction materials., metal products and
machinery, but iower in food, textiles, paperrnakmg and home appliances (Jefferson, !993). The
growth of TFP among the TVEs was higher i5 ail seven branches.



14
Reforms and Efficiency: More Evidence. A number of studies using enterprise-level data
have examined patterns of changing resource allocation and efficiency within China's industry in ways
that help assess the impact of reforms. 24
(i)    Studies tend to show evidence of gains in allocative efficiency that are compatible with
the spread of broad market forces. Naughton (1992) shows convergence of profit rates across 38
industrial branches, with the coefficient of variation declining from 0.78 in 1980 to 0.44 in 1989. In
a similar vein, Jefferson and Xu (forthcoming) evaluate gains in allocative efficiency among 226 large
and medium-size SOEs at the core of the state system. Over the period 1980-89, among enterprises
within the same industrial branches and enterprises operating under similar pricing regimes they find
patterns of convergence of average productivities for capital and labor and, to a lesser extent, for
materials. Convergence is most rapid and complete among enterprises that operate fully outside the
plan.
(ii)   Jefferson and Xu (1992) investigate patterns of convergence among measures of total
factor productivity (technical efficiency). During 1980-89, enterprises within 8 of 10 industries
demonstrate a tendency for TFP to converge. Results by Xiao (1990) using a sample of 903 SOEs
and other research on steel plants also show tendencies for TFP to become more equal. There also
seems to be a link between exposure to market forces and TFP growth. As with gains in allocative
efficiency, gains in technical efficiency are most pronounced among enterprises operating outside the
plan in Jefferson and Xu (1992). Zou (1992) found that ownership by itself provided a statistically
significant explanation of differences in TFP. But, when a carefully constructed measure of degree of
marketization (including the market share of sales and material purchases and price spreads) is added,
Zou found that this degree of marketization was a more powerful explanation of TFP growth than was
ownership type.
(iii) There also appears to have been increasing innovation in China's enterprises. A
survey of 250 enterprises by Jefferson, Rawski and Zheng(1992) found evidence of increasing rates of
I In addition to these studies we note that most studies find evidence of increasing returns to
scale at the enterprise level, and since the number of SOEs grew at only 0.9% in 1980-89, average
gross output per enterprise in 1980 prices rose at 9.8%.



15
innovation. Over 90% of the leading innovators were considered (by enterprises of all types) to be in
the state sector.
Beneath the Numbers: Relating Performance to Reforms. The micro-level and regional
studies noted above indicate that the rise in TFP growth within state industry originated both from
gains in allocative and technical efficiency and from accelerating innovation. They are internally
consistent and suggestive of the ways in which such specific reforms as progressive marketization,
diversification of ownership towards the nonstate sector, and the open door policy have contributed to
improved productivity. However, there is not unanimity among China scholars in this area. Some
studies find evidence of chaotic institutional arrangements, redundant and undisciplined labor,
interference by supervisory bodies, ill-defined ownership, and bank lending with no prospect of
repayment. We do not deny that these problems are widespread, and that there are a number of "soft
spots" in the reform process.' The weight of the quantitative micro-evidence confirms, however,
that on balance the impact of the reform process on efficiency has been favorable.
Because evidence on the reasons for the boost in agricultural productivity seems reasonably
clear, we focus on two key questions raised by China's industrial reform program. (i) How has
incremental reform improved the SOEs' performance despite the less favorable impacts of such
reforms in Hungary (for over two decades) and Poland (for one decade)? And (ii) Why has the TVE
sector boomed despite not being really private? Just what kind of firms are these? How do
incentives work for (and against) TVE efficiency?
(i)    The SOEs. To understand the way in which China's industrial reforms have worked, it is
useful to distinguish between so-called "improving" reforms and end-state reforms. The 1980s
industrial reform program created a set of incentives and opportunities that shifted the SOE
institutional efficiency frontier outwards, closer to best practice. Pre- and post-tax enterprise profits
are correlated and have become more closely so (in general) as reforms have progressed. Moreover,
I For more discussion, see, for example Fan and Woo (1992), Stepanek(1991) and the exceilent
reviews of Walder (1987).



16
tax rates have not typically been revised ex DOS on the basis of performance.>2 Though bad for
fiscal revenues, this implies stronger incentives. Among SOEs the relationship between workers'
bonuses and enterprise profitability became stronger during the 1980s (Rawski, 1992b). Enterprises
for which the strongest incentive structures have been created and have received the greatest
autonomy have succeeded in motivating the largest increases in labor productivity (McMillan and
Naughton, 1992). The introduction of incentives has also motivated factory managers to raise
efficiency (Jefferson and Xu, 1992). Groves eL_a (1992) argue that the reforms introduced many of
the incentives present in Western managerial labor markets, though in somewhat different forms. It
also appears that investment out of retained profits yields higher growth of capital productivity than
investment financed by government and bank loans (Jefferson and Xu, 1992) and that there are
increasingly strong linz-, between profitability and expansion. Jefferson and Xu (1992) find this
profit-expansion link to be statistically sigi'ificant for a sample of 110 iron and steel mills, at the core
of the state system.
Although this paper cannot go into deep comprrative detail, available evidence seems to
indicate that the limited reform initiatives taken by Hungary and Poland before 1990 did not result in
similar improvements in incentives and performance. Rawski (1992b) contrasts his findings for China
with those for Hungary (due to Kornai and Matits (1987)) which, despite years of reform socialism,
had a tax system that left little relationship between pre- and post-tax profitability. Schaffer (1990)
found a similarly small relationship for pre-big-bang Poland. Estrin, Schaffer and Singh (1992)
actually found a perverse relationship between increases in profits and wages in 1989-90.
In addition, the changes in China's incentive system are unlikely to have had as much effect were
it not for the explosive growth of competition from outside the state sector. In contrast to pre-1990
EE, entry and competition grew from two contrasting sources. The first was the open door policy,
comprising trade and joint venture investment. Preliminary analysis by Singh, Xiao and Ratha (1993)
suggests that an "open door" dummy for the four provinces closest to Hong Kong and Taiwan is a
significant explanator of the growth rate of gross industrial output, By the 1990s, two thirds of all
26 A study of 230 enterprises showed that when profitability during the first management contract
period (typically 1987-90) exceeded expectations (i e the profit remittance rate was lower and the
retention rate was higher than expected), subsequent contracts tended. to validate the lower profit
remittance and higher retention rates rather than simply adjust to a new baseline.



17
exports came from special enterprise zones, with the state sector accounting for two thirds of these
and the nonstate sector for the remainder. Ongoing research on coastal zones suggests that the level
of foreign investment is associated with provincial-level growth rates.' The second was the rapid
entry of rural TVEs, which has eliminated the traditional monopoly of state enterprises in most
branches of industry. Both of th se sources of competition have invigorated state industry.
(ii)    The TVEs. As described in Byrd and Gelb (1990), TVEs are typically under the watchful
eye of the local Industrial Council, the business arm of the local government, rather than being
autonomous (see also JRZ 1992). But unlike the central government, township and village
governments cannot engage directly in deficit financing, and there is no effective system of equalizing
incomes across rural communities. These therefore face a relatively hard budget constraint. Local
leaders are heavily dependent on the revenue generated by local industry, and revenue per resident
can differ enormously between successful and unsuccessful localities. In a variety of ways, the
prestige, perks and incomes of local officials respond to the financial success of their communities.
Business competence has become one factor in their appointment.
The result is intense competition among local governments - for industry, profits and
increasingly for foreign partners.28 While governments at various levels try and favor "their"
enterprises, (for example, by trying to ensure that financial resources raised locally are recycled
within the community) their ability to do so is constrained by their resources. Also, being smaller,
they have less potential scope for protecting their industries which operate almost entirely on free
product markets. The fixed-membership nature of China's communities provides a strong natural
focus for the exercise of ownership rights, even though these are communal rather than private."
27 Wang and Mody (1992).
28 Zweig (1992,1993) describes the competition for joint ventures between local governmnents.
29 In some circumstances poor local governments may become "fiscal predators" on their
enterprises - until the base for such predation is eliminated; see Byrd and Gelb(1990) Communities
may also attract labor from other localities, but these are often paid less than the locals and share less
in the benefits of 'ownership".



