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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 4: Reform and political coalition: 1990–2003

Fan Zhang


The leadership resolved the political crisis and reinitiated the economic reform, though it was subject to a narrower political restriction. State-owned enterprise (SOE) reform and tax reform were the major elements of the reform in this period. The reform in the 1990s was driven partly by the top-down design and partly by the enthusiasm to develop the market economy from the bottom of the society. The most important institutional changes were (i) the reform of SOEs, a silent privatisation in which the small SOEs were sold to the public, while the large SOEs were kept by the government; (ii) the setting up of the tax-sharing system between the central and local governments, which readjusted the financial sources and responsibilities of the central and local governments; and (iii) China’s World Trade Organization (WTO) entry, which further opened the door of the Chinese economy to the world. A large private sector and a financial market were formed by the end of this period. As a result of the downward shifting of power from the central government, the local government played a significant role in economic development through political competition among local governments. The leadership formed a coalition with the elites of the society, which provided a foundation for its stability.

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