Lecture#9-The Political Economy of Rural Reform
Why did China adopt a gradualist approach? What are the specific policies to rural reform?
If you were to compare China and Soviet Union and other Eastern Countries, China reformed
o Some people say that China “takes two steps forward, one step back”
Other countries adopted a “big bang approach”
o Liberalized economy overnight and opened up democracy (for other countries)
o China was very slow and gradual in doing this.
Who are the winners and losers of the reform?
o If you are to reform the system, you are redistribute money and power
o Winners: Power will be reallocated, whose position attracts more money
o Losers: Those who lose power and money
To successfully implement reform, the leaders will have to mobilize the people who benefit
from the redistribution into a coalition. At the same time, you must keep in mind of the losers or
there is a lot of opposition.
Failure in mobilizing the “winners” would mean reform is blocked by opposition
Who are the winners and losers of China’s reform from central planning to market economy?
o In the old system, the central planning-power was centralized in central bureaucrats.
o Winners: peasants, private entrepreneurs etc….
Features of a Centrally planned system (central planning to market economy)
o Fiscal Revenue centrally controlled.
Sequences of Reforms
Agri decollectivization introduced ahead of industrial reform: less bureaucratic resistance.
o The state enterprises were seen as a cash cow under central planning. The financial
ministry was a liability as state had to subsidize it. The agriculture reform did not
threaten the ministry of finance. (it benefited the most from central planning and had
the most to lose under market reform)
o The agricultural sector had little political clout. It is a strategy of leaving the powerful
guys behind and returning power to the people.
o Agriculture reform was done ahead as they had little political clout
o Under the Old system, Tax Revenue goes back to central government and local
governments were an agent of the government. (no incentive to collect more money)
o Fiscal decentralization changed the incentive for local governments. The MORE you
collect, the more you can keep.
o Economy opened up to foreign investment.
Special Economic Zones
o Raw materials and imports/exports had no taxes on them
o Designated cities were open to foreign investment. Companies who are located in these
zones could import raw materials in there, tax free. (no taxes)
o HK and Taiwan invested heavily in these special Economic Zones.
o Provinces became the envy of others.
o These policies do not exist anymore….WHY? Ernie Tam
Entire economy is now opened up to FDI. Location no longer matter anymore.
o At the beginning, the leaders were wary of liberalizing all the cities. The leaders were
“experimenting” at first and then gradually expanded to the entire city.
o Even now some industries are protected heavily such as oil and telecoms.
o Stated Owned Enterprises came in mid 1990s (15 years later) why did it come so late
after FDI and agriculture reform? (topic discussed in later lecture)
Provincial and Municipal governments to act as counterweight to conservatives
o They were primary winners of the new system.
o Money and resources in their handsSupport policies of the government.
o Reforms by the centre became very popular among local leaders (supports of new
o Could act as a counterweight to central bureaucrats.
o Deng Xiaopeng used these new “allies” as a counter to the conservatives in the central
Deng Xiaopeng believed that he can use provincial officials through reallocation of
power/money as a counterweight instead of reforming the political system whereas Gobrachev
of Soviet Union believed that you needed to politically open first before getting an effective
counter against his opponents.
Characteristics of Chinese Reforms
“Crossing a river by groping the stones”
Gradualism: kept the state sector while allowing market sector to grow c.f. “big bang approach
o Transition costs were: loss of revenue for central planners. Huge unemployment was the
o Once you liberalize SOE, the inefficient companies would no longer survive and as a
result, many people were let go.
o Big bang reform created losers overnight. Even from an economic perspective, a big ban
approach was more efficient b/c one equilibrium to another equilibrium right away
o China was the opposite.
Dual Track system co existence of a traditional plan and a market channel to allocate a good
o For ten years, there was a two tier price.
o Grainhad a state set price and a higher market price
Compared to former SU states, the state price was demolished and set for
standard price but in china, the two prices co existed for some time
Farmers can sell grain to market prices at a HIGHER price after giving some to
the state at state price. (they have to sell a set amount at set state price and any
surplus can be sold to market for high market price)
o Major problem with this policy
E.g. Laptop…you can buy this computer from the state at a lower price
but sell to the markets at a much higher price.
This is true esp. when you have government officials connection
St. George hotdogs
o Majority of the people do not have this privilege or this opportunity to do this.
1980s: Growing out of the plan: As the economy grew over time, the fixed plan became
proportionately less important over time. Ernie Tam
o For instance, steel sales were up till 1994. Most of the steel sales came from state
allocation. After 1994, the central quantity or central planned economy, stagnated or
shrunk over time whereas the market grew overtime.
o Nearly all the incremental output was sold to markets, left to the control of the private
o 1989-Tinanmen square incident did not affect economy much and then 1992, when
Deng Xiaopeng did his famous tour, the economy took off.
At a macro level, China’s reforms had no losers b/c it created a bunch of winners: peasants,
people who benefited from FDI, local gov