Cover

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Title Page, Copyright, Dedication

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pp. i-vi

Contents

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pp. vii-viii

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Acknowledgments

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pp. ix-x

I am most grateful to my coauthors of the publications included in this book, both for giving me the opportunity to work with them and for allowing me to include these articles in the book. I thank Jiahua Che, Hehui Jin, Lawrence J. Lau, Eric Maskin, Gabriella Montinola, Gérard Roland, Barry R. Weingast, and Chenggang Xu for their intellectual inspiration and input in our joint works, and for their valuable comments and suggestions for other articles included in this book....

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Introduction: A New Perspective on Reform

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pp. 1-16

Starting in 1979, China embarked on a profound economic reform that led to a transformation of the country from a centrally planned economy to a market economy. Over the next 37 years, China produced one of the most spectacular growth records in human history. According to the World Bank, in 2015 the nominal GDP of China was nearly $11 trillion, surpassing 60 percent of U.S. nominal GDP. In comparison, China’s nominal GDP in 1978 was only $148 billion, merely 6 percent...

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1 How Reform Worked in China

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pp. 17-60

In the last twenty-two years of the 20th century, China has transformed itself from a poor, centrally planned economy to a lower-middleincome, emerging market economy. With total gross domestic product (GDP) growing at an average annual rate of about 9 percent, China’s per capita GDP more than quadrupled during this period. The benefits of growth were also shared by the people on a broad basis: the number of people living in absolute poverty was substantially reduced from...

I DUAL-TRACK MARKET LIBERALIZATION

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2 Reform without Losers: An Interpretation of China’s Dual-Track Approach to Transition

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pp. 63-88

Efficiency-enhancing economic reform should potentially allow winners to compensate losers, thereby making the reform Pareto-improving. However, in practice, it seems very difficult to find mechanisms that make economic reform Pareto-improving, and even more difficult for reform to be simultaneously Pareto-improving and efficient, due to distortionary costs of compensation or to lack of credibility of its implementation. We demonstrate in this paper that a simple mechanism...

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3 Pareto-Improving Economic Reforms through Dual-Track Liberalization

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pp. 89-98

Our purpose is to show that, in a competitive general equilibrium context, the “dual-track” strategy for liberalization not only attains full economic efficiency as the “big-bang” strategy but also simultaneously enables a Pareto-improving transition, that is, a transition without losers, from a centrally planned to a market economy. A dual-track strategy may be defined as follows: (1) in one track, the “plan track,” the existing (often inefficient) central economic plan, and the distribution...

II UNCONVENTIONAL OWNERSHIP OF FIRMS

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4 Institutional Environment, Community Government, and Corporate Governance: Understanding China’s Township-Village Enterprises

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pp. 101-130

The remarkable development of the non-state sector has changed the landscape of China’s industries (Table 4.1). In 1978, 78% of national industrial output came from state-owned enterprises (SOEs); by 1993, that percentage had sunk to a 43% level, with non-state enterprises providing 57% of total production. The most dynamic segment in the non-state sector is rural enterprises (xiangzhen qiye), which accounted for 36% of the national industrial output in 1993, up from 9% in 1978....

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5 Insecure Property Rights and Government Ownership of Firms

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pp. 131-160

For the past two decades, China’s transition to a market economy occurred in an environment without the rule of law to constrain the state. In particular, there was no commitment based on law and institutions designed to prevent the national and local governments from encroaching on private enterprises or to prevent the national government from encroaching on local governments. Hence, property rights (both cash flow and control over assets) were fundamentally...

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6 Public vs. Private Ownership of Firms: Evidence from Rural China

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pp. 161-198

In studying economies in transition from plan to market, no single issue has received more attention from economists and policy makers than the one of property rights and ownership of firms. In Eastern Europe and the former Soviet Union, one observes mass privatization of old state-owned enterprises (SOEs) and the emergence of new private (including newly privatized) enterprises. In China, old SOEs also declined even without privatization, and new private enterprises...

III GOVERNMENT AND REFORM: FEDERALISM, CHINESE STYLE

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7 Federalism, Chinese Style: The Political Basis for Economic Success in China

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pp. 201-236

The remarkable success of China’s economic reforms—fostering economic growth averaging 9 percent per year over the past fifteen years—seems to defy conventional wisdom. Consider the following:

• Economic reform appears to have been successfully pursued without any political reform.
• The central government seems to retain considerable political discretion, including the ability to reverse suddenly the reform process or to impose onerous exactions on successful enterprises...

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8 Federalism as a Commitment to Preserving Market Incentives

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pp. 237-250

Traditional economic theories of federalism emphasize two well-known sources of benefits from decentralization. First, Hayek (1945) suggested that, because local governments and consumers have better information than the national government about local conditions and preferences, they will make better decisions. Second, Tiebout (1956) argued that competition among jurisdictions allows citizens to sort themselves and match their preferences with a particular menu of local public...

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9 Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style

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pp. 251-282

Reforming the government is a crucial component of both the transition from a planned to a market economy and economic development. Creating thriving markets in these economies typically requires transforming a highly centralized and interventionist government into one that supports the market and fosters decentralized economic activities. Democracy, separation of powers, and the rule of law are among the important institutions that allow citizens to hold the government...

IV INITIAL ORGANIZATIONAL CONDITIONS AND REFORM

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10 Why China’s Economic Reforms Differ: The M-Form Hierarchy and Entry/Expansion of the Non-State Sector

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pp. 285-332

Recently, there has been a revived interest among economists in China’s economic reforms. Since 1979, economic reforms in China have generated significant growth across the board: the overall performance of the Chinese economy has been better than its own past record, better than most developing countries at similar development levels, and also better than Eastern Europe and the former Soviet Union, both before and after their radical transformations in 1989. It appears that China...

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11 Incentives, Information, and Organizational Form

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pp. 333-360

A central theoretical question is how organization makes a difference to economic performance. Obviously, technology will have a great bearing on the way a firm or economy performs. But, by an organization we mean the hierarchy of managers built on top of technology, e.g., the way a corporation is subdivided into different divisions, and the way a planned economy (such as China or the former Soviet Union) is divided into different functional or regional governing bodies. In this...

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12 Coordinating Reforms in Transition Economies

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pp. 361-394

The comparison between reforms in China and Eastern Europe is often done in terms of the gradualist and experimental approach vs. the bigbang and comprehensive approach. China’s reforms first started with experiments in agriculture followed by experiments in special economic zones in cities.1 However, one often forgets that some experimental reforms were introduced in Eastern Europe and the Soviet Union in the 1980s, but they failed. Those failures led to the discrediting...

Index

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pp. 395-402