Economic Analysis Series No.137
Transition to Market Economies in Asia

December,1994
  • Yasutami Shimomura
  • Akira Kohsaka
  • Akifumi Kuchiki
  • Osamu Nariai
  • Nobuki Sugita
  • Shingo Hosaka
  • Tsuyoshi Mihira
  • Hiroshi Tsuchikawa
  • Motoi Tsunekawa
  • Munekazu Uchikawa

(EXECTIVE SUMMARY)

1 Introduction

The purpose of this paper is to analyze the process of the transition to market economies in Asia. While there are comprehensive studies dealing with the region of Eastern Europe and the former USSR, the number of studies concerned with an overview of transitional attempts in Asia is rather limited. Instead, most of the research has dealt with specific transitional economies, such as China and Vietnam. Our central purpose in this paper is to identify the characteristics of transition in Asia, compare them with those of Eastern Europe and Russia, and draw lessons for the improvement of transition strategy in general. This study focuses on five Asian countries; China, Vietnam, Laos, Cambodia, and Mongolia. It was not possible to include the five republics in Central Asia due to lack of reliable time-series data on their macroeconomic indicators. Nor did we include Myanmar, as it is still at a very preliminary stage in its economic reform process.

2 The Conceptual Framework of Transition

The subject under discussion is "transition to a market economy", a movement from a centrally-planned to a market-based economic system. This process is often called "economic reform". International institutions such as the IMF and the World Bank prefer to use the term "market-oriented reform". When we use such terms as these, we must be aware of the fact that economic reform is a much broader concept than transition. It therefore seems useful to clarify the definitions of these concepts at the outset, in order to prevent confusion.

Economic reform usually takes place within one of the following four frameworks:

(1) Reforms in the economic systems of developed countries

These are attempts at changing the economic systems of well-developed market economies to more efficient systems through the enhancement of the market mechanism. This type of reform was strongly advocated during the 1980s by the Thatcher administration in the UK and the Reagan administration in the US.

(2) Structural adjustment in developing countries

Since the late 1970s, many developing countries, in accordance with the suggestions of the IMF and the World Bank, have removed or reduced excessive regulation and government intervention in order to overcome macroeconomic imbalances. This is another strategy aimed at enhancing the market mechanism.

(3) Economic reform within the framework of a centrally-planned economy

This type of reform is reflected in plans for efficiency improvement or production increases under an existing centrally-planned system through measures such as the introduction of profit incentives and the delegation of power to factory managers. The basic philosophy is to combine the market with the plan with the dominance of the latter (plan). A typical case of this type of reform was seen in the strong movement termed "market socialism" in Eastern Europe in the late 1960s.

(4) Transition to a market economy

A distinct feature of this type of reform is the transformation of the 'rules of the game'from a command system to the market mechanism. This feature is not found in the other types of economic reform described above.

In practice, it is often quite difficult to define the borderline between economic reform within the traditional framework (Type3) and transition to a market economy (Type4). However, we believe it is important to keep this difference in mind, particularly so when dealing with transition strategies, for example the comparison between 'shock therapy' and 'gradualism'. In many countries, reforms begin as Type3 and subsequently develop into transitions. Under these circumstances it is not easy to accurately determine when the transition in a particular economy was initiated.

3 Diversity within Asia

In reviewing the transitional economies of Asia, the most striking aspect is their diversity, the major components of which are described below.

3-1 Political and Economic Reform

In China and Vietnam, the dominance of the respective Communist parties has been maintained despite extensive economic reforms. In contrast, Mongolia has changed its political system completely in parallel with economic reform and introduced parliamentary democracy. Cambodia also adopted a change in its system of governance; it reverted to being a Kingdom.

3-2 Initial Conditions

The socio-economic conditions prior to the beginning of reform differed significantly from one country to another.

(1) Duration of the Centrally-Planned System

Mongolia, the second oldest communist country, introduced a centrally-planned economic system just after World War II. In contrast, a command economy was adopted in the southern part of Vietnam in 1976, only a few years before the beginning of attempts at reform, which subsequently developed into transition to a market economy. The length of the centrally-planned system is considered to correlate closely to its penetration, the degree of price distortion and, as a result, the degree of reform necessity. As an indicator of the penetration of the principle of a centrally-planned system, let us adopt the share of the labor force working in state enterprises. This figure was 18.8 percent in 1979, when China began its attempts at reform. In Mongolia in 1990, just before the beginning of reform, the figure was 70.1 percent (source: World Bank). In Russia in 1985, before Perestroika, 93.1 percent of total employment was in state enterprises (Sachs and Wing, 1994). It is therefore reasonable to conclude that the depth of reform required in Russia and Mongolia is greater than that in China.