18
The TVE sector can therefore be considered as a quasi-private sector in terms of its
governance, with an immobile local community as the shareholders in firms operating mostly in a
market environment.A0 The international experience of similar firms confirms that such a model has
the potential to be competitive."1
v. REFoQ3 :v. INCOME DISI. RIUTIC)N AND PMVR1
One of the major questions about socialist transformation is whether it will lead to a widening
of income differentials and erode the strong social safety net characteristic of communist systems.
This section therefore provides a brief overview of the distributional impact of China's reforms.32
Pre-reform China was a moderately equal society in terms of measured income distribution.
However, it was less egalitarian than the countries in Eastern Europe (which had some of the most
egalitarian income distributions in the world).33 The evolution of income inequality through China's
reforms has reflected three main developments:
1)    Urban-rural income differentials. At the start of refotms, rural income/head
represented only 42% of urban income/head as conventionally measured in China: Figure 5. This
was a wider divergence than in India (71 %); Thailand (45%) and even Brazil (43 %); moreover,
weaknesses in the measurement of incomes, in particular the omission of subsidies, probably
understates the true differential by a considerable margin.3' These differentials have persisted
because of strict regulation of migration from the countryside through the system of urban registration
and because many benefits are tied to jobs.
30 It is not clear that communal ownership warrants the term "cooperative culture" as used by
Weitzman and Xu (1992), because the style of government and corporate culture may be far from
cooperative.
31 Sveinar and Gelb (1990) discuss various international comparators to Chinas rural enterprises.
32 It does not address the question of whether reforms have strengthened, or begun to erode,
health and other social indicators (see, e.g., Nolan and Sender (1992)).
3 For comparisons of Gini coefficients, see Gelb and Gray (1991) Annex 6.
See Zhao (1992).



19
Phase I of the reform saw a considerable narrowing of the margin as compulsory procurement
was reduced in scope, agricultural prices were raised and the household responsibility system boosted
productivity. The margin widened again in Phase II however, as urban reforms liberalized industrial
prices and permitted greater growth of urban incomes. By 1990 the measured ratio of rural to urban
incomes had fallen back to slightly below its pre-reform level.
Measured income is a poor proxy for total income as it excludes so-called "nonwage" income
and subsidy income in kind, particularly important in the urban areas. A special survey conducted for
1988 suggested that urban incomes were higher by 54% and rural incomes higher by 39% of their
conventionally measured values. The implication is a considerably higher Gini coefficient for the
overall country - 0.382 for 1988 compared with the "official" estimate of below 0.33.'5 Further, the
rise of nonwage income relative to wage income roted in the next section suggests that the ratio of
rural to urban incomes may be increasing further.6
2)     Ru,al-Rural Inequality. China is a large country with highly differentiated regional
economies. Whereas urbaii incomes have been very equally distributed (Gini about 16% in 1980),
there have been no effective mechanisms for rural income redistribution. Income from rural
nonagricultural enterprises has become the main factor differentiating rural incomes on a communal
basis. There is no indication that inequality is higher witbin the most industrially developed rural
areas". The evidence on the evolution of the rural Gini coefficient during the Phase I of reform is
somewhat contradictory, with some studies showing a rise and others a fall.38 However, the growth
of rural industry in Phase II appears to have increased rural-rural inequality, with the richest areas
growing faster.
35 Khan et a], 1991, p69.
36 The salary reforms of 1985 sought to further equalize urban incomes by constraining
differentials. One study estimated nonwage income rising from 26% of wage income in 1985 to 35%
in 1990, a consequence of increased enterprise autonomy in the face of continuing controls on state
enterprise pay levels. Zhao (1992) estimates that wages and bonuses may mount to only about half
of urban incomes.
37 Zhao (1992). Gelb (1990) also notes the tendency towards local equality when
surveying TVE workers.
3 See World Bank (1992b) Chapter 2.



20
3)     The Rise of the "Private" Sector. Cash incomes in the private sector, defined to
include self-employed, private domestic firms, joint ventures and foreign-owned firms are only 15%
higher than cash incomes in the urban state sector, according to a 1988 survey. Distribution is very
different in private and state sectors however, with Gini coefficients of 0.49 and 0.23 according to the
survey. Private incomes at the high end of dhe scale are probably partly due to the opportunities to
exploit rents created from the continuance of controls on prices and credit, but the experience of
European and FSU socialist reform also suggests a tendency for wide dispersion in private incomes at
the start of reform.
Overall Inequality and Povery. As a result of these tendencies, oveiall inequality in China,
appears to have declined during Phase I of reform. Since then it has increased, probably back to its
its starting point but possibly more." Combining growth and distributional effects, the first stage of
the reform saw a massive fall in the number of people living in absolute poverty, from about 265
million in 1978 to 90 million in 1984, a decline from one third to less then a tenth of China's
population.' Despite continued high growth, increasing dispersion of income distribution then
caused the number to rise slightly, as shown in the Figure. This is significant because China has yet
to put into place a social safety net appropriate to a market economy and geared to the needs of a
growing "floating" population. It may have been wise not to divert effort in this direction before
reaping the growth rewards of reform (and China was perhaps fortunate in that pie-reform
distribution was not so egalitarian to force the pace) but. to avoid social polarization in the longer
run, rteps in this direction, as well as liberalizing labor movement, will be necessary.
VI. MACROECONOMIC STABILITY AND SUSTAINABILITY
As in EE and the FSU, the movement from planned to market socialism has generated
macroeconomic pressures in China. The policy of resource decentralization was more effective than
anticipated. Government revenues dropped sharply between 1978 and 1991 and enterprise revenues
net of subsidies almost vanished: see Figure 6. This largely resulted from a sharp decline in the
profit rate in the state enterprise sector, but it also reflected the particular inter,.ction of ownership,
3 Gini coefficients from 1981 to 1988 have oeen estimated on a household basis from SSB data.
40 World Bank (1992b), Table 1.2.



21
management aud fiscal arrangements. Local governments were the effective owners and regulators of
many of the enterprises, as well as tax collectors. This produced a situation fraught with conflicts of
interest, moral hazard and collusion against the center. Even though central development
expenditures were cut as investment was decentralized, the effect was a heavy fiscal stress mirrored in
moderate, but rising, ueficits after 1985.
Moreover, revenue and ownership policies interacted, in the form of case-by-case bargaining
over tax targets fixed in nominal (not real) terms. This hsad the unintended consequence of rendering
fiscal policy ineffective as a macroeconomic regulator. At the same tinme, decentralization weakened
central mone-'ry control." China's reform process therefore resulted in demand-led
macroeconomic shocks which impacted on a system with limited indexation; Figure 7 shows the
close relationship between inflation and changes in industrial output symptomatic of such a demand-
pull relationship.
Declining SOE profits and rising losses reflected several factors. In 1991 36 percent of the
losses were concentrated in extractive industries w1iose prices were controlled at below-market levels.
Industrial profits have also felt the effect of contractionary policies initiated after 1989. A third factor
is the erosion of the state's production monopoly and generally growing competition (see Naughton
(1992), Chen, Jefferson and Singh (1992) and Singh, Xiao and Ratha (1993)). This has led to a
decline in the supraprofits of state industry (previously used to concentrate surplus in the state sector)
as well as in the TVE sector, where the entry of hundreds of thousands of new rural producers drove
pre-tax profit rates down from 40 percent in 1978 to about 13 percent in 1990. In further support of
the competition hypothesis Singh and Xiao (1993) use data from 28 provinces to show that the more
rapid the growth of non-state industry during 1985-90, the lower the profit rate of state industry in
1990.
A fourth, less benign, factor may have been the consequence of increasing SOE autonomy in
the face of unclear ownership, leading to owner retained earnings enterprise decapitalization, falling
profits, distress borrowing and macroeconomic pressure. Fan and Woo (1992) note problematic
41 For discussions of China's monetary and fiscai controi methods and their shortcomings see
B'ejer (1992), Schmidt-Hebbel (!991), Fan and Woo (1992), Chen etal (1992).



