Yingyi Qian

Reform Without Losers: An Interpretation of China's Dual-Track Approach to Transition

This paper develops a simple model to analyze the dual‐track approach to market liberalization as a mechanism for implementing efficient Pareto‐improving economic reform, that is, reform achieving efficiency without creating losers. The approach, based on the continued enforcement of the existing plan while simultaneously liberalizing the market, can be understood as a method for making implicit lump‐sum transfers to compensate potential losers of the reform. The model highlights the critical roles of enforcement of the plan for achieving Pareto improvement and full liberalization of the market track for achieving efficiency. We examine how the dual‐track approach has worked in product and labor market liberalization in China.

How Reform Worked in China

China’s reform worked and produced some of the most impressive growth in the largest developing and transition economy in the world in the past twenty-two years. That China has managed to grow so rapidly despite the absence of many conventional institutions such as rule of law and secure private property rights is puzzling. To understand how reform works in a developing and transition economy that has great growth potential, it is not enough to study the conventional ‘best-practice institutions’ as a desirable goal. One should also study how feasible, imperfect institutions have evolved to complement the initial conditions and to function as stepping stones in the transition toward the goal. Underlying China’s reform is a serial of institutional changes concerning the market, firms, and the government in the novel form of ‘transitional institutions.’ These institutions succeed when they achieve two objectives at the same time: to improve economic efficiency by unleashing the standard forces of incentives and competition on the one hand, and to make the reform a win-win game and thus interest compatible for those in power on the other.

The Return to Capital in China

Chinas investment rate is one of the highest in the world, which naturally leads one to suspect that the return to capital in China must be quite low. Using the data from Chinas national accounts, we estimate the rate of return to capital in China. We find that the aggregate rate of return to capital averaged 25% during 1978-1993, fell during 1993-1998, and has become flat at roughly 20% since 1998. This evidence suggests that the aggregate return to capital in China does not appear to be significantly lower than the return to capital in the rest of the world. We also find that the standard deviation of the rate of return to capital across Chinese provinces has fallen since 1978.

China's transition to markets market-preserving federalism, Chinese style

This paper studies the relationship between decentralization and the success of reform in China. We argue that a particular form of decentralization—called market-preserving federalism Chinese style—provides the critical foundations for market success. Chinas form of decentralization has served the critical purpose of creating markets at a time when political resistance to economic reform remained strong and when the durability of the reforms was important. Nonetheless, federalism, Chinese style, lacks some national public goods, and the new system needs to be institutionalized. We also highlight some parallels between the United States under the Articles of Confederation (1781-1787) and those of modern China.

Incentives and Loss of Control in an Optimal Hierarchy

This paper studies incentives and loss of control in a hierarchy model which combines and generalizes the models of Williamson, Calvo-Wellisz and Keren-Levhari. In our model of the hierarchy, the levels of effort from managers and workers, the wage scales, the span of control and, in particular, the total number of tiers are all endogenous. Using optimal control techniques, we show that in the optimal hierarchy the wage scales and effort levels decrease as one moves down the hierarchy. As the hierarchy expands with no technological progress, workers exert less effort and are paid less, top managers work harder and are paid more and the wage distribution becomes increasingly skewed.

Public Versus Private Ownership of Firms: Evidence from Rural China

Why are many of Chinas successful rural enterprises publically owned by local communities? Using a set of provincial data, we find that the share of community public firms (Township-Village Enterprises, or TVEs) relative to private enterprises is higher where the central governments influence is greater, the community governments power is stronger, and the level of market development is lower. We also find that TVEs help achieve the community governments goals of increasing government revenue, rural nonfarm employment, and rural income. However, TVEs do not increase rural income given the levels of nonfarm employment and local public goods provision, indicating possible inefficiency as compared with private enterprises.

Who are China's Entrepreneurs?

It has been increasingly recognized that entrepreneurship plays a crucial role in successful economies. The Schumpeterian approach to growth (Aghion and Howitt, 1997) advances the view that entrepreneurial dynamism is the key to innovation and growth. A growing body of policy work emphasizes the important role of entrepreneurs in economic development (World Bank, 2003). Yet, research on entrepreneurship in economics is rather limited. There are three distinct perspectives on entrepreneurship in social sciences. The first perspective focuses on the role of economic, political, and legal institutions in fostering or restricting entrepreneurship. Institutional problems are seen in credit constraints that make it impossible to borrow and set up businesses; insecurity of property rights that provides insufficient incentives for entrepreneurs; and regulatory burdens that make setting up new enterprises difficult. The second perspective focuses on the sociological variables shaping entrepreneurship. For example, sociologists study the role of values and social networks in promoting or discouraging entrepreneurial activities. Social networks may work through a variety of channels, such as family, friends, or ethnic groups. The third perspective emphasizes individual characteristics of entrepreneurs. Psychologists have studied the traits associated with entrepreneurship such as a personal need for achievement, belief in the effect of personal effort on outcomes, attitudes towards risk, and individual self-confidence. Although there are studies on each perspective, little work looks at each of these factors taking the other into account. This is precisely what we do in this paper, using a new data set of Chinese entrepreneurs and a matching sample of non-entrepreneurs with similar age, gender, and educational characteristics. The survey covers both entrepreneurs and non-entrepreneurs in order to understand how they differ in individual characteristics, family background, social networks, values and beliefs, and perceptions of the institutional environment. The data further allow us to separate Chinese entrepreneurs into two groups, by necessity and by opportunity, and to differentiate non-entrepreneurs in three groups, those who never thought to be entrepreneurs, those who thought but never became entrepreneurs, and those who became entrepreneurs but eventually failed. This is a richer data set than a previous survey in Russia.

Innovation and Bureaucracy Under Soft and Hard Budget Constraints

Because of the inherent uncertainty, promotion of innovation critically depends on screening mechanisms to select projects. This paper studies the relationship between bureaucracy and financial constraints as two such mechanisms. The lack of commitment to hard financial constraints interferes with its ex post screening capability; ex ante bureaucratic screening is optimally chosen as a substitute. However, bureaucracy makes mistakes by rejecting promising projects and delays innovation, and the efficiency loss due to soft financial constraints increases as prior knowledge becomes worse and as research stage investment requirements become lower. In a centralized economy, bureaucracy may reduce the number of parallel projects, particularly for projects with higher uncertainties and less research stage requirements. This theory fits much of the evidence and in particular it explains why the computer industry, but not the nuclear or aerospace industries, has fared so poorly in centralized economies.

Coordination and Experimentation in M‐Form and U‐Form Organizations

We compare the performance of organizational forms (M‐form and U‐form) in experimenting with uncertain projects. In our framework, organizational forms affect the information structure of an organization and thus the way to coordinate changes. Compared to the U‐form, the M‐form organization achieves better coordination in “attribute matching” but suffers from coordination in “attribute compatibility” and less gains in specialization. The distinctive advantage of the M‐form is its flexibility in choosing between small‐scale and full‐scale experimentation.

Why is China different from Eastern Europe? Perspectives from organization theory

We draw from recent work in organization theory to explain the differences in reform strategies between China and Eastern Europe. An experimentation approach was adopted in China whereas a big bang approach was more favored in Eastern Europe. The explanation is based on differences in the organizational structure of central planning: U-form in Eastern Europe and M-form in China. The M-form is more flexible because it makes local experiments possible, contrary to the U-form where this would give rise to major complications in coordination.