The Theoretical and Practical Implications of China’s Development Experience: The Role of Informal Economic Practices

Abstract

China’s economic reform has been understood mainly in terms of the "new institutional economics," emphasizing the role of marketized private firms and related laws. Andrew Walder and Yingyi Qian, however, have pointed out instead the crucial role played by Chinese local governments, especially their township and village enterprises. Neither interpretation, however, can account for what has happened in China since the mid-1990s, when the main engine for development shifted to local governments’ competition for and active support of outside investment. Typically, local governments have provided land and related infrastructural support below cost, plus special subsidies and tax privileges, and also circumvented formal rules and regulations on labor use and environmental protection. Those informal practices and the huge accompanying informal economy, not just the new enterprises drawn in, have been the main dynamic both for China’s striking GDP growth and its mounting social and environmental crises. The analysis presented here is historical-cum-theoretical and calls for a new understanding of China’s development experience and of its practical implications.