China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [13]
Theories of Economic Reform
Economic reform in countries in the former Soviet bloc, China, and Vietnam has proceeded along two distinct routes. In the former Soviet bloc, the pace of economic transition was unusually fast, as was the scope of such transition. Thus, such transitions have often been characterized as “big bang.”13 In contrast, economic reform in China and Vietnam has taken a more gradual and deliberate pace, and the scope of such reform was initially limited. In the literature on economic and regime transitions in communist systems, whether one approach is superior to another remains a heated and unsettled controversy.
Proponents of gradualism maintain that gradual reform has three principal advantages.
LOWER INITIAL COSTS AND GREATER SUSTAINABILITY: The big-bang approach may create too many losers at the same time. In addition, a big-bang approach entails enormous compensation costs, which the government may have no credible means to pay. As a result, losers from big-bang reforms tend to oppose them fiercely, making them politically less sustainable. By comparison, gradual reform, through improving efficiency in certain sectors first, can produce more overall social benefits. Since the number of losers from partial reform is limited and the costs of compensation are manageable, the government has greater credibility in its commitment to compensating the losers, which can enhance the political sustainability of reform.14
GREATER FLEXIBILITY: As captured by Deng’s alleged axiom, “crossing the river by feeling for the stones,” the essence of gradualism is “learning by doing” and reform through experiments. Reformers may not find the best policy mix, but they may seek “second-best” solutions that yield immediate efficiency gains.15 Gradualism allows decision makers to target certain sectors for breakthrough reforms and acquire valuable knowledge for applying reform to other sectors. Most important, gradualism allows reformers to make—and correct—policy errors and avoid costly mistakes that can fatally undermine the support for reform. Over time, market forces can gain strength and become dominant in influencing decision making and the allocation of resources.16
CONSTITUENCY OF REFORM: Gradualist reformers can use the classic strategy of divide and rule by creating beneficiaries of reform first and using them as constituencies for further reform.17
Gradualism has many risks, however. First, its record in reforming state-socialist economies is dismal. In Eastern Europe, the gradualist approach to reform in the 1970s and 1980s was generally considered a failure. Most scholars of Soviet-style planned economies argue that only a comprehensive, not a piecemeal, approach could transform such economies. 18 Second, a gradualist approach suffers from the lack of complementarity among various reform measures. Some reform measures that are implemented cannot be fully effective without other accompanying reforms. János Kornai argues, for example, that implementing some reforms over others in a piecemeal fashion could backfire and discredit the entire process of economic liberalization. Initial reforms that are carried out sluggishly and inconsistently would likely preclude the success of future reforms.19
The lack of complementarity can distort markets.20 Gradual or partial reforms also create new rent-seeking opportunities for the politically connected groups to double-dip by taking advantage of both the new opportunities offered by the market and the rents provided by the old unreformed system. These groups typically rely on their administrative power to create new monopolies and barriers to trade, resulting in lower output, efficiency losses, and fragmented markets.21
Finally, the ultimate cconomic costs of transition can be very high if gradualism allows the ruling elites to make selective