WorldDevelopment, Vol. 25, No. 10, pp.

1639-1655, 1997
Pergamon © 1997 Elsevier Science Ltd
All rights reserved. Printed in Great Britain
0305-750X/97 $17.00 + 0.00
PII: S0305-750X(97)00060-0

On the Past and Future of China's Township and

Village-Owned Enterprises

LOUIS PUTTERMAN*
Brown University, Providence, Rhode Island, U.S.A.
Summary. - - This paper proposes an explanation of the historical success of industrial enterprises
owned by township and village governments in China. I argue that conditions peculiar to China's
prereform economy fostered the growth of a skilled workforce and high savings, created unusual market
niches, and encouraged entrepreneurial undertakings by local political elites, especially in areas adjacent
to certain cities. I then discuss the allocative and technical efficiency of local public enterprises in China
from a theoretical standpoint, and review some relevant econometric findings. Finally, I consider
proposals for reform of town and village enterprise (TVE) ownership, and discuss the possible
advantages of cooperative forms. © 1997 Elsevier Science Ltd

Key words rural industry, Asia, China, capital formation, entrepreneurship, public ownership

1. INTRODUCTION acceleration in the growth rate of the economy as a

China's township and village enterprises are
widely regarded as one of the major successes of
the country's reforming socialist economy. Weitz-
man and Xu (1994) write that "the Chinese model,
with a central role being played by TVEs as the
dominant form of non-state enterprise, is... enor-
mously successful." Jefferson (1993) writes that
"[t]he rapid growth of China's TVE sector has been
critical to the success of that country's transition to a
market economy." Statistics reviewed by Peter
Harrold (1992) for the World Bank show that the
industrial output of the TVEs grew at an average
annual rate of 38.2% during 1982-88, compared
with a 9.8% rate for China's state-owned enterprises.
Recent work by Jefferson suggests that TVEs
outpaced state-owned enterprises in growth of total
factor productivity (TFP) during the 1980s, surpass-
ing them in the absolute level of TFP by the end of
the period, t
One way in which the success of the TVEs and
their contribution to China's reform era growth has
been interpreted is to view them, as in the quotation
above, as "non-state enterprises," the superior
performance of which is attributed to their freedom
from such undesirable hallmarks of the state sector
as excessive and more or less permanent employ-
ment and de facto protection from b a n k r u p t c y . ' T h e
freeing of such enterprises to pursue market
opportunities during the reform period can be seen
as a cause both of their own growth and of
whole. The contrasting suppression of such enter-
prises is a source of the inferior performance of
China's prereform economy.
While such a view contains elements of truth,
however, it may also be seriously misleading. First,
while standard usage defines as state enterprises, in
China, only those under the control of central,
provincial, municipal, or county governments, town-
ships and villages are for all intents and purposes
simply the next rungs of government in rural areas,
and placing a dividing line between "state" and
"nonstate" enterprises just below the county level
may be artificial for some purposes. Not all TVEs
are owned by township and village governments, but
in 1990, 65% of the output value and 50% of
employment in rural enterprises was due to those so
o w n e d ) There is an equal danger, on the other hand,
of drawing false conclusions from the quasi-state
status of township and village-owned enterprises.
Some authors - - for example, several of the Chinese
contributors to the World Bank study edited by Byrd
*An earlier version of this paper was presented at the
International Conference on Property Rights of Township-
Village Enterprises in China, Hangzhou, China, August
1994. The final version benefited from the comments of an
anonymous referee. Completion of this work was supported
by a research grant from the American Council of Learned
Societies/Chiang Ching-kuo Foundation Fellowship Selec-
tion Committee with funds provided by the Chiang Ching-
kuo Foundation. Final revision accepted: April 22, 1997.

1639
1640 WORLD DEVELOPMENT
and Lin (1990) - - have asserted that there is a
continuum of degrees of efficiency or inefficiency
running from that characterizing large state enter-
prises to that of private firms, with the efficiency of
township and village-owned enterprises falling in
between. Others associate TVEs with labor-managed
firms, and anticipate deviations from conventional
firm behavior based on economic theories modelling
the latter type of organization. Evidence that TVEs
display either of these forms of inefficiency is
inconclusive, though. How free of the undesirable
characteristics attributed to state enterprises or labor-
managed firms township and village-owned enter-
prises really have been, and what accounts for that
freedom, is an important question.
Another idea in the earlier paragraph, that town-
ship and village enterprises grew successfully only
after the reform-oriented leadership took charge in
1978, also represents a serious misreading of the
record. Enterprises owned by townships and villages
are direct "descendants" of those formerly owned by
communes and brigades, with the initial transition in
many cases being a matter of a change of name only.
Commune and brigade enterprise (CBE) output grew
steadily during the late 1960s and the 1970s, with
gross output value reaching Y9.25 billion in 1970
and Y27.2 billion in 1976, for an average annual
growth rate of 25.7% during the latter period (Byrd
and Lin, 1990, p. 10). By 1979, 30% of the total
gross output value of China's communes, brigades,
and production teams was generated by roughly a
million and a half CBE's employing over 29 million
workers (Perkins and Yusuf, t984, p. 62), and
commune and brigade-run industry was producing
about 15% of national industrial output value (Saith,
1986, p. 63). CBE growth was regionally concen-
trated, but the same can be said for growth of TVEs
(see below). 4 Although a bias in favor of grain
production led officials to discourage some CBE
investments during the 1970s, and although the
further growth of CBEs and their TVE successors
was indeed facilitated by the development of a more
market-oriented environment after 1978, 5 the prere-
form CBEs were the main sanctioned outlet for rural
nonagricultural energies 6 in a period when private
enterprises were kept within narrow bounds. More-
over, far from shifting decisively to a benign view of
TVEs (CBEs) in 1978, some post-Mat leaders were
initially wary of rural industrialization and anxious
to close down plants they argued were unenonomi-
cally small. 7 This is one reason why the growth rate
of CBE/TVE output slowed from 26.9% a year
during 1971-78 to 15.7% a year during 1978-83,
according to Wong (1988).
In Section 2, I will focus on the sense in which the
TVEs are a unique legacy of the commune system
that structured China's countryside over 1958-84,
arguing that the pattern and extent of rural
industrialization that is peculiar to China, among
poor developing economies, cannot be understood
without reference to the nature of that era's
institutions and policies. In that section of the paper,
I will undertake to explain how those institutions and
policies fostered rural industrialization, and why the
"collective" institutions of township and village
owned enterprise failed to die with the decollectivi-
zation of farming and the nominal death of the
communes. My explanation will emphasize the
conditions of rural savings and capital formation
during the commune era, and the opportunities
generated by structural imbalances in China's
economy.
In Section 3, I will focus on the question of
whether and to what degree local government
ownership and control has been a liability for
township and village enterprises. In addition to a
discussion of the relevant agency issues based on
theoretical considerations and the pertinent institu-
tional environment, several empirical studies bearing
on questions of TVE technical and allocative
efficiency will be reviewed there. In Section 4, I
will discuss some alternative approaches to reform-
ing the ownership of township- and village-owned
enterprises. The discussion is concluded in Section 5.
2. THE COMMUNAL ROOTS AND REFORM
ERA SURVIVAL OF THE TVES: EXPLAINING
M A t ' S MARKET-READY LEGACY
Although China's rural industrial achievements
were much remarked upon by the late 1970s, the
revision of history may by now have reached the
point at which suggesting that the roots of China's
success in this sphere can be found in the policies
and institutions of the M a t era would be risking
ridicule from some quarters. M a t ' s insistence on
pushing for the collectivization of agriculture in the
1950s is held responsible for at least two decades of
relative agricultural stagnation; and the creation of
the commune, in particular, is infamously associated
with up to 30 million famine deaths during the Great
Leap Forward (Ashton et al., 1984). M a t ' s belief
that surplus rural resources could contribute to a
large jump in industrial output led to the melting
down of ton upon ton of rural pots, pans, and utensils
into useless "backyard steel." Periods of Maoist
ascendance are known for their emphasis on grain
production, forfeiting the benefits of local compara-
tive advantage and causing per capita output of such
products as peanuts, rapeseed, and soybeans to
decline substantially during 1952-78. Suggesting
that institutions spawned by M a t ' s rural agenda
could perform well in a market setting is ironic, at
the very least, given the extreme antipathy toward
markets shown by Mat and his leftist allies.
