Contract Matters: An Explanation of China’s Recent Economic History

Contracts, as a form of institutions, have an influence on efficiency. Other conditions being the same, different contracts lead to different efficiency. Unlike property rights which require compulsory implementation by law, contracts rely mainly on the contracting parties’ voluntary implementation due to the fact that they are reached by two or more contracting parties in unanimity. Therefore, in cases where property institutions cannot be altered fast enough due to political or ideological reasons, reforms can be achieved by the modification of contracts, which result in similar effects at a lower cost. This is the case for China’s reforms, especially in agriculture: the land ownership in rural areas— collective land property rights have not changed in name, but the contracts between farmers and the state, or the collectives, have changed tremendously to bring about remarkable economic growth. In a more general sense, it has happened once and again in human history when property institutions—judicial institutions—cannot be changed due to political or other reasons, or due to brutal bloodshed or war in prospect. Therefore, as an option, the change of contract exists as a more common, and unconscious but effective form of institutional change.