China's economic reform: the next step

Abstract

China's economic reforms succeeded in decentralizing decision making power down to the local and enterprise level. This decentralization has permitted a vibrant non-state sector to emerge alongside the state sector. Growing out of the state plan accounts for much of China's spectacular economic growth. However, productivity in the state sector has experienced little improvement. One can trace recurrent macroeconomic imbalances and inflation to the state policy to provide cheap credit to cover the huge losses sustained by state-owned enterprises. Attempts to reimpose controls to cool down an overheated economy repeatedly have halted the momentum for economic reform. Failure to introduce banking and financial reforms threatens future growth of the non-state sector. The success of such reforms depends critically on efforts to restructure and privatize state-owned enterprises. Growing out of the state plan requires officials to adopt an explicit policy to stop supporting the losses in the state owned enterprises.