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The Institutional Evolution of China

Government vs Market

Fan Zhang

China’s experience over the past decades is not just a story of economic growth, it is also one of institutional change. The current political-economic system is a bureaucratic market system, in which the government and the market both coexist and conflict with each other. This book gives a detailed description of the institutional evolution in China, using large amounts of documents and cases. The book provides a theory explaining the origin of China’s reform, the political and economic forces driving the reform, and the reasoning behind the stagnation and turn-over of reform.
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Chapter 3: Reform 1979–1989: building market institutions

Fan Zhang


The Cultural Revolution and the experience of the planned economy in China from the 1950s to the 1970s wiped out almost all the institutions and mechanisms a market economy needed. The task of reform was to rebuild all these institutions of a market economy from nothing and to improve the efficiency of the economy. The reform was started in rural areas. In the late 1970s, attempts to distribute plots to households started in poor villages, such as Xiaogang in Anhui Province, initiated by peasants. These reforms spread nationwide, gave user rights to peasants, and were supported by the leadership. The reform was successful and ended the food shortage in several years. Instead of taking a strategy of rapid privatisation as in many transition countries, China took an alternative approach in the 1980s by giving managers of state-owned enterprises incentives by implementing a management contract responsibility system. This reform failed due to the more complicated situation in the urban area. The government also relaxed its control of prices for consumer goods by using a dual-track approach. Under this approach, a free market was allowed to emerge, while the old planned system continued to exist. Government power was decentralised and the door to foreign investors was re-opened. The Tiananmen Square events in 1989 ended the dream of a Western-style political reform.

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