Book review: Growing Out of the Plan: Chinese Economic Reform, 1978-1993

About the author

Professor Barry Naughton is a distinguished authority on the Modern Chinese economy, with a specialization in this field. He has contributed extensively to the literature on the modern Chinese economy, establishing himself as a leading figure in the field. Notably, Naughton is the author of the acclaimed textbook “The Chinese Economy: Transitions and Growth,” widely regarded as a definitive resource. His groundbreaking book, “Growing Out of the Plan: Chinese Economic Reform, 1978-1993,” was honored with the prestigious Ohira Memorial Prize.

In addition to his notable publications, Naughton recently authored “The Rise of China’s Industrial Policy, 1978 to 2020,” a significant contribution that explores pivotal developments in industrial policy during the post-Mao period. His current research interests revolve around China’s industrial policy, further establishing his expertise in this area.

Recognized as an expert in innovation and industrial policy, he is a member of the Working Group on Science and Technology in U.S.-China Relations and the Task Force on U.S.-China Policy. These affiliations demonstrate Naughton’s commitment to shaping policy and fostering productive relationships between China and the United States.

Barry’s notable publication include

1. “The Chinese Economy: Adaption and Growth” (second edition of The Chinese Economy) (2018)
2. “China: Adapting the Past, Confronting the Future” (with Thomas Buoye, Kirk Denton, and Bruce Dickson) (2002)
3. “Holding China Together: Diversity and National Integration in the Post-Deng Era” (with Dali L. Yang) (2004)
4. “The Chinese Economy: Transitions and Growth” (2007)
5. “China’s Financial Reform: Achievements and Challenges” (1998)
6. “The China Circle: Economics and Electronics in the PRC, Taiwan, and Hong Kong” (1997)
7. “Reforming Asian Socialism: The Growth of Market Institutions” (with John McMillan) (1996)
8. “Urban Spaces in Contemporary China: The Potential for Autonomy and Community in Post-Mao China” (with Deborah S. Davis, Richard Kraus, and Elizabeth J. Perry) (1995)
9. “Growing Out of the Plan: Chinese Economic Reform, 1978-1993” (1995)
10. “Intellectual Property Rights in China: Evolving Business and Legal Frameworks” (1999)
11. “State Investment in Post-Mao China: The Decline of Central Control” (1983)

Pigeonholing

Pigeonholing an individual based on their achievements and contributions can limit their multifaceted abilities and expertise. However, if we were to provide a brief summary of Barry Naughton’s primary areas of focus, specializing in the modern Chinese economy. His expertise encompasses various aspects of China’s economic development and reforms. Notably, Naughton has conducted extensive research on topics such as Chinese economic transitions, market institutions, industrial policy, innovation, and intellectual property rights.

Furthermore, Naughton has authored several influential books, including “The Chinese Economy: Transitions and Growth,” which offers a comprehensive understanding of China’s economic transformation. Naughton’s contributions extend beyond academia, as he actively participates in various organizations and committees.

Assessment of the author

Barry demonstrates his expertise and deep understanding of Chinese economic reform through his comprehensive analysis. His narrative approach to the reform process is essential, considering the gradual and evolutionary nature of the reforms. By highlighting the absence of a predetermined blueprint and emphasizing the time-dependent nature of the reforms, Barry effectively portrays the reform process as a series of interconnected steps, akin to “groping for stones to cross the river.”

One of the strengths of the book is its recognition that economic reform is a multifaceted process influenced by various strands and the actions of countless individuals with their own interests. Barry underscores the importance of considering economic development strategy, macroeconomic policy, and system reform as interconnected elements when seeking a comprehensive understanding of the reforms. His objective is to analyze the reform process and identify its distinct and intriguing aspects, providing readers with a deeper insight into the complexities involved.

The book adeptly balances its narrative structure with stretches of economic analysis, offering approximately 30% policy narrative and 70% economic discussion. This approach ensures manageability and coherence while providing readers with a holistic view of the subject matter. Barry primarily focuses on industry and macroeconomic policy, but also acknowledges the relevance of other areas by including occasional references to them when necessary for the overall story.

Moreover, Barry emphasizes that reforming socialist economies goes beyond merely replacing coordination mechanisms. He highlights the need for a broader transition process that encompasses changing the output structure, transitioning macroeconomic mechanisms, and establishing new institutions to support the new economic system. By acknowledging the existence of various approaches to reform and their varying levels of success, Barry provides a nuanced understanding of the challenges involved.

Overall, Barry’s assessment of Chinese economic reform in this book demonstrates his expertise, research acumen, and ability to present complex concepts in a clear and accessible manner. His comprehensive analysis, balanced narrative structure, and emphasis on the interconnectedness of reform elements contribute to a deeper understanding of the dynamics and intricacies of Chinese economic reform

Assessment of the book

The miracle of the modern Chinese economy remains a perplexing enigma for many observers outside the country. However, Barry Naughton’s book, “Growing out of the Plan: Chinese Economic Reform, 1978-1993,” offers a comprehensive and insightful examination of one of the most transformative periods in modern Chinese history. As an esteemed economist and China scholar, Naughton presents a thorough analysis of China’s economic reforms and their profound impact on the nation’s trajectory.

