1 Official Chinese statistics undoubtedly overstate the pace of recent growth. Plausible downward adjustments would not alter this or other statements advanced here.

2 In textiles, for example, “fluctuations in international market prices directly affect domestic price movements.” See Yunliang, Dong, “This year's changes in domestic prices of textile products and their consequences,” Jiage lilun yu shijian (Price Theory and Practice), No. 10 (1994), p. 24.Google Scholar

3 One report mentions “bad debts” of “nearly 1 trillion yuan in 1994,40% of the country's total bank loan” ( Xiaozhong, Wang, “Bold, new moves needed to make headway,” China Daily, 9 January 1995, p.4).Google Scholar Another notices: “Statistics indicate that defaulted loans account for 11 to 15% of total bank loans” (“This year's reforms to focus on state enterprises,” China Daily, 30 January 1995, p. 4). A third states that “16.7% or 400 billion… in loans have been defaulted ( Shangwu, Sun, “Workers’ interest is priority,” China Daily, 17 January 1995, p. 4).Google Scholar Any of these figures is high by international standards.

4 “The ratio of liabilities to assets of China's State-owned enterprises is nearly 70:30… banks have to bear nearly all the operation risks of State enterprises, which would probably lead banks to bankruptcy” ( Ting, Tong, “Overseas funds aid state firms,” China Daily, 30 December 1994, p. 7).Google Scholar

5 This section summarizes ideas developed in Jefferson, Gary H. and Rawski, Thomas G., “How industrial reform worked in China: the role of innovation, competition and property rights,” Proceedings of the World Bank Annual Conference on Development Economics 1994 (Washington, DC: The World Bank, 1995), pp. 129–156.Google Scholar

6 Dhanji, Farid, “Transformation programs: content and sequencing,” American Economic Review, Vol. 81, No. 2 (1991), pp. 323–28Google Scholar, offers a particularly clear statement of this view.

7 International Monetary Fund et al., The Economy of the USSR: Summary and Recommendations (Washington, D.C., 1990), pp. 24–26, 32.Google Scholar

8 The Strategy of Economic Development (New Haven: Yale University Press, 1958).

9 Perkins, Dwight H.et al., Rural Small-Scale Industry in the People's Republic of China (Berkeley: University of California Press, 1977).Google Scholar

10 Zhongguo tongji nianjian 1994 (China Statistical Yearbook, hereafter Yearbook) (Beijing: Zhongguo tongji chubanshe, 1994), pp. 215, 375.

11 The data for the township-village sector include all enterprises, not just industry. See Thomas G. Rawski, “An overview of Chinese industry in the 1980s,” in Gary H. Jefferson and Inderjit Singh (eds.), Reform, Ownership, and Performance in Chinese Industry (forthcoming), Table 12.

12 The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993), p. 288. See also Thomas G. Rawski, “Progress without privatization: the reform of China's state industries,” in Vedat, Milor (ed.), The Political Economy of Privatization and Public Enterprise in Post-Communist and Reforming Communist States (Boulder: Lynne Rienner, 1994), pp. 27–52.Google Scholar

13 Chen, Kathy, “Chinese bureaucrats take hopes private,” Wall Street Journal, 26 January 1994, p. A10.Google Scholar

14 “China's central government decision on resolving several problems concerning the establishment of a socialist market economic system,” Renmin ribao {People's Daily), 17 November 1993, p. 1.

15 One report notes that “the biggest problem with mergers are the job losses.” Many of the enterprises acquiring loss-making firms “are only interested in obtaining the equipment and extra space,” which creates a “problem of redundancies.” See Zhiling, Huang, “Mergers revive loss-making firms,” China Daily, 16 April 1994, p. 4.Google Scholar

16 Naughton, Barry, Growing Out of the Plan: Chinese Economic Reform, 1978–1993 (New York: Cambridge University Press, 1995)CrossRefGoogle Scholar; Chen, Kang, Jefferson, Gary H. and Singh, Inderjit, “Lessons from China's economic reform,” Journal of Comparative Economics, Vol. 16, No. 2 (1992), pp. 201–225CrossRefGoogle Scholar; McMillan, John and Naughton, Barry, “How to reform a planned economy: lessons from China,” Oxford Review of Economic Policy, Vol. 8, No. 1 (1993), pp. 130–143CrossRefGoogle Scholar; and Gelb, Alan,Jefferson, Gary H. and Singh, Inderjit, “Can Communist economies transform incrementally?” NBER Macroeconomics Annual 1993 (Cambridge, MA: MTT Press, 1993), pp. 87–132.Google Scholar

