Silviase/jgov_v1.4_full_ann huggingface dataset:
farming households, and agriculture shifted from a cooperative basis to a household basis. Furthermore, compulsory procurement by the government below market prices was abolished in 1989. Although the now approved land-use right is long (twenty or fifty years, depending on the crops), transferable and inheritable, the ownership of the land still belongs to the people.

## 3 -2 Macroeconomic Performance

In this section we will review the macroeconomic performance of the five countries, and look at how it is related with the reform process. The performance of key economic indicators is depicted in Chart 1-II-2, together with that of the Eastern European countries.

## 3 -2-1 Inflation

Most of the countries have experienced high inflation, although they differ in magnitude and timing during the reform. Price liberalization almost always caused high inflation, and if combined with loose monetary policy it became hyper-inflation, as in the case of Mongolia and Vietnam. On the other hand, China has been successful in suppressing high inflation mainly through slowing down the speed of the reform process. It should be stressed that the period of high inflation did not last long in all of the countries reviewed here. This is perhaps because the effect of price liberalization is temporary and the monetary policy was tightened relatively shortly after the inflation occurred. Now, inflation seems to be under control in most of the countries. The experience of these countries can be summarized as follows.

Cambodia suffered a very high inflation in recent years due to expansionary monetary policies to finance the budget deficit. The central bank is under the direct authority of the Council of Ministers, and it is difficult to resist the pressing demands of the administration. The liquidity growth was 61 percent, 79 percent and 239 percent in 1990, 1991 and 1992, respectively. Since most of the money supply remained in currency (at the end of 1991, currency accounted for 91 percent of total liquidity), the increase in currency is almost proportionally reflected in the increase of money supply. The inflation rate was 70 percent, 157 percent, 121 percent and more than 200 percent in 1989, 1990, 1991 and 1992, respectively. China

China’s inflation has not been as high as other countries. Even in its worst period, it did not exceed 20 percent a year. The Chinese government has been cautious in its economic management, and when there is a signal that the economy is overheating, it tries to tighten macroeconomic policy. This is in sharp contrast with other countries, which experienced very high inflation (sometimes-three digits) in some phase of the transition.

Laos experienced very high inflation of over 100 percent in the first half of 1989 due to increased money supply caused by lending to public enterprises. But following the tightened monetary policy of the central bank, the inflation rate has decreased to only 6 percent in 1993.

Inflation was virtually non-existent prior to 1991, but accelerated sharply to an annual average rate of 120 percent in 1991 and 320 percent in 1992. This acceleration reflected the
impact of price liberalization and the devaluing of the national currency, tuglig, in both the official and market rates. This inflationary pressure was compounded by initial monetary overhang and by an accommodating monetary policy until the last quarter of 1992, when the monetary policy turned restrictive. It took some time for the tight monetary policy to take effect, and the inflationary pressure continued until the middle of 1993. Finally, inflationary pressure began to wane substantially recently.

## V ietnam

Vietnam experienced hyperinflation in the year 1987, with an annual inflation rates of around 700 percent. This was caused by the rapid liberalization of prices and loose monetary policy. The period of hyperinflation, however, did not last long and inflation is now well under control, with a one-digit annual increase rate of CPI.

## 3 -2-2 Growth

Here the Asian transitional economies greatly differ from their Eastern European counterparts. Most of them have secured acceptable growth in the transition process. This growth was led mostly by the agricultural sector and light industry, which also led exports. The only exception among these countries is Mongolia, where there was a sharp decline of production. The possible reasons for this are: 1) higher dependence on COMECON trade and aid than other countries; 2) economic structure based on Soviet-style state enterprises, and 3) remoteness from the center of the rapid growth in East Asia.

## Cambodia

After the liberation from the Khmer Rouge, the first five-year economic development plan was presented in 1985, covering the period 1986-1990. In general, the Cambodian economy smoothly developed during the planning period but the growth rate was somewhat low, considering the very low basis from which the started. Relatively slow growth in real GDP in 1989 and 1990 changed to moderate growth (7 percent) in 1991 and 1992.