 PAST AND FUTURE OF CHINA'S TVEs
The fact remains that China was not known for its
rural industry before 1949, and that, compared to
other poor and populous economies such as those of
south or southeast Asia, the country stood out as a
hothouse of rural industrialization by the early
1980s. It is thus impossible to avoid the conclusion
that the policies of the intervening years helped to
spawn such industrial growth. Furthermore, the
historical and structural explanations of the phenom-
enon of rural industrialization in China are not
difficult to find.
(a) Ingredients of rural industrial growth in
the Mao era
Consider that, in order for rural industries to be
created and to grow, at least the following five
ingredients must be present: unskilled labor, skilled
labor, capital or financial resources, markets for end
products, and entrepreneurial talents. Unskilled labor
is present in abundance in rural China, but also in all
of the other economies mentioned above. The
creation of each of the other four ingredients was
facilitated, however, either intentionally or inadver-
tently, by the policies followed by the Chinese
government over 1949-78.
The availability of skilled labor in rural China was
increased by a number of factors. Before 1949,
China already had a relatively high male literacy rate
and a small industrial workforce concentrated in
cities such as Shanghai, which drew many workers
from surrounding areas. By the late 1950s, numerous
workers who had gained industrial skills had
returned or retired to their home villages due to
age or other factors. Still more industrial workers
were sent back to their villages after the collapse of
the Great Leap Forward, when policy makers
concluded that China could not support too large
an urban workforce. Basic education, expanded after
1949, facilitated learning on the job, often aided by
such veterans, by new recruits to rural industry.
The origins of the financial means and markets for
China's rural industries are especially closely linked
with the country's commune-era policies. Consider
first capital. Under the circumstances of most
developing countries, the savings of the rural poor
are limited, and formal financial institutions do a
poor job of attracting those savings and channeling
them into productive enterprises. 8 The rich have
more to save, but some of their potential savings are
diverted into extra consumption, and much of the
rest into trading or money-lending activities. To the
extent that rich landowners do invest in nonfarm
production, the enterprises in question are as likely
to be located in large towns and cities as in the
countryside. Such rural investment as does occur
1641
tends to focus on farm buildings, animals, and the
means of carrying on petty commercial activities.
The land reform and subsequent collectivization
of agriculture in China eliminated the class of rich
farmers. Disappearance of land rents raised the
incomes of many poorer farmers, but without further
policy intervention, most of the resulting earnings
can be expected to have been devoted to higher
consumption or to expansion of such activities as
animal husbandry, with little being invested (either
directly or through financial intermediaries) in
industry. Leveling incomes, however, minimized
the resource requirement for securing rural subsis-
tence; 9 and having assured subsistence needs, j° the
authorities proceeded to take a significant part of the
savings decision out of peasants' hands. Arguably,
the better part of the resulting rural savings potential
was in fact transferred to the state through mandatory
agricultural procurements at low prices. Neverthe-
less, some localities managed to retain a meaningful
surplus for local investment. Collectivization al-
lowed the local authorities, rather than farmers
themselves, to determine the division of income
(after explicit and implicit taxation) between con-
sumption or household sideline investment, on the
one hand, and investment in agricultural and
nonagricultural activities, on the other. The kind of
investment chosen was also influenced by the
policies of the period.
Savings and investment occurred at all four levels
of the commune system - - communes, brigades,
production teams, and households - - with the
proportion of earnings earmarked for investment
being highest at the higher levels. Teams at Dahe
Commune in Hebei retained an average of 14% of
net, after-tax income for investment during the
1970s, II a figure similar to the 13% reported by
Marshall (1985) for Cheng Dong Commune in
Shanghai's Jia Ding C o u n t y .13 - But investment
accounted for 60.5% and for 50.4% of the net
earnings of Cheng Dong Commune and of its
brigades, respectively, for an overall average invest-
ment rate of 37% during 1972-78.13 While invest-
ment rates in c o m m u n e s within S h a n g h a i
municipality can be expected to have been well
above average, corresponding figures obtained by
Marshall for all communes in Hebei Province rise
from 7% in 1962 to 14% in 1970, 18% in 1973, and
21% in 1977, with the increase partly reflecting the
increasing share of brigade and commune earnings in
total net revenue. ~4 High rates of reinvestment by
commune and brigade enterprises (without veto
power by the nominal owners) assured the rapid
accumulation of capital where conditions were
conducive to CBE development (conditions that
were not, to be sure, entirely average in rural China
- - see below).
Beyond the generation of investment funds, the
1642 WORLD DEVELOPMENT
allocation of those funds also needs to be considered.
Commune, brigade, and team officials were under
pressure from higher level authorities to concentrate
on increasing their production of grain and of
products required by industry, such as cotton. But
much of the investment in these activities took the
form of labor, or of inputs such as fertilizer that were
purchased on a current basis. Successful units could
often save some investment funds for other endea-
vors. With trading activities generally frowned upon
or prohibited, and with animal husbandry being best
left to households (due to the acute incentive
problems related to the sensitivity of animal survival
to quality of care), which were discouraged from
expanding these activities owing to ideological
constraints, industry and other nonfarm activities
such as mining were among the chief prospects for
collective investment. Despite concern that crop
production receive top priority, cadres were not
entirely discouraged from industrial investment,
since the ideology of the period was not only
developmentalist but also featured Marxist/utopian
notions of eliminating the boundaries between city
and countryside, 15 and the related concept of
industrial dualism known as "walking on two legs."
Moreover, the returns to industrial investment
were often high due to the structural conditions of the
period. In other words, there was considerable
demand for the products of rural industry, the fourth
of the requirements mentioned above. First, industrial
returns were rendered comparatively high, and thus
attractive, by the fact that extractive crop pricing and
insistence that crop production concentrate on low
value staples caused returns from farming to be low
(Lardy, 1983; Putterman, 1993a). Returns to horti-
culture and animal husbandry were similarly kept
down by tight constraints on rural free markets, state
monopolization of procurement for the cities, and low
rural purchasing power. Industrial profits were
rendered high, by contrast, by state pricing policy,
which used the government's monopoly power to
establish high profit rates in order to support the high
investment rates of the period (Naughton, 1992). Not
only might rural enterprises profit from producing, on
a small and sometimes inefficient scale, products
from the production of which state enterprises were
earning monopoly profits; they could also produce
products that were relatively neglected by the state
because of its imbalanced emphasis on heavy industry
and because of gaps in China's decentralized and
somewhat haphazard planning system. 16Finally, state
enterprises, with their high capital intensity, often
crowded conditions, high cost labor force, and
controlled rate of new hires, could often benefit
from subcontracting tasks to and sourcing inputs from
nearby rural enterprises, which they might also supply
with second-hand machinery, training, and partial
finance.
The last required element was entrepreneurship:
the ability to conceive of new projects, to find the
needed inputs and markets, and to organize these
undertakings. Contrary to the image of rural cadre
status as a reward for revolutionary service implying
no managerial competence, there are grounds for
believing that the ranks of local government and
Party institutions became a relatively effective
school of entrepreneurship. Although political loyal-
ties were also important, the developmental orienta-
tion of the Party, and competition among aspiring
cadres in the arena of economic performance, meant
that promotion to leading positions at brigade and
commune levels often reflected economic leadership
abilities. Those having such abilities were naturally
drawn toward cadre positions, before 1978, since
private entrepreneurship of any scale was effectively
outlawed. Nor did the opening up of the latter
opportunities draw all capable entrepreneurs away
from local officialdom. With privileged access to
financial and other resources still concentrated in
Party hands, numerous aspiring "men of affairs"
remained with or entered cadre and TVE manage-
ment ranks in the 1980s. From the standpoint of
potential industrialization, the system for creating
rural elites in Communist China thus compares
favorably with that of the prerevolutionary period,
when the most capable or energetic of rural dwellers
were drawn into nonproductive scholar-gentry roles
or into commercial activities.
