Feb. 7, 2003
Preliminary
Ex Ante Determinants of Regime Transition:
China, Vietnam, and Russia Compared

Shigeru Ishikawa

1. Introduction
Recently, I have been engaged in a study to explore the theme above, as one of thepresently urgent tasks of international development policy. I consider the study useful at least
to a certain extent for thinking about the experiences of Japan and East Asia’s development interms of the relevance to the studies of contemporary development issues, and about the roleof regional study approach thereto.
Fig.1 (1) indicates broadly my idea which I have been holding in my study to explore
the actual, ex ante processes of a specific socio-economic system transforming itself toanother. It is shown as a causality map and in a stylized fashion: First, when a developing
country of a specific economic regime encounters, after many years, the accumulation ofeconomic issues to the extent that the economy cannot be sustained on the basis of the same
regime (“institutional fatigue”), the leaders or the main group of people of the county are
motivated to change the regime (Emergence of a change trigger). At this stage, however, it isunclear for them to foresee what are the final goal and the process to reach it (a scenario ofregime transition), as a result of the efforts at these changes. Second, in these efforts, thegovernment tasks to rely on exogenous models for regime transition as a guidance ofexploration, and in order to ascertain their relevance, it also studies the socio-economicconditions of the own country (koku-jo). Third, the interaction between the exogenous modeland koku-jo is repeated, to result in a trials and errors process for either a longer or a shorter
period. A final outcome is the advent of the effective scenario for a new regime. Fourth, theimplementation of this scenario may further produce a new series of economic issues, butthey should be dealt with as second-generation issues.
One of these stylized causal relations, I bring out four links and name them, forconvenience, as determinants: (1)Economic issues (trigger), (2) exogenous models,(3)Koku-jo and (4) scenario.
In Fig. 1 (2) is shown the ex post determinants of regime transition, which relate eachother in the domain demonstrated in a quadrilateral. In the ordinary economic analysis, thesedeterminants are used as variables. The variables with numbers 1~8 shown outside areidentical to those in Fig 1 (1), and thus indicate the relation between the ex ante and ex postdeterminants.

2. Concepts of regime transition and development
As preliminaries, these concepts might be discussed:
Fig. 2 illustrates one aspect of the concept: regime transition. It indicates that thetransition of the economic regime from the centralized planning to the market economy takes
place side by side with the changes in the instruments by which of the national income flow
are realized in “three dimensions”: i.e. from the planners’ directives derived from physicalplanning to the decentralized markets. Numerical magnitudes of this change is shown in
Tables 1 and 2 only in the dimension of income distributed: i.e. the shares of enterpriseincome and GDP among government, enterprises and private households that changed
between 1 978 (9) and 1988 (9) toward favouring the households (or workers).
Characteristics arising from the fact that the above transition is taking place indeveloping economies can be illustrated in a few ways. One: as Fig. 3 describes, theinterrelationship between the government authorities and various economic entities in thenational economy on the one hand, and the interrelationship among these economic entities
themselves, on the other, were governed not only by the market-oriented one, but even after aseries of reforms by the nonmarket, customary (and after even predatory) relations. Two: In
the 1980s and early 90s, the economies of China and Vietnam were, although nominallydesignated as centrally planned, in fact comprising vast unplanned sectors. In China, I
interpreted on the basis of my reviews of various survey reports that there were three broad
sectors: (1) centrally planned (on the basis of “material-balancing method”), (2) nonplanned
but regulated (by the party network) and (3) nonplanned and non-regulated (under ad hoc
relations with cadres). 1 In Vietnam, a Swedish research group observed the large“spontaneous” sector existing side by side with the sector under the centralized control.2
Three: In Vietnam (as well as in Laos and Cambodia) there is a vast domain where foreign
currencies and gold are used as effective means of exchange and store of values, as recently
revealed by the research done by the Watanabe group.3

1Shigeru Ishikawa, “Resource allocation control in China,” Keizai Kenkyu (Economic Research), 31-4,
Oct. 1980 (in Japanese).
2
Stefan de Vylder, and Adam Eforde, Vietnam: an Economy in Transition, Swedish International
Development Authority, Stockholm 1988.
3
State Bank of Vietnam and JICA, Dollarlization and its Effect on Monetary and Foreign Exchange Rate
Policy and the Development of Financial System in Vietnam, Lao POR and Cambodia, (Joint ResearchProject Workshop), July 5 2002, Hanoi.

