How Industrial Reform Worked in China: The Role of Innovation, Competition, and Property Rights

Abstract

In China early attempts at partial reform unleashed forces that, fifteen years later, have brought China's economy to the brink of a market system. The participation of tens of thousands of enterprises and millions of administrators, managers, and workers over the duration of the reform eventually built a constituency for market-directed change that was far stronger than any official announcement could have produced. Gradual and partial reform shifted the economy toward a market system under a regime of growth, improved productivity, accelerated technical change, and rising exports. Reactions of firms and governments focused increasingly on innovation, cost reduction, and further deregulation, deepening the cumulative impact of reform, rather than on rent-seeking and subsidies. This process of reform is very different from the top-down, centrally planned approach to reform that is widely advocated by international organizations and economic researchers, but it has produced a durable reform constituency that easily rebuffed high-level efforts to roll back reform in the wake of the inflation scare and political repression of 1989.