22
symptoms at the enterprise level very similar to those so destabilizing in the reform socialist pl3e in
EE and the FSU: a rise in wage payments (and especially in fl inge benefits) relative to output, a
"hunger" for resources, and increasing recourse to borrowing by enterprises at the expense of retained
earnings.42
So far, the growth and pronounced financial deepening of China's economy has permitted
credit to expand rapidly in real terms. To an extent difficult to determine, this has, so far, cushioned
losses in the enterprise sector.43 How China deepens reforms in response to the weakened financial
position of the SOEs will play a critical role in determining whether macro-destabilization can be
avoided, and the favorable macro environment for growth sustained. China's financial deepening will
not continue indefinitely. However, for three reasons, the situation is more favorable than in EE and
the FSU. First, Chinese authorities have again begun actively to implement reform within the
industrial sector. These, indeed, appear to signal a change of attitude towards enterprise closures and
property r. hts issues.' Second, the rapid growth of China's economy raises its capacity to absorb
losses. Third, with the share of state industry now accounting for less than one half of industrial
42 For a 300 enterprise sample of SOEs studied by Fan and Woo(1992), nonproductive assets
rose from 18% of productive assets in 1984 to 24% in 1988 and nonproduction expenditure rose over
twice as fast as production costs. See also Xiao(1990).
43 McKinnon (1993) cites estimates of the consolidated government (and enterprise) deficit that
are in the range of 8% of GDP.
" Prices have been further liberalized. Layoffs have been enforced in a number of industries.
The state has begun an active program of restructuring the coal industry, scheduling the reductions of
100,000 workers in each year during 1992-1995. This year, 30 mines are scheduled to be closed
(New York Times, December 29, 1992, p. Dl). Also, ownership reform is again on the agenda: see
Harrold (1993). in practice, many enterprises are selling shares to employees, residents within the
enterprise locality, or on the Shenzhen, Shanghai or renegade. stock markets. More significantly,
there are powerful incentives to bring private capital into the state sector. Strapped for revenue, local
governments are selling participation in many smaller state enterprises for which they are responsible.
Perhaps the most visible example was the recent sale by tne Quanzhou City government (Fujian) of a
60 percent controlling interest in 40 of the City's 41 state factories to a Hong Kong company. (Wall
Street Journal, January 14, 1993, p. A 12). Moreover, because joint ventures operate under favorable
arrangements with respect to taxcs, flexibie :abor-management relations, etc., in order to secure these
advantages, many enterprises are actively seeking foreign partners.



23
output and talling strwadily, with growth ever less dependent on state enterprises.4' With adequate
policies, China therefore appears to have the potential to escape the trap of macro-instability that has
beset other countries in the phase of reform socialism.
VII. CONCLUSIONS AND THEIR TRANSFERABILITY
Micro-based evidence on the impact of China's reforms outside of agriculture has orly
recently become available, and the next few years will see an intensification of studies in this area.
But even allowing for data weaknesses and gaps in information, a number of the questions raised in
the introduction can be addressed.
i)     Slow versus rapid reform? "Improving" reforms can be successful in raising productivity in
agriculture and industry, more in the nonstate sector but also in state enterprises.' The sources of
productivity gains in China have gene-rally conformed to theoretical predictions. Factor returns have
tended to converge with widening marketization, and the entry of nonstate enterprises on a large scale
has helped to create domestic competition. Flows of investment, trading and management skills,
notably from the overseas Chinese community, have complemented the competition benefits of the
open door policy. Despite incomplete market liberalization and reform of property rights, incentives
in both the state and nonstate sector have pushed progressively in the direction of conformity with
market forces.
China therefore suggests that a "Big Bang" is not necessary for economic reasons, unless
addressing initial macro-imbalances justify it. The main elements of the "big bangs" have been price
and trade liberalization anu supporting fiscal, monetary and exchange rate policies. Liberalization
was effected in China over a number of years during which time the structure of the economy was
able to adapt, including through the competitive entry of hordes of nonstate firms. But gradual price
45 In the early 1950s, 90 percerin of Taiwanesc; industry was state-owned. Through the growth of
the non-state sector, not through privatization of state-owned enterprises, this share has now falien to
a small proportion.
" It is worth recalling that there was much criticism of TVE industry in tne 1980s because of the
competition it created for state enterprises, andi that a reform strategy based on its growth by no
means seemed assured.



24
liberalization is not possible when prices are freed abruptly at the start of the reform, as part of a
macroeconomic stabilization program needed as a precondition for effective micro-level reform.
il)    Decentralized Initiative In certain respects, a decentralized "bottom-up", approach to reform
can have advantages. It encourages change by consensus and can avoid possible costly errors. The
most important impact on China's productivity has always followed measures to decentralize
decisionmakihg, in agriculture, rural and urban industry. Success on a local basis of experimentation
has spurred replication and eventual national acceptance. Decentralization has created domestic
competition between different provinces, regions and localities, for investment funds, domestic
markets and foreign investments, creating an economy of many "small provincial dragons" and
innumerable local "dragonlets". Especially for large countries like Russia and India, there are
powerful positive lessons.
On the other hand, this approach to reform also imposes costs: duplication, undue slowness,
less coherence in national policies, the endlessly negotiated "guanxi" nature of China's economic
environment. A bottom-up approach is quite unsuitable for certain aspects of reform, such as
establishing the needed instruments for macromanagement.
iii)    Property Rights at the Outset?  Immediate privatization may not be necessary for successful
reform - but diversifying ownership, providir..g financial incentives and encouraging entry are very
important. Much of China's gains have been due to "pseudo-privatization", of rural land and of
rural industry, to "owners" who, though not always private and not enjoying all of the attributes of
ownership, have faced incentives similar to private owners. In addition to the direct productivity
gains in these sectors, they have made possible the functioning of competitive domestic markets
exerted competitive pressure on state enterprises, where profit-making incentives have been
introduced and management decentralized as partial substitutes for privatization.  China's experience
confirms that small-scale privatization and the liberalization of distribution and service sectors are
likely have the fastest payoff in the reform of property rights.
iv)    Welfare Effects?  Growth, though necessary, is unlikely to solve the problem of absolute
poverty alone. After the elimination of Stalinist repression of -,griculture, China's experience
suggests that reform ieads to a widening of income distributioni capable of offsetting even the effect of



25
high growth. The early establishment of a universal social safety net may be premature in many
reforming socialist countries, but at some stage this is likely to become one of the critical issues for
China's reform.
v)    Is Performance Sustainable?  China's rapid growth momentum cannot be sustained without
deeper reforms. It partly reflects transitional factors and initial conditions that temporarily have
boosted performance. These include the boost to agriculture from the introduction of the household
responsibility system (1978-83), the initially very favorable conditions for the TVE sector which
resulted from surplus rural factors of production, and the extremely repressed and in.fficient
condition of industrial production at the start of the reforms. Industry has also seen transitory
productivity gains from the spread of marketization which is now largely complete outside the state
sector.
These gains from "improving" reforms have permitted China to move closer to its production
potential at the same time that the potential has grown through high investment and technological
upgrading. In the absence of further reforms, however, growth will slow down. The fading of any
gains from the demographic transition of the 1970s is likely to strengthen this proposit.on.
At the same time there is evidence that some of the concerns raised in Eastern Europe and the
FSU - such as the tendency for an economy based on autonomous state firms to generate persistent
excess demand - also apply to China. Up till now, their effect has been muted by the exceptionally
favorable growth record and unsustainably rapid monetary deepening. In this area, China can learn
from the problems of other countries, and it will need to look to their experience in addressing them.
What Kinds of Deeper Reforms? Further reforms are needed by both the state and the
nonstate sector. The decline in profitability of the former threatens to become a serious drain on the
resources of the financial system, and thus ultimately on the fiscal system, destabilizing the
macroeconomy, undermining growth, and reducing the ability to absorb losses in a vicious circle.
State enterprise cum banking reform has become the Gordian knot for China, just as it has for the
transforming countries of Eastern Europe and the FSU. Whether or not this necessarily will involve
rapid, widespread, privatization in China is a moot point But, to be successful, it will require



26
reorganization to have many of the characteristics of privatization - including opening up the state
enterprise sector to foreign investment to facilitate its integration into world markets.
Nonstate enterprises have so far flourished without a well-developed property rights
framework, but there are signs that the informality of regulation and deep involvement of local
gove-ments will become a drag on performance as firms become larger and more sophisticated and
require longer-term investments." Macroeconomic management, too, will require stable and
predictable tax rules, rather than case-by-case tax bargaining. This would be a further important
stage in clearly defining the apportionment of income, risk, and responsibility - in short, formatly
defining property rights.
vi)    How transferable are lessons from China?  Three distinctive features of China may first be
noted. (a) China was never so thoroughly a state enterprise dominated, centrally planned,
monopolized economy as the other, more developed communist countries. This left more open the
option of "growing out of the plan" and facilitated the growth of competition. (b) China started from
a rather balanced macroeconomic position, applied generally conservative macroeconomic policies,
and was not subject to large external shocks during reform. This differs from the situation in Europe
and the FSU, particularly after 1989. (c) China's reforms have not been accompanied by a
fundamental political transition. How do these factors bear on the pattern of reform? And, what has
China done that others have not, and vice versa!
China's policies and response may be compared with twc phases of reforms in Europe and the
FSU: the pre-1990 movement to reform socialism and the post-1990 transitions to private market
economies. Relative to reform socialism in Europe, China's reforms emphasized decentralization,
stimulating entry of new producers, permitting domestic competition, and opening the economy. This
in conjunction with a highly conservative macroeconomic stance and the less monopolized condition
of the economy, forced enterprises to confront a "demand barrier" and respond to market pressures.
At the same time, planriing and a high degree of government direction were retained in certain parts
of the economy. European reform socialism denied new entry, developed little real competition and
sustained less conservative macroeconomic policies while abandoning formal planning. It left agents
47 Young and Gang (1992); see also discusslon in Byrd and Lin (1990).



