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The Role of the Local State in China's Transitional Economy

Published online by Cambridge University Press:  12 February 2009


All states have a role in development, but this varies widely. The spectrum is defined at one end by the laissez faire minimalist state whose role is limited to ensuring a stable and secure environment so that contracts, property rights and other institutions of the market can be honoured. At the opposite end are the centrally planned Leninist states that directly replace the market with bureaucratic allocation and planning. Between these two extremes are the capitalist developmental states of Japan and the East Asian Newly Industrializing Countries (NICs) that are neither Communist nor laissez faire, but exhibit characteristics of both. The state plays an activist, rather than a minimalist, role; there is planning, but it is geared toward creating maximum competitive and comparative advantage for manufacturers within a market economy.

China's Transitional Economy
Copyright © The China Quarterly 1995

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1 See my “Fiscal reform and the economic foundations of local state corporatism,” World Politics, Vol.45, No. 1 (October 1992), pp. 99–126, for further discussion of the term “corporatism.” I am not concerned with the role of the central state in the vertical integration of interests within society as a whole. The corporation that I describe is constituted and co-ordinated by the local government, not the central authorities. For a useful discussion of this term as it specifically relates to East Asia, see Unger, Jonathan and Chan, Anita, “Corporatism, and the East Asian model,” The Australian Journal of Chinese Affairs, No. 33 (January 1995), pp. 2954.CrossRefGoogle Scholar

2 North, Douglass, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990), p. 107.CrossRefGoogle Scholar

3 On the importance of what is sometimes also called the maturity of a bureaucracy, see Dietrich Rueschemeyer and Evans, Peter, “The state and economic transformation: toward an analysis of the conditions underlying effective intervention,” in Peter, Evans, Dietrich, Rueschemeyer and Theda, Skocpol (eds.), Bringing the State Back In (Cambridge: Cambridge University Press, 1985), pp. 44—77.CrossRefGoogle Scholar A useful succinct statement on effective bureaucracy as key to capacity is by Haggard, Stephan and Kaufman, Robert, “The state in the initiation and consolidation of market oriented reform,” in Louis, Putterman and Dietrich, Rueschemeyer (eds.), State and Market in Development (Boulder: Lynne Rienner, 1992), pp. 221242.Google Scholar

4 See Whyte, Martin King and Parish, William, Urban Life in Contemporary China (Chicago: University of Chicago Press, 1984)Google Scholar; and Parish, William and Whyte, Martin King, Village and Family in Contemporary China (Chicago: University of Chicago Press, 1978).Google Scholar

5 Johnson, Chalmers, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford: Stanford University Press, 1982)Google Scholar; his more recent views on the Asian capitalist model and the role of the state in the economy are summarized in his “Capitalism: East Asian style” (1992 Panglaykim Memorial Lecture, Jakarta, 15 December 1992); other recent works include Wade, Robert, Governing the Economy: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, 1990).Google Scholar

6 Richard Applebaum and Jeffrey Henderson, “Situating the state in the East Asian development process,” in Richard Applebaum and Jeffrey Henderson (eds.), States and Development in the Asian Pacific Rim (Newbury Park: Sage Publications), pp. 1–26, try to refine Chalmers Johnson's distinction between plan rational and plan ideological by further dividing systems into “market ideological” and “market rational.” China remains in the “plan ideological” quadrant.

7 On the NICs “getting the prices wrong,” see Alice Amsden, “A theory of government intervention in late industrialization,” in Putterman and Rueschemeyer, State and Market in Development, pp. 53–84.

8 Examples of this in rural and urban areas can be found respectively in Oi, Jean, State and Peasant in Contemporary China: The Political Economy of Village Government (Berkeley: University of California Press, 1989)Google Scholar and Walder, Andrew, Communist Neo-Traditionalism: Work and Authority in Chinese Industry (Berkeley: University of California Press, 1986).Google Scholar

9 Bernstein, Thomas, “Stalinism, famine, and Chinese peasants: grain procurements during the Great Leap Forward,” Theory and Society, Vol. 13, No. 3 (May 1984), pp. 339377.CrossRefGoogle Scholar

10 See, for example, McMillan, John and Naughton, Barry, “How to reform a planned economy: lessons from China,” Oxford Review of Economic Policy, Vol. 8, No. 1 (1993), pp. 130142.CrossRefGoogle Scholar

11 This view is most clearly articulated in Pei, Minxin, From Reform to Revolution: The Demise of Communism in China and the Soviet Union (Cambridge, MA: Harvard University Press, 1994)Google Scholar, especially ch. 3.

