China

Transition from a Planned Economy

China’s movement from a planned economy to a market economy is littered with good intentions. Compared to transitions in Central and Eastern European countries, it has been relatively smooth. Aside from the 1989 Tiananmen Square demonstrations, little serious political or social upheaval can be attributed to the economic transition. Yet, during similar transitions, the Soviet Union and Czechoslovakia disintegrated politically. The early stages of market economy transitions in Central and Eastern Europe saw a sharp drop in output and employment, and increased social and political instability. In contrast, the Chinese economy experienced an annual 9% rise in output during the past 15 years of transition. Given such results, some experts see China’s reform as a model for other socialist countries.

The origins of China’s market reforms can be traced back to the decades from 1957 to 1978, when the centralized planning system averaged only 5% annual economic growth. The sluggish pace of growth eroded the government’s credibility for several reasons. One was the obvious and growing disparity between the Chinese standard of living and that...