Sequencing and the Success of Gradualism: Empirical Evidence from China’s Agricultural Reform

This paper provides evidence regarding gains to agricultural market liberalization in China. We empirically identify the different effects that incentive reforms and gradual market liberalization have on China’s agricultural economy during its transition period. We find that average gains within the agricultural sector to incentive reform exceed gains to market liberalization by a factor of ten. Our method of analyzing the effects of transition policies on economic performance can be generalized to other reform paths in other transition economies. JEL Codes:O4, P2, Q1 Sequencing and the Success of Gradualism: Empirical Evidence from China’s Agricultural Reform At its most basic level the Big Bang versus Gradualism debate can be characterized by two questions. Should reforming nations lead with radical market liberalization policies? Or, should policy makers provide incentives for increasing productivity before central planning is dismantled and markets are unleashed? While the debate has raged for more than 10 years, there has been little progress in understanding exactly how better incentives and liberalized markets have contributed to the success of countries in transition. Most explanations of the success of a particular reform strategy have centered on comparing growth among different reforming economies. Have countries in East Asia grown faster than those in Europe because they adopted gradual reform policies as opposed to radical liberalization policies (Roland and Verdier, 1999)? The problem with comparative studies is that they are unable to empirically isolate the factors that have positively and negatively contributed to the performance of different transitional economies. Almost no one has empirically isolated the effects of gradual market liberalization on behavior and performance throughout the reform period. The goal of our paper is to respond to this lack of evidence. It examines the case of China’s agriculture and seeks to empirically identify and differentiate the effects that the incentive reforms and market liberalization policies have on transitional economies. To meet our goal, we pursue three objectives. First, we briefly delineate the various gains that countries can expect from incentive changes (i.e., decollectivization) on one hand and market liberalization on the other. Second, we layout a framework for measuring the source of and returns to incentive reforms which have been widely studied in the past (e.g., McMillan, Whalley, and Zhu, 1989; Lin, 1992) and market liberalization initiatives. Finally, we offer initial estimates of the timing and magnitudes of returns to incentive and market reforms, which can contribute to the discussion on effective transition strategy. Although our findings do not go as far as showing why gradualism is superior to Big Bang reforms in a general sense, they do help explain why gradualism in China has been successful