The importance to China's subsequent rural
industrialization of the commune structure as a
framework of administration and personnel recruit-
ment deserves considerable emphasis, as should be
clear from a comparison with a wide range of other
developing countries, where it is hard to find a
comparable degree of rural organization and of
administrative capacity at the local level. Although
the required data are perhaps unavailable, there are
strong reasons for suspecting that a comparison of
the combined numbers of private and official rural
entrepreneurs in China with those of their counter-
parts in other less developed countries would show
that China's rural administrative system did not
simply move potential entrepreneurs from the private
to the public sector, but actually increased the overall
stock of rural entrepreneurship. 17 Of course, the
above-mentioned advantages with respect to capital
accumulation played a facilitating role, and the two
phenomena may be impossible to separate.18 Be that
as it may, one can scarcely hope to explain the
success of the TVEs without admitting that great
entrepreneurial ability and drive has been displayed
by tens of thousands of rural officials.
In describing the fertile conditions for rural
industrial growth in the China of the late 1960s
and 1970s, a point deserving of some emphasis is
that the success of the CBEs and later TVEs was due
 PAST AND FUTURE OF CHINA'S TVEs
as much to inefficiencies in the structure of the
economy as it was to the relative efficiency of those
enterprises. Constraints leading to the socially
excessive capital intensity and heavy industrial
orientation of urban manufacturing, which limited
the growth of industrial employment and of small-
scale industry in urban areas, would be described as
inefficient from the standpoint of conventional
economics. But the very disequilibria created by
the state's neglect of certain sectors and by the gap
between low productivity, labor-intensive agriculture
and high productivity, capital-intensive industry,
created the opportunities that CBEsFFVEs took
advantage of. In this respect, the success story of
these enterprises is an excellent illustration of the
ideas of Joseph Schumpeter and of Albert Hirsch-
man, according to whom economic dynamism is a
response to imbalances, not a result of perfectly
balanced development. ~9
The high rural investment rates occasioned by
collective control over incomes, too, were probaby
inefficient in the neoclassical sense, since they most
likely failed to reflect the subjective time preferences
of the rural population. Of course, a benevolent
dictator might have argued that those time prefer-
ences themselves were too short-sighted or did not
give enough weight to the interests of future
generations, and there are economic arguments to
the effect that higher, collectively coordinated
savings levels can make every member of a society
better off (see Sen, 1967). Without effective
democratic control over China's actual "collective"
institutions (see below), however, it is impossible to
tell whether the latter condition held.
(b) TVEs and reform
While the genesis of modem rural industry in
China may be substantially attributable to disequili-
bria of the types mentioned, the shift to a more
competitive, market-mediated economic environ-
ment did not spell the end for the CBEs. On the
contrary, assets and advantages "incubated" in the
Mao period proved especially fertile in the more
competitive and market-driven environment of the
early post-Mao era. 2° As constraints on nonfarm
activities loosened, as more and more resources were
freed for allocation in markets, and as both
purchasing power and investable resources rose
thanks to the higher farm prices of the early reform
era, the growth of CBEs and their successors
accelerated. Even in this period, e.g., during the
1980s, some momentum continued to derive from
disequilibrium phenomena such as the abnormal
profits arising from low saturation of some product
markets, and the attraction of rural resources to
industry due to low returns in agriculture. TVEs
1643
continued to have favorable access to financial
resources, both through retention of profits and due
to close ties between rural banks and rural local
governments. In addition, local government organi-
zational and entrepreneurial capabilities continued to
do their part to power the TVE engine. TVE
flexibility and the relative absence of bureaucratic
hurdles made them attractive partners for foreign
businessmen contracting for labor-intensive assem-
bly and processing work, and low TVE wages and
land costs made them attractive to state enterprises
looking to subcontract out some of their operations.
The structural position of TVEs was now some-
what different from that of their Mao-era predeces-
sors, though. Reform opened up the stage for more
commercially-oriented activities, and TVEs com-
peted on that stage with state and urban collective
enterprises and with nascent private ones. TVEs
were in a privileged position because they had both
greater maneuverability and sharper incentives (or
"harder budget constraints") than state enterprise
counterparts. At the same time, as semi-socialist and
public entities in a transitional but still socialist
economy, they had superior access to funds and
inputs as compared with private enterprises. Thus,
TVEs played a large role in the emergence of a new
"third sector" of the Chinese economy, a sector
saddled with neither the rigidities of the state
enterprises nor the extractive quota burdens of staple
agriculture. Moreover, this sector, the only truly
commercial sector of an economy in transition to
market coordination, took center stage in the
accelerated expansion of China's economy. 2~
(c) An aside on concentration and spurious rurality
TVEs are sometimes viewed as a model of rural
industrialization that might be emulated by other
countries and further diffused within China itself. A
relevant concern, however, is over the degree to
which the observed population of TVEs is genuinely
rural. This concern should be raised for two principal
reasons. First, the distribution of TVEs is quite
concentrated, with the majority of township and
village enterprise output being produced either in the
suburban areas within old municipal boundaries, or
in rural counties adjacent to municipalities. Second,
the definition of "rural" that places enterprises in the
TVE category is a peculiar result of China's post-
1949 history that leads to a number of anomalies
overlapping the cases just mentioned. This aspect of
the question also suggests some interesting com-
parative institutional points.
During the 1960s and 1970s, China's municipa-
lities typically included some agricultural areas that
were locally organized in the same manner as rural
counties, namely as communes, brigades, and
1644 WORLD DEVELOPMENT
production teams. As cities gradually expanded, a
process that was greatly accelerated by the post-1978
reforms, these so-called suburban areas retained their
formally rural character in that residents continued to
hold agricultural household registrations (hukou) and
communes and brigades, succeeded by township and
village governments, retained ownership of many
assets including industrial enterprises. By the late
1980s, however, many of these areas appeared to be
nearly as "urban" as were neighboring municipal
districts: little or no farm land remained; nearly all
employed residents residents worked in industry or
other nonagricultural activities; streets were fitted
with cement sidewalks and electric lighting and lined
with multistory apartment buildings and shops. By
normal standards, the designation of such areas and
of enterprises operating in them as rural would be
highly questionable. Similar comments are becoming
applicable to townships outside of the old municipal
boundaries where industrialization and urbanization
have occurred, but where the formal hierarchy of
township and village government, along with the
associated ownership forms, remain in place. 22
From a comparative institutional standpoint the
fact that formerly "agricultural" areas within and
adjacent to cities were urbanized and industrialized
while "rural" institutional structures were retained
presents an interesting natural experiment. Call the
"traditional" urban areas, which have been domi-
nated by state institutions since the mid-1950s, Type
I Urban Areas, and the new or "agricultural" urban
areas Type II Urban Areas. Industrial activities are
organized in Type II areas by local entities called
townships or villages and in Type I areas by national,
provincial, or municipal entities, under the heading
of "ownership by the whole people." Different
regulations, different amounts of state planning,
and (quite possibly) different degrees of "hardness"
of budget constraints, have affected these areas. The
flexibility of enterprise management, relatively low-
er labor costs, and perhaps stronger performance
incentives for managers, may have given advantages
to enterprises in the Type II areas that help to
account for the far faster growth rates of their
enterprises (TVEs) as compared with the state
enterprises in neighboring Type I areas. Faster
growth could also reflect the simple fact that industry
had more space in which to expand, and expanded
from a smaller base, in the Type II areas. Other
comparisons relating to urban service provision,
public finance, housing, etc., might also be made,
although they lie beyond the scope of this paper.
China has not found a way to break the typical
linkages between modern economic growth and
industry and between industrialization and urbaniza-
tion, nor has it achieved the utopian elimination of
the distinction between countryside and city. Never-
theless, the observation that many of China's TVEs
are located in relatively industrialized areas, and that
still more are close to such areas, does not imply that
there has been no genuine rural industrialization in
China. Rural industry, and nonagricultural enter-
prises of other types exceeding the scale of house-
holds, are found in most parts of China's
countryside, even if the more substantial ones are
concentrated in particular localities. Industrialization
of areas near traditional cities, and urbanization of
medium-sized towns, are also important and dis-
tinctive phenomena for China, which largely de-
ferred the urbanization associated with industrial
development during the 1960s and 1970s. Such
industrialization has permitted large numbers of
Chinese to move from farm to nonfarm occupations
without overly straining existing urban infrastruc-
tures, and probably with less social disruption than
accompanies more conventional forms of urbaniza-
tion. Finally, while the fact that much of China's
"rural industrialization" could be reclassified as
urban may be disappointing from a certain stand-
point, for China to have generated a more dispersed
pattern of rural industry than the one that has in fact
emerged would probably have meant substantially
less industrialization at substantially higher costs,
perhaps outweighing the accompanying distributive
gains.
