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Policy Paper 11: China’s Nonconformist Reforms

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  • McMillan, John

Abstract

How has China achieved its spectacular economic growth under reform, despite having no commercial law, no financial market, prices that are only partially freed, and no privatization? I argue that the fundamental reasons for China’s success are not unique to China. China succeeded because it unleashed the forces of competition. China shows the power of incentives; but it also shows that, in a transition economy, workable incentives can take surprisingly nonstandard forms. Novel institutional forms evolved to solve the unprecedented problems of transition. Entry of new firms, albeit with an unusual ownership structure, produced a competitive non-state industrial sector. New state-imposed incentives induced the state-owned firms to improve their efficiency. The discipline on managers that comes from product-market competition helped compensate for the missing financial-market discipline. Reputation incentives substituted for formal legal enforcement of contracts.

Suggested Citation

  • McMillan, John, 1994. "Policy Paper 11: China’s Nonconformist Reforms," Institute on Global Conflict and Cooperation, Working Paper Series qt9cn9b13c, Institute on Global Conflict and Cooperation, University of California.
    • Handle: RePEc:cdl:globco:qt9cn9b13c
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    References listed on IDEAS

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    Cited by:

    1. Franklin Allen & Jun & Chenying Zhang & Mengxin Zhao, 2012. "China's Financial System: Opportunities and Challenges," NBER Chapters, in: Capitalizing China, pages 63-143, National Bureau of Economic Research, Inc.
    2. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    3. Hongbin Li & Lingsheng Meng & Junsen Zhang, 2005. "Why Do Entrepreneurs Enter Politics?," Discussion Papers 00009, Chinese University of Hong Kong, Department of Economics.
    4. Lino Sau, 2012. "Evolution of China's financial system and its impact on economic development," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 5(1), pages 1-15.
    5. Chittawan Chanagul, 2009. "Democracy and Economic Development," Vienna Economics Papers 0911, University of Vienna, Department of Economics.
    6. Hongbin Li & Lingsheng Meng & Junsen Zhang, 2006. "Why Do Entrepreneurs Enter Politics? Evidence from China," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 559-578, July.
    7. Adam Fforde, 2002. "Resourcing Conservative Transition in Vietnam: Rent Switching and Resource Appropriation," Post-Communist Economies, Taylor & Francis Journals, vol. 14(2), pages 203-226.

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