Can China's gradualist reform strategy be applied in Eastern Europe?

This paper seeks to lay out the strategy of China's developmental approach to transition ‐ how the strategy was developed and why it has worked so well for China. It then goes on to answer the arguments of Sachs and Woo (1994, 1995, 1996) that China's approach to transition has no relevance to the nations of Eastern Europe and the former Soviet Union (EEFSU). The paper begins with a review of China's agricultural reforms. The initial policy changes, as laid out by the Third Plenum in December 1978, were very timid, maintaining the commune and production team structure. But through a process of local experimentation and feedback to the center, the Household Responsibility System eventually became the national standard and free markets in everything but land were established. Neoclassical economists have always insisted that the reform process in the formerly socialist economies must begin with simultaneous stabilization, price and trade liberalization and currency convertibility. But China has moved very slowly in these areas and has done spectacularly well. Sachs and Woo's answer is that China is a special case because of the very small size of its state sector; according to them, the dominance of subsidized state sector jobs in the EEFSU economies means that large shifts in relative prices are needed in order to induce an adequate flow of resources into the new private sector. But this argument ignores the role of demand, both demand for the products of state industry and the derived demand for industrial workers. The state sector in the inner‐core countries of Eastern Europe is much too inefficient to compete at world prices and much too big to simply be shut down. A ‘big bang’ jump to international prices will result in a flood of workers out of the state sector before new jobs are ready for them. Rather China's strategy of a gradual change over to international prices is called for, in order to allow the state sector time to melt away.