3. OWNERSHIP AND EFFICIENCY
(a) Cadre incentives for TVE growth
In both the pre- and post-1978 environments
described above, skilled and unskilled labor, capital,
markets, and entrepreneurship were credited with the
rapid growth of the TVEs. But the question of why
these resources came together in the manner in
which they did, and especially why entrepreneurial
capacity came to be directed towards industrial
development rather than to corruption or the personal
ease of potential entrepreneurs, was never directly
addressed. These questions will now be discussed,
with a view both to completing the explanation of
why TVEs performed relatively well in the past, and
to addressing the issue of their possible transforma-
tion in the future.
In order to answer the question of what motivated
a commune or brigade cadre in the China of the early
1970s to seek out opportunities to develop industrial
enterprises under the auspices of those units, the
nature of communes and brigades must itself be
understood. In theory, communes and brigades assets
were the collective property of the agricultural
residents belonging to those units, and their cadres
served on behalf of those residents. But, the idea that
the units were "cooperatives" or their property
meaningfully collective should be dispensed with,
 PAST AND FUTURE OF CHINA'S TVEs
because leaders were not democratically chosen by
"members," and members had little control over the
amount of earnings to be distributed to them and
could not choose to sell off "collective" assets to
enhance present income. Indeed, the very concept of
membership, central to any true cooperative associa-
tion, is inappropriate here, since one belonged by
virtue of residence. 23 It is more useful to think of
brigades and communes as being simultaneously
units of local government and economic organiza-
tion, in a nonelective system in which authority
resided exclusively with the Communist Party. As
mentioned earlier, then, commune and brigade assets
were essentially public property, but property
controlled by local rather than higher level officials,
with substantial rights to reinvest earned surpluses.
Communist Party control means that understand-
ing the motivation and incentives of commune and
brigade officials, and those of the managers
appointed by them, requires a knowledge of the
organizational objectives and culture of that Party.
This is so because an individual's chances of being
chosen for a local government or Party position, and
of being retained in or promoted from that position,
depended upon criteria set by the Party. To the extent
that the Party as a wider organization was committed
to certain objectives, fulfillment of the same
objectives became a key determinant of cadre
selection and promotion. Recognizing the Party's
commitment to certain core goals, such as stabilizing
and raising the supply of staple foods, protecting the
well-being of poor individuals and households, and
promoting economic development, goes a long way
to understanding actions taken by local cadres. 24
One must still address the question of why
recruitment and promotion were valued by some
capable individuals, and how individual Party
members were motivated to attempt to implement
professed Party objectives. In the early 1970s,
pecuniary rewards to cadres were limited, but
holding cadre status and being promoted within
local government or Party ranks was presumably
attractive because of preferences for managerial over
manual work, the associated status and authority, and
perquisites such as access to transportation and
meals provided and consumed during the course of
official business. National and other high ranking
officials were motivated to implement Party objec-
tives since these were seen as the means of fulfilling
the Party's promises to the overwhelming majority
of the rural and general population, and hence of
retaining power. Altruistic motivations should also
not be discounted, since at least some early Party
members submitted themselves to great risks and
hardships in the name of ideals to which they may
have continued to adhere.
Within this general framework, however, deci-
sions to devote energies to rural industrial enterprises
1645
per se, and to do so in ways that promoted growth of
their capital stock, employment, and financial
returns, must be understood partly in marginalist
terms. While the Party and higher government
organs, that is, emphasized agricultural production
and general economic development, the amounts of
resources to be devoted to each activity were usually
not precisely specified. Moreover, sometimes cadres
made efforts to side-step such specifications as
existed - - a practice that became increasingly
common in the reform period. 25 Thus, not all
decisions nor the exact decisions taken by local
cadres can be seen as responses to incentives
intentionally proferred by higher Party echelons.
As stated earlier, returns to investments of capital
and labor could be substantially higher in industry
than in agriculture in both the pre- and the post-1978
periods. If brigade and commune cadres had been the
elected leaders of true cooperates, they might have
been expected to direct resources into such invest-
ments to improve the livelihoods of their members.
The fact that brigades and communes were not
genuine cooperatives does not mean that pressures
from members or residents were completely lacking.
Popularity with residents might be one criterion
looked at by the Party in its personnel decisions;
success in development efforts could also be a source
of prestige that cadres might value. But cadres might
also secure personal material benefits from industrial
growth. In the austere economic environment of
prereform China, cadres' livelihoods were tightly
linked to the earnings of ordinary rural residents, so
advancing brigade and commune incomes would
directly improve a cadre's income. Additional cadre
benefits might take the form of meals and banquets,
travel to set up arrangements with input suppliers
and customers, and the illegal and semi-legal
transactions which such mobility and contacts could
make possible. For the reform period, Walder (1994)
details a host of material benefits that suggest that
the level of cadre compensation from industrial
projects had become comparable to that of private
managers in other countries.
(b) Cadre incentives and TVE efficienQ,
Economic theory calls an enterprise efficient
when it produces the maximum amount of each
output attainable from the resources utilized in
production, and selects the mix and quantities of
inputs and outputs that maximize the difference
between revenue and cost. Efficiency is desirable
because to the degree that enterprises achieve it, the
resources available to a society are allocated so as to
produce goods of maximum social value (conditional
on the associated pattern of income distribution and
preferences). In a hypothetical competitive market
1646 WORLD DEVELOPMENT
economy, such static efficiency is achieved when
firms maximize profits and competition in factor
markets causes input prices to reflect opportunity
costs.
Fully efficient resource allocation in China's rural
economy has been precluded by numerous factors.
Staple crops (and earlier, almost all agricultural
products) were priced administratively below eco-
nomic cost of production. Investment funds were
controlled by government institutions and allocated,
partly in reference to political criteria, at below
market-clearing interest rates. Other inputs, such as
building materials and energy, have also been
administratively allocated at controlled prices, at
least until recently. The near monopoly of state and
state-controlled urban collective enterprises in the
industrial sector left gaps and abnormal profit
opportunities in many product markets, as mentioned
earlier. These factors mean that TVEs cannot be
expected to have been managed efficiently, from a
global, societal standpoint. The relevant question,
however, is whether they were and are managed
efficiently subject to these constraints.
Here, two kinds of questions arise. The first
pertains to the existence of local government
objectives, possibly promoted by the Party and
higher levels of the state, that may be at odds with
profit maximization. A prime example might be
found in the allocation of jobs, the better paying of
which have generally been reserved (where feasible)
for local residents, and the distribution of which has
been importantly influenced by considerations of
fairness in treatment of those residents. Such
constraints are likely to be detrimental to profit-
ability unless needed skills are themselves equally
distributed, or the perception that the local autho-
rities behave fairly induces loyalty resulting in
greater effort from the employed workforce. 26 Even
if they are harmful to profits, these constraints may
have an offsetting social value. If the local commu-
nity values equity in job distribution sufficiently,
adhering to the constraint could be the efficient
choice, even if profits are lower as a result. 27
The second type of question concerns the degree
to which, even abstracting from the presence of
conflicting official objectives of the type just
discussed, the incentive system facing TVE deci-
sion-makers, including both enterprise managers and
the local government officials who supervise them,
are sufficient or appropriate for inducing profit
maximization. Even if the evidence of private returns
from industrial growth reported in the last section of
this paper is accurate, decision-makers might benefit
from growth, as opposed to profits. Or the fact that
decision makers can appropriate to themselves only a
fraction of the profits from the enterprises that they
manage might lead them to expend less effort on
obtaining profits and/or to consume more profit-
reducing on-the-job perks. 28 The absence of alien-
able ownership rights to TVEs might also lead to a
focus on immediate results at the expense of long-
term interests.
