Conclusion

The reform strategy of a two-track system has opened up the monolithic command economy somewhat by allowing private and collective enterprises to play an increasingly important role. However, it has not altered the fundamental authority relationship that ties enterprises to their superiors and perpetuates the bilateral monopoly between them. As a result, the monolithic and monomorphic nature of the state-run economy has been preserved to an important extent. Enterprises and their superiors continue to be entangled in complex bargaining relationships. One of the most obvious and immediate consequences is that enterprises can never be

held fully accountable for their operations. Every aspect of enterprise performance is related in some way to the bargains the enterprise has struck; an enterprise therefore always has someone in the administrative hierarchy to share the blame for unfavorable outcomes. Conversely, any unfavorable outcome has a possible remedy somewhere in the bargaining process; some negotiated package of concessions and benefits is always potentially available. The lack of accountability naturally reproduces the "soft budget constraint" characteristic of bureaucratic economies. Pressures to raise efficiency are correspondingly reduced, and destabilizing types of behavior are encouraged.

At the same time, the central government has returned to the investment arena with a renewed program for development of priority areas, but without direct control over the resources needed to implement that program. As a result, the national government increasingly competes with enterprises and local governments for available investment resources. The central-government investment deficit combines with the "investment hunger" created by soft budget constraints at the enterprise level to generate significant macroeconomic pressures. In order to accommodate the demands of central and local governments and enterprises, the banking system is continuously prodded to provide more loans to finance investment. The result is a continuing expansion of total demand in the economy and—since the expansion in demand outpaces the expansion in supply—a serious inflation problem. By the middle of 1988 the economic system and reform strategy were in the midst of a major crisis brought about by steadily accelerating inflation.

In a general sense, this crisis can be attributed to the continuation of the bargaining economy. The central government uses the bureaucratic apparatus to reach for more than it could accomplish with its own resources. The enterprises rely on the bureaucratic apparatus to shield them from losses and to avoid stark pressures to economize. These two forces collide in an escalation of demands that the economy cannot accommodate. The continuation of the bureaucratic economy means that the cost of wrong decisions can still be shifted onto society as a whole, rather than being borne by individual decision-makers. The difference today is that such costs are increasingly visible. During the period of the command economy, the monolithic economic structure was able to hide the effects of poor economic choices; there were few markets to register disequilibria, and poor choices became manifest only very gradually with a recognition that real growth and improvement in living standards were occurring much more slowly than seemed warranted. Today, the disproportion between total demand and total supply shows up quickly with the emergence and acceleration of inflation. This could be an advantage if central planners were able to respond quickly to signs of imbalance. In

any case, though, a successful reform process demands a high degree of responsiveness in each individual market, as the system really starts to reward more efficient producers and cut down the flow of resources to the less efficient. The polymorphous bargaining relations that characterize China's industrial hierarchy today tend to deflect the impact of any positive or negative shocks, thus diffusing the pressure for better performance that those shocks would otherwise create. They also serve to disperse costs so that they are borne by the economy as a whole and show up as inflation. Although the system has been partially opened up, the prevalence of complex bargaining relations within the state-run industrial hierarchy is a symptom of the system's inability thus far to establish new principles of operation and decision making on which to base future development.