Foreword

The success of China's reform and development in the last thirty—two years has attracted global attention.The major steps which have led to China's success exhibit many Chinese characteristics.Of these the most striking is the ownership reform in the state and other nonprivate sectors.The theoretical and policy preparations for ownership reform took more than ten years.From being heterodox in the mid—1980s they had become mainstream thinking by the mid—1990s.

Professor Li Yining was arguably the most eminent figure in this process.His most influential public speech on ownership reform entitled,"Basic thoughts on economic restructuring"（Essay No.3 in this selection）,was delivered on April 25,1986 in Peking University.His famous remark,"Economic restructuring may break down if price reform fails.The success of economic restructuring,however,hinges not on price reform,but on ownership reform,which entails revamping the corporate system,"soon appeared in the headlines of a number of leading reformist newspapers and later on became a new proverb in the discourse of Chinese reforms.

In the mid—1980s,"market socialism,"which was initially promoted by Oscar Lange and Abba Lerner,was the guiding principle of economic reform in China and Eastern European socialist countries.This principle advocated that the introduction of autonomy to state—owned enterprises（SOEs） would induce SOEs to behave like profit—maximizing firms.Once SOEs became sufficiently autonomous,comprehensive price reforms（i.e.,price liberalization） would lead to the final success of the economic reform.[1] In line with this mainstream paradigm,Chinese leaders also endorsed the "big bang"approach and implemented a "one—shot"comprehensive price reform in the late 1980s,which,unfortunately,led to more problems than it solved.

At the other end of the spectrum of the reform debates,criticisms of the theory of market socialism and its reform practices in Eastern Europe since 1968,led by Professor Janos Kornai,became increasingly influential in the 1980s.Kornai's book Economics of Shortage became a bestseller in economics and Kornai himself an iconic figure among young intellectuals in China.His insightful analysis of state ownership and bureaucratic coordination led many young economists to believe that without ultimate private ownership,the expansion of enterprise autonomy and self—management under impersonalized state ownership would not be a medicine that would be effective in curing the soft budget constraint（SBC） syndrome.The SBC syndrome would continue to dull the price responsiveness of enterprises and thereby constrain the effects of price signals.Kornai himself later also concluded that unless state property was sold to private owners at a real market price,an attempt to reduce the percentage of state ownership gradually,i.e.,to 95,90,85 percent and so on would not be able to make a difference.[2]

In sharp contrast to the above strands of thought,Professor Li had a keen observation of the de facto diverse property rights structure existing in SOEs in China.He argued that it was feasible and desirable to adopt the shareholding system in SOEs by quantifying interests among different public owners and then converting such quantified interests into shareholdings.With such a shareholding system in place,an individual public agency would have a measurable stake in the fortunes of a firm from which the agency would draw cash flow and control rights.As a result public agencies could more easily consolidate their material interests and assemble more consistent business strategies when facing market competition.They would find it in their best material interest to increase the value of the firm rather than to extend bureaucratic control over it.Furthermore,mixed ownership for a company as a result of joint investment by public,collective,and private partners and diverse forms of ownership in the economy would stimulate competition and induce further property rights reform（also see Essay No.4 in this selection,first published in 1987）.[3]

In the context of China in the mid—1980s,when the official ideology still viewed socialist state ownership as 100 percent ownership by the state on behalf of the whole people,it was analytically valuable,practically significant,and politically brave and skillful to highlight the de facto plural property rights structure of existing state ownership and then to link this structure to the feasibility and desirability of ownership reform.

Within academic circles in the West,Granick（1990） appears to have been the first person to analyze this plural structure.[4] Highlighting that Chinese SOEs were in fact agents with multiple principals exercising control over them,he asserted that these multiple principals acquired property rights through past investment in SOEs or traditional associations with individual SOEs.He cited a 1966 slogan "whoever builds and manages the enterprise has the use of its output."This slogan was regarded as epitomizing property rights relationships of the 1970s,i.e.,instead of control rights being derived from ownership,de facto control rights now define ownership.In other words,this practical property rights arrangement is opposed to the usual textbook teaching in which the right to management is an attribute of ownership.

Rooted in the Chinese reality,the analytical work of Professor Li reveals that the conventional wisdom on state ownership in both the West and East is descriptively narrow.The claim that private investors should own the firm,despite its importance,is not the unique logical prerequisite of free markets and free enterprise.Diverse ownership and governance forms can emerge and evolve that are compatible with the evolutionary development of free market and free enterprise.The Chinese like to create a nickname for someone famous for a particular legacy and,not surprisingly,Professor Li is now known throughout China,as "Li Shareholding."

Another area to which Professor Li has made an important contribution is comparative economic history and the history of economic thought（cf.,Essay No.11 in this selection,published in 1993）.[5] Integrating such comparative studies with his deep understanding of economic practices in China,he proposed an innovative augment on disequilibrium theory.As presented in Essays No.5（published in 1988） and No.12（published in 1993） of this selection,[6] he distinguishes two types of disequilibrium based on whether the majority of firms in the economy are viable profit—makers or not.The first type corresponds to the one dealt with in the existing disequilibrium theory,which features excessive demand or supply due to market friction,stickiness of prices and wages,and demand or supply constraints,rather than nonviability of firms.The second type is characterized not only by an underdeveloped market but also enterprises under various forms of bureaucratic control.He argues that China's economy has belonged to the second category throughout its transition process.To make the transition from the second type of disequilibrium to the first,the top priority is the reform of enterprise system with the aim of producing viable and profit—oriented enterprises.[7] This line of thinking provides a further support to his famous remark — "ownership restructuring holds key to the reform."

