The Institutional Foundations of China's Market Transition

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The Institutional Foundations of China's Market Transition

Author Info

Yingyi Qian

Abstract

April 1999

This paper intends to properly account for China's two decades of market transition by examining its institutional foundations. The journey of transition is analyzed as a two-stage process. In the first stage (1978-93), the system was reformed to unleash the standard forces of incentives, hard budget constraints, and competition, but the underlying institutional forms and mechanisms are far from conventional: reforming government through regional decentralization; entry and expansion of nonstate (mostly local government) enterprises; financial stability through "financial dualism;" and a dual-track approach to market liberalization. In the second stage, China aimed to build a rule-based market system incorporating international best practice institutions but proceeded in its own way. Major progress was made in the first five years (1994-98) on the unification of exchange rates and convertability of the current account; the overhaul of the tax and fiscal systems; reorganization of the central bank; downsizing of the government bureaucracy; and privatization and restructuring of state-owned enterprises. To complete its transition to markets, China still faces serious challenges, especially in transforming its financial system and state-owned enterprises and in establishing the rule of law.

The paper concludes by reflecting on the economics of reform and institutional change from the Chinese experience. The main lesson learned is that considerable growth is possible with sensible but not perfect institutions, and that some unconventional "transitional institutions" can be more effective than the best practice institutions for a period of time because of the second-best principle. Specific lessons include: incentives, hard budget constraints, and competition should apply not only to firms but also to governments; reforms can be implemented without creating many or big losers; and successful reforms require appropriate, but not necessarily optimal, sequencing.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 99011.

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Date of creation: Apr 1999
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Handle: RePEc:wop:stanec:99011

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This paper has been announced in the following NEP Reports:

NEP-ALL-1999-07-19 (All new papers)
NEP-CDM-1999-07-19 (Collective Decision-Making)
NEP-DEV-1999-07-19 (Development)
NEP-HIS-1999-07-19 (Business, Economic & Financial History)

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Other versions:
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Other versions:
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Other versions:
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Other versions:
- Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics. [Downloadable!]
Jiahua Che & Yingyi Qian, 1998. "Institutional Environment, Community Government, and Corporate Governance: Understanding China's Township-Village Enterprises," William Davidson Institute Working Papers Series 59, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
Other versions:
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Other versions:
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Hehui Jin & Yingyi Qian & Barry Weingast, 1999. "Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style," Working Papers 99013, Stanford University, Department of Economics. [Downloadable!]
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Other versions:
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Other versions:
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Jiahua Che & Yingyi Qian, 1998. "Insecure Property Rights And Government Ownership Of Firms," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 467-496, May. [Downloadable!] (restricted)
Other versions:
- Jiahua Che & Yingyi Qian, 1997. "Insecure Property rights and Government Ownership of Firms," William Davidson Institute Working Papers Series 51, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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Olivier Blanchard & Michael Kremer, 1997. "Disorganization," William Davidson Institute Working Papers Series 38, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
Other versions:
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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Huang, Yasheng & Di, Wenhua, 2004. "A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China," Working papers 4482-04, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
Sonja Opper, 2001. "Dual-track Ownership Reforms: Lessons from Structural Change in China, 1978--1997," Post-Communist Economies, Taylor and Francis Journals, vol. 13(2), pages 205-227, June. [Downloadable!] (restricted)
Milanovic, Branko & Hoff, Karla & Horowitz, Shale, 2008. "Political alternation as a restraint on investing in influence : evidence from the post-communist transition," Policy Research Working Paper Series 4747, The World Bank. [Downloadable!]
Other versions:
- Milanovic, Branko & Hoff, Karla & Horowitz, Shale, 2008. "Political Alternation as a Restraint on Investing in Influence: Evidence from the Post-Communist Transition," MPRA Paper 11829, University Library of Munich, Germany. [Downloadable!]
Li Keping & Ehtisham Ahmad & Thomas J. Richardson & Raju Singh, 2002. "Recentralization in China?," IMF Working Papers 02/168, International Monetary Fund. [Downloadable!]
Yasheng Huang, 1999. "The Institutional Foundation of Foreign-Invested Enterprises (FIEs) in China," William Davidson Institute Working Papers Series 264, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
Addison, Tony & Geda, Alemayehu, 2001. "Ethiopia's New Financial Sector and Its Regulation," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
Yasheng Huang & Wenhua Di, 2004. "A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China," William Davidson Institute Working Papers Series 2004-667, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
Xiaogang Wu & Yu Xie, 2002. "Does the Market Pay Off? Earnings Inequality and Returns to Education in Urban China," William Davidson Institute Working Papers Series 454, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
Franklin Allen & Jun Qian & Meijun Qian, 2002. "Law, Finance, and Economic Growth in China," Center for Financial Institutions Working Papers 02-44, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
Other versions:
- Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July. [Downloadable!] (restricted)

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