China's Macroeconomy in the 1980s: The impact of reform on structure and performance

Abstract

This paper presents a descriptive and analytical study, from a macroeconomic perspective, of the impact of economic reform in China on the structure and performance of the economy. The first section briefly reviews some of the problems associated with the macroeconomic analysis of a reforming administered economy. The second section discusses the major reforms in agriculture, industry, trade and finance and examines changes in the supply side structure of the economy. A related chronology of major events over the period 1978 to 1989 is contained in Appendix A. The third section examines the performance of the economy and presents several important macroeconomic time series. The economy's growth performance and the increase in factor productivity is examined. The problems of monetary growth, excess demand for consumer goods and retail price increases are analysed. The fourth section examines two different theories which attempt to explain the nature of the relationship between money and prices in China and whether economic reform changed this relationship significantly. A final section offers some conclusions. Appendix B is a simple economic analysis of the implications of the twotier pricing system in industry which came into evidence in early 1985. It shows that there are two forms of such a system and that existing western interpretations have concentrated on the 'optimistic version' ignoring the possible effects of an alternative system which Chinese economists criticize. A testable economic implication of this alternative system, is derived. Appendix C shows the money supply process in China in detail, identifying the main causes of narrow monetary growth during the reform period.