The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Abstract

The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.

Summary of WP/92/89

“China: An Evolving Market Economy--A Review of Reform Experience” by Michael Bell and Kalpana Kochhar

For three decades after the 1949 revolution, China pursued socialist economic development based on self-reliance and the centrally directed allocation of resources. In the late 1970s, China’s policymakers recognized the untenability of this approach and began to overhaul the economic system.

They undertook the reforms without a detailed blueprint under a style that was generally incremental and experimental. Despite the absence of a blueprint, the authorities recognized the importance of the market and the strength of individual incentives to stimulate production. At the same time, their resistance to widespread private ownership led to a search for solutions that simulated the institutions of a market economy while retaining public ownership.

A key element of reform involved gradually opening China to the rest of the world, which policymakers viewed as a means of acquiring modern technology. In the area of domestic reform, China first experimented in the rural areas, and then, when new mechanisms were successful, extended the reforms to other sectors. Partly for this reason, progress in the various areas of reform has not been uniform.

There can be little doubt that the reforms had a positive effect on China’s economic performance. In contrast with other reforming countries, where output collapsed, unemployment rose, and real incomes declined, China’s output growth accelerated and living standards improved, in some cases dramatically. However, the gradual approach and the resultant incompleteness of reform perpetuated some distortions and contributed to pronounced macroeconomic cycles marked by inflation and external disequilibrium. Because indirect instruments were ineffective for macroeconomic management, the authorities reverted to administrative means to contain excess demand, thereby slowing the pace of reforms.

China’s reform experience differs from that of other countries undertaking structural reform for a number of reasons, including favorable initial macroeconomic conditions; continuation of the prereform political order; a very small external debt burden; and the benefit of having withdrawn from the CMEA arrangements many years earlier. Thus, the favorable results of China’s reform to date cannot necessarily be attributed wholly to the more gradual approach that it has followed.

Beginning in early 1992, the pace of reform accelerated markedly, indicating the onset of a new stage in China’s reform efforts. Detailed analysis of developments during 1992, including the decisions of the Fourteenth Party Congress in October 1992, will be the subject of a further study.