3. Four ex ante determinants: China and Vietnam(1) Economic issues (Triggers for transition)
These issues were described in policy decisions in the important party meetings ofthe two countries: China in 11-3 Central Committee Plenam, Nov. 1978 (Table 5 (1)), and inVietnam in the 6th Party Congress, Dec. 1986 (Table 3). It is important to note that both thesedecisions by no means made clear their aim at transforming themselves from the planned
regime to the market economy regime: No image of the scenario in our sense was not yetappearing. The issues in their mind were “economic crises” to be tided over urgently. Thedecisions stressed, rather the needs for restrengthening thereby “socialist reconstruction”.
The economic crises related in both countries to the immediate and forthcoming foodshortages and fiscal (and international balance of account, too, in the Vietnam case)difficulties, but differed in their causes. In China, economic turmoil brought about by CulturalRevolution (1966-1969) and the disruption of economic management even under the planned
economy by the so-called Gang of the Four. In Vietnam, the war against the U.S., the ensuing
military expedition to Cambodia and the war against China caused large amount of financial
expenditures. Entire national investment and even part of national consumption were financedby economic aid from the Soviet Union as well as COMMECON countries. But the amount of
the aid came to diminish rapidly (Fig. 3).
Behind these immediate causes, there were in both countries longer-term difficulties
caused by inefficient, bureaucratic management of the planned economy. The market
economy and productive force formation were also in the primitive stage of development (Fig.
4).
(2) Exogenous models
There are two significant models commonly in China and Vietnam: one, theCommintern and Soviet models of socialist development and two, the World Bank (and IMF)
model for marketization of the diligiste economy.
The Commintern model here refers to its These that the socialist revolution in thecolonies (most post-WWII developing countries) should be preceded by the capitalist
development, as their productivities were yet very primitive. This model applied to pre-WWII
China resulting in a Mao Tzetung’s strategy of New Democracy. After accomplishment inSoviet Russia of rapid industrialization under the centralized, bureaucratic planning regime, it
became the model to be applied to the socialist-oriented developing country. The concept of“Transition period” before the stage of socialism reaching the stage of Communism came tobe stressed, side by side. After Stalin’s death (1953), the research for new regime of new
economic management was becoming increasingly intense in the Eastern European countries,in particular, in Yugoslavia and Hungary. In Russia, it was only slow, but in 1965 there wasPremier Kosygin’s reform of introducing profit and sales’ amount target in planning; in 1987