## China

In the first stage of the reform (1979-1983) the average annual growth rate of GDP was 10.1 percent. In the second stage, when the reform process was accelerated, the average annual growth rate of GDP was 19.5 percent. This high growth also caused problems like regional inequality and high inflation. In the third stage of 1989-1991, the emphasis was on cooling down the overheated economy. The average GDP growth was 11.9 percent, much lower than the previous period but still quite respectable. In the fourth period, which began with the spring tour to the southern China of Deng Xiaoping, tightened policy ended and China began to accelerate its economy again.

## Laos

Agriculture plays a significant role in the economy of Laos, with a share of GDP of about 60 percent. Bad crops and confusion associated with policy changes were the main reasons for negative growth in 1987 and 1988, but in the following years growth has been stable. The growth rates were 11.5 percent, 5.9 percent, 4.3 percent and 7.3 percent, respectively for each year of the period 1989-1992. It is expected the GDP growth would have reached 7 percent in 1993.

## Mongolia
Mongolia has been suffering negative growth from 1990. By 1993 the real GDP had fallen about 20 percent from the peak level of 1989. Mongolia has had experiences quite different from the other transitional economies analyzed in this report. In this sense, Mongolia's experiences are very similar to those of the Eastern European countries. Although the drop in production seems to have stopped, fast recovery is still not in sight.

## V ietnam

Economic growth in Vietnam has been stable since the reform process began. With the acceleration of the reform process that began in 1989, annual GDP growth also accelerated to the 5-8 percent range. This is partly due to favorable agricultural production and oil production.

## 3 -2-3 External Balance

Signs of a badly behaving economy can appear in its external balances. In the past, the trade deficit was financed mainly by aid and long-term commodity loans from the Soviet Union and the Eastern European countries. Since the flow of funds dried up after the collapse of the Soviet Union, these countries should seek other sources. China and Vietnam followed the path of export promotion, and their trade balance is now on the surplus side. Other countries are still burdened with deficit: financing is a pressing issue for them.

## Cambodia

The trade deficit has continued throughout the second half of the 1980s. The figure increased to two to three times in 1991 and 1992. This is one of the effects of the liberalization of external trade.

## China

In the first stage, the current account was generally in surplus. But in the second stage, with the overheating of the economy, the current account showed a deficit. In 1985 the ratio of the current account deficit to GDP reached at percent, considered to be respectable compared with other countries. In the following stage, current account became positive through increased exports.

## Laos

Laos had a huge trade deficit (131.4 million dollars) in 1992. This volume is roughly the same as the previous year.

## Mongolia

The current account as a percentage of GDP was high even before the reform process began, when the deficit was financed by the Soviet Union and other COMECON countries. Both exports and imports are declining, with the net effect of a reduced trade deficit. The first half of 1993 even showed a surplus. The current account deficit is decreasing, but the overall balance is still negative due to termination of aid from the former Soviet Union.

## V ietnam

The trade balance has improved significantly with the rapid growth of exports of agricultural products and light industrial goods.

## 3 -2-4 Budgetary Balance

Another area where bad economic management can appear is the fiscal deficit. This is
more important because, with the lack of a financial market, the government usually finances the budget deficit through money creation, thus causing inflation. In most countries, the budget deficit still remains high and it is one of the most lagging features of the reform process. Some kind of inflow of capital might be necessary to tide over the critical situation of the government budget. The relationship between the central and local governments is an issue which requires careful study because there are several possibilities of transfer of funds between them.

## Cambodia

The ratio of fiscal deficit to GDP remained at the 3-5 percent level during the period of 1990-1992. Four major factors have contributed to this substantial deficit: 1) the rapid privatization of the economy, which reduced the role of SOEs as a traditional source of taxation, 2) the weak elasticity of many of the established sources of revenue, 3) the gradual abolition of forced procurement at below market prices from the agricultural sector, and 4) the elimination of Cambodia's credit facility.

## China

The balance of the central government budget was slightly negative or slightly positive before 1987, but it turned to positive beginning in 1987.