(2) Legacy of the Pre-Command Economy Era

The coastal regions of China and the southern part of Vietnam operated market economies of their own before their leaders established centrally-planned systems, although these were not well developed. It is assumed that the memories of the rules of the market game experienced previously were maintained in these societies, either consciously or unconsciously, until the onset of later reforms. These countries were fortunate in being able to utilize these assets when they began their attempts at reform.

On the other hand, Mongolia moved from being a nomadic society to the adoption of a centrally-planned system without the benefit of experiencing a market economy. This serious handicap can also be observed in the former Soviet Union, including the republics of Central Asia. In these countries, adjustment to the new and unfamiliar rules of the market economy was very difficult.

(3) Industrial Structure

Another important feature of transitional economies in Asia is the greater influence of agriculture, particularly in comparison with Eastern Europe and Russia. While in China in 1978 farmers accounted for 69 percent of the total labor force, the share was only 14 percent in the former USSR immediately prior to Perestroika (Kondo and Wada, 1993 and Sachs and Wing, 1994). This difference between the industrial structures played an important role as one determinant of the transitional strategies adopted in these two regions.

(4) The International Environment

Most of the transitional economies in Asia were closely related to the Council for Mutual Economic Assistance (CMEA). In particular the dependence on the CMEA was of great significance in the case of Mongolia-90 percent of its total trade during the 1980s was with the CMEA (source: IMF), and the CMEA was by far the largest aid donor. The role of the CMEA was also significant in Vietnam, although to a lesser extent-until 1988 trade with the CMEA accounted for more than 50 percent of its total and the CMEA was easily the largest source of capital flows. These economies were therefore inevitably severely affected when the CMEA collapsed in the late 1980s. At the same time, most Asian transitional economies were able to take advantage of their close geographical proximity to the dynamic economies of East Asia (Japan, the Asian NIES and ASEAN). The merits of this are especially apparent in China and Vietnam. After the adoption of open-door policies, China and Vietnam became integral parts of the rapidly- developing intra-regional networks in East Asia. In particular, the connections with overseas Chinese and Vietnamese residents enabled these two countries to increase exports and attract foreign investment. They also enjoyed the advantages of being latecomers, learning the effectiveness of an outward-oriented development strategy from the experiences of their neighbouring predecessors. Thus they were able to adopt tried and proven methods to realize outward-oriented growth, taking advantage of the external economies of dynamic develop- ment in the region. Unfortunately, Mongolia is more physically remote from the spreading dynamism in East Asia and so has not benefited to the same degree from these factors.

4 Common Features of Asian Economies in Transition

Notwithstanding the diversity within Asia described above, at least two common features can be observed among the Asian economies in transition (with the exception of Mongolia and the former Soviet republics of Central Asia). These are their improved macroeconomic performance and the mode of economic reform adopted.

4-1 Better Economic Performance

The macroeconomic indicators of transitional economies in Asia compare favourably with those of Eastern Europe and Russia. This is particularly apparent in terms of economic growth and export growth. During the period 1980-1992,China recorded annual growth rates of 9.1 percent and 11.9 percent in GDP and exports respectively (source: World Bank). These figures were among the highest in the world. Between 1981 and 1990, Vietnam's average GDP growth rate was 7.1 percent (source: ADB). This economic growth has accelerated in the 1990s and Vietnam has shown rapid and consistent export growth. Lao PDR and Cambodia have also maintained positive growth rates. On the other hand, the Mongolian economy has suffered from a decline in production since the introduction of reform measures. This phenomenon has also been observed in Eastern Europe and Russia, although some Eastern European economies, notably Poland, have begun to experience a recovery in this regard. Although the Vietnamese economy once suffered from hyper-inflation, this has recently been brought under control and is now under 10 percent, a considerable achievement. Inflationary pressure has been chronic in China since the mid-1980s, and there have been forced periods of stabilization brought about by belt-tightening policies. However, it should be noted that despite such pressures, the price situation in China has been much more stable than has been the case in Eastern Europe and Russia. One very striking contrast between Asia (again with the exception of Mongolia) and Eastern Europe and the former USSR is the fact that the economic reforms in the former were accompanied by increases in production, whereas the latter economies suffered serious declines in GDP.