in Premier Gorbachev’s Perestroika, the concept of “Commodity production and economy”(hence, “product market”) was officially made acceptable, but not the concepts of the markets
for the factors of production, in particular, for labor and capital. The concept of full-fledged
market economy was allowed only in 1991 by Premier Yeltsin.
Because of the ideological collision with Russia and of Deng XiaoPing’s pragmatism,
China did not care about the Russian models officially. But in fact they cared about them after
the 1980s, as shown shortly. In Vietnam, the Russian models have been taken seriously, but
the difference between the transitional centralized model and the more recent reformist modelin Russia introduced into the political leaders the policy-oriented conflicts between theconservative and reformist groups. The 6th Party Congress’s decision (on the well-known DoiMoi Line) was said to be the compromise product between the two, although it officiallyadmit the concept of “Commodity Economy” under the support of Premier Gorbachev.4
The World Bank model is well-known. I have only shown Table 4, which indicatesthe places of the World Bank’s marketization model under the name of SAL conditionality
and the PRSP where the first priority goal of aid has been shifted from growth promotion topoverty reduction.5 For China, the model did not play a significant role as conditionality.
China’s international balance of payment performed well, so that it need not request SAL. But
Chinese government seems to have received significant but…friendly assistance for learning
how to introduce and manage the market-oriented economy. The relationship between theChinese leaders (in particular Premier Zhao Ziyang) and the World Bank resident mission inChina (in particular Edwin Lim) was also intimate and flexible until the end of the Zhao
period. For Vietnam, the World Bank first (1989-92) reported to have maintained active
dialogues with it. Between 1994 and 97 it provided SAC (Structural Adjustment Credit) toVietnam; the negotiations for SAC 11 started in 1998 but not been finalized until 2001. It
appeared that as Vietnam government became familiarized more and more to new economic
management, the conditionality imposed upon them came to become unhappy.6(3) Scenario of the regime transition
As for determinants (3) and (4), the order of presentation is reversed for its
convenience of easier description: This sub-section will describe what are the scenario finallyidentified and why it is considered the final one; then, in the next sub-section the process of“trials and errors” in which that scenario is reached after the repeated interactions between theexogenous models and studied Koku-jo.

4Motoo Furuta, “Inner-Party Controversy in the period of Formation of Doi Moi Line,” in M. Shiraishiand I. Takeuchi eds., New Development of Doi Moi Line in Vietnam, IDE, 1999.
5
S. Ishikawa, “Growth Promotion versus Poverty Reduction: World Bank Rethinking of Aid Policy andImplications for Developing Countries,” GRIPS Discussion Papers, No.3, August 2002.
6
S. Ishikawa (1999), source of Table 3.

The scenario thus identified is shown for China in the Decision on the “Socialist
Market Economy” of the 14-3 Central Committee Plenam in November 1993 (Table 5 (1)).
(To this Table is added the decision on “Socialist Commodity Economy” of the 12-3 C. C.
Plenam in October 1984, which was considered as the mid-point landmark of the trials anderrors process toward the 1993 decision (Table 5 (2)), as well as the Communique of the 1 1-3
C. C. Planam in December 1978. The latter constituted, as discussed earlier, the regimetransition “trigger” (Table 5 (3)).
In connection with the Russian models, the 1978 decision only expressed the leader’s
desire to get out of the traditional, centralized physical planning model; the 1984 decision wasthe decision to introduce the product market, but not the factor markets. Therefore, theresources are not allowed to be allocated beyond the boundary of each individual enterprise,but only inside each individual enterprise. The 1993 decision finally allowed the resource
allocation even among the enterprises. On the other hand, the 1993 reform seems to haveincluded most items in the marketization agenda of the World Bank model. However, for mostof the period in the 1980s, the World Bank did not have the self-confidence on theapplicability of its own SAL model to China which was under very different initial conditions
from other developing countries.7
As for Vietnam, the final scenario seems to have been identified in the decision of the9th Party Congress (June 2001), and as a much cruder form, already in the decision of the 8th
Party Congress (June 1996) as shown in Table 6. This decision compares to the Chinese
decision in 1993 in that the market economy is allowed in the factor markets as well, although
it emphasizes that the labor and capital markets are yet nonexistent or primitive.8 The
Vietnam scenario appears to have been influenced at least in the from of presentation, as
shown in Table 5.
Next, I have to make explicit some of the conditions to be judged as having been met
when we evaluate that the above scenario is finalized. The trials and errors process in the next
sub-section is in fact the one through which these conditions were sought after.
a) Ideological admittance of both the product markets and the labour and capital markets.
b) Identification of the steps to raise and foster each of the product and factor markets, aswell as the full-fledged enterprises.
c) Capacity-building for bringing about stability and development of the macro-economy,including the establishment and operation of the national and local governments’ fiscalsystem and the banking and other financial architecture.
d) Articulation of the industrial policy in necessary details: agriculture, vital branches of
7World Bank, China: Long-tem Development Issues and Options, The Johns Hopkins Univ. Press 1985,
Summary and Conclusions, esp. pp. 13-16.
8Communist Party of Vietnam, 9th national Congress Documents, the GIOI Publishers, Hanoi, 2001, p.
44.