27
constrained neither by market nor by plan, In contrast, enterprises in China were constrained by
both, sometimes together, with essentially favorable results.
Relative to post-socialist transition. China has moved slowly on price and market
liberalization. And with the partial exception of agriculture, it did not effect a decisive allocation of
property rights to private agents.
Here, the issue of political transition becomes very important. Indeed, perhaps the most
important lesson from China is that political economy. rather than simply economic theories, lies at
the heart of the process of socialist transition. It is most unlikely that China-style reform would be
acceptable - or successful - with a sharp transition away from Communist government. One reason
is that it leaves power and responsibility (including a planning mechanism) in the hands of the existing
bureaucracy for an extended period. Rapid privatization in Europe and the FSU (where political
changes preceded post-socialist transition) has been needed to create alternative owners and define
property rights in the face of governments' abdication in these areas. It is no accident that the more
radical privatization programs have followed the more radical breaks in the continuity of
governments.4l
The other reason is that a gradual strategy requires effective state management of the
transition. Many might agree that the state could play an important role in guiding reform in the
absence of well-developed market institutions. But how to frame this role constructively becomes far
more .ilfficult when the state loses capacity to enforce its policies. "Glasnost" before "perestroika"
probably dictates a quite different moeel of fast, minimally regulated, and possibly chaotic, reform,
for this reason alone.
This question of whether or not the state retains the capacity to control bears on many
aspects of the reform process. Take, for example, the issue of price liberalization. From the purely
economic perspective, the faster prices are liberalized the better for allocative efficiency. China chose
48 One can imagine a China-style reform being implemented in the USSR in the late 1980s, had
controls succeeded in restoring macro-stability and hac the government been realiy committed so
reform. Communism was externally imposed oi) Eastern Europe however, so that it is narder to
imagine a government retaining iegitimacy through an extended reform perioa.



28
gradual liberalization because of the potential dislocation and destabilization of moving rapidly. A
downside is that the wedge between free and controlled prices encourages corruption and rent-seeking
behavior. In China, the strong authority of the state has kept this within bounds; in much of the
FSU, corruption has perhaps been the only booming sector. Another factor in the calculus is that
political stability is in general a correlate of high growth and foreign investment inflows. The
political stability maintained in China has been an important factor encouraging the investment and
growth needed to effect huge changes smoothly.
But "perestroika" before "glasnost" still leaves open the large question of whether
authoritarian government can coexist indefinitely with a market economy. Experience elsewhere in
East Asia offers a model of gradual political reform that ensues from economic prosperity. Indeed,
the center and party have lost considerable control over local economic imitiative, population mobility
and information flows in China. The basic outline of economic reform seems to be irreversible. But
there is still a possibility of that a chaotic political transition could damage macro stability and the
reform environment.



Table 1
ey Chin  Reform
REFORM                         PHASE l: 1984-88                    PHASE II: 1989-90                     PHASE M. 1989-90                 PRASE IV: 1991 -
Pm|   A  inmwr                1978-79 22% rie in agricultural                                        I -  TP    et                       199092 Rd n  d              y
procument prices: 41% rise n pricn                                            an pre.  nd h t o  etdned on  Ifb_                  - .
for above-quot  agrictdtural ouqpts.                                  dua          n.
1979 Experi_eta introduction of                                       1988-92 R     plan pnc_ wwsds  wi  pro_a eo 'mr_gbg   dw       ne
'guidance prEce. for above-quota                                      syst_n. 1991-92 Gr h*nd oafseeds prim e1an, t convert a    e"
industrial output.                                                    product subase into wages.
Key agricuitwel iu  still controled.
1984 Formal inroducton of 2-tier
pricing system for ndustry. lIft
guidance price celings: remove tem
in 1986.
1985-88 Progrsaively rarge
market price role for industry.
t98S-87 Relaxation of mandatory
production pbn in gricAture in
favor of purchaing contracts which
*lowed output diveification:
progressive relaxation of restrictions
on interregional and internationS
trade in agricStural products.
1986 Remainn control on prices
of mmet consLuner goods
decentralied to local government.;
decontrol according to locl
conditions.
1979 Joint Ventire Law passed.      1986 Sino-BrWtsh Accord on Horng  1988-92 Foregn exchange tradhg cen    esbshed and opwned to al
EXCi|m  8BVutcrff                                                 Kong.                              enterprises for buying and seEn at 1boat  rates (by 1991, a third of
transctions at tng rates).



REFORM                   PHASE l: 1978-83                     PHASE II: 1984-88                 PHASE 11: 1989-90       |       PHASE IV: 1991 -
| Fo;M .WA             1980 Opening of first 4 Specil      1986 Removal of prohbition on creating    Reduction of tback m_wkt premium to oidy 6% by 1991 from 100% in
Ex| wmns & bm riT   Economic Zones: the fvt industrial     foreign trade corporationa (by 1990.   pevia ye.
(Cant.)               reform.                              6,000 createdl. 
1985 Reduction in scope of the trad,                                1991 Bimrutrion of central export
plan: 1987 exemption of certain sectors                             subidies.  nadlocel rktaniwon
from trade plan. shning of foreign                                  of forgn  xchange; China appl
exchange between central and ocal                                   for GATT memberhip; trade reform
governments. 1988 Trade contracting                                 accelerat.
system.
Agricultirel trade administered to tax producer Iricev  nd subsidize conms
(wheat).
REAL DEVALtIATiN OF YUAN
MA|EiSE SUPPLV A       Roduce scope of Materials Distribution System: 1978 cut number of category I and 11 goods (producr nd nbves_met goods) from 210 to 64 and to 20 by 1992:
DunTmo                phase out control over category IlIl goods (inputs for consumer products); establish 485 trade center for industrial material by 1985.
1987 onwards. introduce indusVrial commodity maorkste
Reform Commercial System: dereguate entry/exit (between 1978 and 1990 10 minion private firm. 450.000 cooperative. and 3.400 JVa) entr the commercisl
system: by 1985 75% of state commercial and service companies sold or leased to private owners.
1980 State enterprises allowed to buy  1984 State enterprises permitted to
and sell on free markets,           market direcly.
FUNKMAL SECTOR                                              1984 Central Bank established to create a   1987 Bankruptcy Law passed.
2-tier system S.
1987 two new universal banks created.    1989-92 Stock mwrkets created. fist for secondry trading of
goveroment bonds and than for  hares Shangh; 1990. Shenzen 19911.
OW|   Rw A             1978-79 Experimental introduction of  1988 Transfer of lnd use rights legaized                           1992 New Operating Machanism
|NAGIIT               contracting land use and for outputs to   (although mechnnisms to faclitate a land                        increse autonomy of state
households.                         market came only in 1990 and this                                    enterpui6es.
market is not operative yeti.



REFORM                  PHASE l: 1978-83                         PHASE II: 1984-88                       PHASE IN: 1989-90                   PHASE IV: 1991 -
0Oww a              1981 Official recognition of Household  1987 Adoption of Contract Management
DLAMA.Oi_           Responsiblity System (already adopted  Responsibhity System for industry. 3-b
(Cans I             by 45% of production teams. 98%        year targets.
adoption by 19881, progressive
lengthenirn of lease term, trc;n 1-3 to 15
years, distribution according to famly
size.
1984 Permission granted for local
governments to eatablish industrial
enterprises (TVEs).
1988 Enterprise Law.
Progressive diversitication of industvial ownership towards norntate sector.
1988-89 Temporary retrenchment of      1991 3,000 inefficient stae
entwrprise reform, measures to reduce  enterprise merged with oths;
invetennt at al levels.               direct credit restrint eased.
reversion to enterprise reform.
FKCAI                                                      1984 Tax reform creates 4 new indirect
DeoflATnuIL .tM                                            taxes induding VAT.
1984-85 Reform of enterprise taxaton_:
profit remittance to state replace by
patial taxation (at negotiated rates) of
profits with decreciation and post-tax
profits retained by enterpries. 
1986 Central government enter into
-fiscal contract responsiblity system-
with local governments.