17 Data for 1978 are from Yearbook 1994, pp. 361–62.

18 Chan, Anita, Richard Madsen and Jonathan Unger, Chen Village Under Mao and Deng (Berkeley: University of California Press, 1992), pp. 173, 191, 194.Google Scholar

19 Ran, Jiao, “Facing the challenge,” Zhongguo xiangzhen qiye (China Township Enterprise), No. 11 (1994), p. 27.Google Scholar

20 Wright, Tim, “Growth of the modern Chinese coal industry: an analysis of supply and demand,” Modern China, Vol. 7, No. 3 (1981), p. 325.CrossRefGoogle Scholar

21 Gary, Hamilton (ed.), Business Networks and Economic Development in East and Southeast Asia (Hong Kong: University of Hong Kong Centre of Asian Studies, 1991)Google Scholar; Whyte, Martin King, “The Chinese family and economic development: obstacle or engine?” unpublished paper, 1995Google Scholar; Rawski, Thomas G., “Social foundations of East Asian economic Dynamism,” unpublished paper, 1994.Google Scholar

22 Kahn, Alfred E. and Peck, Merton J., “Price deregulation, corporatization, and competition,” in Peck, Merton J. and Richardson, Thomas J. (eds.), What is To Be Done: Proposals for the Soviet Transition to the Market (New Haven: Yale University Press, 1991), pp. 21, 40.Google Scholar

23 Gerschenkron, Alexander, Economic Backwardness in Historical Perspective (New York: Praeger, 1965), chs. 1–2.Google Scholar

24 Albert O. Hirschman, “Reflections on economic development policy,” observes that “the search for components that have to be in place” continues even though “we should have noticed that whenever development occurs, it does so in the absence of one or several of these ‘required’ components or preconditions” (in Asher, Robert E.et al. (eds.), Development of the Emerging Countries (Washington, D.C.: Brookings, 1962), p. 41).Google Scholar

25 “Information and efficiency: another viewpoint,” in D.M., Lamberton (ed.), Economics oflnformation and Knowledge (HarmondswoTth: Penguin, 1971), p. 160.Google Scholar Peter Nolan advises me that this concept originated with Karl Popper.

26 Murphey, Kevin, Schleifer, Andrei and Vishny, Robert, “The transition to a market economy: pitfalls of partial reform,” Quarterly Journal of Economics, Vol. 107, No. 3 (1992), pp. 905–906Google Scholar; Komai, János, The Socialist System: The Political Economy of Communism (Princeton: Princeton University Press, 1992), p. 496.Google Scholar

27 Ericson, Richard E., “The classical Soviet-type economy: nature of the system and implications for reform,” Journal of Economics Perspectives, Vol. 5, No. 4 (1991), p. 25.CrossRefGoogle Scholar

28 Seers, Dudley, “Why visiting economists fail,” Journal of Political Economy, Vol. 70, No. 4 (1962), p. 331.CrossRefGoogle Scholar

29 Perfection is prohibitively expensive in industry as well. U.S. firms often neglect to cost out alternative manpower arrangements because the cost of doing so exceeds probable benefits (Piore, Michael J., “The impact of the labor market upon the design and selection of productive techniques within the manufacturing plant,” Quarterly Journal of Economics, Vol. 82, No. 4 (1968), p. 611).CrossRefGoogle Scholar

30 Fan, Qimao and Schaffer, Mark E., “Enterprise reforms in Chinese and Polish state-owned industries,” London School of Economics, Development Economics Research Programme, STICERD, CP No. 13, April 1991, p. 21.Google Scholar

31 Yearbook 1994, pp. 139, 145.

32 Sachs, Jeffrey, “Russia's struggle with stabilization: conceptual issues and evidence,” in Proceedings of the World Bank Annual Conference on Development Economics 1994 (Washington, D.C., 1995), pp. 57–80.Google Scholar

33 Leszek Balcerowicz and Alan Gelb, “Macropolicies in transition to a market economy: a three-year perspective,” in ibid. pp. 21–44.