12 The partially private nature of these firms has been suggested by Victor Nee. See, for example, his “Organizational dynamics of market transition: hybrid forms, property rights, and mixed economy in China,” Administrative Science Quarterly, No. 37 (March 1992), pp. 1–27. This is also suggested in his earlier work, Nee, Victor and Su, Sijin, “Institutional change and economic growth in China: the view from the villages,” Journal of Asian Studies, Vol. 49, No. 1 (February 1990), pp. 325.CrossRefGoogle Scholar

13 Yia-Ling, Liu, “Reform from below: the private economy and local politics in the rural industrialization of Wenzhou,” The China Quarterly, No. 130 (June 1992), pp. 293–316.Google Scholar

14 The classic statement is by Gershenkron, Alexander, Economic Backwardness in Historical Perspective (Cambridge, MA: Harvard University Press, 1962).Google Scholar

15 For a description of the variations in contracting, see my “The fate of the collective after the commune,” in Deborah, Davis and Ezra, Vogel (eds.), Chinese Society on the Eve of Tiananmen (Cambridge, MA: Council on East Asian Studies, Harvard University, 1990), pp. 1536.Google Scholar

16 In this study I adopt North's definition of institutions as “a set of the rules, compliance procedures, and moral and ethical behavioral norms designed to constrain the behavior of individuals in the interest of maximizing the wealth or utility of principals.” This definition focuses attention not only on existing structures, but also on policies, such as reform initiatives, adopted at the Centre and passed on to the local governments for implementation. North, Douglass, Structure and Change in Economic History (New York: Norton, 1981), pp. 201202.Google Scholar

17 The essential ideas are laid out in Oi, “Fiscal reform and the economic foundations of local state corporatism.” For a more detailed statement see Jean C. Oi, Rural China Takes Off: Incentives for Rural Industrialization (University of California Press, forthcoming). By property rights I refer to the bundle of rights over property that includes the right to sell the property, the right to the income from the property and the right to manage the property. Demsetz, Harold, “The structure of ownership and the theory of the firm,” Journal of Law and Economics, Vol. 26 (June 1983), pp. 375390.CrossRefGoogle Scholar However, in this study I focus primarily on the rights to income. For a theoretical statement on this aspect of property rights as an incentive, see Barzel, Yoram, Economic Analysis of Property Rights (New York: Cambridge University Press, 1989).Google Scholar

18 For a summary of this point in the principal-agent literature see Moe, Terry, “The new economics of organization,” American Journal of Political Science, Vol. 28, No. 4 (November 1984), pp. 739777.CrossRefGoogle Scholar

19 Richard Bird makes a similar point about the difference between Communist and non-Communist local governments. See his “Intergovernmental finance and local taxation in developing countries: some basic considerations for reformers,” Public Administration and Development, Vol. 10 (1990), pp. 277–288.

20 For details of why this is the case, see Oi, Rural China Takes Off.

21 This view contrasts that put forth by Qian Yingyi and Xu Chenggang who stress the independent and self-sufficient ability of townships and villages in the development of rural enterprises. Yingyi, Qian and Chenggang, Xu, “Why China's economic reforms differ: the M-form hierarchy and entry/expansion of the non-state sector,” Economics of Transition, Vol. 1 (1993), pp. 135170.Google Scholar

22 See White, Harrison C., “Agency as control,” in Pratt, John W. and Zeckhauser, Richard J. (eds.), Principals and Agents: The Structure of Business (Boston: Harvard Business School Press, 1985), pp. 187212.Google Scholar

23 See Jean Oi, “Cadre networks, information diffusion, and market production in coastal China,” paper prepared for the World Bank Project on “Explaining Growth: Chinese Coastal Provinces and Mexican Maquiladoras,” 1994, for details of these networks and how they provide information to local enterprises.

24 China interview 72388.

25 As might be expected, this direct redistribution is limited to collectively-owned township and village enterprises. The private sector might benefit from redistribution by official loans, but it is unlikely that local governments would pay the debts of the private sector.

26 See, for example, ‘Township enterprises should also implement reform,” Jingji cankao, 18 November 1987, translated in Joint Publications Research Service, China Report (hereafter JPRS-CAR) 88–005, 18 February 1988, pp. 20–21.

27 China interview 17788.

28 It should be noted, however, that the corporate good is defined more broadly than mere economic interests and profits. It may include such social interests as providing employment, but increasingly this hinges on profitability, competitiveness, and growth.

29 See, for example, Zysman, John, Government, Markets, and Growth: Financial Systems and the Politics of Industrial Change (Ithaca: Cornell University Press, 1983)Google Scholar; on the East Asian NICS see the work by Robert Wade. One of the best short statements is his “The role of government in overcoming market failure: Taiwan, Republic of Korea and Japan,” in Hughes, Helen (ed.), Achieving Industrialization in East Asia (Cambridge: Cambridge University Press, 1988), pp. 129163.CrossRefGoogle Scholar

30 See Oi, Rural China Takes Off, for details.

31 China interview 22688. In the rural areas, the major bank at the county level serving peasants and rural enterprises is the Agricultural Bank (nongye yinhang). Below the county, however, there are the branches of the Agricultural Bank, known as a business office (yingye suo), and the credit co-operatives (xinyongshe).

