Chapter 11: Inflation and Industrial Deregulation: The Twin Travellers
11. Inﬂation and industrial deregulation: the twin travellers* BACKGROUND Economic transition in China not only represents an arduous process, but has also characteristically been inﬂicted with bouts of inﬂation over the past 20 years or so. As a matter of fact, the occasional outbursts of inﬂation as observed were indeed all triggered by abortive attempts to deregulate the state-industrial sector. This seems therefore quite atypical of the celebrated ‘incrementalist’ or ‘gradualist’ approach propagated by Deng Xiaoping himself. At any rate, the disruptive Chinese inﬂation experience compares unfavourably with the ‘graduated’ cyclical ﬂuctuations in the West. In mature industrialized countries, the established market system normally does not provide room for any drastic institutional reshuﬀle and any anticyclical ﬁscal and monetary policy readjustments made are bound to be marginal in scale. There are two aspects to the background of inﬂation breaking out in China. The ﬁrst refers to what may be called the ‘monopoly overhang’. That is, the backdrop of pervasive sellers’ markets which may be readily exploited by any state-run suppliers operating on grounds of the ‘economics of shortage’ à la Kornai. The second is the familiar ‘monetary overhang’. This relates to involuntary accumulation over the years of purchasing powers or ﬁnancial claims that threaten to burst out, once oﬃcially ﬁxed prices begin to be unfrozen in favour of the deregulated SOEs. Both types of ‘overhang’ are clearly inherited from the Maoist past to constrain the pace of industrial deregulation,1 much as the...
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