## Laos

The ratio of budget deficit to GDP has been declining, from 20.3 percent in 1988 to 8.9 percent in 1992, but it still remains high. Most of the budget deficit is financed by foreign assistance.

## Mongolia

In spite of the government’s effort to reduce fiscal expenditure and to implement a new tax regime, the ratio of budget deficit to GDP, while it is decreasing, has stayed high (around 10 percent).

## V ietnam

The ratio of government expenditure to GDP remains roughly stable between 1988 and 1992. That of government revenue has gradually increased during that period. As a result, the fiscal deficit gradually decreased.

(Sugita. Mihira)
Chart 1-II-1 Overview of Transition Process

Price	Fiscal	Financial	SOE	Agricultural	Foreign Exchange	Foreign Trade	Foreign Investment
1978	CH12	CH12	CH12	CH12
1979	L
1980	CH 4	CH 4
1981	V	L	V	L	V
1982	●
1983	CH
1984	CA	CH	●
1985	●	CA10
1986	L11	L11
1987	L 8
1988	● 8 ●	V	CA 7	●	V10	CA 7	L	V
1989	CA	●	V	●	●	●	CA 7
1990	●	●	●
1991	M 1	M	M 5	M 5	●	M 3
1992	●10	M 3
1993	● 6	● 7
1994	● 3

(Note)

CH ..... People's Republic of China

M ..... Mongolia

V ..... Socialist Republic of Viet Nam

L ..... Lao People's Democratic Republic

CA ..... Cambodia

● ..... turning point in reform process

..... progress of reform not significant
Table 1-II-1 Achievement of Reform

Cambodia	China	Laos	Mongolia	Vietnam
Price Liberalization
?	79%	?	more than 90%	?
Share in Value of Turnover
Non-Liberalized Items	?	?	3	quite a bit	4
Liberalization of Lending Rates	?	✗	✗	✗	✗
Entering Liberalization in Banking	?	✗	☑ Licensed	☑	✗
Share of State Enterprises
Value of Production	Heavy Industry 15% Light Industry 30%	71.0%
in Non-Agricultural Production	?	48.4%	?
In GDP	?	--	?	?	33.3% in GNP
Employment	?	18.3%	?	?	10.5%
Agricultural Land Ownership (∆: Right of Usage)	☑	∆	∆	✗	∆
Responsibility System in Agriculture	☑	☑	?	☑	☑
Single Foreign Exchange Rate	?	☑	☑	☑	☑
Foreign Trade Quota Items	?	Ex:138 Im:53	Ex:3 Im:0	4	10
Admission of 100% Foreign Investment Enterprises	?	☑	☑	☑	☑
Chart 1-II-2 Comparison of Economic Performance
CPI 2 ASIA
CURRENT ACCOUNT (PERCENT OF GDP) ASIA
CURRENT ACCOUNT (PERCENT OF GDP) 2

CURRENT ACCOUNT (PERCENT OF GDP) 2 ASIA
## SURPLUS/DEFICIT (PERCENT OF GDP)

SURPLUS/DEFICIT (PERCENT OF GDP) ASIA
## SURPLUS/DEFICIT (PERCENT OF GDP) 2 ASIA
DEBT-SERVICE RATIO 2
DEBT-SERVICE RATIO ASIA

Asian Development Outlook (ADB)

International Financial Statistics (IMP)

Key Indicators (ADB)

Short-term Economic Indicators (OECD)

World Debt Tables (World Bank)
## Chapter III Lessons of the Experiences in Asia

The purpose of this chapter is to consider what kind of lessons can be drawn from the experiences of transitional economies in Asia. The observation of the previous two chapters leads to a couple of points to be noted. First the experiences are highly diverse. This reminds us the fact that transition to a market economy is a fundamentally diverse phenomenon and closely related to the specific conditions of respective countries. This point should be fully taken into account when we design a reform program of a specific country. Second there are three major determinants of the patterns of transition and the macroeconomic performance of transitional economies: (a) initial conditions at the beginning of transition/reform, (b) international environment, and (c) strategy of transition/reform, in other words speed and sequence in reform programs.