32 A more detailed discussion and description of other mechanisms are in Oi, Rural China Takes Off.

33 For further discussion and documentation of this point see ibid., especially chs. 5 and 6.

34 Local plans may or may not be mandated by upper-level quotas. Provinces send plans to the prefectures, which send them to the counties, which then send them to the townships. For example, the county still sets annual procurement quotas for agricultural goods, such as grain and cotton, and allocates the agricultural tax to the townships. Each of the specialized banks are given growth quotas for deposits by the prefectural banks. Both of these are mandated by centrally-set targets. In addition, localities, from the province on down, also set annual industrial production and fiscal targets which are not necessarily dictated by upper-level directives.

35 Only at the village level is the required preparation of reports attenuated. Townships are the administrative superiors of the villages, but townships seem only to have loose control over their villages, especially the highly industrialized, wealthy villages.

36 Christine Wong makes a similar point. See her “Interpreting rural industrial growth in the post-Mao period,” Modern China, Vol. 14, No. 1 (January 1988), pp. 3–30.

37 For a differentiated view of the rent-seeking character of different states, see Evans, Peter, “Predatory, developmental, and other apparatuses: a comparative political economy perspective on the Third World state, “Sociological Forum, Vol. 4, No. 4 (1989), pp. 561587.CrossRefGoogle Scholar

38 The reasons for this have to do with the access that local governments have to non-tax revenue. Details are laid out in Oi, “Fiscal reform and the economic foundations of local state corporatism.” Further discussion is in Oi, Rural China Takes Off.

39 Some have criticized this relationship as too close. See, for example, ‘Township enterprises should also implement reform,” translated in JPRS-CAR 88–005, 18 February 1988, pp. 20–21; also Xu Hao and Wang Qingshan, Research Department, Agricultural Bank of China, “China's rural financial markets: current situation and strategy,” translated in JPRS-CAR 88–002, 5 February 1988, pp. 54–57.

40 Wade, “The role of government in overcoming market failure,” p. 130.

41 A useful discussion of this general point is in Dietrich Rueschemeyer and Louis Putterman, “Synergy or rivalry?” in Putterman and Rueschemeyer, State and Market in Development, pp. 243–262.

42 See, for example, Streeten, Paul, “Markets and states: against minimalism,” World Development, Vol. 21, No. 8 (August 1993), pp. 1281–98CrossRefGoogle Scholar; and Chaudhry, Kiren Aziz, “The myth of the market and the common history of late developers,” Politics and Society, Vol. 21, No. 3 (September 1993), pp. 245274.CrossRefGoogle Scholar

43 See, for example, Rueschemeyer and Evans, “The state and economic transformation,” pp. 44–77; also Haggard and Kaufman, “The state in the initiation and consolidation of market oriented reform.”

44 North, Institutions, Institutional Change and Economic Performance, especially pp. 76–77.

45 See Dorothy Solinger, “Urban entrepreneurs and the state: the merger of state and society,” in Rosenbaum, Arthur L. (ed.), State and Society in China: The Consequences of Reform (Boulder: Westview Press, 1992), pp. 121142; ??????????Google Scholar David Wank, “From state socialism to community capitalism: state power, social structure, and private enterprise in a Chinese city,” Ph.D. dissertation, Harvard University, 1993; and his “Private business, bureaucracy, and political alliance in a Chinese city,” The Australian Journal of Chinese Affairs, No. 33 (January 1995), pp. 55–74. Liu Yia-Ling, “Reform from below,” also points toward such an alliance.

46 See Montinola, Gabriella, Qian, Yingyi and Barry, R. Weingast, “Federalism, Chinese style: the political basis for economic success in China,” World Politics, Vol. 48 (October 1995), pp. 5081.CrossRefGoogle Scholar

47 See, for example, Wong, Christine, “Central-local relations in an era of fiscal decline: the paradox of fiscal decentralization in post-Mao China,” The China Quarterly, No. 128, (December 1991), pp. 691715CrossRefGoogle Scholar; and Wong, Christine, “Fiscal reform and local industrialization: the problematic sequencing of reform in post-Mao China,” Modern China, Vol. 18, No. 2 (April 1992), pp. 197227.CrossRefGoogle Scholar

48 Kumar, Anjali, “Economic reform and the internal division of labor in China: production, trade, and marketing” (Washington, D.C.: The World Bank, March 1994).Google Scholar

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