What’s driving China’s transition?
Justin Yifu Lin

EAST Asian economies seem to be rather special in terms of their development and transition performance since World War II. Development “miracles” occurred in the newly industrialized economies in East Asia and transitional miracles in China and Viet Nam.
As discussed, China, Viet Nam and other East Asian economies adopted a dual-track, gradual approach in their transition from centrally planned to market economies, which violated the basic tenets of the Washington Consensus and shock therapy. In effect, for its transition from a wartime economy after World War II, Japan also adopted a gradual approach, whereas Germany adopted a big-bang approach. In terms of development policies in Korea and Taiwan, both governments initially adopted a policy mix—including financial repression, overvalued exchange rates, deficit budgets and neglect of the agricultural sector—to support the development of labor-intensive primary manufacturing industries to substitute the imports of manufactured household products—referred to as “primary import substitution.” The policy package was typical in countries that adopted a comparative advantage-defying (CAD) strategy.
It was not, however, the intentional choice of the government in Japan and other East Asian economies to follow a comparative advantage—following (CAF) strategy in pursuit of economic development. Governments in East Asia also had a strong desire for the development of advanced capital-intensive industries—just like governments in other developing countries in the 1950s and 1960s. Their economies were, however, relatively small in population size and their natural resource endowments were extremely poor, which greatly constrained their ability to mobilize enough resources to subsidize the non-viable enterprises in the capital-intensive industries in the early stage of their development. In the early 1950s, Taiwan was influenced by the fashionable post-war development thinking and tried to protect and subsidize the development of heavy industries by using quantitative restrictions, tariff barriers and subsidized credits via strict regulation of banks and other financial intermediaries. The attempt, however, caused severe budget deficits and high inflation. The government in Taiwan had to give up the attempt and devalued its currency, liberalized trade and raised the real interest rate to encourage savings and contain inflation. Without preferential protection and subsidization, industrial upgrading in Taiwan followed closely the changes in its comparative advantages.
A CAD strategy is very inefficient. How long such a strategy can be maintained depends on the level of resources the government can mobilize to subsidize the non-viable enterprises and to support the investment in the prioritized industries. Resource mobilization is constrained by the natural resource endowment and population size. Contrasting with the case of “resource curse” in many parts of the developing world, the East Asian economies were lucky in the sense that their governments needed to be pragmatic in their policies and unintentionally follow a CAF strategy—even though their governments had strong motivations for nation building. China’s Confucian culture—which has a strong impact in East Asia-is pragmatic in nature. The core of Confucianism is zhongyong, the golden mean, which advises people to maintain balance, avoid extremes and achieve harmony with the outside, changing world. The political philosophy and policy principles promoted by the Communist leadership of Mao Zedong, Deng Xiaoping and Jiang Zemin, Hu Jintao are, respectively, shishiqiushi (finding truth from the facts), jiefangsixiang (freeing one’s mind from dogmatism), yushijujin (adapting to the changing environment) and hexie (harmony)—all reflecting the traditional Chinese culture of zhongyong.
Before I answer the question of whether East Asia’s success, especially its transitional experience, has a general implication for other developing and transitional economies, I need to provide an analysis of the failure of gradual reforms in Poland, Hungary and the former Soviet Union in the 1980s before their adoption of shock therapy. They also tried to reform their planning systems by giving state-owned enterprises more autonomy. Their partial reforms did not, however, have the positive results of the reforms in China and Viet Nam. A number of explanations are in order. First, unlike in China and Viet Nam-where state-owned enterprises, after fulfilling their plan obligations, were allowed to sell their extra outputs at market prices-the enterprises in Eastern Europe and the former Soviet Union were not allowed to set their prices. This price rigidity meant that excess demand and chronic shortages remained and the state producers did not have the incentives to allocate their products to more efficient users, who would then have been able to pay higher prices for their products.
Second, market entry by non-state enterprises was subject to severe restrictions. Production remained monopolized and international trade was centrally regulated. The existing state-owned enterprises therefore never faced real competition pressure from domestic or international sources and lacked the incentives to improve productivity.
Third, in the traditional Soviet-type system, to prevent managerial discretion under the distorted macro-policy environment, state-owned enterprises were not allowed to set their workers’ wage level. In the Chinese case, after the profit-sharing arrangement was introduced to the state-owned enterprises, wages were still controlled by the state. A worker’s wage would increase only if the enterprise’s profits exceeded a preset level. In Poland, Hungary and the former Soviet Union, however, partial reforms gave the enterprises the autonomy to set their workers’ wages. The weakening of state control on wages gave managers and workers an opportunity to increase their incomes at the expense of the state by absorbing whatever income flow and whatever assets they could obtain from state-owned enterprises. The state’s revenues were thus greatly curtailed.
Fourth, wage inflation caused the shortage to become even more acute; governments in Poland and in the former Soviet Union then tried to play a populist game. They increased the imports of consumer goods and forced a heavy burden of foreign debt on their countries. Because of this, instead of bringing continuous growth and a gradual transition to a market economy-as in China and Viet Nam-the partial reforms led Poland and the former Soviet Union to the brink of bankruptcy and hyperinflation.
The transition from a CAD-type economy to a market economy in socialist and developing countries proved difficult. A transitional economy’s institutions must be weak and there will be severe distortions in prices and production structures. Shock therapy-which characterizes a macro-first approach to building up the requisite market institutions-cannot deliver a rapid jump to a prosperous market economy. The experiences in China and other East Asian economies show that deep and extensive reforms are not required for dynamic growth at the onset of the transition.
As such, the crucial issue in transition is to have a strategy of sequencing reforms that identifies the most pressing bottlenecks and concentrates resources on the relaxation of binding constraints, removing the suppression of incentives and inspiring people to improve performance to achieve a better life through their own efforts. The IMF/World Bank’s macro-first reform approach might be appropriate for an economy in which market institutions are more or less intact and the structural imbalance is small. To use the famous analogy in a somewhat different version, “When the chasm is narrow, it’s all right to jump over it.” The stabilization program can achieve its goal immediately and the economy can soon operate in a normal market environment. In a country that has pursued a CAD strategy for a long time with severe distortions and a large number of non-viable enterprises, the chasm will be too wide and too deep. A jump without careful preparation will result in a disastrous fall. In such a situation, it is desirable to fill and narrow the chasm before making the jump.
The East Asian experience suggests that with a small change that provides the right incentives for people it is possible to unleash dynamic growth on a weak institutional base, leading to an eventual transition to a fully-fledged, well-functioning market economy. For a developing country that follows a CAD strategy, there must be distortions in the incentive system, which suppress individual efforts in production, and there must be industries that are consistent with the economy’s comparative advantages but which are repressed. The useful lessons from the gradual, dual-track, micro-first approach to transition in East Asia can be summarized as follows.The government can take measures to improve individual incentives by granting partial managerial autonomy and profit-sharing to farms and state-owned enterprises in order to improve incentives and allow the economy to move closer to the production frontier, which will induce a new stream of output growth. The government can introduce a dual-track price and allocation system to replace the old single-track plan. It can remove market entry restrictions to allow resources to be allocated increasingly by the non-state sector to the previously suppressed, more productive industries, while maintaining the quota obligations of state-owned enterprises and farms in order to secure adequate resources to subsidize the existing non-viable enterprises.
- When the products in a sector are allocated largely by the market track, it is time for the government to introduce full market liberalization in the sector. - The government should introduce continually the necessary regulations and laws to strengthen market institutions during the above process.

