American Economic Association

How Did China Take Off?

Author(s): Yasheng Huang
Source: The Journal of Economic Perspectives, Vol. 26, No. 4 (Fall 2012), pp. 147-170
Published by: American Economic Association
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of Economic

Journal

Number

26,

PerspectivesVolume

4Fall

147-170

2012Pages

How Did China Take Off?

Yasheng

Huang

two prevailing

are
economic

There

globalization.

zones

in the

largely
and

coastal

In

this

and

wide.

land

view

view,

The

growth
by setting

up

China's

export-oriented
migrants,

interior

to

place

when

Deng

economic

manufacturing,
their

the

businesses

income,

the

emphasizes

regionsof

of rural

entry

rate of

of

special

boosted

perspective

in rural,

China's
pride

started

of rural
second

the

the

gives

Chinese

investments

and

contracting;

first

view,

millions

reformsespecially

system;

pricing

far

this

foreign

employed

poverty

of internal

and

The

off.
to

provinces.

foreign-funded,

reduced

tance

trade

of what caused

explanations

take

According

liberalized

Xiaoping

to

growth

impor

agricultural

known

as

town

ship and village enterprises.

China's
zones

of foreign

shift in policies
and

are

of the
were

investments

Joint

Equity
the

committing

the

time

reformist
not

important.
they

were

leaders

spontaneous;

only

three

over
they

years

to the

government

economic

Special
introduced

after

and

conservatives.
required

Politically, the 1979 passage

Ventures,

Chinese

politically

at

and legal practices.

Chinese-Foreign
tion

a triumph

signaled

inflows

reforms
controversial

ideologically

establishment
the

external

early

were

the

Also,

an

explicit

of the Law on
Cultural

of foreign

protection

their

Revolu
property

rights, was pathbreaking.

But

the

economic

contributions

of foreign

do

investments

not

remotely

match

rural industry. At their peak, firms funded by foreign capital

18
million
people (in 2010). By contrast, at their trough in 1978, town
employed
ship and village enterprises employed 28 million people. Between 1978 and 1988,
those of China's

Yasheng
Massachusetts
yshuang@mit.

Huang

is Professor

Institute

of International

of Technology,

Management,

Cambridge,

Sloan

Massachusetts.

School
His

of Management,
email

address

edu.

http://dx.doi.org/10.1257/jep.26.4.147.

doi= 10.1257/jep.26.4.147

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All use subject to JSTOR Terms and Conditions

is

148

of Economic

Journal

China's

Perspectives

poverty headcount

record

China's

during

declined

three

by 154 million, by far the most impressive

decades

of

The

reforms.

contributions

of

foreign

capital toward China's initial poverty reduction during this period are miniscule.
Employment by firms funded by foreign capital was 60,000 in 1985 and 660,000 in
1990. The same two figures for township and village enterprises are 69.8 million
and 92-7 million, respectively (National
in

economic

next

growth

internal

the

often

massive

every

trade

an
year

ratio

To

every
stood

township
owned

and

treated

has

has

neurship
But

my

private

have

bank

economics

the

and

its

widespread

on

believe

scholars
the

is often

of township

Chinese

and

government

to conclude

that

of private

importance

are

they

entrepreneurs.

view

that

that

Chinese
entrepre

for growth.

and

data

of Chinese
inception

and

been

the

financial

than

the

basis

at

reforms

show

voluminous
contradicts

that

that

China

the

very

start

correlate
fast

undertook
of

investments

reforms.

with

strongly
GDP

growth
and

and

township

and

reduction,
by corporate

of

1980sdirectly

I will

private

liberalization

achievementspoverty
(rather

on
from

reforms.1

have

financial

consumption

detailed

spearheaded

private

statist

belief

many

years.

and

accurate

yet government-owned,
This

had

consumption
in recent

scholars

by

defi

has

structurethat

than

1980s,

trade

China

industry

ownership

rather

led

an

like

the

it had

percent

China

Many

efficient,

wisdom

documents

entrepreneurship

35

In

1989

of what

model,

household

rural

narrativeformulated

the

since
the

none

growth

1990,

off requires

literature.

the

and

especially

and

of finance,

meaningful

took

governments

with

mercantilism.

with

a distinct

dynamic

and

1980s,

enterprises.

liberalization

from

conventional

Chinese

financial

reading

of

The

for

some
driven

government

and an initial decline of income inequality.

spending),
The

the

the

had

China
China

contrast,

compared

village

conventional

best-known

by personal

1993.)

economy

interpretation

and

of China's

so

historical

enterprises

Rural

the

financial

and

be

together

own

significant

take-off

developments

the

1980

(By

In

development,

and

control

and

heterodox

village

rural

in

defied

government

China's

reduction

poverty

1980s,

of

Between

1990.

percent,

by local

enterprises,

growth

50

China's

could

tight

and

except

the

investments
rate.

enterprises

a paradox

retained

this

its

village

firms

as

village

how

operated

these

its

of its rural

features

requisite

1983,

year

of township

and

and

in

industry

exchange

at over

of

rise

of rural

the

1982,

understand

the

of Statistics 2011).

1970s

a function

infrastructural

except

understanding

That

as

overvalued

surpluses

to GDP

by

of

thought

had

Bureau

late

completely

era

golden

state-controlled

China
cits

was

the

in general.

reforms

During
are

starting

of decades

couple

in

the

documents

view
sector

historical

include

of China

scholars

is completely
evidence

is right

about

state-controlled.
on

financial

reforms

one

How

pointthat

does

with

one

the

a 22-volume

today's

reconcile

my

well-established

of documents
of the central bank, all major state
compilation
the rural credit cooperatives
between 1982 and 2004. While they are
available at libraries at Chinese University in Hong Kong and Harvard, they have not previously been
examined
I cite are in the reference list.)
(Of these, the specific documents
by researchers.
owned

commercial

banks,

and

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

Yasheng

current

fact

sources

of

provide

sometime

the

statist

financial

the

answer:

China

around

mental

effect

the

on

in the

same

The
almost

1990s.

This

of hundreds

welfare

unknown

completely

to mid

early

the

controls?
reversed

all

financial

reversal,

off.

growth

in

rural

market

in
not

economy,

was

population

rural

China

but

also

determine

economy.

rural

because

the

China

also

because

only

the

In

its monu
is almost

Chinese,

West.

Developments

to a market

tion

data

liberalization

despite

rural

of

My discussion is heavily tilted toward rural China because

took

and

documentary

of its financial

of millions

149

Huang

in

Chinese
and

pace

it was

1980s,

the

nature

the

overall

vast

is rural

transi
of the

majority

in origin.

of China's

rural

the

China's

1980s

capitalism

the

this is where Chinese

affected

overall

Reforms

transition

who

entrepreneurs

to

responded

quickly to the incipient political and policy flexibility and who started businesses
that

rural

reversing
effect
and

and

down

because

the

tions

and

rural

China.
and

township

village

that

liberalization

successful
the

about

Other

"Nothing
China's

Rural
per

thought

quo
but

income

(Lau,

were

not
not

the

initial

is

village

section

section

condi
in

economy

in rural

Chinathe
documents

enterprises

offers

some

Chinese

may

financial

discusses

affected

of

China's

in

and

1978,

more

than

privatized;
privatized,

their

success

doubled
by 51

rural
rural

reforms

is

reforms

were

2000).

system

striking,
mere

China

in which

it was
but

contracted

out

percent

specula
and

growth

entrepreneurs

Pritchett, and Rodrik (2004)

huge

1978

between

and
1978

and

instan
and

1984,
and

1983.

of reforms (Riskin 1987).

that

considering
"modest"

sold

their

economists

many
from

departures

did not dismantle

farmers

the

all planned
crops

at

the

status

prices,
market

to the state at state-fixed prices. Land

to farmers
were

was

between

sharply within the first decade

to a dual-track

Hausmann,

This

Reforms"

prices after they fulfilled their obligations

was

third

have

housing

government

and

fourth

may

increased

consumption

capita

Qian, and Roland

moved

The

reversals

policy

The

and
world.

of a market

township

story.

reversals.

