Working Paper
Decentralized Socialism and Macroeconomic Stability

Using a survey of 300 state-owned enterprises (SOEs), we argue that the acceleration of inflation in China after 1984 was caused by the decentralization reforms in the state sector. These reforms allowed the SOEs to realize their innate tendencies to over-consume and over-invest. The evidence suggests that the increasing government budget deficits were caused by an upward "wage drift"; and that there has been a decline in production efficiency in the 1984-88 period. The latter implies that the efficiency improvements in SOEs immediately after 1978 (found by earlier studies) was only a temporary phenomenon; and that the higher aggregate growth rate of 1984-88 came from other sources.