The Economic Reform Strategy in China Started in 1978 - Assignment Example

1. How do you characterize the economic reform strategy in China started in 1978, as compared to the strategies pursued by some Eastern European countries and Russia?The regions and sectors were entitled to bring new profits by replacing the old rents, and as a result, bureaucrats began to take rents from the reform strategy. This strategy thus became successful in the agriculture sector of the coastal regions in Guangdong province. As compared to China, Eastern European countries and Russia were all over industrialized, however, their service sectors were underdeveloped as well as incentives are given to employees were low.

Both China and Russia changed itself from centrally planned economies to market-directed and China’s reforms started in the late 1970s whereas Russia saw such reforms only during the early 1990s. The pace and situation of the reforms were different in both countries. Russia’s reforms were brought into effect comparatively at full tilt after the end of Communism. In China, market-oriented reforms took form gradually and were controlled by the Communist government. 2. Discuss possible political constraints often associated with economic reforms.

What reform strategies did China pursue to solve the political constraint problem? Political constraints play a critical role in the development of economic reforms. For Chinese leaders, the reform strategies were a medium through which they could make changes and adjustments to their own political interests. However, if the interests are not protected, the parties would disagree with such reforms. According to political scientist Susan Shirk, political constraints lead to a compromise in the decision-making process among political parties.

In order to solve the political constraint problem, China had started modest reform strategies in some areas and sectors where investment opportunities were huge and the estimated profit from the pre-reform system was small. 3. Provide at least two alternative explanations for the Soft Budget Constraint (SBC) phenomenon which was widespread in the centrally planned economies.The soft budget constraint was introduced by Kornai. It is the main source of inefficiency. These inefficiencies, in order, tend to lead to inefficient resource allocation, over investment, shortages and macroeconomic imbalances.

The SBC exists and creates problems in other financial systems. Kornai states that there are two kinds of explanations of SBC. They are exogenous and endogenous. “Explanations of the first type attribute the existence of the SBC to various exogenous reasons, including the paternalism of a socialist state and the governments aims for job creation or for gaining political support” (Lin & Tan 1999). The second type of explanation views the SBC as an endogenous phenomenon, which is a phenomenon that occurs from a problem of time-inconsistency. 4. Describe briefly the evolution of managerial incentive schemes during the transition from the centrally planned economy to a market economy in China.

In case of incentives to work, causality has to be functioning in both directions. The promise of bonuses can entail in higher productivity. Managers were presented with monetary rewards openly based on their organization’s performance. The choice and right regarding how much to produce, what to produce and how to produce was moved from the state to the enterprise.