How Reform Worked in China
The Transition from Plan to Market
A noted Chinese economist examines the mechanisms behind China's economic reforms, arguing that universal principles and specific implementations are equally important.
As China has transformed itself from a centrally planned economy to a market economy, economists have tried to understand and interpret the success of Chinese reform. As the Chinese economist Yingyi Qian explains, there are two schools of thought on Chinese reform: the “School of Universal Principles,” which ascribes China's successful reform to the workings of the free market, and the “School of Chinese Characteristics,” which holds that China's reform is successful precisely because it did not follow the economics of the market but instead relied on the government. In this book, Qian offers a third perspective, taking certain elements from each school of thought but emphasizing not why reform worked but how it did. Economics is a science, but economic reform is applied science and engineering. To a practitioner, it is more useful to find a feasible reform path than the theoretically best way.
The key to understanding how reform has worked in China, Qian argues, is to consider the way reform designs respond to initial historical conditions and contemporary constraints. Qian examines the role of “transitional institutions”—not “best practice institutions” but “incentive-compatible institutions”—in Chinese reform; the dual-track approach to market liberalization; the ownership of firms, viewed both theoretically and empirically; government decentralization, offering and testing hypotheses about its link to local economic development; and the specific historical conditions of China's regional-based central planning.
In this masterful book, Yingyi Qian unlocks China's economic mystery—how a country still ruled by the Communist Party and rampant with state intervention has engineered the most impressive poverty reduction and economic growth experience in history. Qian explicates in detail the key role played by what he calls 'transitional institutions,' arrangements that are far from what's considered best practice yet much more effective because they are suited to the local context. The book's lessons go beyond China and open the reader's mind to the potential diversity of development paths around the world. Qian has done economists and practitioners alike a great service by putting this collection together.
Dani Rodrik, Ford Foundation Professor of International Political Economy, John F. Kennedy School of Government, Harvard University
Over the years, Yingyi Qian wrote a series of important papers that applied economic theory creatively to distinctive Chinese institutions. Each one opened up fresh insights and most were instantly accepted as classics that were fundamental to any analysis of China. Now brought together and reintroduced by Qian, the pieces work together to create the most coherent and compelling perspective on China's overall economic transformation available. Indispensable for economists and political scientists alike.
Barry Naughton, Professor, School of Global Policy and Strategy (GPS), University of California, San Diego; author of The Chinese Economy: Adaptation and Growth, 2nd edition