4-2 Mode of Economic Reform

Such countries as China, Vietnam and Lao PDR spent considerable time conducting reforms within the framework of a centrally-planned system before shifting to explicit transition-type reforms and policies. The smooth and continuous shift from the long prepara- tory stage to the overt transition to a market economy is an important characteristic feature of transition in Asia. In Mongolia and Russia, the preparatory stage (Perestroika in Russia) was very short, and in Eastern Europe the continuity aspect has been of lesser importance, as attempts at "market socialism" were severely suppressed for political reasons.Similar reform measures were initiated in China, Vietnam and Lao PDR around 1980. A common component of which was the attempt to increase motivation in the agricultural sector by; (i) restoring the family as the basic unit of production-replacing the commune system of socialized agriculture, and (ii) raising procurement prices of major agricultural products. The following section discusses the economic reform policies adopted by these countries in greater detail.

5 Reasons for Improved Macroeconomic Performance

Although initial conditions and a favourable international environment are clearly important factors in the positive economic performances in China, Vietnam and Lao PDR, these two determinants do not entirely explain the progress made in these economies, particularly in China and Vietnam. Another crucial element has been the mode of reform in these countries. This section identifies and describes three aspects of reform which played significant roles in their successful development-gradualism, the priority given to agriculture, and the slow pace of privatization of state-run enterprises.

5-1 Gradualism

As has previously been pointed out, the transitions to market economies in China, Vietnam and Lao PDR were preceded by long periods of reform within centrally-planned economic frameworks. Chinese leaders carefully avoided using the term 'market economy' until 1992, having previously advocated an economic system which combined central planning and market forces. In Vietnam, the 'Doi Moi' movement, which signalled a clear commitment to abandon the centrally-planned system, came five years after the introduction of agricultural reform. In addition to the length of time taken, the reforms in these countries shared another unique feature-the absence of a clear reform strategy or blueprint. Instead, a variety of measures, often partial ones, were tried. According to the World Bank (1992), Chinese reform has consistently maintained this feature, and in 1993 the IMF observed that in Vietnam piecemeal reform measures were taken until "the launching of a bold and comprehensive program of structural reform in march 1989 (under the guidance of the IMF)". Critics argue that this style of reform has fundamental shortcomings, the most serious of which are a lack of logical consistency in the measures taken and the possibility of provoking anti-reform political groups. On the other hand, this pragmatic approach allows people sufficient time to adjust to newly-introduced rules and modes of behaviour. In addition, the government has the opportunity to modify aspects of the reform program based on the results of experimentation. The experiences of China and Vietnam suggest that piecemeal reform measures, if adopted carefully, can contribute to progress in macroeconomic performance.

5-2 The Priority of Agriculture

In China, Vietnam and Lao PDR, the first efforts at reform were made in the agricultural sector. A 'contract responsibility system' was introduced with the objective of restoring the family as the basic unit of production. At the same time, procurement prices of agricultural products were raised. The purpose of these measures was to give incentives to farmers who were (and remain) the largest group in the labor force. The improved agricultural production (Chinese agricultural production grew at an average annual rate of 5.4 percent from 1980 to 1992, and Vietnam became the third largest exporter of rice in the world), provided a firmer basis for subsequent stages of reform, as these economies were basically agricultural ones. In China in particular, capital accumulation in rural areas led to the evolution of town and village enterprises which served as a driving force for rapid growth. If reforms had been initiated in all sectors of the economy simultaneously (as was the case in Russia and Mongolia), farmers would have experienced a deterioration in their terms of trade from the beginning.

5-3 Slow Privatisation of State Enterprises

Most transitional economies are faced with serious problems with regard to state enterprises, which form an essential part of any centrally-planned system. In China and Vietnam, the governments have not attempted a drastic transfer of ownership from the state to the private sector. This contrasts sharply with the approach taken in Mongolia where, as in Eastern Europe and Russia, ambitious mass privatization was attempted through the provision of vouchers or coupons. Instead, China and Vietnam focused their attention on promoting the private sector on the one hand, and establishing autonomous management in state enterprises on the other. Although the slow progress of privatization in these countries has been widely criticised, we believe that perhaps too much importance has been placed by the critics on the rapid transfer of ownership. As the sustained growth of private investment (including direct foreign investment) can be anticipated, the seriousness of the problem of state enterprises in relation to the whole economy is likely to be progressively reduced. In other words, the approach adopted by China and Vietnam has been to 'contain' the problem of state enterprises, preventing their financial collapse. Although the situation regarding state enterprises is quite serious, particularly in China, the pragmatic approach to this area described above does provide a reasonable possibility of a 'soft landing', as private investment is very active. At the very least, this approach has helped to reduce the likelihood of social unrest due to the restructuring of state enterprises.