34 North, Douglass C., “Institutions,” Journal of Economic Perspectives, Vol. 5, No. 1 (1991), pp. 97–112.CrossRefGoogle Scholar

35 Wong, Christine P. W., Heady, Christopher and Woo, Wing Thye, “Economic reform and fiscal management in China,” draft paper, May 1993Google Scholar; Tseng, Wandaet ai. Economic Reform in China: A New Phase (Washington, D.C.: International Monetary Fund, Occasional Paper No. 114, 1994), p. 23.Google Scholar Revenue data are adjusted to standard international definitions. Borrowing is excluded from revenue.

36 Jefferson and Rawski, “How industrial reform worked in China.”

37 Groves, Theodore, Hong, Yongmiao, McMillan, John and Naughton, Barry, “Autonomy and incentives in Chinese state enterprises,“Quarterly Journal of Economics, Vol. 109, No. 1 (1994), pp. 183–209.CrossRefGoogle Scholar

38 Buchanan, James M., What Should Economists Do? (Indianapolis: Liberty Press, 1979), p. 29.Google Scholar

39 Weiling, Liu, “Enterprise managers upset by ‘unfair’ regulations,” China Daily, 18 September 1993, p. 2.Google Scholar

40 “Text of regulations on transforming state enterprises,” U.S. Department of Commerce, Foreign Broadcast Information Service, Daily Report: China, 28 July 1992, pp. 27–36. On the limited impact of these reforms, see “Executives of major firms meet in Beijing to discuss the program of enterprise reform,” Zhongguo gongye jingji yanjiu (Research in China's Industrial Economics), No. 2 (1993), pp. 4–10.

41 Min, Cao, “State to cut 2m jobs in year-long slim plan,” China Daily, 17 December 1994, p. 1Google Scholar; Rong, Wang, “Guangdong to cut government staff by 40,000,” China Daily, 21 January 1995, p. 3.Google Scholar

42 Shutang, Gu and Xuelin, Cao, “Create the circumstances to overcome difficulties: on enlivening state enterprises to escape contradictions,” Jiage lilun yu shijian (Price Theory and Practice), No. 2 (1993), pp. 13–14.Google ScholarXiaohui, Huang, Changle, Yan and Xuesong, Ix>u, “Thoughts on the reform and development of large and medium-sized state enterprises,” Zhongguo gongye jingji (China Industrial Economics), No. 2 (1995), p. 50.Google Scholar These figures refer to redundant workers in all state enterprises, not industry alone.

43 “Statistics from 1980 to 1993 show that the profits tax, energy transportation funds and budgetary adjustment funds collected from State industrial enterprises averaged 86% of their total profits” (“State firm is base of economy,” China Daily, 21 January 1995, p. 4).

44 Haibo, Wang, “Now is the time to strengthen the unity between high speed growth and raising efficiency,” Zhongguo gongye jingji yanjiu (Research on China's Industrial Economics), No. 10 (1992), p. 26.Google Scholar

45 Cottrell, Robert, “A vacancy awaits: a survey of China,” Economist, 18 March 1995, p. S–10.Google Scholar

46 Jian, Fu, “Stockpiles hurt healthy development,” China Daily, 5 January 1995, p. 4Google Scholar, reports banks “decreasing or stopping credits to certain enterprises” with excessive stockpiles. According to Su Ning and Lu Zhongyuan, “Because the specialized banks day-by-day increase their attention to the safety, liquidity and profitability of their funds, some old enterprises seek for loans but find no suppliers, and face bankruptcy and closure” (“Fiscal difficulties of state industries and the way out,” Caimao jingji (Finance and Economics), No. 8 (1994), pp. 17–20.

47 “China's largest bankrupt enterprise, a freight container producer” in Wuhan, was sold for 42 million yuan to the International Business Section of the Hubei Branch of the Agricultural Bank of China, its main creditor. “Bankrupt enterprise sold to bank,” China Daily, 23 January 1995, p. 7.

