This paper employs province-level panel data to assess the contributions of decollectivization, price adjustments, and other reforms to China's agricultural growth in the reform period. Decollectivization is found to improve total factor productivity and to account for about half of the output growth during 1978-1984. The adjustment in state procurement prices also contributed positively to output growth. Its impact came mainly from the responses in input use. The effect of other market-related reforms on productivity and output growth was very small. Reasons for slowdown in agricultural growth after 1984 are also analyzed.

The agricultural crisis in China in 1959-61, after the initial success of the collectivization movement, resulted in 30 million extra deaths. In this paper, a game theory hypothesis proposes the main cause of this catastrophe. I argue that, because of the difficulty in supervising agricultural work, the success of an agricultural collective depends on a self-enforcing contract, in which each one promises to discipline oneself. A self-enforcing contract, however, can be sustained only in a repeated game. In the fall of 1958, the right to withdraw from a collective was deprived. The nature of the collectivization was thus changed from a repeated game to a one-time game. As a result, the self-enforcing contract could not be sustained and agricultural productivity collapsed. The empirical evidence is consistent with this hypothesis.

Justin Yifu Lin, Hybrid Rice Innovation in China: A Study of Market-Demand Induced Technological Innovation in a Centrally-Planned Economy, The Review of Economics and Statistics, Vol. 74, No. 1 (Feb., 1992), pp. 14-20

The agricultural crisis in China in 1959-61, after the initial success of the collectivization movement, resulted in 30 million extra deaths. In this paper, a game theory hypothesis proposes the main cause of this catastrophe. I argue that, because of the difficulty in supervising agricultural work, the success of an agricultural collective depends on a self-enforcing contract, however, can be sustained only in a repeated game. In the fall of 1958, the right to withdraw from a collective was deprived. The nature of the collectivization was thus changed from a repeated game to a one-time game. As a result, the self-enforcing contract could not be sustained and agricultural productivity collapsed. Copyright 1990 by University of Chicago Press.

In a socialist economy, when a state-owned enterprise (SOE) incurs losses, the government often provides it with additional funding, cuts its taxes, and offers other compensations. Coincidentally, the managers of an SOE also expect to receive financial assistance from the state. Such a phenomenon is called the soft budget constraint (SBC), a term coined by Janos Kornai (1986). Kornai attributes many problems in a socialist economy to the existence of the SBC. To achieve successful reform of both the SOE's and socialist economies, it is imperative to eliminate the SBC. However, the SBC phenomenon continues to exist in transitional economies, even after SOE's are privatized (World Bank, 1996 p. 45). There is a large literature on the SBC. Mathias Dewatripont et al. (1996) and Eric Maskin (1996) provide surveys on the recent literature. According to Kornai (1998), there are two types of explanations for the existence of the SBC: the 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 government's aims for job creation or for gaining political support (Kornai, 1986). Explanations of the second type view the SBC as an endogenous phenomenon, arising from a time-inconsistency problem (Dewatripont and Maskin, 1995). For an inefficient, uncompleted investment project, the state or creditor may have incentives to refinance the investment because the marginal benefit of refinancing exceeds the marginal cost of abandoning it. Yingyi Qian (1994) attributed the shortage of goods in socialist economies to the SBC based on such a timeinconsistency argument. In this paper, we provide another explanation for the prevalence of the SBC in socialist and transitional economies. We will argue that the SBC is rooted in the state's accountability problem. The traditional Stalinist system was designed to facilitate the establishment of certain strategic SOE's, which were not viable in a market system. To establish the nonviable SOE's, a socialist government distorted the prices of all kinds of inputs and of outputs and used administrative measures to allocate these inputs and outputs according to plans. However, due to information and coordination problems, the state could make wrong decisions regarding investment/production and fail to deliver necessary materials and inputs in time. Consequently, the state, instead of SOE's, was accountable for the failures and needed to allocate additional credits and other assistance to the SOE's in order to complete the investment and production. As such, the SBC arose. After the transition to a market economy, many strategic firms still remain nonviable in a market economy. For strategic purposes, the state needs to support these finns. Moreover, most firms in a transitional economy carry many types of policy burdens, inherited from the pretransition system (Lin et al., 1998). Because the state is accountable for the losses arising from policy burdens, the SBC phenomenon persists. In a market economy, the state's attempts to build nonviable industry and the state's policy burdens on enterprises will also lead to SBC.

One of the most important remaining issues in China's transition to a market economy is the reform of state-owned enterprises (SOE's). When reforms started in late 1978, SOE's dominated China's industrial sectors in every aspect. After 18 years of gradual transition, the SOE share in China's total industrial output has declined from 77.6 percent in 1978 to 28.8 percent in 1996. However, in 1996 SOE's still employed 57.4 percent of urban workers and possessed 52.2 percent of total investment in industrial fixed assets. Improving SOE performance is crucial for social stability and sustained growth in China. However, over 40 percent of SOE's are losing money. In this paper, we will argue that the root of the SOE problem is the separation of ownership and control and that the oftencriticized soft-budget constraints arise from various state-imposed policy burdens, which make the state accountable for the poor perfornance of SOE's. The key for a successful SOE reform is to remove the policy burdens and to create a level playing field so that market competition can provide sufficient information for the managerial performance of the SOE's and make the managers' incentives compatible with those of the state)' Io Competition and the Performance of Large Corporation in a Market Economy