Foreword

"Among all your publications on current Chinese economy, which one is most representative of your academic viewpoints?" If this is the question someone asks me, "it is the book right in front of us, Chinese Economy in Disequilibrium ," I would answer. Why do I have this answer? I have my own reasons.

Among my publications, Institutions, Goals and People—Challenges to Economics (Heilongjiang People's Press, 1986) studied comparative economics. Many of its chapters discussed Chinese economic issues. It also proposed a methodology for studying socialist economic theories. Nevertheless, it is not a book on current Chinese economy.

Socialist Political Economics (The Commercial Press, 1986) is a textbook which described the framework of my economic theories, but barely discussed real economic issues. Moreover, it is a book on socialist political economy intended for beginners. Therefore, it is unlikely to include in-depth discussions and analyses of certain economic theories. Nonetheless, I believe it is the most comprehensive and systematic publication on my own economic theories.

Exploring Reforms of Economic Institutions (The People's Daily Press, 1987) specifically discussed issues associated with the shareholding system, controlling shareholder system and conglomerates in the public ownership system. It did not further discuss any other issues.

Management of National Economy (Hebei People's Press, 1988) is also a textbook, primarily discussing the principles and policies for managing the national economy from short-term, mid-term, and longterm perspectives. Due to the requirements of a textbook, it is difficult to fully discuss in-depth issues related to economic disequilibrium.

Perspectives on Chinese Economic Reforms (China Prospect Press, 1989) summarized the general economic reform plan that I proposed for China, including the main reform directions and corresponding reform measures and execution processes. But it is not a book on disequilibrium.

Where is Chinese Economy Heading (The Commercial Press, Hong Kong, 1989) is a collection of my speeches delivered in Hong Kong at the beginning of 1989. It is intended to address a few specific issues encountered during Chinese economic reforms. Such topics as how to switch from the subcontracting system to the shareholding system, why it is not possible to privatize large and medium state-owned enterprises, and how to manage state assets were elaborated fairly thoroughly in the book. But it did not give a systematic analysis of the disequilibrium conditions prevalent in the Chinese economy.

Compared with the abovementioned publications, Chinese Economy in Disequilibrium is different in three aspects: First of all, it is academic research, not a textbook for college students. Although my analysis herein is based on the principles stated in the books of Socialist Political Economics and Management of National Economy , the theoretical study on economic disequilibrium is far more detailed than that in those two books. Secondly, it focuses on current Chinese economy, unlike the book of Institutions, Goals and People—Challenges to Economics , which focused on comparative economics. Thirdly, it features theories, primarily analyzing the characteristics of economic disequilibrium in an attempt to discover the underlying reasons for resource misallocation, distorted industrial structures, and institutional innovation variation. The book does not designate economic disequilibrium as a prerequisite, as did the books of Exploring Reforms of Economic Institutions , Perspectives on Chinese Economic Reforms , and Where is Chinese Economy Heading , but directly discusses specific policies for Chinese economic reforms. With these thoughts, I believe Chinese Economy in Disequilibrium is the book that most fully presents my academic views on current Chinese economy.

In my opinion, the book provides featured analyses in the following eight aspects:

There are two types of economic disequilibrium. Type I disequilibrium refers to the disequilibrium condition under which the market has not been fully developed. Type II disequilibrium refers to the disequilibrium condition under which the market is not fully developed and enterprises lack profit maximization mechanisms and budget constraints. Current Chinese economy belongs to type II disequilibrium. We should do our utmost to first and foremost transit the economy from type II disequilibrium to type I disequilibrium, followed by gradually shrinking the magnitude of imbalance inherent under type I economic disequilibrium condition.

The socialist economy is susceptible to stagflation in economic disequilibrium. There are two types of inflation, open inflation and hidden inflation, with the latter referring to an unchanging price level at which commodities are actually out of stock. There are open and hidden stagnation as well, with the latter referring to the situation of superficial growth in aggregate output with effective supply actually remaining unchanged. Therefore, stagflation has four potential forms of combinations. Any measure to prevent and tackle stagflation must be properly adopted according to the specific situation.

3. The impact of structural factors on current economic imbalances in China cannot be ignored. Difficulties in industrial restructuring are associated with the defects of enterprise operation mechanism, and the shortsightedness of corporate behavior as well as societal behavior. Therefore, the rationalization of industrial structure can only be achieved by accelerating the reconstruction of enterprise operation mechanism and by actively leveraging the leadership of the central government in quota adjustment in the commodity market and the establishment of order in the socialist commodity economy.

4. Economic fluctuations are common in a disequilibrium economy. People tend to ask when an economy will come out of recession. It should be noted that it is relatively easy to pull the economy out of recession that is calculated based on the growth rate of output, for direct government spending or corporate spending with credit support will generate higher output growth. Nevertheless, it is far more difficult for the economy to come out of recession calculated based on the growth rate of enterprise profitability or the growth rate of actual fiscal revenues (i.e., excluding borrowings and net of inflation rate). We need to reform the enterprise operation mechanism, which is critical to actually pulling the national economy out of recession.

5. There are various rigidities under economic disequilibrium conditions. In addition to many known rigidities, such as wage rigidity, employment rigidity, and welfare rigidity, there is a unique type of rigidity under current disequilibrium conditions (type II disequilibrium) in the Chinese economy, one called "enterprise rigidity." It refers to the situation in which an enterprise is not actually responsible for its own profits and losses or only responsible when it is profitable. Thus bankruptcy is almost out of the question. Without resolving the "enterprise rigidity," China will have to remain in type II economic disequilibrium for a long time.

6. If commodity shortages are prevalent, a dual-track price mechanism applicable to shortage commodities cannot be terminated if there are relatively severe resource constraints. Otherwise, even when the gap between the dual prices, i.e., planned and non-planned price, is eliminated, a gap between two new prices, i.e., open price and underground price, will appear. Therefore, a full price decontrol before all other conditions are ready will only lead to social turmoil and unjustified profits taken by certain people who can take advantage of the gap between open price and underground price.

7. Scarcity of certain resources, as well as the exclusivity stemming from such scarcity, may persist for a long time in the socialist commodity economy. The government has to make necessary adjustments, such as levying resource taxes on the producers of exclusive scarce resources. The government, however, should also be careful not to completely seize everything above normal profits, but only a portion. Otherwise, it won't help improve resource utilization efficiency.

8. It is essential to further push economic reforms under current economic disequilibrium conditions. We are often confronted with this challenge: A new institution or policy tends to deviate from its original plan (hereinafter referred to as "institutional variation"). This is mainly attributable to such issues as non-standardized institutional innovation, changes in enterprise expectations and personal expectations, and market imperfection. Institutional variation can only be addressed by making appropriate adjustments in these areas.