From Mao to Market (review)

Andrew H. Wedeman's book makes the case for the preeminent importance of price reform and institutional conditions in China's rapid growth through the transition period and the relative completeness of the Chinese economic transition process. He does this by arguing that local protectionism was not merely an unintended consequence of Deng Xiaoping's reforms—and not just a minor inconvenience—but rather a "struggle of epic proportions for control over commodity production" between household farms, individual speculators, and producers and the local, provincial, and central governments. Indeed it was this sedition that ushered in the market economy and defeated command prices. Thus, local protectionism was key to propelling the Chinese economy past the "pitfalls of incremental reform" that have entrapped so many countries of Eastern Europe and the former Soviet Union, because it prevented the rise of early winners and their halting of the transition process due to the protection of their vested interests, as so eloquently described by Stiglitz, through rent seeking, endemic corruption, and influence peddling.¹

There are some key differences in the make-up of the Chinese economy under the planned economy that made this possible. Most important of these was Maoist self-reliance, which meant that during the reform process, at the provincial, county, and even township (commune) levels, there were "firms" ready to compete in the reawakened markets for agricultural produce, sideline products, handicrafts, and even manufactured goods. The Dengist preconditions that made this autarky possible were interregional trade and interdependence instead of excessive local self-sufficiency; partial de-monopolization of internal commerce, producing interregional markets; fiscal and property-rights changes that turned local governments into economic actors; and, finally, dual-track pricing, which produced numerous rent-seeking opportunities for local governments as economic actors. Additionally, export protectionism was a function of the post-1985 shift in the price scissors against agriculture and raw materials, once again in favor of industrial outputs, pitting local economic actors on the wrong side of the price scissors against those on the right side. In this climate of ready-made competition, we see a balancing of top-down forces—policy instruments—and bottom-up forces—grassroots actions—helping to propel reform forward. This gave rise to a more populist reform process, where the general population had a much greater vested interest in both reform and production than in many other transitional economies. I would argue that this greater buy-in was crucial—a point that Wedeman skirts around.

Wedeman stresses the crucial role of rent-seeking behavior by procurement agents in price manipulation. For example, theft by distribution agents would have been simple embezzlement without any significant impact on price, while attempts to monetize rent on the black market by manufacturing agents would only have had limited impact on output prices. It is therefore rent seeking by procurement agents that led to the rapid changes in input prices, as they monetized their rent by setting up their own local production facilities and selling the finished product on the open/black market, or by directly diverting the inputs onto the open/black market for commodities themselves, thereby capturing rents that would normally flow to the center. This caused the entire edifice of planned procurement and marketing to collapse, and left manufacturing and distribution agents no choice but to engage in a bidding war for the raw materials at their source (cf. p. 80).

As agriculture was at the root of this reform process, and agricultural price reform in the vanguard, it is most refreshing to see such a central place given to four key commodity price wars as an illustration of the see-saw between top-down and bottom-up forces in pushing forward both economic reform and economic growth—and arguably functioning very much like market adjustments toward equilibrium with first undershooting and then overshooting in the markets.

Wedeman poses two central questions. The first is "Why did China escape dysfunctional partial reform despite a political equilibrium that...