In addition to constructing this second analytical foundation for his ownership reform theory,Professor Li's work on the Chinese economy in disequilibrium also emphasizes the fundamental importance of achieving and maintaining healthy economic growth and social development in China under the conditions of the second type of disequilibrium.The majority of his essays in this selection discuss various coordination issues across economic reform,growth and development,and the urgency of finding solutions to immediate practical policy dilemmas.The central normative guideline has been that the reform and transition are means to serve economic growth and social development and,furthermore,that economic growth and social development are means to serve the well—being and happiness of ordinary citizens in society.

In dealing with the immediate policy dilemma,Professor Li has incorporated the methodology of "dialectical thought and synthetic analysis"of traditional Chinese medicine,which emphasizes holistic connections among many facets of human anatomy and physiology and examines the effect of the social and natural environment on the interrelations and conditioning of yin and yang.He pays particular attention to both the "treatment effect"and "side effect"of each policy pill,as well as its short—run and long—run effects.For instance,the first essay of this selection was published in June 1980 when the high urban unemployment rate was at the top of policy agenda.With a thorough and comprehensive analysis of the historical and structural roots of the high unemployment rate,Professor Li suggested that in the short and medium run,the solution would be to actively develop labor—intensive manufacturing industries and labor—intensive export processing to take advantage of China's abundant low—skilled labor force.However,in the long run,China has to develop human capital intensive manufacturing and services industries and actively promote human capital intensive exports so as to convert the persistent population pressure into an emerging comparative advantage.Therefore,it was strategically important to significantly increase investment in education in the 1980s so that China would no longer suffer high unemployment rates in the next two to three decades and become well prepared for the inevitable era of human capital intensive production and exports.Clearly,this vision is still valid today.

The publication of this Economic Reform and Development the Chinese Way enriches the literature in English that examines the past,present and future prospects of China's reforms,transition,and development.Although all the essays in this selection are well—known in China,they provide carefully examined alternative perspectives which scholars and students in the West may not be familiar with.I am honored to write the foreword for this excellent selection and commend it enthusiastically to scholars,policy makers,business professionals,as well as to more general readers,who are interested in the dynamics of China's transition and the growing importance of China in the world.

Academician,the Academy of Social Sciences,UK

Professor and Head,Department of Financial & Management Studies,

School of Oriental & African Studies,University of London,August 9,2010

[1] For an excellent critical review on market socialism in general and its manifestation in the 1980s in particular,see Kornai,Janos（1992）,The Socialist System,Princeton:Princeton University Press.For a leading essay on market socialism for China,see Sun,Yefang（1982）,"Some theoretical issues in socialist economies,"originally published in Chinese in the period 1958—1961,in Fung,K.K（ed.）,Social Needs versus Economic Efficiency in China,Armonk,N.Y.:M.E.Sharp.For an influential essay which promotes comprehensive price reform in China,see Wu,Jinglian and Reynolds,Bruce L.（1987）,"Choosing a strategy for China's economic reform,"American Economic Review,Vol.78,No.2,pp.461—466.

[2] See Kornai,Janos（1990）,The Road to a Free Economy,New York and London:W.W.Norton & Company.

[3] For more detailed and systematic discussions on multiple property rights and ownership reform by Professor Li,see Li,Yining（1986）,Political Economy of Socialism,Beijing:Commercial Press; Li,Yining（1987）,An Exploratory Study of Economic System Reform,Beijing:People's Daily Press; and Li,Yining（1989）,Thoughts on China's Economic Reform,Beijing:Zhongguo Zhanwang Press.All these three books are in Chinese.

[4] Granick,David（1990）,Chinese State Enterprises:A Regional Property Rights Analysis,Chicago:University of Chicago Press..

[5] Also see,for example,Li,Yining（2003）,The Rise of Capitalism:A Study of Comparative Economic History,Beijing:Commercial Press; Li,Yining（2006）,The Economic History of Rome—Byzantine Empire,Beijing:Commercial Press.Both books are in Chinese.

[6] More detailed and systematic analysis on this topic is presented in Li,Yining（1990）,Chinese Economy in Disequilibrium,Beijing:Beijing Daily Press.This book is in Chinese.

[7] An important parallel research on the viability issue of SOEs in China（and other transitional economies） has been conducted by Professor Justin Yifu Lin.Lin employs the analytical perspective of comparative advantage and argues that the firms in heavy industries prioritized by the government in transitional centrally planned economies are not viable in open,competitive markets because their activities are inconsistent with the economy's comparative advantage.This viability problem is another root of the soft budget constraint（SBC） syndrome.If the viability problem is not solved,the SBC syndrome will not be eliminated even though the socialist government is overthrown and all firms are privatized.See,Lin,Justin Y.（2003）,"Development strategy,viability and economic convergence,"Economic Development and Cultural Change,Vol.53,pp.277—308; Lin,Justin Y.（2005）,"Viability,economic transition and reflection on neoclassical economics,"Kyklos,Vol.58,No.2,pp.239—264.