Away from socialism: The Asian way

Abstract

Abstract This article offers a refined institutional approach to ascertain the main cause of China's economic surge. It first surveys the literature on economic performance of (ex‐)socialist countries. Then it offers an institution mix to account for Chinese economic success: hard budget constraint, state‐regulated market, export expansion and bureaucratic autonomy. It argues that hard budget constraint of the private or quasi‐private sector is necessary to concentrate incentives on production, and away from vertical bargaining, while the state regulation of markets is conducive to a strategic allocation of resources. In this institutional framework, export expansion becomes necessary not only for the market outlets it provides, but also for the competition it brings about that would otherwise be lacking in a state‐regulated market. Finally, bureaucratic autonomy is necessary to design and implement industrial policy that serves state capitalism and promotes export expansion. This four‐item institution mix explains to a great extent China's economic success in the past decade. With some modifications, it also accounts for most of Asia's other economic miracles. By doing so, the article rejects the Krugman theme which predicts that East Asia's miracle economies will inevitably slow down as they enter the phase of intensive growth without being able to raise factor productivity continuously. In contrast, this article asserts that the optimal institution mix, if property maintained, may be able to successfully shift East Asia from extensive to intensive growth.