Chapter

I Introduction

Author(s):
Gyorgy Szapary, Steven Dunaway, David Burton, and Mario Bléjer
Published Date:
March 1991
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China has undertaken a wide-ranging program of economic reforms since 1978. Recognizing that the rigidities inherent in central planning had seriously inhibited the efficient allocation of resources and had not provided adequate incentives for productivity gains, the authorities moved to enhance freedom of choice for economic agents in the decision-making process and strengthen the role of market forces through the gradual removal of administrative controls and the fostering of competition. Even though some basic structures, such as widespread state ownership of productive factors, were not radically changed, reforms were aimed at increasing the flexibility of the system and introducing elements that to some degree replicate free-market conditions, inducing economic agents to behave and react more as they would in a competitive environment.

Scaling down central planning and partially replacing it by market mechanisms have altered the functions and objectives of macroeconomic policy instruments, requiring the development of new instruments and their adaptation to the changing needs. In particular, more emphasis has had to be given to those levers of macroeconomic policy that indirectly regulate the behavior of increasingly autonomous economic agents. Despite the rapid growth of literature dealing with different aspects of the process of reform in centrally planned economies (CPEs), relatively little attention has been paid to the macroeconomic aspects and, in particular, to the changing role of monetary and fiscal policies. This is so, perhaps, because the focus has been on structural issues connected with agricultural and enterprise reforms—the two cardinal elements of economic transformation in most CPEs. However, the bouts of inflation in the late 1980s in China, Hungary, and Poland—with the latter two also experiencing external problems—have highlighted the macroeconomic dimensions of the reform process, focusing attention on the importance of, as well as the difficulties, in maintaining macroeconomic stability as the reforms proceed.

Although the analysis concentrates specifically on China’s experience with reform, it seeks to generalize some of the lessons from this experience to other CPEs in the process of transition. China is indeed a special case, given its size and structure, but it has confronted problems similar to those now facing the Soviet Union and other CPEs in Asia and Eastern Europe. In view of the length and scope of China’s experience, an analysis of its achievements and the problems encountered could certainly provide insights helpful to other countries embarking on reform.

Chapter II of this paper briefly reviews the main reforms implemented since 1978, attempts to assess their effectiveness and identifies the main problems that have been encountered. Chapter III examines the evolving functions of monetary and fiscal policy under the reforms and assesses the extent to which they may contribute to the cause or to the cure of internal and external imbalances during reform. In addition, it considers possible modifications to monetary and fiscal institutions, policy mechanisms, and other factors that might be helpful in strengthening macro-economic management.

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