(The Daily Mail-Beijing Review Articles Exchange Item)



Muslim Govts must stop playing with fire
Dr Farish A Noor

THE tragic and violent killing of Benazir Bhutto leaves us with many unanswered questions. The question remains as to who was really responsible, and some radical Islamist groups have claimed responsibility and credit for her assassination. There is further speculation as to whether other non-religious actors and agents were behind the killing, and, of course, it remains to be seen (and discovered) as to how close or far the links between radical groups like the Lashkar-e-Tayeeba, Jama’atul Dawa and Harkat’ul Mujahideen and conservative factions in the Pakistani army really are.
For now, however, the murder of Benazir Bhutto serves as a painful reminder of how violent politics has become in so many Muslim countries, the very same countries whose citizens pride themselves on the ‘abode of peace’ and ‘Darul Islam’, as opposed to the ‘Darul Harb’ or ‘abode of chaos’ without. But a simple overview of developments across the Muslim world since the 1970s will indicate that hardly any Muslim country has even made the successful transition to popular representative democracy of any kind: Iran’s despotic Shah who ruled with an iron fist was finally ousted from power by student revolutionaries, only to open the way for a new wave of repression by the mullahs who instituted public hangings and the public execution of homosexuals, political opponents and those regarded as ‘deviants’ by the regime. Egypt’s Anwar Sadat was gunned down in public view by members of the Gama’at Islamiyyah, who likewise opted for the radical path of violence. From Morocco to Indonesia, radical Islamist groups have long since bid adieu to the norms of democratic participation — but not least simply because they have been denied the democratic option themselves.
The real crisis in the Muslim world seems to be a structural one and has less to do with Islam or theology. In Egypt for instance, a teeming population expanding at the rate of one million per year has created an economy that is not only unevenly developed but also unsustainable. Only three per cent of Egyptian soil can be used for agriculture, and even much of that is used to grow cash crops for export to the developed world: The poor fellaheen of the rural interior grow everything from lettuce to string beans, but these are destined for the dinner tables of developed countries instead, while the poor live on bread and bean stew. Faced with such stark economic realities, many Muslim governments have failed to do what is necessary — open the way for economic reform, careful management of resources and plan and save for the future. Instead grandiose projects have been the order of the day and corruption the norm. The net result is social antagonism which is hardly surprising to anyone, and the rise of workers movements and protests.
Here is where many a Muslim leader has failed doubly: Fearful of further democratic demands they have cultivated — since the 1970s — right-wing conservative Islamist movements as a counterweight to social progressives, unions and workers movements. Anwar Sadat’s great mistake was to favour the radical Islamists and use them as a means to blunt the criticisms of the progressive democrats of Egypt. But following the Camp David accord where he was seen as a traitor to the Arab cause and a lackey of both the USA and Israel, Sadat was assassinated by the very same radical Islamists his regime had cultivated and protected.
If it is ultimately proved that Benazir Bhutto was murdered by a radical Islamist, then this would be another case of the mouth biting the hand that fed it. For it has to be remembered that it was during Benazir’s tenure that the Taleban were cultivated, armed and protected thanks to her government’s reliance on such groups and her own co-operation with conservative Islamist parties and movements like the Jama’at’ul Ulema-e Islam (JUI) of Pakistan. The Islamists of the JUI who worked with Benazir’s government were the ones who were constantly campaigning for things like the implementation of Shariah Law, in a country where illiteracy is a problem that affects almost half of its population. It is one of the supreme ironies of modern Islamic history that the misogynistic Taleban were bred under the gaze of Benazir’s leadership, as she herself was a product of Western Oxbridge education. The lesson to be learned from all this is that Muslim governments need to address real economic problems with real economic and structural solutions rather than cut cards with the Devil and playing around with fire. If countries like Pakistan and Egypt today seem tottering on the verge of crisis with radical Islamists waiting in the wings, part of the responsibility for that is the role played by Muslim leaders like Sadat and Benazir in tolerating, and even using, these radical firebrands in the first place.

