Institutional Foundations of Robust Economic Performance: Public-Sector Industrial Growth in China

China’s economic reform was launched by fiscal decentralization, the gradual delegation of decision-making from the central state to local authorities and enterprises. The reform resulted in prodigious economic growth. From 1978 to 1991, the deflated growth rate of China’s national income was more than 10 per cent per year. By 1991, its national income was nearly three times as large as that of 1978, transforming China into the third largest economy in the world after the United States and Japan. This sustained economic growth is difficult to explain. China lacks many of the conditions that economists look for in accounting for sustained economic growth. No plan for the privatization of public property was implemented as in Eastern Europe and Russia. Private property rights remain insecure and poorly enforced. The state does not serve as a neutral third party enforcer of contracts. The monitoring and enforcement of laws and regulations are often arbitrary and inconsistent. Economic markets are intertwined with political markets in which officials secure rents in exchange for administrative favours. Such features of the institutional environment in China ought not to promote sustained economic growth according to orthodox economic reasoning (North and Thomas 1973, Eggertsson 1990). Why then has the Chinese industrial economy maintained such a spectacular rate of sustained growth?