How Do You Assess the Chinese Approach to Economic Reform?

...

Nonetheless, there were also some serious problems associated with China’s decentralised and gradualist approach to reform. One of the key drawbacks was the fragile legal institution that emerged as a result of granting law enforcement and lawmaking powers to the sub-national governments. The starting point of China’s legal reform was among the weakest of all transition economies since the Cultural Revolution dismantled her formal legal system. Therefore China had to build her legal system virtually from scratch during the reform era, whilst major reforms, such as in terms of the protection of private property rights, were further delayed due to China’s ideological and political constraints. To compensate the local governments for their losses during the fiscal recentralisation of 1994, the local governments were assigned greater control rights over revenues generated by land sales within their jurisdictions (Xu 2010). However this then unintentionally induced the local governments to switch from a passion for industrialisation to an urbanisation frenzy. This is because although arable land in China was de jure collectively-owned, but the village authorities represent the collectives, and hence have the right to alter land usage and to transfer land to another party. Blessed with escalating land prices (especially for commercial and real estate development in premium areas) on the one hand, and low compensation to the farmers (which is only equal to the value of crop production) on the other, local governments can pocket windfall profits from this urbanisation process. As a result, personal-utility maximisation dominated the interests of the greedy local governments, and land conversion accelerated after 1999. This example shows that although the Chinese approach to economic reform was successful in incentivising actions towards economic growth at the onset of reform, however no regimes are perfect, and that as a result of this weakly endowed legal institution corrupted officials chose to maximise their own welfare over that of the country’s.

To conclude, despite the fact that the origins of the decentralised regime cannot be fully credited to the central government, but rather to the outcomes of China’s devastating policies in the past, namely the GLF and CR, I do believe that it was a success up until the late 1990s. This is because it has not only solved the institutional and resistance problems of a command economy, it has also created incentives for maximising economic growth. However since then, I believe China’s reform regime has turned into a devastating failure, with China being described as having one of the worst corruption problems in the world and with land ownership and compensation creating one of the most serious social unrests. As a result I agree with Xu (2010) in the sense that although the decentralisation regime has proceeded far in encouraging economic growth, however in order to proceed even further, China must resolve to a fundamental institutional change, as the most serious and radical problems with her decentralised regime is the regime itself.

References

Xu, Chenggang. 2010. The Fundamental Institutions of China’s Reforms and Development. Journal of Economic Literature

Naughton, Barry. 1996. Chapter 1 - The command economy and the China difference pp. 26-56. Growing Out of the Plan Chinese Economic Reform, 1978–1993.

Zhu, Xiaodong. 2012. Understanding China's Growth: Past, Present, and Future. The Journal of Economic Perspectives, Vol. 26, No. 4 (Fall 2012), pp. 103-124.

...