The Transformation Process in China
Since 1978 China has been implementing reforms designed to liberalize the economy. So far the transformation process has been accompanied by high economic growth and an above-average export performance, and seems to have produced less friction than in most countries of East-Central Europe and the successor states of the Soviet Union. In these countries, the reforms have brought about an adjustment recession from which some economies have not yet recovered. More favorable initial conditions as well as the specific reform strategy chosen account for China's success. In the People's Republic of China the initial economic situation was more favorable to a successful restructuring of the economy than in the former Socialist economies. The main factors were the sectoral economic structure with 60 percent of labor employed in agriculture, the fact that in China central planning was of less importance, and the proximity to the high-growth countries of South-East Asia; furthermore, China barely suffered from the disintegration of the CMEA and China's political system endured. China's path to reform was a gradual one. The reforms were introduced into selected regions and sectors of the economy in a step-wise fashion on an experimental basis. Agricultural reform provided the basis for the development strategy. Restructuring of manufacturing has not relied on mass privatization as in most Eastern European countries, but instead on the dynamic development of collective and private enterprises, as well as joint ventures. Other factors which distinguish China's reform process from that in the former Socialist countries are the great importance of township and village enterprises, the introduction of microeconomic reform components (liberalization of prices, reform of enterprises) ahead of macroeconomic components (fiscal and monetary policy), the introduction of special economic zones, as well as a policy of decentralization which gave the local authorities a substantial autonomy in administrative matters, and in fiscal and industrial policies. At the enterprise level, the high degree of autonomy accorded to the provinces amounted to a de facto privatization: the local authorities as owners of collective enterprises faced an incentive structure similar to that in a system of private ownership. Another crucial factor, typical of China's gradualism, was that the institutional system remained intact. The continuity of the institutional and social infrastructure has helped to reduce uncertainties regarding the economic system in the short and medium term, and to attract foreign investors and suppliers to China.