Thriving markets require not only an appropriately designed economic system, but a secure political foundation that limits the ability of the state to confiscate wealth. This requires a form of limited government, that is, political institutions that credibly commit the state to honor economic and political rights. This article studies how limited government arose in the developed West, focusing on the critical role of federalism for protecting markets in both England and the United States. Federalism proved fundamental to the impressive economic rise of England in the 18th century and the United States in the 19th and early 20th centuries. The article also shows that federalism underpins the spectacular economic growth in China over the past 15 years. Copyright 1995 by Oxford University Press.

The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development

Highlighting an important facet of diversity among organizations operating in different institutional environments, this article presents a model of the growth strategy of the firm in planned economies in transition such as Eastern Europe, the former Soviet republics, and China. Focusing on the stylized state-owned enterprises, we explore the interaction between institutions and organizations in these countries. Given the institutional constraints, neither generic expansion nor acquisitions, two traditional strategies for growth found in the West, are viable for firms in these countries. Instead, firms settle on a network-based strategy of growth, building on personal trust and informal agreements among managers. The institutional environment that leads to this unique strategy of growth is examined, and boundary conditions, limitations, and implications of this model are discussed.

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The Growth of the Firm in Planned Economies in Transition: Institutions, Organizations, and Strategic Choice

China's economic reforms have resulted in spectacular growth and poverty reduction. However, China's institutions look ill-suited to achieve such a result, and they indeed suffer from serious shortcomings. To solve the "China puzzle," this paper analyzes China's institution—a regionally decentralized authoritarian system. The central government has control over personnel, whereas subnational governments run the bulk of the economy; and they initiate, negotiate, implement, divert, and resist reforms, policies, rules, and laws. China's reform trajectories have been shaped by regional decentralization. Spectacular performance on the one hand and grave problems on the other hand are all determined by this governance structure. ( JEL O17, O18, O43, P21, P25, P26)

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The Fundamental Institutions of China's Reforms and Development

China's remarkable economic success rests on a foundation of political reform providing a considerable degree of credible commitment to markets. This reform reflects a special type of institutionalized decentralization that the authors call “federalism, Chinese style.” This form of decentralization has three consequences. First, it fosters competition, not only in product markets, but also among local governments for labor and foreign capital. This competition, in turn, encourages local government experimentation and learning with new forms of enterprises, regulation, and economic relationships. Second, it provides incentives for local governments to promote local economic prosperity. Finally, it provides a significant amount of protection to local governments and their enterprises from political intrusion by the central government.

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

In the 1980s fiscal reform in China provided localities with strong incentives and a heightened capacity to pursue industrial growth. As a result, local governments have responded vigorously to economic reform, managing rural collective-owned enterprises as diversified corporations, with local officials performing the role of a board of directors. This article analyzes the incentives that have led to the development of this form of local state corporatism and rapid rural industrialization, and it describes the ways in which local governments coordinate economic activity and reallocate revenues from industrial production. These developments are important for two reasons: they show that local government involvement in the economy does not necessarily decline with the expansion of market coordination; and they offer a successful model of reform that serves as a counterpoint to privatization proposals.

Fiscal Reform and the Economic Foundations of Local State Corporatism in China

The emergence and recent rapid growth of rural nonagricultural enterprises (township, village and private enterprises - TVPs) in China is a striking and in many ways unique phenomenon. Almost overnight, industrial activity has expanded tremendously and enterprises have proliferated. These changes have brought about large increases in rural personal incomes and significant shifts in the structure of the rural labor force. The goal of this report is: (a) to present a better understanding of how China's industrial TVP sector actually functions; (b) to present information about the rural communal institutional and regulatory framework within which it operates; (c) to ascertain the reasons behind the rapid growth of the sector, particularly since 1984; (d) to identify and analyze the problems and obstacles faced by the TVP sector as it continues to evolve and develop; (e) to evaluate on an informed basis different institutional and policy options for the future; and (f) to shed light on the TVP sector from an international perspective. Finally, it is noted that China's TVPs have already become a pillar of the country's economy and are playing a decisive role in rural industrialization and national economic modernization.

William A. Lin Qingsong Byrd

Papers

China's rural industry : structure, development, and reform