## 1 Diversity

When we review the experiences of former centrally planned economies in Asia, we find that the situation is quite different from one to another country. The implication is that we should pay due attention to specific country conditions when we deal with the issue of transition, and we should be careful not to easily apply a standard prescription for reform. The recognition of diversity, in our opinion, leads to a “pluralistic approach”, which allows multiple types of reform programs as alternatives.

Let us review several major aspects of diversity:

## 1 -1 Political and Economic Reform

In China and Vietnam, the dominance of communist parties are still secured. In other words, in these countries, the two dimensions of reform, political and economic, are basically separated. On the other hand, in Mongolia and Cambodia, particularly in the former, political and economic reforms have been implemented in parallel.

## 1 -2 Initial Conditions

When Asian countries started their attempts of transition to market economies, the socioeconomic conditions were significantly different each other:

## (1) Duration of the Centrally Planned System

Mongolia, “the second oldest communist country in the world”, became a people’s republic in 1924, introduced a centrally planned economic system just after the World War II. On the other hand, command economy was adopted in the southern part of Vietnam in 1975, only several years before the beginning of the reform attempts, which developed afterwards into transition to the market economy. The duration of centrally planned economies in other countries are placed somewhere between these two cases.

## (2) Legacy of the Days before the Introduction of Command Economy

The residents of southern Vietnam or the coastal regions of China experienced, at least, “some kind of” market economies before their leaders established centrally planned systems. It is assumed that the memories of the rules of games in the old days had been maintained among them, consciously or unconsciously, until the beginning of transitions. On the other
hand, the Mongolians basically moved from nomadic society to centrally planned system, without enough opportunity of experiencing market economy. This was the big handicap when they tried to move toward a market economy.

## 1 -3 Speed and Sequence of Reforms

In Asia, many countries spent rather long time in their reforms within the framework of centrally planned system, and afterwards shifted to transition to market economies. The fundamentally similar “piecemeal” reforms were initiated around 1980, in China, Vietnam, and Laos, almost simultaneously. These reforms developed into transition to market economies in the late 1980s. Although these three countries shared the period of gradual reforms composed of piecemeal measures, they experienced different speed of reforms afterwards. Since 1989, the speed of the reform in Vietnam has been accelerated remarkably, in accordance with the suggestion of the IMF and the World Bank, whereas such acceleration is not notable enough in China and Laos. On the contrary, Mongolia started its transition without significant record of the reform within the framework of centrally planned system.

In China, open door policy was an important part of its reform program from the very beginning. In this regard, the reforms of Mongolia and China share the common features. In contrast, Vietnam and Laos postponed the reform in eternal economic relations until the late 1980s.

## 1 -4 Macroeconomic Performance

The macroeconomic performance of Asian transitional economies is also diverse. Throughout the 1980s and the early 1990s, China has shown an impressive record of rapid economic growth and export growth. In the meantime, since the mid 1980s, the threat of inflationary pressure became chronic in China, and they had to have periods of stabilization through tight-belt policy periodically. The performance of Vietnam has been impressive too as far as economic growth is concerned, particularly when we take into account that Vietnam had to overcome the adverse impact of the collapse of the CMEA system. While the Vietnamese economy suffered from hyper-inflation until recently, they finally succeeded in pulling down the inflation rate to single digit. This was another great achievement made by Vietnam.

On the other hand, the Mongolian economy has been faced with serious macroeconomic disequilibria composed of reduction of GNP, high rate of inflation, and deficit of international balance of payment. Originally such imbalance was caused by the collapse of the CMEA system, particularly the fact that the capital flow from the former USSR ceased entirely in 1991. The stabilization efforts under the guidance of the international institutions such as the IMF and the World Bank could not lead to any remarkable recovery.

