"Understand, so that you should believe, Augustine's words on faith and reason, might apply to the West's attitude towards Chinese economic reform: for some, the reform process started with Mr Deng Xiaoping and has proceeded without hitches to make China a formidable machine ready - and probably willing - to conquer the world; for others, China's reforms are too timid to save it from economic and social collapse, which lasting disregard for the prescriptions of the Washington consensus must inevitably bring about. Both views contain a grain of truth, and it needed Professor Wu's book to put them both in perspective.

Professor Wu, one of China's most respected economists, graduated from Fudan University in 1954, and has been an influential actor in the reform process for more than four decades, both as an advisor to Government and as a teacher and researcher; he has played a role in most of the controversies engendered by the reform process; he summarizes his position, not always popular in government circles, in the introduction to his book: "With our common effort, an orderly and sound market economy based on the rule of law will be established in China and the country will develop into a land of social justice and common well-being.

Reform in China started in the mid-fifties, almost as soon as it was decided - as it had been in the Soviet Union, after Lenin's initial hesitations- that a centrally planned economy was the inevitable complement of a communist regime. By 1956, during the period called "letting a hundred flowers blossom and one hundred schools of thought contend the first criticisms of the inefficiencies of the central plan were heard; unfortunately - as was also the case in the Soviet Union- it was believed that administrative decentralization was the answer: decision powers were transferred to lower levels of the administration following Mao's On the Ten Major Relationships (1956); but, without serious budget constraints and deprived of the information carried by the market price system, the decisions of lower-level units resulted in chaos: that was the institutional underpinning of the Great Leap Forward. Even though a new wave of centralization corrected the worst excesses of the period, the notion that administrative order was the only way to allocate resources under socialism was to hamper the process during this first, and longest, stage of reform (1958-1978).

The second stage (1979-1993) is labeled that of "incremental reform: at first - under the ideological influence of reforms taking place in Yugoslavia and Romania- reform centered on the state-owned enterprises (SOEs); but, without market competition and a price system reflecting relative scarcities, reform efforts could not go far; after some hesitations, the emphasis switched from "inside the system (SOE reform) to "outside the system, promoting growth in the periphery of the state-owned industrial sector: encouraging the growth of non-state enterprises, setting up the household contracting system for agricultural production, opening up the economy through the creation of special economic zones. The result was the first big push in China's growth; while it avoided the pitfalls of excessive concentration on public enterprise reform, as was the case in other transition economies, it led to the establishment of a dual-track system, which granted non-state enterprises long-deprived access to material and financial resources at the cost of encouraging corruption and rent-seeking behaviour. Furthermore, this period made it plain that the tools of macroeconomic control were lacking, and that rapid growth was making the economy much more unstable.

The third stage of reform, started in 1994, is labeled that of "over-all advance; its ideological foundations date from 1984, when the 3rd Plenary Session of the 12th Central Committee of the Party declared that "the fundamental task of socialism is to develop social productivity; but a period of hesitation followed, culminating in the reaction to the events of Tiananmen (June, 1989); it is not until November, 1993, that a Decision of the 3rd Plenary Session of the 14th Central Committee of the Party stated that reform was to be carried on all fronts, and endorsed a blueprint for major reforms in fiscal and tax policies, banking, foreign exchange, enterprise and social security: the major institutional changes needed for stabilization policies are put in place.

To show how much remains to be done, the second part of the book is devoted to sector reform: agriculture, SOEs, the financial system, the tax system and the trade regime. Lastly, the third part covers macro issues: the social security system, macro policies, and the role of the State. In this third part, most of the questions that Westerners pose about the future of the Chinese economy are addressed in a competent, thoughtful fashion.

So much for the contents of reform. Two other perspectives are worth noting: first, the account of the political controversies surrounding reform: although these are not described in detail, the main names - and their fortunes- are there, and provide clues to the interested reader. Second, the intellectual landscape surrounding reform is described in a vivid way, as surveyed by a scholar: Professor Wu makes parallels between the process in China and that taking place in other socialist economies, and shows how China learned from the efforts of others; he shows how the "logic of the market imposed itself after the failure of piecemeal reform; precisely why half-way measures were often counter-productive, and thus lent political capital to those opposing liberalization. For those belonging to the generation that saw central planning presented as a viable alternative to a market-based economy, this is more than just interesting reading.

The book originated in notes for the lectures delivered in Chinese by Professor Wu; in their raw form, they would have been hard to appreciate by Western readers. Fortunately, Professor Jianmao Wang has provided us, not only with an outstanding translation, but also with summaries of the main documents and extensive references to sources, hitherto unavailable to all except sinologists. In its present form, Professor Wu's book gives non-specialists the opportunity to gain a genuine understanding of the Chinese economy; as such it is likely to become the definitive work covering this essential period of China's history.

 

Alfredo Pastor is Spanish Chair Professor of Economics at CEIBS.