These problems are of course similar to those
facing Western businesses in which managers are
only partial owners or hired employees of owners.
They are therefore at least partly amenable to the
same sorts of solutions. Equally efficient solutions
might be discovered or adopted less frequently,
however, because constraints on competition for
investment funds and for the control of the
enterprises creates less pressure to do so. The lack
of alienable ownership rights also rules out some of
the solutions that operate in the Western context,
such as the threat of unfriendly takeover, or giving
managers stock options (rights to make future share
purchases at low, fixed prices). Absence of a market
for ownership and control also deprives incumbent
owners of a source of information about managerial
efficiency - - the publicly quoted share price.
In and of themselves, some of these last concerns
are misplaced, because even in the most unregulated
economies, small firms virtually never raise equity
on stock markets. 29 The fact that such firms are
usually directly managed by their owners could,
however, be interpreted as prima facie evidence that
the separation of ownership and control found in
TVEs is inefficient. Limitations on the set of
competing organizational arrangements might also
be expected to reduce the likelihood that those that
are more efficient will more frequently survive.
Finally, economic theory indicates that it is the
discounted stream of profits, not current profits
alone, that is the socially appropriate maximand. If
ownership of TVEs cannot be alienated and if
nominal collective owners do not press managers
to adopt appropriately long-term views, there may be
nothing to induce managers to sacrifice current
profits when significantly larger future profits can
thereby be attained.
(c) Evidence on TVE efficiency
Some evidence regarding the technical and
allocative efficiency of township and village en-
terprises comes from econometric analysis of panel
data sets collected by the World Bank and Chinese
research institutes. Jefferson (1993) analyzes panel
data on 204 state-owned enterprises (SOEs) and 132
TVEs covering the years 1984, 1988, and 1990. His
production function estimates suggest that total
factor productivity was higher in the TVEs than in
the SOEs both at the beginning and the end of this
period, with the gap growing over time. The
differences attributable to ownership type largely
disappear, however, when factors such as scale,
 PAST AND FUTURE OF CHINA'S TVEs
management system, and proportion of output sold
under state plan, are simultaneously considered. He
also mentions management surveys revealing wide-
spread agreement that state-owned enterprises
(SOEs), not TVEs, are leaders in the introduction
of new technology, and that TVE output is generally
of lesser quality.
A number of studies compare the productivity of
rural enterprises of varying ownership type and
attempt to infer the objectives pursued by TVEs.
Svejnar (1990) analyzes panel data from 122 rural
enterprises located in the four widely separated and
economically distinctive rural counties featured in
the joint World Bank-Chinese study edited by Byrd
and Lin. The annual observations cover 1975-86,
with a large majority (81%) being those of township-
and village-owned units, but with some private and
joint venture enterprises also included. In a first set
of exercises, he estimates a Cobb-Douglas produc-
tion function with the log of the gross value of output
as dependent variable and with the logarithms of
capital and labor inputs plus dummy variables for
ownership, compensation scheme, location, industry,
and year, as regressors. The estimates 3° are sig-
nificant and reasonable with respect to the conven-
tional variables, with implied returns to scale around
1.1, but none of the ownership dummies has a
statistically significant coefficient, suggesting that
village, township, and private rural enterprises are all
equally technically efficient. The results also suggest
that bonuses and work-points internal to enterprises
(but not common to an entire community) raise
productivity, so that "[g]roup coordination and team
spirit may.., be important for efficiency" (Svejnar,
1990, p. 249).
In a separate exercise, 3j Svejnar attempts to
obtain evidence on the nature of the enterprises'
objectives. In this part of the study, he assumes
that an enterprise selects variable employment level
and wages to maximize an objective function that
is a weighted geometric average 32 of profits,
employment, and the difference between the en-
terprise wage and the wage available to workers
in the local labor market. In order to recover
the relevant weights, he assumes that technology
can be represented by a Taylor series approxima-
tion of a CES production function. He then takes
the first order condition of the assumed objective
function with respect to labor, and solves for the
optimal employment level. Finally, he estimates
the parameters of this labor demand function on
the 1980-86 observations of the data panel just
described, 33 allowing for differences due to loca-
tion, ownership type, and compensation scheme.
When wage and opportunity wage variables are
interacted with location and ownership dummies,
the results obtained are interpreted as showing that
enterprises in two of the four counties placed
1647
positive weight on employment creation during the
full seven-year period, but not during the last four
years as a subperiod. When the variables are not
so interacted, there is not evidence of weight being
placed on employment creation. The approach does
not permit one to obtain separate evidence regard-
ing the weight placed on the wage differential. 34
Pitt and Putterman (forthcoming) analyze annual
data on 200 township, village, and other rural
enterprises in 10 provinces for 1984-89 to investi-
gate the degree to which the enterprises pursued
employment creation and/or wage enhancing objec-
tives at the expense of profit-seeking. They estimate,
by fixed effects methods, a Cobb-Douglas produc-
tion function relating value added to assets and
employment, and based on this calculate a set of
enterprise-specific technical efficiency measures.
Using a method that recognizes the possibility of
measurement error, they then test for profit-max-
imizing employment and wage choices by regressing
the log difference of reported and (predicted) profit-
maximizing employment, and of the reported and
market (provincial average rural enterprise) wage, on
market wage, enterprise assets, technical efficiency,
and year dummies. With computed profit-maximiz-
ing employment already taking the wage, assets, and
technical efficiency into account, the hypothesis of
profit-maximizing behavior is tested by examining
whether the two dependent variables are unrelated to
the independent variables in these regressions.
The analysis finds that township- and village-
owned enterprises are neither more nor less techni-
cally efficient than other types of rural enterprise in
the data set. The local government owned TVEs also
appear to be no more prone to creating employment
than are private counterparts; however, all rural
enterprise types tend to employ fewer workers than
would be profit-maximizing (where the latter means
the employment level at which the wage equals the
value of labor's marginal product, calculated from
the estimated Cobb-Douglas production parameters).
Township enterprises appear to pay higher wages
than village and private enterprises, and both town-
ship- and village-owned enterprises show signs of
sharing rents on scarce capital with their employees,
since the difference between enterprise and market
wage varies positively with asset levels.
Dong and Putterman (1997) study a subset of the
data used by Pitt and Putterman for which a
somewhat more demanding analysis can be con-
ducted. Whereas the former authors control for price
changes by the use of time dummies only, the latter
study uses separate industry-specific deflators for the
output, current input, and asset series. Unlike Pitt-
Putterman and Svejnar, who estimate deterministic
production functions, Dong and Putterman use a
stochastic production frontier model, checking the
robustness of their conclusions by comparing results
1648 WORLD DEVELOPMENT
under alternative assumptions regarding both the
random error component and the component mea-
suring technical inefficiency. They calculate a mean
efficiency of enterprises in their sample of 63.7%
under the half-normal assumption regarding the
distribution of the random error component. This
result is quite comparable to estimates of 62.5% for
Brazilian industrial firms, 61.8% for Indonesian
weaving firms, and 55.4% and 55.8% for Colombian
apparel and footwear firms, respectively. 35
In the second part of their study, Dong and
Putterman consider four possible determinants of
technical efficiency, which are (i) the ratio of
the enterprise wage level to provincial average
rural earnings, (ii) the ratio of loan capital to real
asset value, (iii) ownership type, and (iv) location
(province). Both the wage ratio and the loan ratio
show evidence of being related to efficiency. A
higher wage ratio is associated with greater produc-
tive efficiency, perhaps because higher wages
elicited greater effort (as in either an efficiency
wage or a team-based incentive model). 36 A greater
ratio of loans to assets is also associated with
higher technical efficiency, perhaps because enter-
prises with greater access to loans were more
successful in upgrading the quality of their capital
stocks.
Dong and Putterman's results are consistent with
those of the other studies in providing no evidence of
a productivity advantage for privately owned en-
terprises. Indeed, their results suggest that those
sample enterprises owned by township and village
governments if anything displayed a productivity
advantage, since the raw average technical effi-
ciency of these firms is higher than that of private
firms in the sample, and dummies for township and
village ownership have significant positive signs in
multivariate productivity regressions in which pre-
ference in access to capital and other variables have
been controlled for. The coefficients on the province
dummies are reassuring, showing higher technical
efficiency in the more advanced coastal provinces
and lower efficiency in the less advanced interior
provinces, as one would have expected based on
prior knowledge of regional variation in rural China.