## 1 -5 International Environment

Most of the transitional economies in Asia were related to CMEA. Their relationship with CMEA which determined the basic structures of these economies played important roles as the determinants of the paths of reforms. The dependence on CMEA was extremely large in the case of Mongolia; the trade with CMEA accounted for over 90 percent of the total
amount of trade during the 1980s $ ^{1} $ and in addition CMEA was by far the largest donor. It was also significant in Vietnam, although to a lesser extent; until 1988 the trade with CMEA had accounted for more than 50 percent, $ ^{2} $ and CMEA was by far the largest donor. These economies were inevitably hit severely when CMEA collapsed in the late 1980s.

At the same time, most of these transitional economies were geographically close to the dynamic economies of the East Asia (Japan, Asian NIES, and ASEAN countries). The merit of the proximity is especially apparent in the trade and capital inflow China and Vietnam, as we will discuss in 2 below.

## 2 Determinants of Macroeconomic Performance

What caused the aforementioned difference in the macroeconomic performance among the transitional economies in Asia? It should be pointed out that the initial conditions and international environment mentioned above played crucial roles. This is the point Jeffrey Sachs and Wing Thye Woo stressed regarding the reform in China in their recent article. $ ^{3} $ However, at the same time, it should be admitted that in addition to these two factors the strategies of transition adopted in Asia, particularly in China and Vietnam, contributed to a large extent.

The purpose of this section is to analyze these three determinants of macroeconomic performance.

## 2 -1 Initial Conditions

(1) The Penetration of the Principle of Command Economy

The more the principle of command economy is established the heavier the burden of reform. Let us adopt the share of labor force working in state enterprises as an indicator of the penetration of the principle and compare the figures among China, Vietnam and Mongolia. $ ^{4} $ It was 18.8 percent when China started its reform attempts (1979). It was 14.2 percent when the reform attempts were under acceleration in Vietnam (1988). On the other hand, in Mongolia, just before the beginning of the reform (1990), the figure was 70.1 percent. These figures suggest the difficulty of transition attempts in Mongolia, in comparison with other two countries.

In Russia, before Perestroika (1985), 93.1 percent of total employment was in state enterprises. $ ^{5} $

## (2) Experiences of Market Economy

As was explained in 1-2 above, the experiences of market economy before the introduction of centrally planned economic system were advantages of China and Vietnam. In this regard, Mongolia were severely handicapped.

## 2 -2 International Environment

After the adoption of open door policies, China and Vietnam became integrated parts of rapidly developing intraregional economic networks in East Asia. In particular, the association with overseas Chinese (in the case of Vietnam, overseas Vietnamese too) enabled these two economies to increase export and attract foreign investment. At the same time, they fully enjoyed the advantage of the late comers, as they learned the effectiveness of outward
Vietnam is found in the fact that the transfer of ownership has not been the major issue, unlike Mongolia (and Eastern Europe and Russia), where ambitious mass privatization attempts through voucher or coupon have been popular. Instead China and Vietnam focused their attention on the promotion of private sector on the one hand, and gradual restructuring of state enterprises on the other hand.

This approach seems to be a realistic and pragmatic one, as they can expect rapid and sustained increase of private investment which will finally reduce the magnitude of the problem of state enterprise substantially within the total economy so that the governments can tackle the subject in a more drastic manner. In other words, the basic idea is to “contain” the problem of state enterprises. Under such a strategy, a central issue is how to restructure or rationalize the management of state enterprises without causing social unrest or financial collapse. Although the situation of state enterprises are serious especially in China, these countries seem to have good chance to succeed in containment of the problem heavily relying on the development of private sectors.

(Shimomura)
## FOOTNOTES

1/ source: World Bank

2/ source: IMF

3/ SACHS and WING, 1994

4/ sources: World Bank

5/ SACHS and WING, 1994

6/ In China the agricultural production has grown at the average rate (1980-1992) of 5.4 percent. Vietnam became the third largest exporter of rice finally.

## REFERENCE

SACHS, Jeffrey and WING Thye Woo, STRUCTURAL FACTORS IN THE ECONOMIC REFORMS OF CHINA, EASTERN EUROPE, AND THE FORMER SOVIET UNION, ECONOMIC POLICY, April 1994.