China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [15]
Gradualism, Chinese Style
Despite the potential pitfalls of gradualism, the experience of China’s economic transition seems to suggest the opposite: gradualism has been a resounding success in China. In fact, the consensus view has so overwhelmingly endorsed China’s gradualism that Thomas Rawski claimed in 1999 that “We are all gradualists now.”25 Such an assessment is mainly based on the consistently high output growth the country has achieved since it began economic reform in the late 1970s. Compared with the large fall in output in the transition economics in Eastern Europe and the former Soviet Union, China’s rapid output growth seems to vindicate its gradual approach to economic reform. A leading textbook on economic transition, which cites the Chinese experience as the most robust example of the gradualist model, claims that such a model is “more complete and adequate” than the big-bang approach, otherwise known as the “Washington consensus.”26 Specifically, economists who have given high marks to China’s gradualist approach have singled out several key incremental institutional reforms as reasons for its success in introducing market forces and incentives without causing disruptions in output.27 One such reform was the use of dual prices for the same goods; one price was set by the government and the other determined by market forces. This measure of limited market liberalization was deemed, economically, “Pareto-improving” and, politically, palatable to opponents of economic reform. It was “reform without losers.”28
Another important example of gradualist institutional innovations cited was the township-and-village enterprises (TVEs). By Western standards, the property rights of the TVEs were poorly defined because they were owned by local governments. Political constraints in China, including both ideological prejudices against private property and the absence of the rule of law, prevented the emergence of purely private firms at the initial stage of the transition. Rural township governments, rather than the central state, managed to overcome these political constraints and established TVEs that performed more efficiently than state-owned firms because the interests of the TVE managers and local politicians were more closely aligned, and because TVEs contributed significantly to the budgets of township governments.29
In addition, China’s gradualist approach has had several unique features. First, it has allowed Chinese leaders fully to exploit the structural advantages provided by favorable initial conditions. These included a relatively decentralized economic decision-making system; a political structure conducive to regional competition; a relatively small proportion of the labor force employed in the state sector; a less distorted industrial structure compared with the former Soviet bloc; and a significant nonstate sector.30
Second, Chinese reformers quickly responded to peasant demands to dismantle the communes and implemented breakthrough reforms in the country’s most critical economic sector: agriculture. The initial success of the rural reforms built a crucial proreform constituency. The surpluses generated by the reform allowed rural governments to invest in new manufacturing businesses, which eventually became a critical source of local public finance.31 Thus, while China’s overall pace of reform may be gradual, its rural reform was decidedly big-bang.
Third, perhaps the most important feature of China’s approach is the strategy of “growing out of the plan,” the main thrust of which was to grow a nonstate sector rapidly along the side of the state sector.32 Unlike the former Soviet bloc countries that experienced sharp falls of output after adopting the big-bang