With respect to their results on ownership, the
authors caution that their sample of privately owned
enterprises is small, and that they have no assurance
of its representativeness. Moreover, the sample
period represents little more than the first half
decade of permissive policies toward private rural
industry, and the relative strengths of private and of
publicly-controlled forms may well have shifted
since that time.
Xu (1991) studies TVE performance using
province level data covering 1982-87. He first
identifies the best fitting among several differently
specified production functions. Xu's tests select a
Cobb-Douglas specification with the log of output in
constant prices as dependent variable, the logs of
labor and capital inputs plus broad regional and
region-specific time trend dummies as regressors.
Using this estimate, he computes the value of the
marginal product of labor (MPL) for each province
and year, then estimates equations in which TVE
wages are the dependent variable and the indepen-
dent variables are MPL, profit per worker, average
collectively-owned enterprise (COE) (alternatively,
state-owned enterprise (SOE) wage, and average
income of rural laborers. He obtains positive
coefficients on all of the latter variables, with the
estimated coefficients on COE and SOE wages being
significant in their respective equations, that on
profit per worker being significant in both equations,
and those on MPL and average rural incomes being
significant in the SOE but not in the COE equation.
The weak correlation between the wage and MPL
leads him to reject the hypothesis that TVEs are
profit-maximizing and operate in competitive mar-
kets, while the correlations with SOE and COE
wages, along with evidence from surveys, leads him
to conclude that TVE wages may be linked to the
latter by various regulations. 37
A striking result of Xu's analysis is that, like Pitt
and Putterman, he finds TVE wages to be consider-
ably lower than the enterprises' estimated marginal
products of labor. The average ratio of the two
variables, about 1:2.8 in Xu's study, is quite close to
that found by the aforementioned authors. 38 Xu cites
survey evidence suggesting that TVE employment is
determined more by local government than by TVE
managers, but this in itself does not explain the
exhibited inhibition with respect to employment. He
speculates that labor immobility and local labor
shortage might help to explain it. Finally, Xu
calculates growth rates of total factor productivity
for TVEs and finds them to be high relative to either
those of SOEs or of rapidly developing Korea and
Japan during 1960-73.
More recently, Dong and Putterman (1996) have
reviewed the results suggesting underemployment of
labor in Xu's and Pitt and Putterman's studies. They
reconfirm those findings for the panel data set
studied by the latter authors, and they raise the
possibility that such results are caused by enterprises
confronting upward-sloping labor supply curves
(consistent with Xu's local labor shortage and
immobility suggestion) responding in a monopso-
nistic fashion. They perform a preliminary test for
this thesis by regressing the estimated gaps between
marginal products of labor and wages, for the
enterprise sample, on variables proxying for labor
scarcity, labor market infrastructure, and pressure to
maximize profits. Their results are broadly suppor-
tive of the monopsony thesis.
To sum up, the evidence supports the idea that
 PAST AND FUTURE OF CHINA'S TVEs
TVEs are technically and dynamically efficient,
when compared with either SOEs, COEs, or rural
private firms. The main problem manifested appears
to be limited employment creation. While this
problem is potentially serious from the standpoint
of allocative efficiency, its cause remains poorly
understood. Initial findings consistent with the
presence of monopsony in at least some rural
industrial labor markets should be viewed as
exploratory, only.
4. TVE REFORM OPTIONS
Reform discussions in China frequently focus on
property rights changes as a means of fostering more
efficient managerial behavior. Weitzman and Xu
refer to property rights in TVEs as "vaguely defined"
but argue that their performance suggests that better
definition may be unnecessary. Many reformers
would agree with the Weitzman-Xu description of
TVE property rights but, embracing the "property
rights school" viewpoint, call for "better defined" - -
i.e., more private - - property rights in TVEs. The
discussion above (see also Chang and Wang, 1994),
however, suggests that TVE property rights are not
necessarily ill-defined, even if they are not assigned
to individuals. This suggests that the "definition" and
"privatization" questions should be distinguished
from one another.
Nor is privatization necessarily a panacea. In nay
1993 book, I argue that the notion that Chinese
farmers would have invested more in their agricul-
tural enterprises if they had had more private
property rights in land, in the 1980s, is at least
partly misguided, because the actual deficiencies in
agricultural performance had more to do with
agricultural pricing, administrative interventions in
planting decisions and input distribution, and under-
developed marketing systems for staple crops. I
would similarly argue now that selling "shares" of
enterprises without giving real control rights to
shareholders and without the development of finan-
cial institutions to monitor enterprise management is
likely to be an empty gesture from the standpoint of
disciplining managers.
As already mentioned, public trading of owner-
ship stakes in TVEs is probably infeasible for
reasons of scale. Not only would the cost of arms-
length monitoring of such firms be high, but also the
benefits, in terms of facilitating the accumulation of
a large amount of capital at low risk to diversified
investors, would tend to be low, for which reason
one expects small firms to avoid agency problems by
joining ownership to management (Fama and Jensen,
1985). The most plausible options for reforming
property rights in TVEs are therefore not turning
them into public stock companies, but rather either
1649
selling them off to private owners, perhaps including
some current managers, or transforming them into
true cooperatives owned by their workers or other
local residents.
One problem with the privatization option is that
the most likely buyers are those who already know
the enterprise well, namely current managers and
local officials, or their relatives and friends. One
problem with this is that the valuation of the
enterprises would be difficult to determine, and
buyers might thus obtain a large windfall at the
expense of local communities. Monitoring by
people representing the interests of those commu-
nities, and not only of its leaders, would be needed
to forestall such inequitable and socially divisive
outcomes. 39 Even if sale prices pass the "fairness"
or "legitimacy" test, however, ownership by people
closely associated with local leaders, many of
whom are already resented by community members
for alleged excessive taxation and corruption,
would probably be perceived as a political liability
by the central government. If privatization leads
to changes in management practices, these are at
least sometimes likely to divide workers and
managers, intensifying already existing frictions
between farmers and members of the local political
elite.
Cooperative ownership is of interest in part
because it could help to lessen the problem of fair
privatization. Assuming that cooperative owners are
vigilant about their property, later sale to private
individuals could be appropriately monitored by
them. If private individual ownership were more
efficient than cooperative control, and if members
preferred a high sale price to any perceived social
benefits of joint control, then orderly privatization
could gradually occur. Freedom to choose either
form in the medium or long term would also tend to
produce an efficient choice between them.
As a long-term proposition, cooperative owner-
ship could have both advantages and disadvantages.
TVEs are already nominally collective, and part
of the transition to genuine cooperation would
be making real the decision-making power of the
fictive control group. Increased participation in
decision-making and in the distribution of profits
might well increase the "cooperativeness" with
which workers choose effort levels, raising produc-
tivity by strengthening this factor cited by Svejnar
and by Weitzman and Xu. I must express some
skepticism about the presence of a cooperative
atmosphere in existing TVEs, in view of the top-
down manner in which they are controlled. The
same skepticism, however, suggests that real em-
powerment of those outside of cadre and manager
ranks could be quite difficult to achieve under
prevailing political, cultural, and economic condi-
tions. Without concrete formal and operating
1650 WORLD DEVELOPMENT
changes, cooperativization could itself be an empty
rhetorical gesture. 4°
One possibly helpful change which is recom-
mended on efficiency grounds is the transformation
of ownership rights from a joint to an individualized
basis. While ownership is now formally held by the
community as a collectivity, that is, it could be
reassigned to community members (or enterprise
workers, only) as individuals. This individualization
of property rights in a cooperative offers a simple
resolution of the investment incentive issues raised
by Furubotn and Pejovich (1970) in their now well-
known "horizon problem" analysis, 4~ provided that
share values appropriately reflect those of the
underlying assets, and that shares are saleable or
can be redeemed, say, upon retirement. Worker
management can be maintained in such enterprises
by invoking a one-member, one-share rule, or by
separating decision control rights (assigned to
members or workers) from shareholding, perhaps
with some limits on variation in the latter.
