Why China's economic reforms differ: the M‐form hierarchy and entry/expansion of the non‐state sector

China's thirteen years of economic reforms (1979-1991) have achieved an average GNP annual growth rate of 8.6%.What makes China's reforms differ from those of Eastern Europe and the Soviet Union is the sustained entry and expansion of the non-state sector.We argue that the organization structure of the economy matters.Unlike their unitary hierarchical structure based on functional or specialization principles (the Uform), China's hierarchical economy has been the multi-layer-multi-regional one mainly based on territorial principle (the deep M-form, or briefly, the M-form).Reforms have further decentralized the M-form economy along regional lines, which provided flexibility and opportunities for carrying out regional experiments, for the rise of nonstate enterprises, and for the emergence of markets.This is why China's non-state sector share of industrial output increased from 22% in 1978 to 47% in 1991 and its private sector's share from zero to about 10%, both being achieved without mass privatization and changes in the political system.2 Data sources in this paper are from Statistical Yearbook of China (various issues from 1985 to 1992), otherwise noted.3 Statistical Communique of the State Statistical Bureau on the 1992 National Economic and Social Development, February 18, 1992. 4 The export-GNP ratios are calculated based on the official exchange rate and are upward biased.But the dramatic increase of export share in GNP during the reform is unmistaken. 2 both before and after their radical transformations in 1989.It appears that China had no coherent reform programs, no commitment to private ownership, and no changes in the political system, and China's economy was still not fully liberalized.From both the theoretical and policy perspectives, China's different reform strategies and outstanding reform performances are particularly interesting and puzzling.The economic reforms in China formally started in 1979 following the Third Plenum of the Eleventh Congress of the Chinese Communist Party in December 1978.The starting time was later than that of Yugoslavia (1950) and Hungary ( 1968) and was about the same as for Poland (1980), and earlier than the Soviet Union (1986).Between 1979 and 1991, China's GNP grew at an average annual rate of 8.6%, or at 7.2% on the per capita basis. 2 In 1992, the growth of GNP reached 12.8%. 3Exports grew at a faster pace, so that China's export-GNP ratio increased from below 5% in 1978 to nearly 20% in 1991. 4 Also in this period, inflation was kept within a single-digit range except for three years (11.9% in 1985, 20.7% in 1988 and 16.3% in 1989); the household bank deposits to GNP ratio increased from 6% in 1978 to 46% in 1991; and the government budget deficit accounted for about 2-3% of GNP, about half of which was financed from bond issues (Table 1.1).Even more convincing evidence of the success of the reform is the increase in consumption and consumer durable goods by an average Chinese consumer in physical terms.For example, between 1978 and 1991, an average Chinese consumer increased his/her consumption about three times for edible vegetable oil, pork, and eggs (Table 1.2).In the rural areas, which account for about 75% of total population, the living space per person increased about 130% between 1978 and 1991 (Table 1.3).The 5 Data source for Hungary and Poland is from Table 9.1 of Kornai (1992).6 For example, Summers (1992) expressed this view when he highly praised China's reform performance.Sachs (1992) also expressed similar ideas during his interview with the Chinese Journal of Comparative Economic and Social Systems.