From federalism, Chinese style to privatization, Chinese style

In 1995, China began a profound reform of its state‐owned enterprises. We first describe and characterize this progress in two areas: privatization of small state‐owned enterprises at the county level and mass lay‐offs of excess state workers at the city level. Local governments have initiated these reforms, which are proceeding in economically and politically sensible ways. We then argue that privatization, Chinese style, rests on an adequate economic and political foundation ‐ federalism, Chinese style. We suggest a range of incentives that propel local governments toward state‐owned enterprise reform, including their harder budget constraints and increased competition from the non‐state sector. In this sense, federalism, Chinese style, has induced privatization, Chinese style. JEL classification: H7, L30, P3.