The book comprises nine chapters, totaling 382 pages, and is divided into three distinct phases. The first phase, titled “The Bird in the Cage,” covers the years 1979 to 1983. The second phase, spanning from 1984 to 1988, is aptly referred to as the second phase of reforms. Lastly, Naughton explores the reform cycle that followed the Tiananmen Square incident till 1993.

Within the pages of this book, Naughton delves into the period from 1978 to 1993, during which China embarked on its economic reforms under the visionary leadership of Deng Xiaoping. He meticulously examines the policies, strategies, and challenges faced by China during this critical period. Naughton’s writing style is clear and concise, offering a well-structured narrative that makes the complex subject matter accessible to readers with varying levels of familiarity with economics

Naughton’s book provides a comprehensive analysis of the transformations that occurred at the core of China’s planned economy. While primarily focusing on the industrial sector and macroeconomic policy, the book offers valuable insights into China’s reform policies and implementation process, highlighting the country’s accomplishments up until the first half of the 1990s. Although agriculture and foreign trade receive less attention in the book, Naughton effectively portrays China’s reform landscape.

One of the striking paradoxes highlighted by Naughton is that despite the absence of a predetermined blueprint for reforms and unsuccessful attempts to introduce coordinated programs, the reform process in China exhibited significant ex-post coherence. Gradualism, a key characteristic of China’s reforms, was not a deliberate choice but an unintended consequence of the process. Naughton notes that a considerable amount of time was wasted on pursuing dead ends and regressive policies. However, the initial policies adopted, such as the relaxation of the state monopoly over industry in 1979 and the introduction of the “dual-track” approach in 1984, played crucial roles in shaping China’s later successes.

According to Naughton, the dual-track approach stands out as a distinctive feature of China’s economic reforms, setting it apart from European rationalizing reforms under socialism or the “big bang” reforms that occurred after 1989. In this approach, while a portion of economic activity remains planned, sectors exposed to the market are encouraged to grow and eventually dominate the economy. Unlike theories of market socialism or a clean break from the old system, the dual-track approach relies on a guidance mechanism where the successive expansion of market-coordinated economic activity in each stage indicates the direction of reforms for the next stage.

1^st Phase of reform (1979-1983)

According to Naughton’s review in Chapter 1, the command economy in pre-reform China had the ability to allocate resources to the state sector through arbitrary terms of trade and state monopoly over the distribution network. Despite weak economic planning management compared to the former Soviet Union, aggregate output continued to grow due to the mechanism of channeling resources into new investment. However, public enterprises, operating under state control, lacked consideration for comparative advantage and failed to capitalize on efficiency gains from specialization.

The initial response to the shortcomings of this system set off a positive cycle of reforms and enabled the Chinese economy to avoid the challenges faced by Soviet reformers in the 1980s (Chapters 2 and 3). When Chinese policymakers recognized the drawbacks of the command system in 1979, they abandoned the ambitious ten-year economic program focused on growth acceleration and began implementing policies to redirect economic development strategy. The objective of the reform was simply to improve the functioning of the economic system using suitable means. This shift away from growth acceleration allowed resources to be allocated to the consumer goods industry, reduced market demand pressures, and created a favorable macroeconomic environment for launching a new round of reforms.

According to Naughton, the most significant positive reinforcement in the reform process occurred after the relaxation of the state monopoly over industry in 1979. The removal of barriers led to the entry of non-state enterprises on a large scale, attracted by the high state-fixed prices of industrial consumer goods. Rural industry experienced explosive growth during this period as it filled the void left by the state sector. The entry of these enterprises exposed state-owned enterprises to market competition, reducing their profitability and squeezing state revenues, which heavily relied on profit transfers from state enterprises. To secure revenue sources, the government strengthened enterprise monitoring while offering managerial incentives through expanded autonomy. The pressure to adapt to the new environment compelled state enterprises to improve their performance, leading to a rapid increase in productivity. Naughton highlights that once critical features of the command economy are eliminated or weakened, the system tends to transition into a different type of system.

Despite various piecemeal measures implemented in the first phase of reforms (1979-1983), attempts to coordinate these policies into a coherent program failed. The main obstacle was the inability, due to strong resistance, to correct the distorted price structure and introduce new fiscal and financial arrangements. The delay in these reform areas left the government incapable of steering the economy using indirect tools, such as relative prices, taxes, and interest rates, in line with market socialist ideals.

2^nd Phase of reform (1984-1988)

The breakthrough came in 1984 when reformers, led by Zhao Ziyang, introduced the dual-track approach as an alternative, marking the beginning of the second phase of reforms (1984-1988). Under this approach, state enterprises were still required to fulfill their planned quotas, but they were allowed to produce and sell goods beyond these quotas in the market. Restrictions on prices for above-plan output were abolished, and state-fixed prices were successively adjusted according to market prices. In 1987, enterprise managers were offered long-term profit contracts, putting an end to annual negotiations over profit allocation between managers and supervisory divisions.

