Introduction

Abstract

Since 1979, China has embarked on a radical reform of its economic system and introduced a number of policies designed to change the way in which state-owned industrial enterprises operate. The pre-reform economic system was set up in the 1950s patterned after the Soviet model. Despite some of its advantages, this system has some serious drawbacks. Although Chinese economists have many different views upon the defects of the system, they seem to agree on one fundamental point: that, the economy is over-centralised and has an excessively complex bureaucracy. Before 1979, some 84 000 state-owned industrial enterprises had little freedom of action with regard to making production plans, choosing inputs, setting prices, marketing products, and disposing of profits and losses. Such a system in which there is no penalty for inefficiency or awards for efficiency provides no incentives, and thus it breeds built-in bureaucratisation and waste.