THE LESSONS OF CHINA'S TRANSITION TO A MARKET ECONOMY

Abstract

China’s transition from a plannedeconomy to a market economy beganatthe endof 1978.When Chinastartedtheprocess,thegovernment did nothaveawell-designedblueprint. Theapproach to reform can be characterized as piecemeal, partial, incremental, and often experimental. Someeconomists regard thisapproach as self-defeating (Murphy, Schleifer, and Vishny 1992). China’s average annualrate of GDP growthhasbeen miraculoussincethe beginningofthe transition (Liiietal. 1996) andis the most successfulofthetransition economies. Nevertheless, the Chinese economyhas beentroubledby an increasingly serious “boom and bust” cycle (see Figure 1). WhetherChina’s experienceprovides usefullessonsforothertransition economies is hotly debated.Some economists argue that China’s successdemonstratesthe superiorityofanevolutionary, experimental, and bottom-up approach over the comprehensive and top-down “shock therapy”approach that characterizes the transitionin Eastern Europe and the former Soviet Union (Jefferson and Rawski 1995; McKinnon 1994; McMillan and Naughton 1992; Smgh 1991; Chen et al. 1992; Harrold 1992; Perkins 1992)~Other economists argue that itis neithergradualismnorexperimentation butrather China’s unique initial conditions—namely,a largeagriculturallabor force,low subsidies to the population, and a rather decentralized economic system— that have contributed to China’s success(Woo 1993; Sachs and Woo 1993; Qian and Xu 1993). According to these economists, China’s

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