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Chapter 4

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McGill University
Economics (Arts)
ECON 336
Christopher Green

Chapter 4: Market Transition: Strategy and Process Overall reform process consists of two phases: o The Dual-Track Reforms Gradualist and decentralizing Encompassed dismantling of the command economy Developed out of rural successes Markets and competition were introduced within the existing framework o The Second Phase After 1993 and is still ongoing Restructuring of institutions to make them more compatible with a market economy Reduction of state sector Creation of fair competition in markets 4.1 The Chinese Approach to Transition For the Chinese, different from other socialist regimes, they recognized the need for China to undergo both systemic transformation and economic development simultaneously. This would later guarantee their success. Because reformers did not really know where they were going with these reforms, they ensured that policies would be judged on their contribution to economic growth They also sought to eliminate the serious problems in a command economy Before they could complete the transition to a market economy, the economy needed to reach at least middle income status Yeltsins Russia and China both wanted to move to a modern economy fast However, there are differences in Chinas transition in comparison to Yeltsins Russia: o Russia had a ready model in the form of Western Europe and wanted to rid of communist legacy as soon as possible o They thought that reformers could not correct distortions in the economy o The reformers were elected democratically; therefore, they had distrust the in the planners and bureaucrats in the economy that they inherited. Hence, it would easier for them to start from scratch. o The process of big bang would sacrifice short term output, but this was seen as essential to allow markets to work. However, these costs were later seen as larger than anticipated. China, on the other hand, realized that China was poor and underdeveloped: it has many unmet needs o The command economy wasted a great deal of resources, such as extravagant industrial projects, and neglected simple, easily met demands, of the people o Therefore, the new system had to meet these demands with additional income (incentives), even if this meant eroding of the commands policies. o Therefore, early reforms opened the system: Allowing entrepreneurship Allowed individuals to supply market demands Officials reduced regulation and taxed lightly o These policies were seen as imperative in developing the economy further o Some examples of these loosen policies were: Foreign businesses allowed to operate in Special Economic Zones (SEZs), which would also allow foreign transfer of technology and increase foreign investment Rural communities allowed to run township and village enterprises, which would contribute to rural growth and investment Therefore, instead of correcting for distortions, reforms enabled flow of resources into less regulated pockets that people could exploit for high profits, leading to high level of entry and competition The focus then shifted towards eliminating the compulsory plans and the creation of uniform taxes and rules for all sectors of the economy This was a process with little economic disruption and relative social stability 4.2 How did Reforms start? The Initial Breakthrough in the Countryside The success of reforms in China was predicted on breakthroughs in rural areas Rural reforms began with a policy decision to reduce the pressure that farmers had operated during the command economy Essential, during the China command economy: o Farmers had high procurement targets with low prices o They were always pressured to collect more grain This led to low productivity among farmers would did not find incentives attractive and invested less time and money with less effort in agriculture The landmark decision in the Third Plenum was to: o Stabilize and reduce procurement targets slightly o Raise procurement prices o Above procurement production, prices were significantly higher This was actually a hard decision because it encompasses doubling grain imports for 3 years, reducing investment and reducing the technology import program (the leap outward). However, leaders found it necessary for rural structuring and rehabilitation Thus, agricultural collectives were given freedom to innovate and experiment with different output organization and payment systems One radical change was the contracting of land to farm households o In return for management of a piece of land, farmers agreed to turn over an amount of procurement at a low price with tax grain (no price, seen as rent) after harvest o This created a traditional household economy, which China was used to o However, it made collectives little more than landlords, reducing their regulation and role, receiving government support The effects of such a policy were astonishing: o Contracting land to households became universal in China at the end of 1983 o Agricultural production, helped by modern inputs such as chemical fertilizer, increased sharply, increasing to 1/3 higher than 1978 output levels o China was once again able to feed all its people o Although grain output increased, the number of days spent in fields decreased: they had allocated more of the time to diversify in non-grain crops and nonagricultural businesses o There was increased employment in township and village enterprises (TVEs) and output and competition increased as well. Rural incomes increased dramatically and reforms gained support of the rural population. 4.3 A two-phase framework of economic reform Reformers sought to extend the successful rural reforms to industrial and commercial sectors However, by 1993, the Chinese economy had grown out of its plan and policy makers shifted their attention to construct a firmer institutional basis for the market economy 4.4 Elements of Chinas Transition through 1992 Zhao Ziyang was largely responsible for these policy changes that steered China through this period. However, because he was a subordinate under many members, he was cautious and gradual and always had to establish a passive consensus. His gradual policies, however, enabled China to avoid the collapse that happened in the Soviet Union. Chinas gradualist transition from 1978 to 1992 may be summarized by nine key features o Dual Track System Shuangguizhi is a term that refers to the coexistence of a traditional plan and market channel for the allocation of a good The plan was still existent during reforms, especially to ensure stability and enable the government to achieve some priorities, such as energy investments and infrastructure The dual track is called so because it has a two-tier pricing system for most goods: A low state-set planned price Typically higher market price Note that the dual track system implies two coordination mechanisms (market and plan) and not two different ownership systems All industries and sectors were exposed to such a system, enabling transition of all sectors to the market processes. It also allowed state firms to interact and cooperate with non-state firms (such as collective, private and foreign invested firms) o Growing out of the plan Chinese planners decided to fix the overall size of the central government materials-allocation plan A growing economy would imply that this commitment would become less
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