started

capita

per

success
that

sector

the

both

institution

of original

reading

Revolutionary

reforms

Rural poverty declined

The

the

of how

emergence

belief,

widespread

subsequent

than

rural

rural

A careful

private

how

rapid

to foreign

firms;
in

the

1990s

1990s.

account

an important

the

opening

state

economies

in the

In

had

of growth.

composition

taneous.

to the

an

to the

discusses

small

statist

reforms

provides

led

enterprises.

and

tive comments

rural

most

as

token,

also

economy.

such

reforms,

of loss-making

reversed

section

contrary
most

history's

of urban

of the

reforms

second

to a market

same

but

entrepreneurship

transition

one

By the

enterprises.

rural

suppressed
overall

of this paper

specific

The

state-owned

privatization

government

the

urban

shortage

remains

first section

The

suggests

no

had

China

the
only

China's

investments;
Yet

real

not

China

2000s,

reforms.

the

with

of slowing

trade

be

directly
reforms

competed

allowed

emphasize

on

long-term
to start

leases.

their

own

State

firms

businesses.

the virtues of relaxing existing

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All use subject to JSTOR Terms and Conditions

150

of Economic

Journal

restrictions

which

characterized

they

himself

seemed
Team

Economy
few

are

nothing

years

It depends

correct?
China

to what

to

1998),
other

on

what

is sometimes

deregulation,
standard,

Chinese

mind

the

in

had

Deng

was,

entrepreneurs
perspective,
and

was

Hobbes,

partial

market

allowing

millions

by rural

of startups

rural

The

reforms

did

reforms

modest.

when

is

benchmark
that

But

the

and

was

the

perspective

template

includes

short."

From

private

this

dynamic

contracting,

at all.

modest

were

They

benchmark

land

crops,

not

isolation.

the

of Chinese

life

of agricultural

in

happen

Which

Rural
in

out

rule of law, and democratiza

were

entrepreneurs

not

in

quoted

consensus"

brutish,

"nasty,

example

carried

economists

Revolution,

pricing

(as

were

Western

liberalization,

Cultural

to quote

that

reforms."

a "Washington

rural

stated

Deng

use.

you

agricultural

a prominent

words.

reforms

revolutionary

financial

tion.

that

than

called

1984,

rural

benchmark

privatization,
By

In

"The

Xiaoping's
are

in other

revolution,

disagree.

Deng

in origin,

as "humble"
not

Research

reforms.

institutional

frameworkevolution,

Deng

past

with

compared

reforms,
in their

Perspectives

in

implemented

conjunction with some broad changes in Chinese politics. The Chinese leadership
took deliberate and well-publicized gestures to instill confidence in policy cred
ibility and political stability. In 1979, the Chinese government returned confiscated
assetsbank

for

In

in

some

10
two

1980,

of

percent

were

China's

premiers

homesto

private

imprisoned

commerce

private

vice

and

gold,
of people

number

large

engaging

that

bonds,

deposits,
A

landlords.

during

released

private

personally

former
the

from

were

entrepreneurs
New

brought

(One

jail.

Year's

and

capitalists

Cultural

Revolution
showed

survey

former

prisoners.)
to

greetings

a woman

who received the first license to open a business in Beijing. In 1981, the Politburo
a

passed

that

resolution

for

laborers"eligible
thenreleased

county

made

and

graft)

I provide

the

more

The

Revolution

estimated.

China

of

to

more

the

It also

backwater
in

(arrested

published

an

village

elections

introduced

Cultural

resolve

a paradox:
the

era

predictable

open

rural
for

1982

in local

apology
(in

to

Why
state

was,

and

from

Deng

2008,

Huang

of entrepreneurs

were

automatic

risks

therefore

the

reason

of being

under

even

is that

arrested

era

Deng

to invest

willing

of cred
Cultural

to private business

during

One

a source

capricious

opposition

stance

is, absolute.

the

Xiaopingis

a supportive

still

faced

longer

of

as

government

from complete

change

millions

on

changemoving

Revolution

no

entrepreneurs

of constraints

marginal

This directional

of

also

think

typically

the

power

peasants-turned-entrepreneurs
assets.

Wenzhoua

1984,

membership.

1980s,

effect

during

the

In

eight

of their

"individual

entrepreneurscode-named

details).

Economists
ibility.

private

Party

restitution

In

newspapers.

made

in

and

helps
though

the

1980s

executed.

In

the 1980s, China went a long way in establishing security of proprietors even though
of property

security
the

incentive

Revolution
safety
future

was

effect
fades

of property

in

of

far from

being

not

being

memory

and

and

the

rule

achieved.

executed!
the

of law

safety
will

One
(By

should

the

same

of proprietor
increase

in

their

never

underestimate

token,

as

is taken

for

importance

growth.)

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

the

Cultural

granted,
for

the

China's

How Did China Take Off?

and

Policy
system.

price
are

political

had

to be

confident

dual-track

price

they

that

the

neither

novel

for the

would

targets
nor

not

ratcheting

There
the

areas

toward

posed
the

best

Chinese.

China's

of any

some

For

absent

in the

a huge

China's

to

service

area.

provision.

The

That
rural

readiness

in Rural

took
but

also

off not just

because

extant

urban

history.
urban
in

activities
need

in

acted

to have

rural

China

as a multiplier

of the

reforms

failed

completely
in

from

market

many

of agri

cleansed

agents

still

is why

matter,

in the

that
more

Contexts

China).

and

to policy.

China
because

study,

became

peasants
created

activities

to one

According

free

for capitalism

Vietnam

reforms

value-added

higher

that

but

Sichuan.

nature

in part

economic
was

This

and
that

some

to work,

reforms.

for

(and

still

knowledge

in China

response

were

provide the necessary complements

grain,
to

there

and

the

and

of

many

Shanghai

Anhui,

shock

political

in
that

predis

Today
or

from

part

more

China.

Deng

success.

when

been

it

itself

started

Union

Beijing

industry,

urban

reforms

Hunan,

in

than

an

reforms

of policy

Union

economy

switch

as Zhejiang,

to planning

but

in

located

arise

for the

always

urban

of the

politics

Soviet

has

The

tried

committed

Chinese

than

not

such

primarily

claims.

Entrepreneurship

in producing

are

Union

accounted

the

China

capitalism

contracting

effects

Soviet

initial conditions

ants

land

supply

industrialized

Private

Rural

predispositions

was

urban

the

amplified

elicited

program.

firms

of residual

knowledge

that

agrarian

than

Soviet

the

peasants
later.

up

leadership

that

Union.

of capitalism,

the

reform,

to work:

ratcheted

The

dual-track

its mechanics

system

It was

Soviet

conducive

vestiges

China.

of the
the

provinces

Revolution

credibly.

with

and

capitalist

is less

Cultural

so

far more

manufacturing

which

culture,

rural

reform

in then-agrarian

Rural

China

was

entrepreneurship

private

originated

The

China

its own

did

mechanics

difference

and

began

and

targets

the

is another

rural

country

but

not just

era,

Xiaoping

the

up

because

be

many times but failed. The difference is the Chinese

to not

of the

workings

system

price

a precondition

planned

was

system

for

dual-track

ignore

the

mattered

the

praise

but

straightforward,

also

stability

Economists

151

conditions

such

four-fifths

as

more
for

industrial

of the

income

productive

Chinese

peas
and

production
came

gains

from

improving allocative efficiency (Riskin 1987).

Township and village enterprises played a vital role in this process. They raised
rural

absorbed

income,

rural

surplus

labor,

and

contributed

to a decline

in the

rural

urban income gap in the 1980s. The value-added produced by these rural businesses
increased from 6 percent of GDP in 1978 to 26 percent of GDP in 1996 (Naughton
2007, p. 274). They also injected competition into the Chinese economy. In the
1980s,

these

state-owned
private
in both

firms

rural

businesses

enterprises
were

product

were

at a time

small.

They

markets

and

the
when

only

catalytic role" in China's economic

markets

of competition
firms

foreign

undermined
factor

source

the

were

labor

to the
restricted

of state-owned

monopoly

(in

still

and

capital).

transformation (Naughton

incumbent
and

enterprises
They

played

2007, p. 271).