To be sure, there is a substantial burden of risk
borne by worker-owners, which is partly unavoid-
able, since workers who would finance their firms
entirely from external sources will either be forced to
cede control rights or will face exhorbitant interest
rates. That workers already have returns on their
human capital bound up with their firms' fortunes
and (due to their limited wealth) are in a poor
position to bear the extra risk resulting from an
undiversified financial portfolio may explain why
worker ownership and control is not more prevalent
in market economies. 42 Worker risk-bearing might
be somewhat reduced, however, by introducing risk-
sharing arrangements among groups of enterprises in
a given locality (following the example of the well-
known Mondragon system).
Even if there is no horizon problem, investment
might well be lower under cooperative than under
local Party control, due to desires for current
consumption and for investment in family-run
enterprises. As argued earlier, it might be unrealistic
to expect China's rural poor to voluntarily save as
much as their local economic and governmental units
have in the past saved and invested on their behalf. If
China's leaders are intent upon maintaining very
high investment levels, they might have to mandate
rates of reinvestment out of net enterprise earnings.
But, moderating run-away investment has been a oft-
stated, yet elusive, goal of China's reformers (see
Dernberger, 1993), and making investment rates
more reflective of the time preferences of the
populace might offer an opportunity to demonstrate
their commitment to it. Moreover, preventing the
free flow of funds between reformed TVEs and other
enterprises would perpetuate an allocative ineffi-
ciency which in the existing system arises due to
favored access to local bank loans by TVEs.
Another concern is that TVEs reformed along
worker-ownership lines would act more like the
"labor-managed firms" of economic theory with
respect to employment. This means that, where
profitable (i.e., earning surpluses and thus able
to pay wages above the opportunity costs of local
labor), they would employ fewer workers and
pay higher wages than would similar privately
owned enterprises. The evidence reviewed above
indicates that high wages (relative to local opportu-
nity earnings) and restricted employment already
mark TVEs. While an exacerbation of these
tendencies would be undesirable, there are reasons
to think that worker-owned TVEs would at least
do somewhat better in these respects. As men-
tioned, the studies by Pitt and Putterman and by
Xu suggest that TVEs hire far fewer workers than
the number at which MPL equals the internal
wage. However, cooperatives could be expected to
hire at just such a level. 43 One can also recall
the observations of Xu and others that TVE wages
tend to be linked to COE and SOE wages. If that
tendency results from political pressures, then as
independent cooperatives, reformed TVEs might
no longer manifest this pattern. Letting cooperati-
vized TVEs compensate local and nonlocal workers
at different levels would be a way to further
ameliorate the employment-inhibition problem
within the cooperative framework. Note that wage
discrimination as such would be unnecessary,
because members could receive their above-market
returns as profit shares while member and non-
member workers in the same skill category could
receive the same labor payments.
One major oversight to be noted before conclud-
ing this discussion of reform possibilities is that, like
the property rights literature mentioned above, it
may concentrate on internal and ownership reforms
more than is really necessary. Reforming policies
and institutions external to TVEs may be more
important to fostering TVE efficiency than are
internal institutional changes. For example, product
markets might he made more competitive by further
reducing barriers to competition among localities,
and by allowing capital to flow more freely between
localities and to competing enterprise forms. Town-
ships and villages might be permitted to open branch
enterprises in other localities, to tap local surplus
labor, and they might also employ more workers
from such localities in their home-area enterprises.
Political pressures to set TVE wages at some fraction
of local SOE or COE wages, if present, could be
eliminated. Budgetary independence of village and
township governments, largely present already,
should be carefully preserved.
Efficiency-enhancing internal changes are also
possible short of radical revision of property rights.
Both worker and managerial incentives could con-
 PAST AND FUTURE OF CHINA'S TVEs
ceivably be enhanced by a better choice of reward
schemes and managerial practices. Future research
could help to identify which payment systems and
forms of managerial contract are most conducive to
raising productivity even in TVEs that remain the
property of township and village governments.
5. CONCLUSION
China's township and village-owned enterprises
are a unique product of the country's economic
passage from land reform and formation of the
commune system to gradual marketization. Rela-
tively leveled incomes (in the 1960s and 1970s,
through the collective system) permitted subsistence
provision at lowered aggregate cost. Control of net
revenue allocation by local authorities thus allowed
them to earmark the lion's share of above-subsis-
tence earnings for investment. Low agricultural
producer prices, the planned economy's bias toward
staple crops, and its numerous industrial gaps and
prohibitions, gave those authorities strong incentives
to divert as much of that investment as they could
into industrial projects. C o m m u n e and brigade
control over resulting profits led to high reinvest-
ment rates. Party objectives, promotion criteria, and
internal discipline, combined with material incen-
tives, the abundance of entrepreneurial opportunities,
and the absence of alternative ways of grasping
them, fostered entrepreneurial talent within the ranks
of local officialdom and management. Increased
opportunities to buy inputs on the market, relaxed
controls over the release of labor from agriculture,
and new opportunities to produce light industrial
products for both domestic and foreign markets,
spurred continued growth of the sector under the
later, reforming economy.
Most economists expect enterprises controlled by
governments to be less efficient than privately-
owned counterparts. While TVEs may suffer less
from the inefficiencies that plague the state-owned
sector because township and village governments
NOTES
1. Jefferson's results are discussed in more detail below.
2. These, at least, continued to be the perceived
characteristics of China's state sector enterprises on the
eve of concerted efforts at more drastic reforms in the mid-
1990s. See Broadman, 1996.
3. Qian and Xu (1993, Table 3.6). In the present paper,
the acronym TVE will be used to denote rural enterprises
owned by township and village governments, where not
otherwise stated. The milestone World Bank volume edited
by Byrd and Lin used the term TVCE, for township and
1651
have relatively hard budget constraints, the fact that
those in control of TVEs do not have full claim on
their enterprises' net earnings, while the nominal
owners (the local citizens) have little control over
their local governments and enterprise managers,
suggests a potentially serious agency problem. This
problem seems to have been held in check by the
high degree of de facto control over residuals by
officials and managers, if we are to believe
econometric results according to which TVEs show
no sign of comparative technical inefficiency. On the
other hand, TVEs appear to have been even more
inefficient than the LMFs of theoretical analysis in
their conservative employment creation. Without
vigorous competition, including free entry and exit
of firms, such behavior could perpetuate allocative
inefficiency in China's rural economy.
Although some economists would favor privati-
zation of both state enterprises and TVEs as early
as possible, reforming both sets of enterprises
requires sensitivity to political-economic realities.
Transition to an open shareholding system is not
a realistic possibility for the vast majority of TVEs,
and many larger TVEs might look with difficulty
for domestic buyers. Transfer to more formal local
community or worker control could be an attractive
option, moderating if not eliminating wage-aug-
menting and employment-restraining effects, and
perhaps reducing investment rates, making more
room for private enterprise growth. Such changes
could facilitate a more equitable transition to
conventional private ownership in some cases,
while also providing a testing ground for a worker-
run sector that many would view as a desirable
legacy of China's collective institutions, and that
also might prove more stable in the long run than
is the present system of local government control. 44
reer mobility of labor, capital, and products. With
freer competition by the private sector, any ineffi-
ciency problem associated with enterprises owned
by public bodies will either be resolved internally
or be rendered unimportant by an ever shrinking
role in the economy.
village communi~ enterprise, to distinguish these from
other (e.g., privately owned) enterprises classified as TVEs,
but I find this usage unappealing, since it connotes a degree
of local resident control that has in fact been lacking (see
below). I forego the option of introducing yet another
acronym, here, for fear of simply adding to the existing
terminological confusion on the subject.
4. In some localities favored by proximity to important
industrial areas, such as Wuxi County in southern Jiangsu
province, the output of CBEs already exceeded the output
value from agriculture before 1978 (based on interviews
1652 WORLD DEVELOPMENT
with Wuxi township and village officials, Harvard Uni-
versity Fairbank Center research group, January 1989).
Huang (1990, p. 355) reports that industry accounted for
47% of GVO above household level in Huayang Commune,
Songjiang County, Shanghai, in 1978, versus 37.2% for
crops. In Dahe commune, in a county adjacent to Hebei's
capital of Shijiazhuang, industry's share of the gross value
of output had reached 47% by 1980 (Putterman, 1993a,
p. 99).