—Khaleej Times




Growing up in the Bhutto era
Huma Yusuf

THE shock and confusion I feel after learning about Benazir Bhutto’s assassination is strangely familiar. One incarnation of Benazir, a woman I thought I knew and wanted to be, died on September 19, 1996, when she was implicated in the death of her estranged brother, Mir Murtaza Bhutto, who was brutally shot, allegedly by police officials in a planned attack outside his home. I was barely 16, learning how to flirt and sneaking cigarettes at the first dance party I was allowed to attend, when the power was switched off and an eerily dark Karachi echoed with the sound of gunfire. In the coming days, opposition politicians, armchair pundits, and my parents grumbled about state terrorism, rampant corruption, and Pakistan’s devolution into a police state. This incident occurred during Benazir’s second stint as the prime minister of Pakistan. I continued to sneak cigarettes and marvelled at the ease with which icons can crumble.
Until 1996, Benazir had seemed like a real-life Wonder Woman, having expanded the conditions of possibility for Pakistani women for over a decade since her entry into politics. While the boys at school emulated cricketers, my girl friends and I would drape white scarves across our heads and try to imitate Benazir’s awkward accent when speaking in Urdu, a vestige of her privilege and power. And who could blame us? During her first term as prime minister, Benazir was a role model, the likes of which Pakistan will be hard-pressed to find again. In 1988, at the age of 35, she became the youngest person, and the first woman, to head a Muslim nation.
Too young to understand the dynastic politics that spurred her career, I saw in Benazir a vision of femininity that had yet to materialise in the world around me. She was a sister who outshone her brothers by carrying forth her father’s legacy; a daughter of privilege who knew the travails of solitary confinement; a woman who deigned to marry only after she was confident that her career would not stall; a young bride who kept her last name; a mother who did not let pregnancy get in the way of politics; a Harvard and Oxford graduate who could move with ease amongst the throng of truckers, farmers, and day labourers who attended Pakistan People’s Party rallies. The fact that Benazir happily assumed the responsibility of inspiring millions of women still recovering from General Zia ul Haq’s rigid and repressive regime became apparent to me when she presided over my high school’s annual athletics meet in 1990. All the young girls who had won races earned a wink, a warm hug, or had words of wisdom whispered in their ears. To this day, I regret not having run a wee bit faster.
Over the years, though, I have found my enthusiasm for Benazir slowing down. Her charisma suffered, owing to well-circulated jokes about conjugal visits during her husband Asif Zardari’s eight-year imprisonment. She disappointed Pakistani women when she failed to repeal the Draconian Hudood and Zina Ordinances that continue to curtail the rights of Pakistani women, especially those who have been raped. Her glamorous visage — well-cut shirts, stark-white scarves, a slick of red lipstick — had been supplanted by images of gore from Mir Murtaza’s death, violent political clashes in Karachi, and, of course, her own untimely demise in Rawalpindi. I still mark the day that my admiration for Benazir mellowed into ambivalence as the beginning of adulthood. I suspect her tragic death will similarly age the Pakistani nation.—Khaleej Times