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urban

"a

152

of Economic

Journal

The
book

Perspectives

conventional

on

the

view

Chinese

on

that

economyis

distinction during this period

corporate

governance

setup.

and

township

and

"township

under

Originating

tive

means

ownership
as township

public

(2000),

ownership,

the

of mainstream

neurs

to invest

not

rural

to take

The

to

to

that

Chinese

political

and

village

The

ownership

of the

their

given

theoretical

strong
motivate

rights

performance

system,

enterprises,

because,

well.

township

2007, p. 271). Collec

researchers

perform

private

stellar

of the

of township

a challenge

are

risks.

level

most

communes,

(Naughton

feature

supposed

economists

and

lower

special

poses

are

they

priors

This

village.

to Roland

according

at the

ownership

and

had

enterprises

a text

a special

of their unusual ownership and

and village enterprises were collectively-owned...."

such

village

because

[1978-1996]

in

out

enterpriseslaid

village

entrepre
and

township

village

enterprises without this incentive device is puzzling.

Elaborate
been
as

theoriessome
to

proposed

argue
tion

explain

businesses.

public-sector
that

backed

and

township
by the

provided

the

performance

For

example,

village

local

formal

by

up

of

and

had

enterprises
and

that

of township

environment

and

with

village

weak

According

the

velopment

of the

private

nature

hybrid

with

These

a biased

enterprises

aligns

local

governments

and

of

the

on

stealing

and

the

are

"commune
and
In

correct.

partially

but

enterprises,

village

believe

(1958-1961)

is only

brigade

village

scholars

rural

Forward

belief

and

township

Western

to the

origins

but

goes

of the

part

the

protec

for an
one

underde

sector.

private

effectively

further.

step

interests

they

develop
economic

is not

economies

sector

conceptualizations

detailthat

Many

problem

transitional

(1996)

system

(2000)

substitute

(2006)

Stiglitz
in

financial

and Roland

efficient

Li

of the

The

central
private

prevents

assets.

theoretical

empirical

Leap

those

of public

stealing

biggest

of township

government

institutions.

legal

to him,

as an

enterprises

enterprises

and

of political

advantage

in

had preferential access to capital. Che and Qian (1998)

models

village

(1994)

Wang

the

proofshave

and

township

Chang

governments

mathematical

1985

by

that

brigade

thus

should

are

and

were

were

about

1.5

12

true?

owed
the

during

as collective

already

important
claim

enterprises

created

enterprises"

one

Is that

public.

village

be viewed

there

there

on

predicated

enterprises

township

and

1978,

all

their
Great

institutions.

million

million

This

commune

businesses

and
labeled

as township and village enterprises (Ministry of Agriculture 2003). Clearly, the vast
majority of township and village enterprises had nothing to do with the Great Leap
Forward.
In
appeared

were,

They
the

a product

instead,

records

that

in a policy

I studied,

the

issued

document

of the
term

replaced

previous

village

enterprises"

was

longer

rural

no

reforms.

an

term

"commune

precisely

because,

accurate

The

second

description
paragraph

and
as

reforms
and

"township

by the

State

on March 1, 1984. This landmark document

the

rural

that

began

village

Councilthe

in

1978.

enterprise"
Chinese

first

cabinet

broke new policy grounds. It officially

brigade

the

of many
of this

of the

historic

with

enterprise"

document

pointed
new

out,

enterprises

document

gave

"township
the

old

and
term

spawned
the

by

following

definition of township and village enterprises (Ministry of Agriculture 1985, p. 450):

"Township

and

village

enterprises

include

enterprises

sponsored

by townships

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

and

Yasheng

the

villages,

alliance

formed

enterprises

other

by peasants,

alliance

153

Huang

and

enterprises

individual businesses."
The
the

enterprises

kind

of
and

township
and

ship

Western

village

village

and

by townships

sponsored

firms

economists
The

enterprises.
are

enterprises"

other

to

two

are

villages

assume

the

represent

categories

under

private

businesses

straightforward

owned

collectively
universe

the

label
or

of

all

of "town
The

entities.

private township and village enterprises are divided by size. Individual businesses are
equivalent to single proprietorships in the West and they typically have an employ
ment

of seven

1980s

reference

shareholders
seven

or under.

people

to larger
are

(who
Over

people.

The

private-sector
usually

references

time,

to explicitly

use

the

ties).

by family
to

have

They

enterprises.

alliance

Chinese,

(in

enterprises

unrelated

term "private-run enterprises"

began

alliance

enterprises

term

firms"

"private-sector

(China

is consistently

ship
from

applied
of

sampling

a manual

across

prepared

official

official

statements,

the

by

the

Shanxi

documents.

and

Township

Village

and

Village

private owner

are

and

documents,

policy

document

Township

Here

the

by

replaced

(siying qiye) after a major 1987 Politburo

Enterprise Yearbook 1989a, p. 138).

This definition of township and village enterprises as including

than

more

employ

were

founders/

multiple

They

are

lianying)

four

excerpts

references.

Enterprise

First,

Management

(1985, p. 1) says that a township and village enterprise "belongs to collec

tive ownership or individual ownership." Second, a 1989 Ministry of Agriculture
Bureau

to the

report
ment

businesses
village

and

in

to lend

Bank

by Agricultural
to enterprises
and

enterprises
1989b,

Yearbook

p.

portion

village

for

a large
and

southwest,

enterprise

and

develop

village

enterprises

. . . Currently, individual

enterprises.

account

northwest,

and

of township

and alliance

enterprises
the

of township

share

other

of the

and

township

backward

economically

Township and Village Enterprise Yearbook 1990, p. 4). Third, a 1987

(China

regions"

state

a large

businesses

alliance

enterprises

document

the

on

"Nowadays

individual

comprise

book

Council

State

summarized:

at the

businesses
an

Fourth,
states:

(1978-1987)

and

village

enterprise..

with

a lot

of autonomy

instructed

and

township

household
524).

of China

village

(China

analysis

in the
with

"Compared

able

to make

branches

but

to lend

also

and

Township
China

Village
and

Township

a state-owned

.is a collective-ownership
and

its regional
level

not

Enterprise
Village

Enterprise

enterprise

its own

concerning

Year

a township

enterprise,

or individual-ownership

decisions

only

to alliance

fate"

(China

Township and Village Enterprise Yearbook 1989b, p. 3).

The critical distinction between the Chinese official definition of township and
village enterprises and the definition widely accepted in the Western economics
literature is that the Chinese
townships
enly,

and

assumed

villages.2

villages
that

Interestingly,

the

definition refers to geographyenterprises

regardless
definition
some

Chinese

of their
referred

Western

ownership.
to

bureaucrats

enterprises
have

owned

committed

located in
mistak

economists,
by
the

2 One

townships
same

and

mistake.

a joint
in English that got this question
early study published
right is by Bryd and Lin (1990),
research project by the World Bank and Chinese academics.
It identified township and village enterprises

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

154

of Economic

Journal

Wan

reformer

a foremost

Li,

1980s, remarked
owned

on
and

own

vice

villages

include

those

alliance
the

of

definition

from

and

by peasants
as township

capital

village

The

absolute

of

majority

and

township

from

enterprises,

village

beginning, were in fact private rather than public. In 1985, according

of Agriculture

million
and

township
registered
grown

ably

one

to

of Statistics
two

sources
and

and

3)

size

of their

It is almost

certain

is that

in

through

development

the

private.

under

the

examples

village
and

rest

of the

and

Bureau
categories.

2)

to divide

privately-run,

but

private,

effect.
those

occurred

differ

in

1986

and

in the

the

as

did

the

of collective

but

then

number

number

on

entirely

number

1993,

Meanwhile,

1980s

almost

The

enterprises.

