Economic Reforms and External Imbalance in China, 1978-81

The relationship between foreign trade and the Peoples Republic of China's domestic economy during the period 1978 to 1981, from a macroeconomic perspective is reviewed. A simplified version of a model constructed by Richard Portes (1979) is presented and used to consider the relationship between internal and external balance in China. The model clarifies the tradeoffs that Chinese policymakers faced in this period, and the adjustment mechanism that brought a sharp disequilibrium in 1979 under control by 1982. Also reviewed are the sharp changes in development strategy and in institutional arrangements that occurred in late 1978 and 1979. This results in a somewhat different view, compared with the implications of the Portes model, of China's prospects for continued growth through technology acquisition. While reform has solved the problem of internal and external balance, it leaves the economic system where it was in 1978.