- 32 -
TABLE 2
Selected Economic Indlcators
00Av           70 A            80D Av        1990 91-
Level of Per Capita GNP (PPP in 85 conabnt dollare)
China                                647           1004            1712              nla
EastAsia                            1084           1946            3122              nia
Socialist Comparators               2165           3800            4559              nla
India                                613            642             687              noa
Rat!o of PPPIAtlas Per Capita GNP (in 8E constant drollare
China                               9.41            8.94           8.86              nla
East Asia                           2.81            2.77           2.80              nla
Socialist Comparators               5.29            3.97           3.99              noa
India                               3.22            3.00           2.68              nla
Growth Rate of Per Capita GNP (Atlas in 85 constant dollars)
China                               1.21           5.53            7.62           4Vm
East Asia                           4.87            6.42          Rf67             5.16
Socialist Comparators               5.70            5.09           0.59            .8.60
India                               1.47           0.73            3.50            1.54
lavesunt Ratio
China                               0.21            0.30           0.35            0.36
East Asia                           0.18           0.26            0.27            0.34
Socialist Comparators               0.30 Ihy        0.34 WY)       0.31            0.23 (hp
India                               0.16           0.20            0.23            0.22
Efficiency OOCR) S
China                               0.16            0.25           0.26            0.12
East Asia                           0.44            0.33           0.27            0.24
Socialist Comparators                 nla           0.17           0.06            -0.34
India                               0.23            0.16           0.26            0.25
Growth of Expor.
China                               1.98           5.69           14.49            9.87
East Asia                          15,30          18.05            9.48           10.73
Socialist Comparators                 nla           6.70 ,hpyl     2.70 lhpyl      5.39 pIP
India                               2.27            7.97           6.42              n/a
INFLATIONGN
China                               1.08           0;75            8.15            1.29
East Asia                          29.82           12.42           7.12            6.79
Socialist Comparators              12.51 IY)        6.79          64.39          180.07
India                               6.03            7.54           9.12           11.42
M21GDP
China                                 nla           0.28           0.55            0.89
East Asia                           0.20           0.34            0.54            0.79
Socialist Comparators               0.51 ,yj        0.64 (y)       0.54 lhpy,      0.37  hpy
India                               0.22            0.29           0.42            0.46
Note.
East Asia represented by Indonesia, Korea, Taiwan and Thailand.
Socialist Comparators are Hungary, Poland, Former USSR and Yugoslavia.
Data not available for 1991 in some cases.
e    IOCR - GOP Growth Rate/Investment Rate
(hpl  Average of Hungary and Poland.
(h9y) Average of Hungary, Poland and Yugoslavia.
jhy)  Average of Hungary and Yugoslavia only.
vyj   Average for Yugoslavia only.
(p)   Average for Poland only.
uA  Inflation computed from CPI.
Source: World Bank for most of the variables. PPP values taken from Summers and Heston, 1991,
The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950.1988,
The Ouorterly Journal of Economnics          pp 327-368.



- 33 -
TASLE3
Selected Social Indicators
lOsAvi         70o Avin        S   Ava       1990.91'
Life Expoctanoy
Chhn                               52.60          64.37           68.58           70.28
Eagt Asia                          55.62          61.25           65.82           68.13
Socialist Comparators              66.20          69.32           69.98           71.39
India                              44.87          50.12           56.36           59.21
Inhfnt Mortalitv Rate
China                             105.30          51.00           35.59           2888
East Asia                             n/a         69.78 rkt)      48 .06 kt)      35,18 Okit
Socialist Comparators              46.55          30.66           22.72           17.00
India                                 nla        130.14          104.43           91.90
Am Daendancy Ratio            [-(under 15 and over 8411(15 84)1
Chins                               0.79           0.76            0.57            0.49
East Asia                           0.87           0.77            0.63            0.54
Socialist Comparators               0.57           0.52            0.52            0.51
India                               0.78           0.77            0.72            0.70
Women's Particibation in Labor Force                l- (Female laborlOO)Fama PoPubltion]
China                              44.19          44.52           48.46           52.20
East Asia                          29.12 k)       30 58 ,)        32.36 z,t       33 17 W
Socialist Comparators              38.33          41.01           42.22           42.35
India                              28.41          24.98           22.01           20.95
Grco Enrollment Ratio: Secondary
China                                nla          24.00           50.38           40.50
East Asia                             nla         22 67 wt,       42.81 t)        54.33  l
Socialist Comparators                 n/a         69.77 jy       , 80.08          82.25
India                                nWa          26. 50          31.00           38.50
Gross Enrollment Ratio. Females: Primary
China                                 n/a        113.67          113.10             nla
East Asia                          77.33          91.50          103.96           99.00 ht)
Socialist Comparators             102.88          98.29          100.02             n/a
India                              48.50          61.83           76.20             nla
Notes
East Asia represented by Indonesia, Korea, Taiwan and Thailand.
Socialist Comparators are Hungary, Poland, Former USSR and Yugoslavia.
)kt)  Average of Indonesia, Korea and Thailand.
ktj  Average of Korea and Thailand only.
zp.r  Average of Indonesia, Korea and Thailand.
Gross enrollment ratio is defined as gross enrollment (in all streams) of all ages
at the primary/secondary/tertiary level as a percentage of school-age population
as defined by each country and reported to Unesco. Many countries consiaer
primary school age to be 6.11 years and secondary to be 12.17 years. This ratio may be
greater than 100% if some pupils are outside the country's standard age-range.
Source: United Nations Social Indicators Database.



- 34 -
Table 4:
Sources of Growth
Growth rate      Contribution       Contribution       Contribution
of net mat'1      of increase        of increase       of TFP growth
product         in K stock          in L force
(1980 prices)
(y)             (aKk)               (aLl)            (tfp)
1955-65          4.31              1.50               5.79            -2.98
1965-78          6.40              1.55               3.64             1.20
1978-84          7.98              1.83               3.31             2.84
1984-88         10.12              1.80               4.51             3.82
1988-91          5.30              1.43               4.37            -0.50
These figures are derived from an aggregate production function converted into
the standard growth accounting form:
y   tfp + aKk + aLl.
Data sources: SSB (1991) p. 401, SSB (1992), pp. 33, 97, 401, 406-7, 413
Table 5:
Sectoral Sharee of China's Gross Social Product*
1952             1978             1984             1990
Agriculture        45.4             20.4             24.4             20.2
(28.4)           (33.0)           (28.4)
Industry           34.4             61.9             57.8             63.0
(44.8)           (40.1)           (39.5)
of which:
state-owned    41.5              77.6             69.1             54.6
collective       3.3             22.4             29.7             35.6
other           55.2a             C.0              1.2              9.8
Services and       14.6              9.4              8.2              9.0
transportation                     (23.0)           (21.9)           (27.2)
a.  Pre-nationalization.
* The figures not in parentheses represent Social Gross Product, i.e. they
are inclusive of intermediate inputs at the level of the producer. The
figures in parentheses are shares based on GNP which are exclusive of
intermediate inputs. Also note: industry includes construction.
Data sources: SSB (1991), pp. 31, 50, 396



- 35 -
Table 6:
Sectoral Sources of Growth. 1962-1988
Agriculture                       Industrv _
State              Collective
1955-65
total             1.8
TFP              -0.6 (0.8)1             0.e03
1965-78
total             2.9
TFP              -1.0 (0.9)
1978-84
total             8.0                   (8.49)                   (14.03)
TFP               5.9 (6.2)2             5.2 (1.80)4              (3.45)
1984-88
total             4.0                  (10.22)                   (19.86)
TFP              (3.0)                  (3.01)                    (5.86)
1. Figurea for labor productivity (in parentheses) and TFP for 1955-65 and
1965-78 are drawn from A. Tang (1981) "Chinese Agriculture: Its Problems and
Prospects," Working Paper No. 82-WO9, Department of Economics, Vanderbilt
University.
2. TFP and labor productivity figures drawn from McMillan et al (1989).
3. For the period 1953-78.
4. The figures in parentheses are TFP measures for capital, labor           and
intermediate inputs. The earlier figures cover 1980-84, not 1978-84.
Table 7:
Levels of TFP in State and Collective Industrv
State industry            Collective industry
1980                         2.18                        2.28
1984                         2.34                        2.64
1988                         2.63                        3.04
Index for 1988
(1980 = 100)            120.6                       133.3
Source: Jefferson and Rawski, 1992 (p. 52)