manufacturing and other industry and infrastructure included.
e) Conditions relating to “globalization”.
f) Establishment of social service sectors.
g) Administrative modernization

5. Koku-jo and the trials and errors processThis process of trials and errors was a long and difficult one for China; it took
altogether fifteen years finally to arrive at the point of identifying the effective scenario. There
were no exogenous model that fitted fairly well to the initial conditions similar to China andwhich was also considered useful to rely on in confronting at least some issues arising in
China. In Vietnam, the process was shorter: 10 to 15 years. As compared to China, timing of
the “trigger year” was nearly ten years later; hence more potential exogenous models wereavailable. And, China's reform effort itself also played a role of one of the models, as between
China and Vietnam, there were many similarities in the initial conditions and issues.
It is for these reasons that the cases of trials and errors are many in China, relating
almost all items to the above conditions. In these cases, the policies and measures, whichconstituted the components of the final scenario were made available only by way of suchtrials and errors. I can indicate only one exceptional case to those with certainty - that is
relating to item (e), namely the decisions to establish Special Economic Zones in theprovinces of Southern China as early as 1978 and 79. They were followed in later years by aseries of outward-looking policies for foreign trade and FDI. However, for Vietnam, the cases
were a few in number and mostly implicit. It is possible for me by now only to show a fewcases.
With regard to the cases for China, I would only refer to those which I was able todetect in my review studies in the 1980s and in which the government attempted to introduce
the market simply by means of issuing laws and regulations but could not attain success(Table 7). They cover many cases in agriculture and modern urban industries, which emergedin the earlier stages of trials and errors when the government did not yet recognize that theeffective market economy required not only the regular market exchange rules, but also therules prohibiting opportunistic and unlawful activities of the participants. It required evenwhat is now well-known under the name of “social capital”. It must also accompany theaccumulation of productive forces to the extent that is suitable to the intended level of themarket development.
As for Vietnam, probably the most explicit case of trials and errors is that related tothe above referred controversies that occurred in 1985 and 86 between the conservative andreformist groups within the party leadership. The former group argued that the product market
liberalization would allow the private merchants dominate the commodity circulation thus

destroying socialist construction, whereas the latter considered that the bureaucratic, andsubsidy-based planning economy would suppress the productive forces and thus aggravate theeconomic crises further. The Doi Moi strategy was a product of compromise between the two.
The cases of trials and errors can be detected in the areas of rural credit cooperation andprivate joint-stock banks, as well.

6. Russian experience - Disastrous trials and errors
Finally, a few words on the Russian experience - which is in short the case ofdisastrous trials and errors:
Trigger: Breakup of Council of Mutual Economic Assistance and the Soviet Union (Dec.
1991). Crises of the macro-economy caused by large fiscal deficit, price spiral and rapidly
diminishing industrial output in the first half of 1992. Starting from these events asbackground, President Yeltsin took up an Enhanced Economic Reform Program in June 1992,
which followed fully the IMF program of a nearly complete set of liberalization, stabilizationand privatisation.
Exogenous model: The IMF program was accepted in exchange for IMF’s provision ofUS$ 24 billion credit to Russia. “Western advisers marched in with their sure fire recipes for aquick transition to a market economy.” (J. E. Stiglitz’s words)
Scenario: Yeltsin’s goal was seemingly the establishment of the market economy of thewestern capitalist countries, regardless of the answer to the question whether he took into
consideration Russia’s Koku-jo in order to modify that goal. The process toward it was indeed
misconceived.
Trials and errors: most conspicuous indications of this process are the movement of CPI and
GDP as shown in Fig.5.
(to be ended)