beginning.

## 5 -3 Slow Privatisation of State Enterprises

Most transitional economies are faced with serious problems with regard to state enterprises, which form an essential part of any centrally-planned system. In China and Vietnam, the governments have not attempted a drastic transfer of ownership from the state to the private sector. This contrasts sharply with the approach taken in Mongolia where, as in Eastern Europe and Russia, ambitious mass privatization was attempted through the provision of vouchers or coupons. Instead, China and Vietnam focused their attention on promoting the private sector on the one hand, and establishing autonomous management in state enterprises on the other.

Although the slow progress of privatization in these countries has been widely criticised, we believe that perhaps too much importance has been placed by the critics on the rapid transfer of ownership. As the sustained growth of private investment (including direct foreign investment) can be anticipated, the seriousness of the problem of state enterprises in relation to the whole economy is likely to be progressively reduced. In other words, the approach adopted by China and Vietnam has been to 'contain' the problem of state enterprises, preventing their financial collapse.

Although the situation regarding state enterprises is quite serious, particularly in China, the pragmatic approach to this area described above does provide a reasonable possibility of a 'soft landing', as private investment is very active. At the very least, this approach has helped to reduce the likelihood of social unrest due to the restructuring of state enterprises.

## 6 Strategy: Shock Therapy vs Gradualism

In the study of economic transition, one of the most important issues has been the choice between two alternative approaches regarding the speed and sequence of transition reforms. These are 'shock therapy' (also termed the 'big bang' or 'radical approach') and 'gradualism' (or 'conservative approach'). Some experts argue that this choice is a central policy issue; in 1993 the IMF stated that, "It is important to establish whether a gradual or big bang approach is to be pursued". In 1990, reports prepared by four international institutions (the IMF, IBRD, OECD and EBRD) on the economy of the former USSR strongly recommended that a radical approach to transition should be taken, arguing that "the conservative approach would certainly fail".

However, the polarization of these two approaches is not, we believe, the most appropriate way to view strategic options for reform. Instead, we should combine elements of these two methods to form a third approach.

In some fields, the introduction of radical and drastic measures on all fronts is crucial, a typical example being the control of hyper-inflation. In other fields however, for instance state enterprise reform, a patient, step by step approach is preferable. A third category of issues, which would include price liberalization, financial reform, and trade liberalization, may offer a real choice between rapid or gradual implementation (e.g., covering all major commodities or adopting a 'two-track pricing system'). This combined approach can provide a wider range of options for policy-makers in transitional economies and contribute to more