- 36 -
Table 8:
Comrparative Levels of Industrial TFP Growth
Country                      Period                     Estimate
Chinal                  1957-78 (SOE)                        0.4
1978-85 (SOE)                       4.8
China:                  1980-88 (SOE)                        2.4
1980-88 (COE)                       4.6
Hong Kong               1960-70                              3.2
Singapore               !960-70                             3.6
Taiwan                  i955-70                              5.4
Korea                   1960-70                              3.7
1960-77                             3.7
Turkey                  1963-76                              1.3
Yugoslavia              1965-78                              0.5
India                   1959-79                             -0.3
Source:
1. Chen et al (1988).
2. JRZ (1992).
All other figures are from I.J. Ahluw]ia (1991).
Chi=-2.tnb/2-8-93



Figure 1
Economic Growth and Demographic Change
30
_   S             ~~~-  e       be   X          ¢ s)a o   3w Year MXoai Aere    /1 Cb sw  's e                     f                      >G
10
230
O-                                                            N -   -   -  -    -    -   -  -   -   -  -    -    -      -   -   -   -   -   -   -  -   -   -   -   -    -    -    -
40
Birth Rate
I 0
Soutee: Chno Stotistitol Yoor 600k ont World 6an
Source: China Statistical Year Book and World Bank.



- 3p .
Figure 2
Prise and Market Reform
1.000   -.
0.900
0.800
0.700
0.600
0.500
0.400                                                                          1 0
0.300
0.200   -
0~~~~~~~~~~~1
0.100                      o,;,o, 
In   n        I n -         N    t                               c In     r
$Share of iulctu    °        I Shore. of tsiate     - - - -  Sheri otf tte                      Shae of Roti Satles at
antwpner  output sold          enteIMaN setput aold             ter,enee r mt eelo at           Fxed Pnca
It mathel pruiu                It marhat rnce                   metket pncec
Sources: Share of COE and SOE at market pricsare estimated by Zou (1992) from a sample of 253 enterprisess Share ot retail sales at fixed pnc
Schmidt*Hebbel (19921
1.450
1,400
1.350 -
1.300
1.250
1.200  t 
1.150                                                                                Spread: freelplan prices
1.100  --0 
PI      C@        C,       -        O                  t       6f       to                @        @        0 °
Su c  nn                  In                                                             co       co
Source Sprred of freil'pian prtirs are euii"mated by2ou O 90) from ei7ampie o0V253 enterprises,      -        -        -        -



- 39 -
Figure 3
Ownership Oiversification
100.00
_ hare of Privets Pdurmr    _        
90.00
80.00
70.00
.             ~~~~~Share of COEs in Retail
60.00  -                                                Sal
S   50.00  -
40.00  - -
30.00 - -
Share of SOEs in Retail
20.00                                                   Sales
10.00
0.00                                             I                  I                          I       I
CO     cO                      .      C1             us      cD      1%      co     IO      C  
I~~-    i-.   ~~   -   CO                     CO      C  CO           O              m 
m          am    am       a"      mn      CO      D m@                    1      D        I
-       -        °              s      -g     -       -      -        e      -       -a      -0     -
Source: Schmidt-Hebbel 11992), World Bank 11992a)
Figure 3 continued
Ownership Reform in Industry
50.0
45.0
40.0 t
S I
135.0t
30.0 t
25.0 t
20.0  1    -
0O      DI      0                0       1      q z       c     O                O  C O  0            o  _
Nonstate Industry Share in Gross Value of Industrial Output
Source: Schmidt-Hebbel (1992), Singh and Xiao 11992)                         -                                           --



-  40  -
Figure 4
Opening the Economy
20.0                                                                                                   0.800
0.700
15.0                                                                                                   0.600
4    0.500
10.0   t-                I     1     r-                                                                 .o00
a- _
'3 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~.0
10.0   T    ~ 100.200 
0.300
0.0                FIt 0.000
co   C"-            N    C2LU)Cni                        ~    0            -    C
-  Ratio of Exports/GNP (%)              Real Exchange Rate vs. US$     0-Parallel Forex Market
Premium
Zhao 119921, World Bank (1992b)



- 1,I-
Figure 5
Distributional Indicators
Rural/Urban Income N                                                                                      Absolute Poverty
(nrilion people)
60.00                                                                                                                300.0
55.00
250.0
50.00
45.00
200.0
40.00
35_00                                                                       150.0
35.00 -_                        
30.00
100.0
25.00 -
20.00                                                                                                                50.0
a      cn      o       -      CN    en      ¢ c  c                 X c    c              o      X
_                                                                                      -
~ RurallUrban Income (%l          *      Gini coefficients                  Absolute Poverty (Million i
People)
urce: World Bank 11 992b). Gini for 1979 is cited by Zhao (19921



- 42 -
Figure 6
Fisca  Demorallzation
35
30
25
20
10 
5
S  ~  _.-  ,                 7:                    ,      7   _ _ 2  02  -  02
1%      F        a     0I                            a                                            0            _
02~ ~  :2 02          02:   02          02       02 ::             02       02       02       02       02       02::: 
c -              co                  , -,                       ,-              'co _,     ,_  __
Entarpriss & Fial              Fiial                          Not Ruo from                    Oviopmmnt
SubsidiulGNP                   RvemnuulGNP                    Entvpris.IGNP                  ExpenditurulGNP
1.20
1.10
1.00
0.90
0.80
0.70  t
0.60
0.50  - 
0.40
0.30k          I                 I                                           I
02      02n                        C         s c     w.                co                        CD2            
02      02       02       0        02n      02o      02       0        02       2        2       02       02       0
Ratio of Profits/Wages for SOEs
co World Bank (1992.)



_ 43
Figure 7
Inflation and Growth of Industrial Output
25.0
20.0
15.0
10.0
5.0
0.0
co       a       C        a       C        a       Co      Cacoa            co       a,               cm 
Industrial Output Growth               Inflation (Retail Pries Index)]
co: World Bank



44
Bibl iography
Ahluwlia, Isher Judge (1991), Productivity and Growth in Indian Manufacturing, Oxford University
Press, Oxford.
Barlow, Robin (1992), "Demographic Influences on Economic Growth," University of Michigan,
January.
Beck and Bohnet (undated manuscript), "Productivity Change in Chinese Industry: 1953-85: Some
Further Estimations," Justus-Liebig University, Glessen.
Blanchet, Didier (1992), "Reversal of the Effects of Population Growth on Economic Growth since the
End of the 1970s: Reality of Artifact? International Conference on Population and Development,
Expert Group Meeting, Paris, 16-20 November.
Blejer, Mario I., David Burton, Steven Dunaway and Gyorgy Szapary (1991), "China: Economic
Reform and Macroeconomic Management." IMF Occasional Paper No. 76, January.
Blejer, Mario 1. (1992), "China: Prolonged Reforms and the Weakening of Fiscal Control," Country
Economics Department, The World Bank, mimeo, March.
Bruno, Michael (1992), "Stabilization and Reform in Eastern Europe: A Preliminary Evaluation," Paper
presented to IMF-World Bank Conference on the Mcr'oec:onomic Situation in Eastem Europe,
Washington, D.C. June 4-5.
Byrd, William and Lin Qingsong (eds.), China's Rural Industry: Structure. Development. and Reform,
Washington, D.C., The World Bank, February.
Byrd, William A. and Alan Gelb (1990), "Why Industrialize? The Incentives for Rural Community
Governments," 0p cit.
Chen, Kang, Gary H. Jefferson, and Inderjit Singh (1992), "Lessons from China's Economic Reform,"
Journal of Comparative Economics 16: 201-225.
Chen, Kuan, Gary H. Jefferson, Thomas G. Rawski, Hongchang Wong, and Yuxin Zheng (1988)
"Productivity Change in Chinese Industry: 1953-1985," Journal of Comparative Economics, 12: 570-
591.
Chin-Sheun, Ho. (1992), "Comparison of Aggregate Productivity Trends Between Taiwan and the
Chinese Mainland." Paper presented at a Conference on "Productivity, Efficiency, and Reform in
China's Economy," The Chinese University of Hong Kong, mimeo, August.
Estrin, Saul, Mark Schaffer, and Inderjit Singh (1992), "Enterprise Adjustment in Transition Economies:
Czechoslovakia, Hungary and Poland," Paper presented to IMF-World Bank Conference on the



