Relflections on neoclassical theories

Abstract

In the thirty-three years since 1978, China's reform and opening has achieved remarkable progress, with its GDP growing 9.9 percent annually and trade volume growing at 16.3 percent. China has grown into the world's second largest economy and the largest exporter, as mentioned in Chapter 1. During this period people's living standards and incomes increased significantly; 600 million people were lifted out of extreme poverty. Opinions in the international economic research community China's reform and achievements can be called a miracle in economic history. But in the late 1980s and early 1990s the international economic research community did not understand much about China's reform, and many economists were far from optimistic, believing that a market economy should be based on private property, a feature that the Chinese economy apparently lacked at that time. China's large SOEs were not privatized, and a dual-track system was prevalent, with state planning still very important. Many economists thought the dual-track system would soon lead to efficiency loss, rent-seeking, and institutionalized state opportunism – in short, an inferior institutional arrangement. Some economists even claimed that China's transition would finally fail due to incomplete reform. At the same time most economists were optimistic about reform in the former Soviet Union and Eastern Europe – because these countries reformed their economies according to the fundamental principles of neoclassical economics. The most representative of these principles was the “shock therapy” in the Czech Republic, Poland, and Russia, with three main elements: price liberalization, rapid privatization, and macroeconomic stabilization by closing fiscal deficits.