48 In percentage terms, this backlog of on-the-job unemployed is no larger than Japan's cadre of three million corporate window-sitters (rnadogiwazoku). See Wood, Christopher, The End of Japan Inc. (New York: Simon & Shuster, 1994), p. 19.Google Scholar

49 Figures presented in Yunhe, Wu, “Economic setting advances,” China Daily, 28 January 1995 p. 4Google Scholar, imply that state enterprises account for two-thirds of outstanding debts at year-end 1994, but contributed only 43% of the 1993–94 increase. Debts of state firms rose by 38% during 1994, while debts of enterprises outside the state sector jumped by 263%.

50 Tseng et ai, Economic Reform in China, note (p. 29) that 80% of China's direct tax payments in 1991 came from state enterprises. In 1993, the state sector contributed 308 billion yuan to government revenues; revenue from collectives, private firms and “other” entities (including foreign-linked enterprises) was only half as large (Yearbook 1994, p. 215).

51 Profit rate is the ratio of after tax profits to the sum of net value of fixed assets and average value of quota circulating funds. Data come from Yearbook 1994, p. 399 and Zhongguo gongyejingji tongji nianjian 1993 (Statistical Yearbook of China's Industrial Economy 1993) (Beijing: Zhongguo tongji chubanshe, 1994), p. 66.

52 He Jun, , “State firms urged to finance education,” China Daily, 4 April 1995, p. 1.Google Scholar

53 International Monetary Fund et at, The Economy of the USSR, p. 32.

54 Ya-hwei Yang, ‘Taiwan: development and structural change of the banking system,” pp. 302–303 and Yung Chul Park and Dong Won Kim, “Korea: development and structural change of the banking system,” p. 195, both in Patrick, Hugh T. and Yung, Chul Park (eds.), The Financial Development of Japan, Korea, and Taiwan (New York: Oxford University Press, 1994).Google Scholar

55 International Monetary Fund et ah, The Economy of the USSR, p. 2.

56 Ohkawa, Kazushi and Rosovsky, Henry, Japanese Economic Growth: Trend Acceleration in the Twentieth Century (Stanford: Stanford University Press, 1973), ch. 8.Google Scholar

57 Sachs, Jeffrey and Woo, Wing Thye, “Structural reforms in the economic reforms of China, Eastern Europe, and the former Soviet Union,” Economic Policy, April 1994, pp. 102–103.Google Scholar

58 Perkins, Dwight H., “Economic systems reform in developing countries,” in Perkins, Dwight H. and Michael, Roemer (eds.), Reforming Economic Systems in Developing Countries (Cambridge, Ma: Harvard University Press, 1991), pp. 11–54.Google Scholar

59 Data for 1978 from Yearbook 1985, pp. 216, 305.

60 See, for example, Kornai, Janos, The Road to a Free Economy (New York: W. W. Norton, 1990), pp. 176–78.Google Scholar

61 For a summary, see Stiglitz, Joseph, Whither Socialism (Cambridge, MA: MIT Press, 1994).Google Scholar

62 Ibid. p. 261.

63 Laffont, Jean-Jacques and Tirole, Jean, “Privatization and incentives,” Journal of Law, Economics, & Organization, Vol. 7 (1991), special issue, pp. 84–105.CrossRefGoogle Scholar

64 Summarizing empirical comparisons of public and private firms producing similar products, John Vickers and George Yarrow observe that “the most important point to emerge is the importance of competitive conditions and regulatory policies, as well as ownership, for incentives and efficiency” (“Economic perspectives on privatization,” Journal of Economic Perspectives, Vol. 5, No. 2 (1991), p. 118.)

65 Newbery, David M., ‘Transformation in mature versus emerging economies: why has Hungary been less successful than China?” China Economic Review, Vol. 4, No. 2 (1993), p. 110.CrossRefGoogle Scholar

66 Stiglitz, Whither Socialism, p. 32.

67 Piore, “Impact of the labor market,” p. 605.

68 Sachs, Jeffrey, Poland's Jump to the Market Economy (Cambridge, MA: MTT Press, 1993).Google Scholar

70 Stiglitz, Whither Socialism, p. 176.

71 Aghion, Philippe, Blanchard, Olivier and Burgess, Robin, “The behaviour of state firms in Eastern Europe, pre-privatization,” European Economic Review, Vol. 38, No. 3–4 (1994), pp. 1327–49.CrossRefGoogle Scholar

72 Stiglitz, Whither Socialism, p. 186.