45
Macroeconomic Situation in Eastern Europe, Washington, D.C. June 4-5.
Fan, Gang and Wing Thyo Woo. (1992), "Decentralized Socialism and Macroeconomic Stability: Lessons
from China," milmeo, July.
Fischer, Stanley and Alan Gelb (1991), "The Process of Socialist Economic Transformation," Journal
of Economic Perspectives, 5,4: 91-106.
Gelb, Alan. (1990), "TVP Workers' Incomes, Incentives, and Attitudes," in Byrd and Lin (eds.) China's
Rural 1 , Washington, D.C. The World Bank, February.
Gelb, Alan and Jan Svejnar. (1990), "Chinese TVPs in an International Perspective," in Byrd and Lin
(eds.) China's Rural Indust, Washington, D.C., The World Bank, February.
Gelb, Alan and Cheryl Gray (1991), "The Transformation of Economies in Central and Eastern Europe,"
Policy and Research Series No. 17, World Bank, June.
Groves, Theodore, Yongmiao Hang, John McMillan and Barry Naughton (1992), "China's Evolving
Managerial Labor Market" Discussion Paper 92-36, University of California, San Diego, September.
Harrold Peter (1992), "China's Surge Towards a Socialist Mar;.;ec Economy," Transition, March.
Harrold, Peter (1992), "China's Reform Experience to Date." World Bank Discussion Paper No. 180.
Jefferson, Gary H. (1991), "Measuring China's Gross National Product." Paper presented at a Meeting
of the American Economic Association," mimeo, January.
Jefferson, Gary H. (1992) "Growth and Productivity Change in Chinese Industry: Problems of
Measurement" in M. Dutta, ed., Research in Asian Economic Studies. Asian Economic Regimes: An
Adaptive Innovation Paradigm, vol. 4 (Part B), pp. 427-442.
Jefferson, Gary H. (1993) "Determinants of Performance Differences Among China's Industrial
Enterprises," Meetings of the American Economic Association, Anaheim, CA, January 4-7.
Jefferson, Gary H. and Thomas G. I'iwski (JRZ 1992) "Underempl,yment, Unemployment and
Employment Policy in China's Cities," Modern China, 18,1: 42-71.
Jefferson, Gary H., Thomas G. Rawski and Yuxin Zheng (1992), "Growth, Efficiency, and Convergence
in China's State and Collective Industry." Economic Development and Cultural Change, 40,2: 239-
266.
Jefferson, Gary H. and Wenyi Xu (1992), "The Impact of Reform on Socialist Enterprises in Transition:
Structure, Conduct, and Performance in Chinese Industrv." Journal of Comparative Economics, Vol.
15, pgs. 45-64.
Jefferson, Gary H. and Wenyi Xu (forthcoming), "Assessing Gains in Efficient Production amnong
China's Industrial enterprises, " Ecorhoic Development and Cuiturai Change



46
Jefferson, Gary H. and Inderjit Singh (1992), "China's State-Owned Industrial Enterprises: How Effective
Have the Reforms Been?" mimeo, October 8.
Keidel, Albert (1992), "How Badly do China's National Accounts Underestimate China's ENP?" mimeo,
December.
Kelley, Alan C. and Robert M. Schmidt (1992), "Is A Negative Population-and Economic-Growth
Correlation Emerging? If So, so What?" Duke University.
Khan, Azizur Rahman, Keith Griffin, Carl Riskin and Zhao Renwei (1991), Household Income and Its
Distribution in China. University of California, manuscript, December.
Kornai, Janos and Agnes Matits (1987), "The Bureaucratic Redistribution of Firms' Profits" in J. Kornai,
Vision and Realith. Market and State: New Studies on the Socialist Economy and Society, Budapest:
Corvina; Hemel Hempstead: Harvester-Wheatsheaf and New York: Routledge.
Lardy, Nicholas R (1991) foreign Trade and Economic Reform in China. 1978-1990. New York,
Cambridge University Press.
Liang, Chi-Yuan. (1992), "Overview of Productivity Performance in Taiwan's Industrial Sector." Paper
presented at a Conference on "Productivity, Efficiency, and Reform in China's Economy," Chinese
University of Hong Kong, mimeo, August.
Lin, Justin Yifu, Richard Burcroff and Gershon Feder (1993), "Agricultural Reform in a Socialist
Economy: The Experience of China," The Agricultural Transition in East/Central Europe and the
FormerUSSR, Washington, D.C., The World Bank.
Ma, Guonan and Ross Garnaut (October 1992, revised manuscript), "How Rich is China: Evidence from
the Food Economy, "Australia National University.
McKinnon, Ronald I. (1993), "Gradual Versus Rapid Liberalization in Socialist Economies: Financial
Policies and Macroeconomic Stability in China and Russia Compared," Paper presented to Annual
Bank Conference on Development Economics, World Bank, May.
McMillan, John and Barry Naughton (1992), "Autonomy and Incentives in Chinese State Enterprise,
unpublished Manuscript.
McMillan, John and Barry Naughton (1992), "How to Reform a Planned Economy: Lessons from
China." University of California, November.
McMillan, John, John Whalley and Li Jing Zhu (1989), "The Impact of China's Economic reforms on
Agricultural Productivity Growth" Journal of Political Economy 97(4) pp. 781-807.
Naughton, Barry (1992), "Implications of the State Monopoly Over Industry and its Relaxation", Modern
China, 18,1: 14-41.
Nolan, Peter and John Sender (1992), "Death Rates, Life Expectancy and China's Economic Reforms:
A Critique of A. K. Sen," World Development, Vol. 20, No. 9, pp. 1279-1303.



47
Perkins, Dwight H. (1992), "China's "Gradual" Approach to Market Reforms." Paper presented at a
Conference on "Comparative Experiences of Economic Reform and Post-Socialist Transformation",
El Escorial, Spain, mimeo, July.
Perkins, Frances, Zheng Yuxin and Cao Yong. (1992), "The Impact of Economic Reform on Productivity
Growth in Chinese Industry: A Comparative Study of the Xiamen Special Economic Zone." Paper
presented at a Conference on "Productivity, Efficiency and Reform in China's Economy", Chinese
University of Hong Kong, mimeo, August.
Rajaram, Anand (1992), "Reforming Prices - The Experience of China, Hungary, and Poland." World
Bank Discussion Paper No. 144.
Rawski, Thomas G. (1991), "How Fast Has Chinese Industry Grown?" Research Paper Ser:es no. 7,
Transition and Macroeconomic Adjustment Division, World Bank, Washington, D.C.
Rawski, Thomas G. (1992a), "Progress Without Privatization: The Reform of China's State Industries.
Forthcoming in Changing Political EcOnomy of Privatization in Post-Communist and Reforming
Communist States., Lynne Rienner, 1993.
Rawski, Thomas G. (1992b), "Chinese Industry in the 1980s: An Overview," University of Pittsburgh,
mimeo, October.
Rawski, Thomas G. and Robert W. Mead (1993), "On the Track of China's Phantom Farmers or One
Hundred Million Chinese Farmers are Missing." University of Pittsburgh, mimeo, January.
Schaffer, Mark (1990), "State-Owned Enterprises in Poland: Taxation, Subsidization and Competition
Policies," European Economy No 43, March.
Schaffer, Mark (1992), "The Enterprise Sector and Emergence of the Polish Fiscal Crisis 1990-91,"
Research Paper 31, Enterprise Behavior and Economic Reform Series, CECTM, World Bank,
November.
Schmidt-Hebbel, Klaus (1991), "Market Reforms, Inflat.on and Growth in China," Country Economics
Department, The World Bank:, mimeo, June.
Singh, Inderjit (1991), "Is there a Schizophrenia about Socialist Reform?" in Transiticn, Vol 2, No. 7,
CECSE, World Bank, July-YAugust.
Singh, Inderjit, Geng Xiao and Dilip Ratha (1993), "Non-State Enterprises as the Engine of Growth,"
Transition and Macro-Adjustment Division, Policy Research Department, World Bank, May.
Srinivasan, T.N. (1992), "Development in the Context of Rapid Population Growth: Aui Overall
Assessment," Yale University, November.
Stae Statistical Bureau (SSB) (1992), China Statistical Yearbook, (Chinese language edition), Chinese
State Statistical Publishing House, Beijing.



