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

Reviews 219 Barry Naughton. Growing Outofthe Plan: Chinese Economic Reform, 19781993 . New York: Cambridge University Press, 1995. x, 379 pp. Hardcover $49·95> isbn 0-521-47055-2. Barry Naughton describes his as a narrative approach to China's economic reform , and good storyteuing this is. The bookwinds through policy debates, the measures adopted, and their outcomes—expected and unexpected, and compels even those famüiar with the Chinese reform experience to turn each page and find out what happens next. As Naughton notes, China's reforms have been reactive and improvisational; yet without a grand design ex ante, an ex post coherence has emerged. Naughton succeeds in Uluminating this coherence and in capturing a feeling of the momentum that has propelled reform forward. The book is selective in the aspects ofreform treated. The focus is on industry and macroeconomics. Agriculture and international trade enter only tangentiaUy . Such microeconomic issues as the nature ofproperty rights and incentives and the efficiency ofstate enterprises receive only cursory treatment. Perhaps more compromising to a full understanding ofreform dynamics, employment and income distribution are also given short shrift. The book is organized around three time periods. The first, 1979-1983, began with rationalizing reforms aimed at making the socialist system work better. The intent was to reorient development strategy foUowing the failure ofan overly ambitious post-Cultural Revolution investment program. Instead oftaxing agriculture to support industrial development, growth within agriculture would be stimulated with better incentives. Relative prices were shifted in agriculture's favor , and rural collective industry was aUowed to expand into processing activities. Initially, a return to family farming was permitted only in the poorest areas. This was, however, "profoundly subversive," suggesting as it did fhat socialism need only apply in areas that could generate an extractable surplus for the state. From this crack in fhe edifice, institutional change in agriculture took off, whüe industrial -sector reform initiatives of a far more fundamental nature foundered. The reforms in industry permitted profit retention and die direct marketing of aboveplan output, measures that would prove key to reform of the state sector later on but which in the environment ofthe early 1980s had little effect on enterprise behavior . The real boon to transforming the industrial sector was the unanticipated growth ofrural industry. Widespread entry brought competition to the market-© 1997 by University place and eroded the state's easy monopoly profits. ofHawai'iPressfhe second period ofreform, 1984-1988, marks the "growing out ofthe plan" phase. Masterminded by Zhao Ziyang, the strategy was to limit the plan domain, foster entry ofnew firms, and improve incentives widiin the state sector. Tacidy 220 China Review International: Vol. 4, No. 1, Spring 1997 anyway, the goal was to buUd a market economy. Market prices were freed and prices within the plan were graduaUy adjusted toward parity. That the in-plan price adjustments be only gradual was critical to a state-sector reform program based on long-term contracting. State enterprise managers would commit to meeting given profit remission targets expecting the plan component oftheir operations to remain reasonably stable, thus aUowing their energies to be focused on market-oriented activities to increase retained profits. The state's stance vis-à-vis enterprises was fundamentaUy altered by these reforms; rather than directing production , it was promoting entrepreneurship. Still, the system rested on one-toone negotiations between enterprise and state to set the terms ofeach management contract. Repeated efforts to formalize capital charges and tax rates, and fhereby establish uniformly applicable rules, faded. The innovative second period ofreform ended with spiraling inflation and the faU ofZhao Ziyang from power. There foUowed an attempt to recentralize decision making by enlarging the scope ofplanning, reimposing wage and price controls, and strengthening state enterprises. Macroeconomic stabUity was restored but at the cost ofdrastically slowed growth. By 1992, reform was back on track, and by fhe end of1993 when Naughton's tale closes, "growing out of the plan" had reached a conclusion as the plan itselfwas being chipped away. Plan prices were being decontroUed, enterprises were being converted to "joint stock" companies, and workers were being employed on a contract basis. On die first day of1994, the exchange rate was unified and a new...