1990s.

the

throughout

that

these

official

of township
the

1980s

the

political

Many
collective
of these

for

Newly

previously

village

Chinese

declined

of household
of privately-run

township

firms"

village

leading

This changed

registered

as

sector

their

it had
businesses
their

registered
(One

which

was

not

of

busi

the

founded

most
by Lu

automobile

component supplier, and

in 1994 when China's Company Law

firms

private

private

to register

enterprises.

size

1980s.

opening,

is Wanxiang,

the

for the

but

therefore

entrepreneurs

"red-hat

supported

financial

entrepreneurs

overstate

especially

government

and

firms

enterprises,

and

private

private

established

of collective

figures

and

statements

Guanqiao. Wanxiang
it has an operation in Illinois.)
private

Ministry

began

collective,
are

enterprises

highest

is now China's

into

(The

National

data

and

township

ownership
this

1)

categories

village

was

framework

a legal

explicitly

went

by the

1985,

categories:

two

prob

1990s.

ownership

public
reason

and

enterprises

sharply

in the

famous

three

latter

of township

village

rose

enterprises

nesses

The

township

throughout

substantially

as

of

spectrum
and

developed

into

enterprises

of

detailed

In

are

enterprises

data.

provided

other.)

number

employment.

private

businesses

each

of legally
this

1985,

development

by more

down

of

collective

stories.

of Agriculture

those

very

enterprises,

number

by

village

success

the

Ministry
than

with

businesses.

growth

township

consistent

village

of

on

detailed
broken

and

sector

private

zero;

the

to Ministry

million

the

1978,

was

township

village
1.57

only

In

enterprises

China's

based

are

they
are

household

The

The

more

because

township

of the

time

are

were

year.

representation

over
data

village

and

township
there

same

the

remarkable

graphical

enterprises

in

strong.

most

million

12

By contrast,

and

million

1 is a

over

private.

township

10

of Agriculture

were

enterprises

village

of history's

Figure
village

were

private

had

there

data,

10.5

which

the

(as

enterprises

in China Township and Village Enterprise Yearbook 1991 p. 128).

quoted

The

and

township

established

pooled

township

as

masses

later

businesses

the

the original collectively

by the

financed

enterprises

in

enterprises"

started

in

of agriculture

charge

officials] only include

not

do

in

premier

and

or those

village

the

of townships
but

enterprises,

their

and

in 1984, "[Some

enterprises

village

Perspectives

began

collective

to be
were

explicitly

converted

into

privately

as covering both public arid private sectors. But this study had no apparent effect on the modeling
of economists
that treated township and village enterprises as run by local government.

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

as

registered

work

How Did China Take Off?

155

Figure 1
Number

of Township

and

Village

Private-run, and Household

Collective,

by Three

Enterprises

Ownership

Categories:

1985-2002

Businesses,

(millions of units)

Notes: Data

are from Ministry of Agriculture

entities.

registered
a

village

Some

township

and

As

shown
of

terms

accounted
prises.

and

in
had

mind

were

new

township

township

and

brief
among
village
total

that

30

interval

village

enterprises
bill

village

township

and

claimed
of all

township

1980s.

enterprises,
declined

and

1992

58

percent
and

in

township

Even
and

private

with

their

village

and

the

Other
enterprises.
of the

village

In

after-tax

enterprises.

in

township

and

start,

1989,
profits
In

and

short,

(except

same

private
45
the

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

the

that

of

of collective

era

the

late

village

by 1989,

share

reform
show

the

matched

employment
the

enter

village

founded

late

larger

enterprises

and

enterprises

measures

were

collective

were

the

throughout

1994).
village

the

enterprises
whereas

village

of titles.
enterprises

1985,

employment

township

enterprises

between

private

wage

by private

the

In

and

of collective

privatization

village

was
and

township

township

a clarification

there

1994,

privately-run

as

and

1980s.

collective

in

entrants

and

mid

overall

the

it was

township

of operation

years

of employment

collective

of

percent

had

the

2. After

in collective

development

reality,

2, collective
in

of

employment

this
In

1 and

Figures

decrease

mistook

enterprises.

Figure

59

and

a corresponding

employment
for

enterprises
share

in

in

appears

number

scholars

village

Keep

1950s

change

the

and

enterprises

enterprises.

in

This
in

increase

sharp

(2003).

dynamism

township
percent
growth

for

and
of the
miracle

156

Journal ofEconomic Perspectives

Figure 2

of

the

are from Ministry of Agriculture

in the

not
Data

and
32

on

village
percent

policy

tells

a similar

enterprises.
of the

output

gross

1987,

GDP

The

output

private
value

took

place

about

the

misses

almost

an

township

and

ones

tended

enterprises

village

village
to

private

township
produced
sector.3

enterprise

detail

important

the

of private

village
and

township

in

entirely

importance
and

township

of the

collective

includes

4 divide
rural

China's
shares

top

private

compared
both

tier
share
with

industry

29

graphs

of per

capita

of the
the

gross

provinces

and

service

into

provinces

of population,

The

provinces).

in the

lowest

enterprises
value

and

nine

provinces
the

1987-2002

that

has

substantial

enterprises
in

prevail

prospered

richer

and

less

provinces.

capita

have

story

private

whereas

by Ownership

Businesses,

(2003).

measure

aggregate

3 and

comprising

sector.

provinces

Figures

ten

collective

implicationsthat

poor

Enterprises

Village

enterprises

In

industrialized

per

village

output

this

However,

in

and

township

sector,

and

Private-run, and Household

Collective,

Categories:

Notes: Data

of Township

Shares

Employment

are

based

on

GDPaveraging
value

output
in

three

data

based

groups
the

(with

respectively

for

1987.

1,473
of the

yuan
township

lower

income

tiers.

sectors.)

On

average

for

enterprises'

share

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

their
group

In Figure

the

unweighted
average of the private township and village
across the provinces of China in 1987 is 40 percent.

on

middle

the

per

1, the

person
and

(Gross

village
output

provinces

of the value

in

of gross

Yasheng

157

Huang

Figure 3
Private

Shares

Three

of the

Gross

of Provinces

Groups

Value

Output
Based

on

of Township

their

per

Capita

and

Village

GDP,

1987

for

Enterprises

(provincial averages)

Notes: Data are from Ministry of Agriculture

on their per capita GDP. The middle

(2003). Twenty-nine provinces are divided into three groups

on the
group has nine provinces. The figures in parentheses
per capita GDP in that income group.

based

horizontal

the

income

top

of the
the

gross

other
The

the

axis refer to the average

income

highest

in private
lowest

village

sector,

of township

at 70.4

percent.
had

the

6 percent,

only

provinces
the

share

Shanghai

output,

entire

enterprises

compared

31

produced

with

47

and

48

percent
for

percent

tiers.

of Hebei,

By contrast,

and

township

for the

private

enterprise

with

private

value

output
two

province

rural.

tier,

shares

1987,

lowest

of the

and

village
85

there
village

percent

is an

and

township

output.
enterprise

village
between

range
The

in
was

population

extraordinary

village

is found

output

of Hebei's
of the

enterprise
and

township

enterprise

share

private

meaning

of township
shares

private

In

and

three

regions
are

output

all

cities: Shanghai (6percent), Beijing (10.9 percent), andTianjin

(12.2 percent).4The
contrast between Hebei on the one hand and Shanghai, Beijing, and Tianjin on the
other

illustrates

is rural

and

the

two

socialism

sides

is urban.

in

the

Figure

development
4 further

inces with the highest share of rural population

in private

Chinese

under

share

of total

township

and

village

of Chinese
illustrates

this

(86.5 percent)

enterprise

output.

capitalism:
divide.

ten

prov

averaged 49 percent
For

the

ten

provinces

one. Cities also have rural population

concept, not an economic
In 1987, 34 percent of Shanghai's
was rural.
population

cities are an administrative

their administration.

capitalism
The

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

158

Journal ofEconomic Perspectives

Figure

Private

Shares

Three

of the

Groups

(provincial

Gross

Value

Output

of Provinces

based

on

of Township

their

Rural

and

Shares

Village

for

Enterprise

of Population,

1987

averages)

Private share of township and

village output
H Rural share of population

Group

Group

Group

Notes: Data are from Ministry of Agriculture (2003). Twenty-nine provinces are divided
on their shares of rural population.
The middle group has nine provinces.

into three groups

based

with

the

There

tion
in

of rural

factors

the

correlations

enterprise
One

of

of

poverty.