5. See the discussion in Putterman (1992) where it is
argued that the success of China's economic reforms after
1978 should be attributed to the creation of a "third"
sector, beside the state and staple agriculture, with TVEs
constituting a major part of that sector.
6. During the same period, smaller-scale handicraft and
food processing activities were often undertaken by
production teams, rather than communes and brigades. In
contrast to the CBEs, the team-run enterprises usually
reverted to household control after the decollectivization of
farming.
7. Wong divides the early post-Mao period into a
relatively slow growth phase during 1978-83, and a rapid
growth phase beginning in 1984. She attributes slow growth
in the earlier period to the transfer of many brigade-level
enterprises to smaller units in conjunction with the
decollectivization of agriculture, but also to the fact that
"[a]mid accusations that rural enterprises were using their
unfair tax advantages to 'squeeze out" urban industries,
that they were disrupting plan fulfillment by competing for
raw materials, energy, and markets, and so on, an
administrative clamp-down was implemented in 1981-82'
(Wong, 1988, p. 10).
8. Rural saving typically takes the form of tangible
assets such as jewelry or cattle. Money savings may not be
sufficient to justify the overhead required to set up formal
banking and other intermediation outlets in the countryside.
9. Assuming a common, biologically determined con-
sumption requirement for each individual, say c, the
minimum total needed to achieve this requirement for all
P individuals is c x P . The aggregate income requirement
rises monotonically with the degree of income inequality.
10. This discussion is of course simplified since it is well
known that subsistence needs were by no means met in all
localities (see, for example, Lardy, 1983). But failure to
meet those needs was arguably more attributable to low
local output levels than to high savings, tax, and
procurement levels.
11. Based on raw data used in Putterman (1993a, p. 164).
12. Average ratio of team level accumulation to team
distribution plus accumulation during 1972-78 based on
Marshall (1985), Table 5.7, p. 98.
13. Marshall (1985). Net earnings refers to earnings net
of nonlabor production costs and taxes, but prior to
distribution to workers.
14. Marshall (1985, p. 103). The data are reported to
have been provided by an official of the provincial
government during a 1979 interview.
15. That notion was, to be sure, strikingly at odds with
much of China's actual practice (see, for instance, Zweig,
1990; Putterman, 1992); but its presence as official rhetoric
was there to be seized upon by local officials (see, for
instance, Chan et al., 1984).
16. Indeed, Byrd and Lin (1990, p. 10) write that market
shortages caused by urban factory closings during the
Cultural Revolution provided rural communities with the
opportunity to open enterprises in the early 1970s.
17. By entrepreneur, I mean an individual who plays a
leading organizing and innovating role in a nonfarm
enterprise which significantly exceeds in scale the labor
resources of a single household.
18. Imagine that entrepreneurs are created by taking raw
talent and adding learning-by-doing that can only take place
when there is sufficient capital to work with (in part
because potential entrepreneurs cannot leave their routine
occupations without some financial resources in hand).
Then two countries having equal stocks of raw talent will
end up with different stocks of entrepreneurs if different
numbers of their potential entrepreneurs have access to the
necessary capital inputs.
19. See Schumpeter (1934) and Hirschman (1958).
20. The TVEs are not alone in this respect. Mao-era
investments in imgation and drainage systems, new seed
technologies, and so forth, were also a major ingredient for
the agricultural growth spurt associated with the transition
to household farming (Stone, 1988).
21. See again Putterman (1992). For another discussion
of the TVE advantage in the transitional environment, see
Che and Qian (1996).
22. This general discussion glosses over a number of
nuances. For example, China adopted a new definition of
"urban" in the early 1980s that vastly expanded munici-
palities. The partitioning of households into "agricultural"
and "nonagricultural," and the corresponding distinction in
local government and economic organizational forms, was
not substantially altered by that change, but important
changes in this regard have occurred more recently.
23. That membership was not voluntary would have
disqualified brigades and communes from being considered
cooperatives according, for example, to the principles of the
International Cooperative Alliance.
24. This enumeration of goals may appear to cry out for a
political-economic explanation of how such goals could
have come into being and been sustained. While I agree that
such an explanation is desirable, I do not embrace the
extreme assumption that the Party cannot have valued any
goal other than maximizing the discounted sum of wealth
that its leaders extracted from China's populace. The
 PAST AND FUTURE OF CHINA'S TVEs
problem must remain, however, beyond the scope of this
paper.
25. Strategies for getting around higher-level demands to
moderate industrial investment are described by Oi (1991).
Rozelle (1991) concurs in finding a contrast between
industrial investment, which was motivated by its immedi-
ate profitability, and agricultural investment, which was
motivated by its importance to cadre career advancement.
26. Akerlof (1982) provides the different but related
example of an US firm which paid its less and its more
productive employees equally, and argues that the firm may
have found it profitable to do so because its "leniency"
toward the slower workers was reciprocated by their
sympathetic, more able coworkers in the form of a "gift"
of extra productivity.
27. The point here is no different from that made by
Demsetz (1983), who notes that a firm owner's choice of
some consumption on the job at the expense of some profits
is quite socially efficient, even if it is not profit maximizing.
28. A manager who receives less than 100% of an
enterprise's profits might still maximize total profits, since
this maximizes the value of any fixed profit share. But if
effort is expended to increase profits, the size of the share
can affect the effort choice (as in theories of share-
cropping). The effect of incomplete manager residual
claims on the level of consumption on the job is treated
by Jensen and Meckling (1976). Partial residual claims
could also lead to temptations to engage in corrupt
practices: a manager might perform a favor costing the
firm X in exchange for money or services worth bX<X when
the manager's profit share is less than b.
29. The main reason is that generating the information
required for trading shares is subject to economies of scale.
See Putterman (1993b).
30. The equation is estimated separately for 1970-86,
1981-86, and 1983-86.
31. My discussion of this exercise is based on that in Pitt
and Putterman (forthcoming).
32. This form can be viewed as the solution to the
conflict between profit-oriented owners, employment-
oriented political authorities, and wage-oriented workers,
where the weights reflect the bargaining power of each of
these constituencies.
33. Earlier observations are considered less reliable
because data covering them were generated retrospectively,
1653
34. To sign the weight on employment, Svejnar assumes
that the weight on the wage differential is positive. With
this assumption, a third county appears to have been
employment-restricting during 1980--86, but this fact is not
mentioned by the author.
35. See Dong and Putterman (1997) for the sources of the
latter studies.
36. But, the data do not allow one to rule out the
alternative possibility that the higher productivity is due to
the presence of employees having greater skills and
accordingly earning higher levels of pay.
37. Interestingly, Xu speculates that such regulations
may have been promoted by political forces favoring
agriculture over rural industry.
38. In work that has yet to be written up, I have also
found that direct calculations based on estimates of a Cobb-
Douglas production function show that for the TVE sample
studied by Svejnar, too, average VMPs of labor are far
above the average wage paid, despite that author's some-
what contrary finding for 1980-86.
39. Letting higher levels of government serve as
monitors could have the opposite effect, if overzealous
advocacy for "the general interest" caused privatization to
become financially unattractive to the prospective buyers.
40. It is pertinent that buy-outs with just over 50%
worker ownership have been the most popular form of
privatization of former state-owned enterprises in Russia.
Yet observers find little evidence of worker participation;
instead, the workers seem to have been enlisted in what is in
effect a take-over by managers. See, for instance, Burawoy
(1996) and Weisskopf (1996).
41. The "horizon problem" refers to the fact that if
workers' returns on capital invested in their enterprises are
limited to the duration of their employment, the stream of
returns considered in investment choices involving long-
lived assets may be a truncated one, leading to a higher
hurdle rate (or return) for collective than for competing
individual investments. Discussions include Bonin and
Putterman (1987) and Putterman (1993b).
42. See again Putterman (1993bl.
43. The comparison is imprecise because the observed
internal wages may differ from the wages that cooperatives
are expected to pay, that is, those that maximize profit-per-
worker.
44. One does not know, e.g., what would become of the
present system under an alternative political regime.
1654 WORLD DEVELOPMENT
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