Since 1978 China's leaders have taken steps to expand the role of markets in allocating resources. These steps were motivated by problems of misallocation and inefficiency arising under planning. Despite general agreement within China about the disadvantages of purely administrative allocation, however, views regarding the extent to which markets should replace planning vary. According to one school of thought, markets should play only a supplementary role. That is, planning should still allocate and guide most important economic resources, while markets serve to allocate minor, diverse products and to reallocate planned products. Another school proposes to do away with planned allocation and limit planning to indirect measures that influence markets. This second view envisions an economic system akin to "market socialism" where the market, not planning, guides resource allocation. The proposed research addresses questions about plan and market raised by China's recent reform experience. First, it will examine theoretically the operation of a mixed system of plan and market such as that found in China. Using a general equilibrium- type approach, the theoretical analysis will examine the conditions under which plan and market can coexist in a complementary fashion, and factors that would cause either plan or market to dominate. Such factors include transactions costs or economies, plan evasion, monopolistic state commerce, and non-neoclassical behavior by enterprises. Second, the research will analyze empirically plan and market for farm products in China, testing hypotheses generated by the theoretical analysis. An important component of the empirical work was to have been data collection, including a multi-year panel survey of farm households in two or three localities in China. Unfortunately, however, it is no longer feasible to conduct collaborative research in China, following the crushing of the Chinese students in Beijing. Accordingly, the empirical analysis will focus primarily on survey data previously collected by the principal investigator in field work during 1987/88. Although curtailed in scope, this research should still yield important theoretical insights and policy- relevant findings for Chinese development. In addition, it should shed light on the developmental paths of other centrally planned economies.
