Essay About Institutional Foundations Of China And Chinas Transition

Apple Swot
Essay Preview: Apple Swot
Report this essay
The Institutional Foundations of Chinas Market Transition
Interpreting Chinas Transition to Markets: The Institutional Perspective
In the two decades between 1978 and 1998, China has transformed itself from a centrally planned
economy to an emerging market economy and at the same time has achieved nearly a 10 percent average growth
rate. During this period, Chinas per capita GDP has more than quadrupled and the living standard of ordinary
Chinese people has improved significantly. For instance, per capita consumption has increased four times for
eggs and eight times for poultry, the per person living space has more than doubled in the urban areas and
nearly tripled in the rural areas, and total household bank deposits, measured against the GDP, increased from
less than 6 percent in 1978 to more than 60 percent in 1998. The benefits of the reform were also shared by
the people on a broad basis. The number of people living in absolute poverty has been substantially reduced
from over 250 million to about 50 million in two decades, a decline from one-third to a twenty-fifth of Chinas
population. Life expectancy on the other hand has increased from 64.37 in the 1970s to 70.80 in 1996 (68.71
for men and 73.04 for women), with infant mortality falling from over 50 per thousand in the 1970s to less than
30 per thousand in the 1990s (China Statistical Yearbook, 1997; Almanac of Chinas Population, 1997). In
1998, the World Bank moved Chinas ranking up from a low-income to a lower-middle-income country.1
Such a performance appears more impressive when compared with the average performance of the
transition economies in Eastern Europe and the former Soviet Union. By 1998, with only a few exceptions,
the great majority of these countries still have not recovered to their 1989 output levels according to the official
statistics. The Chinese performance looks even more impressive when considering the fact that transforming
large countries is much more complicated than transforming smaller ones; conceivably, the tasks of
transforming Russia or China are more challenging than those of transforming Poland or Vietnam. At the
outset, Chinas reform went against all odds: Coming out of the disastrous decade of the Cultural Revolution,
it was poor, over-populated, lacked human capital and natural resources, and was constrained by adverse
2 According to Maddisons (1998) calculation based on purchasing power parity, without taking into account the
1998 Russian economic crisis, Chinas per capita GDP will surpass that of the 15 former Soviet Union countries by
2010.
ideology and political opposition. Two decades ago few economists would have bet on todays outcome of
reform in China.
Even so, Chinas reform experience has been always viewed as an anomaly in terms of transition to
a market economy, and it has not been properly accounted for by mainstream economics and thus appreciated
by mainstream economists. For example, From Plan to Market: World Development Report 1996 on
transition economies (World Bank, 1996) gave China short shrift because it couldnt figure out where to put
China on the various measurement parameters, and instead illustrated the Chinese experience mainly in boxes
rather than in the text. China simply does not fit the general description of the report. However, the data point
of China is too important to ignore: It has been one of the most successful transition economies, it produced
more than all other transition economies combined in 1998 in terms of GDP, and, moreover, its per capita GDP
is very likely to surpass that of the 15 former Soviet Union countries in the next decade, which was unthinkable
a decade ago.2
Still, economists tend to underestimate the significance of Chinas reform experience. The most
popular argument is that China was a poor agricultural country and thus reform was easy. Of course China
was much less developed than Eastern Europe and the former Soviet Union at the outset of reform and the latter
faced some difficulties that China did not have, such as problems of excess industrial capacity and
comprehensive welfare coverage. However, this argument does not explain how and why Chinas reform was
successful, especially considering that it faced double difficulties: As a planned economy, China faced many
problems similar, although not identical, to Eastern Europe and the former Soviet Union, such as a lack of
property rights and markets, persistence of a predatory government, and the difficulty of maintaining financial
stability. In addition, as an underdeveloped country, China also faced many problems that do not exist in
Eastern Europe and the former Soviet Union, such as enormous population pressure, severe shortages of human
capital and natural resources, very poor industrial and infrastructure bases, and a lack of democracy. The fact
that China faced the double problem of transition and development presented a bigger challenge and it is far
from