During the second phase of reform (1984-1988), Naughton argues that the underlying strategy was centered around expanding market forces by restricting the scope of planning, encouraging market entry, and enhancing incentives and autonomy for state-run enterprises to participate in the market (p. 200). In this period, the dual-track approach was implemented, utilizing fixed obligations and long-term profit contracts as credible commitments from the government, and allowing market prices to influence enterprise behavior. The cumulative effect of increased market entry and competition was most evident in the substantial reduction of the standard deviation of the rate of return on assets across various industrial sectors during the 1980s, declining from 19.7 percent in 1980 to 7.4 percent in 1989 (p. 237)

3^rd Phase of reform (post-Tiananmen reform)

The events at Tiananmen Square in June 1989 had a significant impact on China’s political trajectory and how it was perceived by the world. It marked the end of a period of gradual liberalization and ushered in a renewed era of political repression. Initially, the hardline leaders who gained power after Tiananmen sought to roll back economic reforms and political liberalization. In 1989, they initiated a program to regain control over the economy, which would have reversed many of the achievements made in the previous decade of reform. However, this program ultimately failed, leading the hardline leadership to backtrack and eventually abandon it.

By the late 1990s, there was a renewed emphasis on practical reform measures, and the momentum for reform intensified, especially during the years 1992-1993. Notably, significant reforms were implemented on January 1, 1994. Despite the initial setbacks caused by Tiananmen, the subsequent period saw considerable progress in economic reform and witnessed a surge in economic growth. Many challenging reforms that had previously faced obstacles were successfully adopted.

While the post-Tiananmen era saw cycles of retrenchment and subsequent growth, it was likely the last of its kind. After Tiananmen, with the removal of key reformers, the economic conservatives gained more control but ultimately proved to lack effective solutions. The period of 1989-1990 was the last time a significant group within the Chinese leadership could argue for strengthening the traditional planning system alongside measures to restrict marketization. However, the failure of these efforts highlighted that there was no viable alternative to a market economy and no coherent way to combine market forces with remnants of the old planning system in the long run.

In October 1992, during the Fourteenth Party Congress, China’s leadership unequivocally declared the objective of reform to be a “socialist market economy.” This was the first time such a commitment had been made. Simultaneously, China began dismantling the old planning system by reducing compulsory allocation and price controls. The strategy of “growing out of the plan” reached its logical conclusion, and the focus of reform shifted toward dismantling the plan and establishing a well-functioning market economy. Thus, the post-Tiananmen period represented both a familiar policy cycle and the beginning of an entirely new era.

The Communist Party Congress in October 1992 belatedly acknowledged that the ultimate goal of reforms was the transition to a market economy. Substantial progress was made between 1992 and 1994 in terms of price decontrol, the introduction of new economic laws, the launch of new tax and fiscal systems, and the unification of the foreign exchange rate. By the mid-1990s, the Chinese economy was close to completing the gradual marketization process that began in 1979 and was prepared to shift focus towards establishing a well-functioning market economy.

Conclusion

Naughton considers the Chinese dual-track approach as the third model of reform, distinct from the European rationalizing reform and the big bang reform. According to this model, transitioning to a market economy becomes a self-reinforcing process once certain core features of the command system are eliminated. As market-based economic activity grows, efficiency gains are realized, existing institutions are strained, and potential areas for further reforms become evident, providing policymakers with strong incentives to continue on the reform path. Therefore, ex-ante coordination or consensus on the overall goal among policymakers is not a prerequisite for a successful transition. Deviations from the ideal transition regime do not significantly impact the final outcome; instead, they consume additional time and resources due to suboptimal resource allocation. Gradual reform, as demonstrated by China’s experience, is feasible and serves as a viable alternative to the other two reform models. Importantly, the dual-track approach avoids the need for ex-ante coordination present in European rationalizing reform and minimizes short-run adjustment costs associated with the big bang reform.

Criticism

However, the book does not extensively cover the negative aspects of China’s reforms. One unintended consequence of the gradualist reform approach has been the rise of rent-seeking activities. The prevalence of corruption, abuses stemming from perverse incentives under the dual-track approach, and opportunistic behavior by local governments following piecemeal empowerment measures deserve more attention. Naughton acknowledges institutional development delays as a significant shortcoming of the reform process. The crucial tasks ahead include defining property rights and establishing full accountability in the investment system. Despite these drawbacks, the reviewer agrees with the main arguments of the Chinese reform model and believes that they will not impede China’s progress towards a well-functioning market economy.

My opinion

The book offers a detailed account of the economic reforms and political changes that took place in China, particularly focusing on the period before and after the events at Tiananmen Square in 1989. The book highlights the failure of the program of recontrol in the economy and the subsequent abandonment of those policies. It emphasizes that this period of retrenchment was followed by renewed growth and reform, leading to significant achievements in economic reform by the end of 1993.

Moreover, the text suggests that the failure of the hardline program made it clear that there was no alternative to a market economy and that the objective of reform shifted towards dismantling the old planning system and creating a well-functioning market economy. It also mentions the declaration of the objective of a “socialist market economy” by the leadership in 1992.

Overall, the book appears to provide a comprehensive analysis of the economic and political changes in China during the mentioned period.