48
State Statistical Bureau (SSB) (1991), China Statistical Yearbook, (Chinese language edition), Chinese
State Statistical Publishing House, Beijing.
Stepanek, James (1991), "China's Enduring State Factories: Why Ten Years of Reform Has Left China's
Big State Factories Unchanged," in China's Economic Dilemmas in the 1990s: The Problem of
Reforms, Modernization and Interdependence, Study papers submitted to the Joint Economic
Committee, Congress of the United States, U.S. Governmnent Prir. '-g Office, Washington, D.C.
Svejnar, Jan and Alan Gelb (1990), "Chinese TVPs in an International Perspective" in William Byrd and
Lin Qungsong, opLct
Tang, Anthony (1981), "Chinese Agriculture: Its Problems and Prospects," Working Paper No. 82-W09,
Department of Economics, Vanderbilt University.
Tien, H. Yu-.n et. al. (1992), "China's Demographic Dilemmas" Population Bulletin Vol 47, No 1, June.
Walder, Andrew G. (1987), "Wage Reform and the Web of Factory Interests," China Ouarterly, 109:
2341.
Wang, Fang-Yi and Mody, Ashoka (1992), "Explaining Growth in China's coastal Provinces: Evidence
from Industry Level Data, 1985-89" (preliminary draft), World Bank.
Watson, Andrew (1992), "Regional Disparities in Rural Enterprise Growth." Paper presented at a
Conference on "The Role of Rural Enterprises in China's Economic Development," University of
Adelaide, Australia, mimeo, September.
Weitzman, Martin L. and Chenggang Xu (September 1992, Unpublished manuscript), "Vaguely Defined
Cooperatives and Cooperative Culture: A Reconciliation of a Paradoxical Phenomenon in Transitional
Economics."
World Bank (1991) World Development Report.
World Bank (1992a), China: Reform and the Role Qf the Plan in the 1990s. A World Bank Country
Study, The World Bank, Washington, D.C.
World Bank (1992b), China: Strategies for Reducing Poverty in the 1990s. A World Bank Country
Study, The World Bank, Washington, D.C.
Xiao, Geng (1990), "Tlhe Impact of Property Rights Structure on Productivity, Capital Allocation and
Labor Income in Chinese State and Collective Enterprises." Research Paper Series No. 24, The World
Bank, October.
Xiao, Geng (1991), "Managerial Autonomy, Fringe Benefits, and Ownership Structure - A Comparative
Study of Chinese State and Collective Enterprises." Research Paper Series No. 20, The World Bank,
March.
Xiaopeng, Luo (1990), "Ownership and Status Stratification." China's Rural Industry: Structure.



49
DevelogrMent. and Reform, Washington, D.C., The World Bank, February.
Young, Susan and Yang Gang (1992), "Rural Private Enterprise: Towards a New Definition in the
1990s." mimeo.
Zhao, Renwei (1992), "Three Features of the Distribution of Income During the Transition to Reform."
Paper presented at a Conference on "Income Distribution in China During the Transition to a Market
Economy," Washington, D.C., mimeo, December 18.
Zou, Gang (1992), "Enterprise Behavior Under the Two-Tier PlarA/Market System." IBEAR/SBA/USC,
L.A., mimeo, September.
Zweig, David (1992), "Reaping Rural Rewards." The China Business Review, November-December.
Zweig, David (1993), "Trade and Investment on the China Coast: Understanding a Developmental
Community in Rural China." Paper presented at the 45th Annual Meeting of the Association for
Asian Studies, Los Angeles, CA.,
mimeo, March.



Pollcy Re"arch Working Paper Series
Contot
Title                            Author                    Date               for paper
WPS1 164 Power, Distortions, Revoft, and   Hans P. Binswanger       July 19£9           H. Binswanger
Reform in Agricultural Land Relations Klaus Deininger                         31871
Gershon Feder
WPS1 165 Social Costs of the Transition to  Branko Milanovic        August 1993         R. Martin
Capitalism: Poland 1930-01                                                    39026
WPS1 166 The Behavior of Russian Firms in  Simon Commander          August 1993         0. del Cid
1992: Evidence from a Survey     Leonid Liberman                              35195
Cecilia Ugaz
Ruslan Yemtsov
WPS1 167 Unemployment and Labor Market    Simon Commander           August 1993         0. del Cid
Dynamics in Russia               Leonid Liberman                              35195
Ruslan Yemtsov
WPS1168 How Macroeconomic Projections      Pashid Faruqee           August 1993         N. Tannan
in Policy Framework Papers for the                                            34581
Africa Region Compare whh Outcomes
WPS1 169 Costs and Benefits of Debt and    Eduardo Fernandez-Arias  August 1993         R. Vo
Debt Service Reduction                                                        33722
WPS1 170 Job Search by Employed Workors:   Avner Bar-llan           August 1993         D. Ballantyne
The Effects of Restrictions      Anat Levy                                    37947
WPS1171 Finance and Its Reform: Beyond     Gerard Caprio, Jr.       August 1993         P. Sintim-
Laissez-Faire                    Lawrence H. Summers                           Aboagye
38526
WPS1172 Liberalizing Indian Agricufture:   Garry Pursell            September 1993      D. Ballantyne
An Agenda for Reform             Ashok Gulati                                 37947
WPS1 173 Morocco's Free Trade Agreement with Thomas F. Rutherford   September 1993      N. Artis
the European Community:           E. E. Rutstrdm                              38010
A Quantitative Assessment         David Tarr
WPS1 174 Asian Trade Barriers Against Primary Raed Safadi           September 1993      J. Jacobson
and Processed Commodities        Alexander Yeats                              33710
WPS1 175 OECD Trade Barriers Faced by the    Bartlomiej Kaminski    Septernber 1993     J. Jacobson
Successor States of the Soviet   Alexander Yeats                              33710
Union
WPS1 176 Cash Social Transfers, Direct Taxes, Branko Milanovic      September 1993      R. Martin
and Income Distribution in Lais                                               39065
Socialism
WPS1177 Environmental Taxes and Policies    Neil Bruce              Septsmber 1993      C. Jones
for Developing Countries         Gregory M. Ellis                             37699



Policy Research Working Paper Series
Contact
Title                            Author                  Date               for paper
WPS1 178 Productivity of Public Spending,  John Baffes            September 1993      C. Jones
Sectoral Allocation Choices, and  Anwar Shah                                37699
Economic Growth
WPS1 179 How the Market Trans tion Affected   Baillomiej Kaminski  September 1993     P. Kokila
Export Performance in the Central                                           33716
European Economies
WPS1 180 The Financing and Taxation of U.S.   Harry Huizinga      Septemdber 1993     R. Vo
Direct Investment Abroad                                                    31047
WPS1 181 Reforming Health Care: A Case for   Zeljko Bogetic        September 1993     F. Smith
Stay-Well Health Insirance       Dennis Heffley                             36072
WPS1 182 Corporate Governance in Central    Cheryl W. Gray        September 1993      M. Berg
and Eastern Europe: Lessons from    Rebecca J. Hanson                       31450
Advanced Market Economies
WPS1 183 Who Would Vote for Inflation in   Cheikh Kane            September 1993     T. Hollestelle
Brazil? An Integrated Framework  Jacques Morisett                           30968
Approach to Inflation and Income
Distribution
WPS1 184 Providing Social Benefits in Russia:  Simon Commander    September 1993     0. del Cid
Redefining the Roles of Firms and    Richard Jackman                        35195
and Government
WPS1 185 Reforming Hungarian Agricultural    Morris E. Morkre     Septembi 1993       N. Artis
Trade Policy: A Quanti.ative     David G. Tarr                              37947
Evaluation
WPS1 186 Recent Estimates of Capital Flight   Stijn Claessens     September 1993      R. Vo
David Naude                                31047
WPS1 187 How Should Sovereign Debtors     Andrew Warner           September 1993     J. Queen
Restructure Their Debts? Fixed                                              33740
Interest Rates, Flexible Interest
Rates, or Inflation-indexed
WPS1 188 Developmentalism, Socialism, and    Mario Marcel         September 1993      S. Florez
Fi;e Market Reform: Three Decades  Andre. Solimano                          39075
of Income Distribution in Chile
WPS1189 Can Ceommunist Economies          Alan Gelb                September 1993     PRDTM
Transform Incrementally? China's    Gary Jefferson                          37471
Experience                       lnderjit Singh
WPS1190 The Government's Role ir Japanese  Yoon Je Cho            September 1993      T. Ishibe
and Korean Credh Markets: A New    Thomas Hellmann                          37665
Institutional Economics Perspective