In

and

how

China

ship,

not

bulk

of output
and

half

of the

home
another

to

15

In

provinces,

this

the

was

the

village

and

Chinese
rural

it was

to

of population

reduc

focus

on

the

to understand

private
that

sharp

is concentrated

in order

enterprises,
scale

is

poverty

provinces

and

entrepreneur
to the

contributed
affected

by private

massive.

and

township

rural

village
the

aggregate,

poor

29 provinces,

it is 0.49.

reforms

provinces,

percent.
enterprise

of township

it is important

reason,

poor

Across

shares

population
Chinese

village

shares

private

countries,

in the

and

township

of the

of

developing
For

In

enterprises

million

all

and

for rural

and

substantial.

fairly

is 34.6

figure

of township

GDP

capita

township

private

output
260

but

developments

production.

of 1987,

in

its poverty.

village

perfect

-0.71;

regions.

government-run

township
As

as

rural
business

private

per

the

percent),

shares

achievements

China,

reduced

not

is about

undisputed

underdeveloped

economic

are
between

output

the

(57.2

population

influencing

correlation

two-way

village

share

other

and

output,
the

lowest

are

private

(30

enterprises

village
percent
sector

already
sector

enterprise
of
produced

China's

contributed
in

rural

between

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

eight

about
provinces,
In

population).
30

to 50

percent

How Did China Take Off?

of the

township

and

for an

additional

village

427.8

million

rural

tion). Within a single decade

went

from

tural

output

It would
an

in provinces

not

be

an

Financial
An

influential

close

and

to 80
to say

in China's

Reforms

50

(about

15

accounted

provinces
of the

percent

a substantial

to contributing

with

overstatement

role

instrumental

Chinese

These

rural

popula

of reforms, private township and village enterprises

nonexistent

essentially

value.

output

enterprise

159

of the

percent

that

rural

private

record

impressive

share

rural

of nonagricul

Chinese

population.

entrepreneurship

of poverty

played

reduction.

Reversals

finance

to

sought

paper

explain

can

China

why

without

grow

financial liberalization

by identifying informal finance as a key source of capital

for private entrepreneurs
(Allen, Qian, and Qian 2005). Informal finance and
formal

finance

requires
and

are,

some

other

centrally

that

financial

knowledge.
economies

planned

substitutes.

view,
Unlike

other

To

evaluate

developing
banned

categorically

informal

finance

is allowed

rather

liberalization

than

to operate

evidence

claim
China

finance.

underground

at all

of financial

this

countries,

deposit-taking or loan-making could be considered

Unlicensed
in China,

this

to

according

contextual

a capital crime. Thus,

evidence

is, ipso facto,

controls.

of

It is unsurprising

that informal finance is most vibrant during the most liberal period of Chinese
reforms (such as in the 1980s) rather than in the Maoist period of the 1970s, and
it is most vibrant in those regions of China with liberal economic policies (such
as

Wenzhou

private

or

are

policies

in

the

that

this

for

reforms.

informal

informal

discriminate

economic

lacked

financiers

finance
the

against

this

financial

lack

The

view

are

are

themselves

substitutes
sector.

private

if

only

Otherwise

research

was

of

China

in

challenges
is due

liberalization
the

during

start

early

fact,

China

of rural

view

observation
since

period

the

reforms,

significance.
China

1990s,

standard

to an

reversal

wrong

In

reforms.

very

the

the

they

are

its monumental

despite

is that

knowledge

done

at the

of China

are

(2005)

Qian
but

finance,

of Chinese

liberalization

and

Qian,

to formal

feature

outside

that

financial

access

a permanent

unknown

without

growing

was

far-reaching

is basically

reason

these

all,

and

of the early 2000s, Allen,

sector

private

that

implemented

The

or

suppress

on the data

that

believing

fact

finance

complements.

Based
correct

After

province).
Formal

entrepreneurs.

government
they

Zhejiang

reversed

of economics

by

bias:

much

of the

early

1990s

rather

than during the liberal period of the 1980s.

Rural
the

financial

authorities

nally,

were

intermediation
these

to

began
rural

institutionthe
the

true
was

aforementioned

in

reforms

the

credit

reforms,

had
rights

Second,
even
access

three

main

of

important

an

entry

of

rural

Third,

to credit

for rural

as

a cumulative

private

financial

who,
into

entrepreneurs

encouraged.

First,

components:

its depositor-members,

cooperativesto

shareholders.
permitted,

1980s

control

delegate

entrepreneurs

eased considerably.

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

nomi

financial
result

of
was

160

of Economic

Journal

In

rural

1985,

Perspectives

credit

loans

and

47.8

They

also

intermediated

percent

loans

and

Their

and

criteria

took

hold

ments

members
of their
in

took

of rural

were
the

ince,

credit
the

unlike
initiated

financial

credit

three

This

members,

1980

occurred

economic
dicts

takeoff.

China

has

Second,

This
claim

explicitly

four

rural

credit

tone

for the
In

reforms

to

a reserve

erative's

indirect

own (Agricultural

and

in

to

tions
for

of

implement
rural

selection

election"

of

widespread
across

1986, p. 34).

cooperative

of these
Chinese

from

afflicting
set

controls
Bank

of the

rural

lend

the

this

along

In 1988, Agricultural
11

the

of

the

managers

document

bureaucracyrotating

rural
China

credit
rest

coop

on

their

of the rural
line

of

(Agricul

regula

China

called

"democratic

through

the

of
of

employment

Bank of China

same

the

Bank of China

Bank

Agricultural

(Agricultural

elections,

problem

By 1985, 80 percent

branch

and

as a problem

micro

reforms

by

growth.

direcdy

Agricultural

could

Article

that

decade.

percent

1985).

extent

with

document

control

contra

directly
to the

serious

of the

adopted

drafted

in

most

and

political

endogenous
this

reforms

withChina's

reforms

are

cooperatives

cooperatives

function

rest

Financial

1988b, p. 200). To
banned

explicitly
heads

of departments

regions.
The

of

had

meetings

the

to 30

reforms.

credit

they

to restore

documents,

policy

Chinathat,

study

shifted

[1983]

as

"organizational

a deliberate

financial

management.

governance

rural

practice

China

credit

country

[1985]

at shareholder
the

safeguard

credit

the

equivalent

rural

the

tural Bank of China

began

of

Bank of China

cooperatives

for

macro

requirement
base

deposit

credit

Bank

Agricultural

of

as

prov
early

flexibility."

concurrent

of government

framing
finance

of rural

cooperatives

imposed

This

as

least

was

are

of timing.

Revolution,

control"

Anhui
As

group

by later

issue

at

reforms,
Cultural

"government

cooperatives.

1983,

the

reformist
reforms,

in

government.

operational

process

who

govern

of the

own

These

times
an

timing

institutional
after

years
out

singled

credit

among

implemented

only

the

acts

by this

and

toor

economists

planning

local

group specifically to reform the

numerous

growth

institu

priorities

and

their

cooperatives.

exogenous

Agri

lending

responsibility

on

formulated

it clarifies

on

first

central

democracy,

First,

detail

from

as central

China,

of the

by the

plan

cited

of

peasants

credit

of China's

were

They

a common

The

1970s,

household

launched

rural

ways.

outset

very

decision.

policy

one

of Chinese

managerial

in several
at the

was

the

and

Bank

better-known

document,

policy

is remarkable

cooperatives.

of

principles

the

credit

system.

enterprises.

Rural credit

1960s

tasked a finance leadership

cooperative

on

Agricultural

were

village

originating

determined

in the

cooperatives

reforms

founding

reliance

and

bank,

by a group

1980, the Politburo

rural

But

much

loans

agricultural

Association

officers

branches.

of rural

and

1986, p. II-19).
in 1951 as genuinely private financial

the

a state

control

And

which

own

China,

Reform
leaders.

elected

of the

of all

percent

to township

many

Finance

(China
were first established

cooperatives

for 76.8

extended

disbursed

cultural Bank of China

tions.

accounted

cooperatives
of all

porous

authorities
bans

also

but

liberalized

because

of

entry.
deliberate

Informal
and

finance

proactive

emerged
policy

not

because

encouragements.

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Yasheng

These

two

statements

"In

(1987):

there

eratives,
operations.

