Redistribution in a Decentralized Economy: Growth and Inflation in China under Reform

Abstract

Despite expanding at an annual rate of nearly 9 percent, China's economy has exhibited a marked cyclical pattern: Periods of rapid growth, accompanied by accelerating inflation, are followed by contractions during which both growth and inflation fall. A widening gap also emerged between the output contribution of the state sector and its share of investment and employment. In this paper, we offer a consistent explanation for this behavior that reflects several key institutional features of China's economic reform: (i) economic decentralization, (ii) the government's commitment to the state sector, and (iii) the credit plan and credit control.