Modern China

Many economists have attributed China's high growth to the implementation of the correct sequence of reforms. The authors reject this interpretation because it does not characterize the reform process correctly; it does not recognize adequately the interaction among reforms that sustains the progress of each individual reform; and optimal sequences exist only when the policy maker is constrained to introducing only one new policy measure at a time (so-called optimality disappears once simultaneous implementation of policies is allowed). We propose the parallel partial progression approach as the alternative conceptual framework for the gradualist approach. Parallel partial progression is not the same as the step-by-step sequencing approach because a “partial reform” is not a “completed step.” Simultaneous partial implementation is preferable to policy sequencing because it eliminates the costs of incoherence among policies. Incoherence among reforms results could cause a “reform bottleneck,” and the two major bottlenecks that China is facing right now are financial reform and political reform.

Adaptive capacity is essential for any human social system, because human societies are full of unique circumstances, genuine uncertainty, novel complexity, structural instabilities, and conflicts of values and interests, and, more important, the environment under which the systems exist is always changing, while everyone, including policy makers and policy experts, operates under conditions of “bounded rationality.” Learning is the base of adaptive capacity. The first section of the article distinguishes four learning models by their location along two dimensions: the promoters of learning (policy makers or policy advocates) and the sources of learning (practical experience or controlled experiments). By studying the evolution of health care financing in rural China over the past 60 years, the remaining five sections attempt to illustrate how policy makers react to newly emerging problems, imbalances, and difficulties by “fine-tuning” or altering policy instruments, or adopting a new goal hierarchy according to lessons drawn from past and present experience as well as deliberate policy experiments. The resilience of the Chinese system lies in its deep-seated one-size-does-not-fit-all pragmatism.

The informal economy—defined as workers who have no security of employment, receive few or no benefits, and are often unprotected by labor laws—in China today accounts for 168 million of the 283 million urban employed, but the official statistical apparatus in China still does not gather systematic data on the informal economy. Part of the reason for the neglect is the misleading influence of mainstream economic and sociological theories, which have come from the “economic dualism,” “three-sector hypothesis,” and “olive-shaped” social structure theories that held great influence in the United States in the 1960s. This article reviews the core elements of that modernization model, the “revolution” in development economics that followed in the 1970s and 1980s, and the “counterrevolution” from neoclassical economics that came with the rising ideological tide of neoconservatism. The article argues for a balanced theoretical perspective that can more appropriately capture the realities of the informal economy today.

China's rapid economic growth since 1978 has occurred precisely because it has not followed the strategy of parallel partial progression and financial liberalization advocated by Fan and Woo. However, China missed an historic opportunity to build welfare capitalism in the 1980s and 1990s, choosing instead to dismantle its rural health care and educational systems and—as Philip Huang rightly argues—failing to secure workers' right in the burgeoning informal sector. In these respects, China's transition path has been far inferior to that of Britain in the late 1940s and early 1950s. Nevertheless, the global financial crisis of 2008-2009 has discredited Anglo-Saxon capitalism and presents a renewed opportunity for China to build a form of xiaokang socialism modeled on the Rheinish capitalism that was so successful in countries such as France, Germany, and Japan before 1989.

At a time when many Western standard recipes for economic policy are losing credibility, it is imperative to step back from past orthodox explanations and rethink the unconventional approaches to managing economic change that we find in China's developmental experience. The key to understanding the adaptability of China's political economy over the last few decades lies in the unusual combination of extensive policy experimentation with long-term policy prioritization. China can serve as an extremely instructive place to look for lessons on creative management of uncertainty in policy making.