China's Trapped Transition_ The Limits of Developmental Autocracy - Minxin Pei [16]
Of course, China’s gradualist approach has its critics. Some believe that the success of China’s reform has been overstated, especially given the hidden costs of deteriorating public finance, the slow pace of structural reform, and the inefficient allocation of capital.33 Others argue that China’s superior economic performance during transition is largely due to the country’s structural factors or initial conditions—such as a less distorted industrial structure, smaller state subsidies, and a more restrictive state-socialist welfare system—and not to better policies or institutional innovation.34 In addition, skeptics believe that economic distortions tend to increase in a partially reformed economy, citing China’s well-known problem of local protectionism and the fragmentation of internal markets as examples of massive economic distortions.35
Implicit in the arguments presented by the skeptics of China’s gradualist approach is their belief that gradualism will ultimately fail. They reason that China will eventually exhaust the advantages generated by its favorable initial conditions, and the market distortions embedded in an incremental approach will slow down economic growth. In the absence of constitutional transition (or democratic transition) in China, the same skeptics worry that the process of economic transition can be “hijacked by state opportunism” and be exploited by the ruling elites to consolidate their hold on power, at the expense of the long-term interests of society.36
The assessment of China’s economic performance by its own economists shows a surprising degree of nuance and demonstrates a deep understanding of the benefits and limits of gradualism. Two themes dominate the discussion by Chinese economists concerning the country’s reform strategy. First, like their Western counterparts, Chinese economists clearly recognize the country’s achievement in output growth during the reform era, and a majority of them share the belief that this gradualist strategy is a more appropriate approach for China. They point to the rapid improvement in the standard of living, the pace of industrialization, the growing links with the world economy, and the increasing influence of market forces as evidence of the success of the gradualist strategy.37 Second, they also understand the limits of gradualism in transforming the deeply embedded institutions of a planned economy. In particular, they arc acutely awarc of the so-called salient systems contradictions—or the constant frictions and incompatibilities between the emerging market institutions and the powerful influence of the old system.
To use the blunt language of an official assessment, “markets in capital, land, technology, and labor” arc underdeveloped; the government has only “incomplete capabilities in macroeconomic management” and has failed to “form a system of public finance... and transform fundamentally the management mechanisms of state-owned enterprises.” Reform is threatened by the “emergence of special interest groups within certain government departments and the weakening of the state’s capacity” and by “the influence of local protectionism.”38 Wu Jinglian argues that, judged by the changes in the allocation of economic resources, China has not yet passed its reform test. He believes that the state-owned economy has not been fundamentally reformed or restructured and that capital is, to a very large extent, allocated by the government via administrative means.39 Fan Gang, a well-known proponent of gradualism, admits that gradualism carries huge costs, especially in terms of efficiency losses, continuing price distortions