China's two main economic problems before reform were low incentives to workers and the misallocation of resources among sectors. These problems were theresult of a development strategy oriented toward heavy industry. By improving material incentives, China's reforms created a flow of new resources and allowed them to be allocated to sectors suppressed under pre-reform strategies. The onset of reform in China was not allowed to disrupt production from existing resources. Instead, the newly created resources were permitted to accrue and to flow into the more productive, often light industrial sectors, thus stimulating continuous growth of the national economy during reform. Low incentives and the suppression of nonpriority sectors are common features of the legacy of economies in transition from central planning that based their development on the rapid growth of heavy industry. China's approach may be of interest to them. Among lessons China learned are that: (a) Autonomy must be granted to micromanagement units and preserved to improve the incentive structure and create a new flow of resources. (b) While maintaining essential minimum levels of production in the pre-reform priority sectors, autonomous enterprises must be permitted and encouraged to allocate new incremental resource flows to the previously suppressed sectors. (c) In parallel, the distorted policy environment and planned-allocation system must be progressively reformed to bring them into line with the new system of incentives and modus operandi of autonomous enterprises.
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