Lei

now

have

(1984,

finance

capital

various

at

the

of private
These

Muhua

are

and

"Rural

the

on

improve

and

bank

observation

banks.

on

and

credit

rural
have
is Han
for

cooperatives

need

to allow

the

exis

bank

they
bank

(The

but

competition

of the

Bank

People's

Chen
of China

of Agricultural Bank of China,

in

in

China
from

the

informal

therefore

1990s

the

given

justified

and

in the

exactly

1980s,

era

with

documents

the

that

competed

drew

reforms.

advocating

Governor

documents

groundsthat

state-owned

coop
lending

here

Second,

we

the Chairman

bank

Several

competitive

banks

economists
the

state-owned

important

and

mobilization

financial

supervision,

academic

respectively,

reforms.

of

Muhua

credit

non-governmental

development."

state-owned

rural

deposit-taking

and

methods

is Chen

and

borrowing."

liberal

were,

banks

with

economic

central bankand

most

the

time,

under

two

rural

finance

need

not
Lei

various

areas

lending

Han

pioneering

The

state

mobilizadon

here

First,

telling.

by the

of businesses

to local

free

(PBoC)China's
arguably

same

quite

provided

capital

emerged.

51):

are

kinds

contribution

p.
but

factual

1980s

Non-governmental

a positive

tence

the

to the

are

cooperatives
made

from

addition

161

Huang

helped

made

the

same

normative

opposite

and

policy implications.)
Western

academics

in liberal

primarily

economically

Bank

People's

of

production.
That

policies.

regions

and

better

predictor

informal

finance

1990s

record

such

country,

informal

as Wenzhou

81

1987

that

finance
and

(China's

Fujian

poorest

69

of

percent

informal

finance
in many

present

is not

of the

households
used

were

had

to finance
but

geography,

of the

parts

Branch

rural

loans

prov

(a conservative

by the Jilin's

report

of informal

percent

of
was

as Guizhou

by ethnic minorities), andjilin

shows

151)

(p.

finance

the

such

regions,

enterprises).

China

to informal

in

of the

in the 1980s record informal finance activities across

(poor and populated

of state-owned

stronghold

research

heterogeneous

ince), Guangxi

access

richer

Bank documents

(Tsai 2002).
many

did

who

and

liberal

is evidence

country

that policies were liberal nationwide.

The
Han
tions

were

Bank

of

to are
local

that

except

financial

nongovernment

referred

their

China

"rural

the

and

savings

that

institutions

exercised

real

Chen

Rural

similar
control

to

and

Chairman
founda

cooperative

rural

rights.

rural

acknowledged

formally

Governor

foundations."

cooperative
loan

shareholders
never

institutions

credit

cooperatives
the

Although

People's

foundations

cooperative

as

legitimate financial institution, it tacitly permitted their operation. The Ministry

of Agriculture provided the political cover by giving rural cooperative foundations
status.

a formal

cooperatives
The

nesses.
rural

Rural

scale

cooperative

of the

rural

foundations

(Rural Work Leadership

Wenzhou,
Agricultural

by the
Bank

end

foundations

cooperative

and Agricultural

cooperative
operated

foundations
in

38

1980s,
in both

rural
loan

was

percent

cooperative
size

with

directly

on both deposit

Team of Fujian Communist

of the

of China

competed

Bank of China

and

massive.

of Chinese

As

reach

credit

rural

began

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

the

townships

1997).

to approach

(Wenzhou

History 1995, p. 152, 225).

busi

of 1990,

Party Committee

foundations
network

rural

and lending

Financial

In

162

the

In
in

of Economic

Journal

era

to

the

and

rates

credit

are

cies

to

larger

private-run

and

enterprises

then

1988

and

to scarcity

of

In

waived

China

1984,

collateral

the

extended

Bank

the

Fixed

as collateral.

rates

in

(Agricultural

credit

from

lead

they

assets

interest

formal

entrepreneurs.

because

fixed

to

documents

private

to capital

floating

businesses,

access
Bank

for

is requiring

permitted

household

substantial
finance.

access

access

barrier

of China

for

requirements

to private

Another

had

of credit

easing

a barrier

Bank

also

of informal

availability
for

rationing.

Agricultural

households

new

called

consistently

interest

rural

1980s,

addition

Perspectives

same

poli
1986,

[1984]

p. 364; Agricultural Bank of China 1988a).

all

On
and

three

credit

bank

access,

reversals

policy

frontsreforms
documents

in the

of democracy
the

rotating

were

cooperatives

now

Chinese

the

as

explicitly

"local

cooperatives,

and

(Agricultural

cited

Rotation is a

regions.

often

(Imagine

of rural

rights

in the

managerial

of rural

credit

from
with

credit

1980s

docu
and

democracy,

which

cooperatives,
to public

private

in

the

After

ownership.

was

"cooperative"

the

finance.

of China

and

to inspect

the

Bank

of China

the

Several
an

One,

owned

document

1995).
status

In

dropped.

The

management

quo

the

during

1999,

private

financial

illiterate

woman

Zhejiang,

was

in rural

of rural
central

of rural

credit

the

cooperatives
had

cooperatives
era.

planning

to wipe

arrested

executed.

detailed.

to examine

credit

attempt
were

was

credit
account

numbingly

its officers

used

entrepreneurs
in

People's

of rural

of candidates,

members,

a ferocious

the

1998,

controls

micromanagement

instructed
software

mounted

authorities

The

by their

computer

March

screening

of appointments.

Bank

to their

In

operational

appointments,

termination

still nominally

1990s,

institutions."
assumed

formally

personnel

returned

completely

severely.

control

complete

cooperative

in the 1990s. The bank documents

disappeared

financial

1999)

the

Agricultural

In

members,

associated

government

including

systems

filing

the

rotated

the

The

principles

of transition

autonomy

cooperatives,

1995

in a state

([1998]

examinations,

means

of China

credit

credit

(1999), a vice governor of the central bank defined rural credit cooperatives

Shijiliang
Bank

and

direct,
rural

rotating

in

three

nature

"cooperative"

implied

on

to Maine.)

on

flexibility"completely
the

ban

liberalization,

entry

of explicit,

elections

any

The

reliance

parlance
even

1996,

it nullifies

recentralized.

emphasized

1988

of Massachusetts

ments"organizational

operational

The

cooperatives,

evidence

in 1992 (Agricultural Bank of China 1992b).

as

governor

credit

reveal

1990s.

early

managers was rescinded

mockery

of rural

(She

out
and

informal
punished

committed

the

fraud in 1986 but was executed

alleged
only when the macro policy changed, in
1991. Incidentally, another Zhejiang woman, WuYing, was given a commuted death
sentence in 2012 for "illegal capital mobilization.")
The

most

target

foundations

cooperative
ordered

direct

to transfer

was

were

their

rural

stripped

of their

to rural

deposits

foundations.

cooperative

credit

In
businesses

deposit-taking

(State

cooperatives

rural

1993,
and

Council

were
[1993]

1994, p. 7). The following year, the authorities restricted the lending operations
rural

cooperative

establishment

foundations
of new

branches

ship Team of Fujian Communist

to low-margin
and

lending

agricultural
to urban

Party Committee

production

residents

(Rural

1997).

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

and

forbade

Work

Leader

of

How Did China Take Off!

The
1996

official

described

state-owned

banks.

did

this

in 1986,
by rural

tions

other

the

only

decree

foundations

cooperative

of welcoming

ordered

the

takeover
out

rural

the

finance

rural

himself,

premier
were

informal

declared

categorically
itself

finance

but

also

The

illegal.

failures

any

rural

1980s,

credit

of

sources
rural

sector's

private

for

to

agricultural
40

neurs

who

was

the

State

in

started

order

direct

The
clear

evidence

that

defaulted

on
to

cooperatives

it was

of rural

loans

tightened

substantially

In

state-owned

1992,

deposits

private

rural

credit

default
tive

because

policy

In

the

the

1980s,

Chinaland

Bank
under

and

for

of

certain

1996
rural

entrants

"risk

credit

guarantee

In the 1980s,

1992a).

rates

to mitigate

approach

can

bad

the

rural

required
for

(despite

entrepreneurs,

against

be

borrowers.

produc

Potentially

higher

interest

lending

to the

costs.

