China's transition from a planned economy to a market economy began at the end of 1978. When China started the process, the government did not have a well-designed blueprint. The approach to reform can be characterized as piecemeal, partial, incremental, and often experimental. Some economists regard this approach as self-defeating (Murphy, Schleifer, and Vishny 1992). China's average annual rate of GDP growth has been miraculous since the beginning of the transition (Lin et al. 1996) and is the most successful of the transition economies. Nevertheless, the Chinese economy has been troubled by an increasingly serious "boom and bust" cycle (see Figure 1).
Whether China's experience provides useful lessons for other transition economies is hotly debated. Some economists argue that China's success demonstrates the superiority of an evolutionary, experimental, and bottom-up approach over the comprehensive and top-down "shock therapy" approach that characterizes the transition in Eastern Europe and the former Soviet Union (Jefferson and Rawski 1995; McKinnon 1994; McMillan and Naughton 1992; Singh 1991; Chen et al. 1992; Harrold 1992; Perkins 1992). Other economists argue that it is neither gradualism nor experimentation but rather China's unique initial conditions-- namely, a large agricultural labor force, low subsidies to the population, and a rather decentralized economic system--that have contributed to China's success (Woo 1993; Sachs and Woo 1993; Qian and Xu 1993). According to these economists, China's experience has no general implications because China's initial conditions are unique.