6 Strategy: Shock Therapy vs Gradualism

In the study of economic transition, one of the most important issues has been the choice between two alternative approaches regarding the speed and sequence of transition reforms. These are 'shock therapy' (also termed the 'big bang' or 'radical approach') and 'gradualism' (or 'conservative approach'). Some experts argue that this choice is a central policy issue; in 1993 the IMF stated that, "It is important to establish whether a gradual or big bang approach is to be pursued". In 1990, reports prepared by four international institutions (the IMF, IBRD, OECD and EBRD) on the economy of the former USSR strongly recommended that a radical approach to transition should be taken, arguing that "the conservative approach would certainly fail". However, the polarization of these two approaches is not, we believe, the most appropriate way to view strategic options for reform. Instead, we should combine elements of these two methods to form a third approach. In some fields, the introduction of radical and drastic measures on all fronts is crucial, a typical example being the control of hyper-inflation. In other fields however, for instance state enterprise reform, a patient, step by step approach is preferable. A third category of issues, which would include price liberalization, financial reform, and trade liberalization, may offer a real choice between rapid or gradual implementation (eg. covering all major commodities or adopting a 'two-track pricing system'). This combined approach can provide a wider range of options for policy-makers in transitional economies and contribute to more effective reform strategies. The results of attempts at transition in Asia suggest that gradualism definitely has advantages, and that its effectiveness should not overlooked.

7 A 'Pluralistic Approach' to Transition

What kind of market economy will be realized once the transition process is complete? Although this question has not been overtly taken up by the IMF and World Bank, in our view it is a crucial issue, since the course of transition, i.e. the contents of reform programs, are determined by three elements: (i) initial conditions (ii) speed and sequence of transition and (iii) the ultimate goal of the movement from centrally-planned economies. Recent studies have established that there are various types of market economy. These include the American model, that of Continental Europe, and the Japanese model. If there existed a single type of market economy, the path of transition may be relatively simple. However, once we acknowledge that there are various types of market economy, decisions regarding the contents of reform programs become more complex. At the same time, broader alternatives can be offered to policy makers in transitional economies. An example of this is the role of directed credit with subsidized interest rate. If the goal is to realize a market economy which is similar to that of the United States, this policy would be an unacceptable method of financial reform. However, if the aim were to establish a Japanese-style market economy, such a policy could become an important component of the financial system. We therefore propose a pluralistic approach to transition, one which is based on the recognition of multiple market economy models. The resulting broader range of options would, we believe, lead to more effective reform strategy.

REFERENCES

IMF, Vietnam-Reform and Stabilisation, 1986-92, 1993

---, IBRD, OECD, EBRD, The Economy of the USSR, 1990

Kondo, Kuniyasu&Wada Haruki (Eds), Perestroika to Kaikaku Kaiho (Reforms in Post -Maoist (China and Perestroika), University of Tokyo Press, 1993

Sachs, J&Wing Thye Woo, Structural Factors in the Economic Reforms of China, Eastern Europe, and the former Soviet Union, Economic Policy, April 1994

World Bank, China-Country Economic Memorandum: Reform&the Role of the Plan in the 1990s, 1992


Structure of the whole text(PDF-Format 5file)

  1. page16
    Executive summary別ウィンドウで開きます。 (PDF-Format 299 KB)
  2. page23
    Part 1  Theoretical and Empirical Issues of Transitional Economies
    1. page23
      Chapter  I   Conceptual and Theoretical Framework
      1. page23
        1  Introducution
      2. page38
        2  Fundamental Issues for Transition Strategies
      3. page51
        3  Transition Strategies
      4. page63
        4  A "Pluralistic Approach" to Transition
    2. page70
      1. page70
        1  Introducution
      2. page70
        2  Background
      3. page71
        3  Historical Review
    3. page99
      Chapter III  Lessons of the Experiences in Asia
      1. page99
        1  Diversity
      2. page101
        2  Determinants of Macroeconomic Performance
  3. page105
    Appendix
  4. page107
    1. page107
      Chapter  I   Cambodia
    2. page129
      Chapter II   People's Republic of China
    3. page174
      Chapter III  Lao P.D.R.別ウィンドウで開きます。(PDF-Format 413 KB)
    4. page200
      Chapter IV  Mongolia
    5. page217
      Chapter V   Vietnam
    6. page242
      Figure別ウィンドウで開きます。(PDF-Format 443 KB)
  • 1-6-1 Nagata-cho, Chiyoda-ku, Tokyo 100-8914, Japan.
    Tel: +81-3-5253-2111