The

incumbent

entrants.
China

and

rural

The

credit

In

conditions.

and

farming

for

it biased

tightened.

private

this
and

good

entrepreneurial

Agricultural

reinstated

that

to pay

payment,

of new

of all
new

rural

of China

interest

higher

and

In

borrowers

not

entrepreneurs

between

entrepre

discrimination

were

Bank of China

suggest

returns

upfront

requirements
were

theory

generate

expense

collateral

rural

an

and

floating
and

to distinguish
can

required
at the

requirements
in

evidence

it is able

businesses

waived

Both

borrowers

productive
1992

used

cooperatives

risks.

private

percent

for private

Bank

fund" as an eligibility criterion (Agricultural

(usually

investment.
30

for

facilities.

enterprises,

Agricultural
from

were
set

cooperatives

definition,

by

of new

1990s,

were

implicit

at

capped

the

cooperatives

rural

than

the

important

In

floors

credit

against

were

not

informal

In

were

China.

High

rather

the

curtailed.

credit

Another

entrepreneurs,

urban

loans).

program

construction

were

collect

agriculture.

production

fixed-asset

criteria
that

to

Private

to finance

lending

to

forms

1998).

rural

rural

discrimination

implicit

lending

loans.

loans

needed

loan

and

to get out of agriculture.

document,

cooperative

and

focus

total

businesses

to

abolished

all

criminalized

to refer

sharply

in

being

and signed by

foundations

cooperative

entrepreneurship

lending

is an

was

founda

and

decree

by officials

finance

rural

were

the

This

percent).

Council

credit

their

lending

above

and

nonfarm

foundations

redirect

formal

to

cooperatives

funding

cooperative

ordered

access

Muhua

themselves

foundations

cooperative

financial operations to public security bureaus (State Council

The

Chen

cooperative

were

before,

A
with

viciously"

as Governor

of all

as pointed

which,

to derogatory.

laudatory
as "competing

competition

a complete

cooperatives,

from

changed

Then in 1998, in a decree issued by the State Council

than

of informal

competition

rural

Instead

credit

recentralized.
none

on

language

document

163

most
private

the

cooperatives
collateral

1990s,

common

form

of

assets

structureswas

housing

as collateralizable

assets. This raised the threshold for loan eligi

Rural
Work
bility substantially (see
Leadership Team 1997). Even all these measures
were deemed inadequate. In 1994, Agricultural Bank of China required rural credit
purposely excluded

to issue

cooperatives
secured,
cooperative

approved

one

from
at the

loans
the

next

loan

to private
officer

higher

level.

entrepreneurs
and

the

For

other

example,

only
from

the

a loan

after

two

head
in

signatures

of the

a township

at the county level (Agricultural Bank of China 1994).

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

rural
had

were
credit
to be

164

of Economic

Journal

with

Along
tives

a catalog

financial

as

rural

rather

governments

making

forcing

to sell

the

peasants

when

cooperatives
loans;

making

share

the

expropriating

bills

lending
to

to higher-level

credit
financing

government

operating

at a loss.

The

health

that

their

books

lending

in

the
the

during

loans

consumption

loans;

rural

1990s

after

financial

assets

of the

rural

and

all

cooperatives

In

according

Governor

Bank

The

of the

People's

of China.

loans;

sedans

while

documents
loans

loans

of

percent
in

1996

to Dai Xianglong

shareholder

from

extended

increased

and

in the
the

loan

nonper

the

(1997),

of the

equity

on

resulted

cooperatives

nonperforming,

to 38 percent,

their

bank

loans

1994,

forming loans increased

of rural

nonperforming

31.4

their

shares

The

credit

when

peasants
to finance

from

Nonperforming

instituted.
were

from

nonperforming
rural

and

credit

rural

luxurious

some

is

cooperatives;

to purchase

massively.

when

households.
were

controls

fees

Here
of China

money

the

of

governments

purchasing

carried

of these

than
credit

members
and

of local

Bank

contributions

deteriorated

Revolution

to indigent

credit

share

cooperatives

Cultural

by rural

peasants

forcing

almost

1980s,

People's
rather

village

coopera

shareholders.

goods

taxes

and

credit
cashiers

by the

of the

their

finance

nominal

designated

construction

credit

of

collecting

deducting

rural

form

contributions

to township

office

of

while

the

governments;
and

cooperatives

reveal

goods

loans

compiled

in

to buyers

capital

extending

making

of their

rural

became

essentially

needs

practices

peasants

of

governance

cooperatives
the

serving

loans

the

controls,

credit

than

of egregious

(2001):

tax

these

deteriorated

Perspectives

rural

credit

cooperatives was reported to be 63.2 billion yuan in 1995, 54.8 billion yuan in 1996,
31 billion yuan in 1997, 15.1 billion yuan in 1998, and -8.5 billion yuan in 1999
(China Finance Association 1997, p. 452; 2000). Within a single decade of policy
an

reversals,
takeoff

institution

became

that

had

an

played

role

important

in

China's

economic

insolvent.

technically

Conclusion
This

addresses

section

concluding

rural financial reforms? Second,

closed

subsequently

evidence?

mentary
economic
tion

Fourth,

the

down.
rural
China

the

reforms
was

led

did

policy
the

by

reversals

China

reversals

policy

as

quantitative

in

group

1980s,

the

of leaders
leader

in Sichuan,
by a group

but

in

well

rural

China

matter

affect

China's

pace

its

reverse

and then
as

docu

for

real

of transi

in charge
he

fell

of urban

closely in timing with the assumption

the

aftermath
of the

from

technocrats

launched

massive

1989

Tiananmen

economyZhao
in

power

technocrats

of the

who

the most urban and statist region of ChinaShanghai

urban

did

why

economy?

by a new
In

First,

supported

The rural policy reversals coincided

power

issues.

is the claim that China initially opened

finance

did

Third,

outcomes?

to a market

rural

its

four

infrastructure

1989.

of

crack

Ziyangpioneered
Between

made

their

(Huang
projects

1989
political

and

2002,

career

in

and Qian 2010). The

that

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All use subject to JSTOR Terms and Conditions

required

classic

Yasheng

mobilization
China

of

and

financial

resources.

out

stamped

informal

reduced

They

the

credit

in rural

financemostly

to strengthen

discontinue
bore

the

the

by the

Communist

brunt

There

of this reversal

is

quantitativenot
as

story

dataset conducted

just
out

laid

reforms

political

in

coauthor

my

the leadership
the

went

paper.

and

and

that

in rural

for

the

rural

a large

Examining

I found

in the

board

farthest

documentaryevidence

this

rural

to fund

to

by Zhao Ziyang. Rural China

by the Ministry of Agriculture between

(2012),

Huang

because

order

across

Party

the incipient political reforms introduced

reform/reversal

and

controls

to

allocation

Chinain

these big-push projects. The instability of 1989 also prompted

1990s

165

Huang

China.

financial
household

1986 and 2002, in Qian

credit

access

rural

by

house

sharply between the 1980s and the 1990s. Specifically, during the
period, close to 30 percent of rural households reported receiving either

holds declined
1986-1991

formal or informal credit. This ratio declined

We

found

status

that,

for

controlling

of householdssuch

as

a variety

to 10 percent between 1995 and 2002.

of household

the

characteristics,

a Communist

having

political

memberhad

Party

no

effect

on credit access in the 1980s but a substantial and positive effect in the 1990s. As
credit

access

tion.

Another

nonfarm

was

One

can

compared

examination

had

labor

early

1980s

there
income

year,

are

the

a year,

the

less
was

growth

came

from

be

70

1980s,

rural

1990s

no

overall

of the

nominal

capita

GDP

growth

has continued

of rural

clear.

2002,
In

lowest

for any

by the

driven

is in sharp

contrast

other

Asian

East

A reasonable
slowdown
and

possibly

major

rural

did

more

and
is that

household
important

affect

ratio

was

than

household

migrant

and

1988,
a

10 percent
slowed

down
in the

years
at

all.

income

income

China's

All

growth

its trade

was

50

growth

changes

and

this

In
ratio

effect
savings

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All use subject to JSTOR Terms and Conditions

This

exports.
comparable

produced

household

in household

part

increasingly

by net

at a level

income

This

percent.

became

2000

consistently
of rural

the

patterns.

