hyperinflation in centrally-planned economies: the Chinese exception

Louis R Godena louisgodena at ids.net
Fri Oct 11 06:17:57 MDT 1996

Why has China been able to avoid the crippling hyperinflation that has
bedeviled so many centrally--planned economies attempting reform?*    The
short answer must certainly focus on the question of investment controls.

Analysis of central-local relations demonstrates that,  even during reform's
heyday,  China's central authorities had not lost their capacity to select
and control local government and party officials in order to tame
inflationary investment demand and impose investment reduction policies.
Both state and private sector borrowing are typically the purview,  in each
enterprise,  of managers operating under a so called "management
responsibility contract."   But these managers work under the supervision of
the effective owners,  various levels of the government,   representing the
Communist Party,   which has a big stake in their success.

Inflationary controls put in place by the Party in its reform plan (see
*China's Economic Structure Reform*  Foreign Languages Press,  1984) follow
closely the stated goal of a "planned commodity economy,  not a market
economy that is entirely subject to market regulation."    They allow for
market forces to determine to some degree the allocation of resources,  but
carefully balance,  through investment controls,  the competing inflationary
impulses of dynamic and relatively low producing enterprises.

Further,  fully three fifths of China's fixed investment capital is absorbed
by its state-owned enterprises (SOEs).   The non-SOEs (the majority of which
are collectively owned or run by townships and villages) are by far the most
dynamic in terms of output.      The World Bank estimates that,  between
1985 and 1992,  non-SOEs required,  on average,  less than a third as much
investment as SOEs to achieve equivalent industrial output.     Inflationary
pressures were mitigated somewhat by an only modest decrease in the share of
the state sector in industrial development income (from 86.5 to 74.3 per
cent from 1982 to 1992).    The use of the SOEs as a potential brake on
inflation has worked well because of a relatively high investment rate
(officially estimated at 35 and 42 per cent of the Gross Domestic Product
[GDP] in the 1990s,  enough to finance vast investments within SOEs while
leaving plenty left over for non-SOEs.

Louis Godena

*Yasheng Huang,  *Inflation and Investment Controls in China: The political
economy of central-local relations during the reform era.*   (1996:
Cambridge University Press)

William A Byrd & Allen Gelb,  "Why Industrialize?  the incentives for rural
community governments," in Byrd & Lin Qinsong,  eds., *China's Rural
Industry* (Oxford University Press,  for the World Bank,  1990)

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