35 percent, probably

growth
since

investing

accounts

consumption
the

then

on

growth

around

Chinese

1990s,

China

reduced

than

1978

income

household

not

and

when

1980s,

economies

hypothesis
of rural

In the

investments

to the

rural

growth

household

in rural

slowdown

to GDP

economy.

state-controlled

income.

how

for several

fact

began to decline in the early 1990s, and now it is only around

the

household

more
the

affect

difference

Between

averaged

to grow

clear

with

to do

rural

One

inhib

reversals

policy

itself.

rates

and

2003,

the

year.)

population

consumption

GDP

growth.
of

ran

in

have

reversals

financial

is

1989

(Since

per
if this

the

per

who
shown

changes

policy

having

trend

to households

policy

growth

growth

(mostly

deflation.

of

household

in the

Between

half

rural

the

alloca

effect.

financial

the

than

income

growth.
than

surprising

percent

it seems

lies

the

7 percent

to about

of some

that

in credit

important
went

The

claim

complications

GDP

there

It would

loans

1980s.
substantial

rather

household

1990s,

recovered

fewer

the
and

But

measured),

rural

exceeding

late

data

the

to 4 percent

1990s

more

a real

growth
the

and

is

of real

growth

1990s.

of the

the

the

with

the

became

power

growth by pointing out that China's

the

composition

Although

counter

easily

since

between

in

as

ited economic
strongly

political

is that

finding

businesses

documentary

the

reduced,

to

a deficit.
led

to a

is in addition

to

income

behavior.

166

of Economic

Journal

account

My
argue

that

is less

relevant

is heavily

this

rural

from
that

argue

the

urban

ments,

of

has

key

does

not

Chinese

state-controlled.

The

is the

overall

Those

who

and

high

that

private

from

27.9

estate

sense.

of market
that

of private

in

for

52.3

this

like

definition

of private
firms

be

classified

affiliates

as state-owned

of industrial

fact

issue

value

sector

by

invest
of

the

pronounced
and

economy

its

1999;

(Qian

reforms.

between

rural

led

have

to the

most

prominent

reversals

of rural

(the

entrepreneurial
rural

type

China;

they

and

is highly

is far

by contrast,

1990s

the

For

more

rise

of a
of

example
reforms

have

of private

sector.

have

slowed

may

likely,
tend

zero

to overstate

sector

the

in its definition

in

1998

was

18

OECD

cite

rising

study

shows

value-added

true

size
OECD

of private

in 2003,

1978

in

The

reality,

estimate

percent

in

is that

1998

and

many
should

and

enterprises

realistic

private
includes

study
In

up

(Dougherty

of China's

firms.

state-owned

A more

enterprises.

an

percent

is complex.

of

transition

example,

of industrial
from

subsidiaries

added

its market

completed

percent

most

and,

or

2003 (Huang

has

Estimates

2005).
the

1998

are

the

28

private
in

percent

2008).
that

the

the

size

Here

transition.

Leonid

share

output

is whether

as

of

an

of the

sector

private

from

example

much

half

as

(Gregory and Stuart 1981, p. 230).

was

much

disproportionate

efficient
to

the

the

sector

has

output

is

Soviet

of agricultural

Union

more

private

private-sector
effect

example
policies.
and

Union

state

than

inputs

household

This occurred
so

farming,

allocated

to

it.

reliable

disputed.

indicator

is illustrative.

shows

that

Output

a policy

effect.

input,

measures
Because

not
of

income

because

plots

in

of

No

one

private

the

Soviet

private farming

its contribution

Private

1.4 percent of cultivable land in the Soviet Union

Soviet

is not

grown
a

of being pro-market, but under his leadership,

Brezhnev

contributed

efficiency

one

offset

of Chinese

China,

early

as evidence.

output

shareholding

of

Also

direct

reforms

assessment

Urban

beyond

go

China

accounted

percent

firms

This

off,

share

transition.

these

so

than

differences

whereas

firms),

"legal-person"

plots

rural

than

have

market

rather

the

arm's-length,

of

accuses

may

took

restructuring

economists
to

optimistic

since

reversals

policy

argued

firms

First,

economic

more

and

some

transitioning

private

private

pace

shares

Herd

The

opening

fundamental

reforms

of a more

of rural

the

The

are

to foreign

enterprises,

One

today.

reversals

policy
as

China.

is rural in origin, and rural capitalism

capitalism
urban

expense

effects

share

percent

such

this

some

on

rent-seeking

real

at the

sector.

50

to around

reforms,

a Schumpeterian

politically-connected,

and

the

development

support

rests

here

insight

down

reduced

of rural
1990s,

in

today

in

The

initially

has

1980s

of these

basis

is economic

entrepreneurial

been

China

2O07).

urban China.

which

rural

of how

state-owned

already

account

My

the

the

early

urban

succeeded

challenge

Naughton
A

On

system.

major

the

privatization

China

in

effects

negative
since

banking
that

the

in

to a story

industrialization

Rapid

percent

reforms

developments

important

today.

80

toward

tilted
while

focus,

to China

of population
may

Perspectives

to income
accounted

only

was
for

(Hewett 1988, p. 117).

output,

is a more

transition

private

firms

reliable

conflate
are

more

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

two

measure
effects:

efficient,

an
their

How Did China Take Off?

share

output
the

can

rise

even

post-Tiananmen
share

output
asset

of the

the

1989,

Between

sector

private
China's

down

of fixed

on

increased.

sector

private

share

private

still

is fixed

environment

policy
cracked

leadership

investments,

and

if the

the

input-based
was

investments

not

and

the

fixed

Between

1981

around

averaged

1990,

yet

measure,

linear.

sharply to 13 percent

1993 and 2001, the share declined

In

adverse.

sector,

private

By one

development

asset

or

167

21

percent.

(for details, see

2008).

Huang
The

rural

1980s,
of rural

reversals

policy
all

almost

of the

private

reversals

policy

was

contributed

direcdy
fixed

asset

to reduce

to

investments

the

of the

growth

this

were

In

development.
and

rural,

the

sector

private

net

from

the

effect

a much

larger, initial rural base of capitalism. The private sector did grow, especially since
but

2000,

To
tion

on

its

of fast

the

reforms

tionswas

weakened

tightened

its direct

village

Party

Between

1978

planning

system

to 1978. Under
share

investment

Indiaof
Indian

The

was

to what

China

substantial
to

did

who

secretaries,
and
than

it took

was

for

around

34

real

taken

58

might

is far from

author

be

greatly

called

completing

benefited

from

are

power,

China

more
and

in 2005.

Bank

discussions

began
reasons,

the

reform

reversed

and
elec

survivedvillage

Chinese

Communist
are

Party
to

subject

elec

not.
to "reform"

years

that

operate

This

is less

the

system

central

from

1949

private fixed-asset

than

the

same

ratio

in

Singh, that is. In 1983, the comparable

China

1989).

a commanding-heights
its transition

of

completely

directors

village

of its

takeoff

for political

of private sector, China's

percent

(World

percent

the

orientation

much

that

reduc

poverty

China's

but

were

that

it to establish

definition

statist

right.

reform

fact

Only

have

it has

2012,

a broad

the

by

of villages.

steep

discontinue

reforms
One

deepen.

considerably
controls

or

Financial

not

the

story

liberalization,

reverse

Indira Gandhi, not of Manmohan

ratio

planning
but

and

rural

storyits
and

growth,
the

to get

chose

base.

growth

income

personal

1990s

urban

of China's

so promising.

proved

contracting

tions;

sides

is important

in

that

package

two

entrepreneurship

leadership

land

the

todayit

rural

off a far smaller

was

growth

account

economy
with

that

understand

and

moved

economy.

to a market

with

has

from
This

central

is progress,

economy.

comments

from

Daron

Acemoglu,

David Autor, Chang-Tai Hseih, David Li, John List, Meijun Qian, Yingyi Qian, Heiwai
Tang,

Timothy

Taylor,

and

Bernard

Yeung.

This content downloaded from 115.113.11.187 on Thu, 27 Nov 2014 06:52:45 AM

All use subject to JSTOR Terms and Conditions

168

Journal

of Economic

Perspectives

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