The entrepreneurial state: Local governments, property rights, and China's transition from state socialism, 1978-1990

This dissertation relies on a property rights framework to explain the widespread participation of local governments in the growth of the nonstate, market-oriented economy under Deng Xiaoping's reforms. More specifically, it seeks to explain why local governments at all levels of the Chinese state hierarchy have invested, or diverted substantial assets from the command economy into the nonstate economy. The entrepreneurial behavior of local governments outside of the traditional command economy is puzzling because it runs counter to our usual understanding of the role that communist bureaucracies play in reform. Middle-level bureaucrats in communist and former communist countries are generally seen as resistant to change in the direction of markets, and concerned with preserving the command economy, of which they are the main beneficiaries.; This study contends that this view of communist bureaucrats is overly simplistic and underestimates their ability to adapt to change. It shows that the entrepreneurial behavior of local governments can in fact be understood as a rational response to an institutional environment that has its origins in the state socialist system that emerged during the Maoist period. Two institutions are especially important for understanding this environment. One is a highly decentralized property rights structure that made local governments de facto owners of much of the nation's productive assets in the state-owned economy. The second is the principal-agent relationship that structures the relationship between central and local governments. In the area of economic management, this relationship focused on the center's efforts to provide incentives (and disincentives) for lower-level authorities to carry out its economic policies. This study examines the interplay between these two institutions, and shows how repeated efforts by the center to control local governments introduced a substantial degree of uncertainty and ambiguity into the property rights structure. Local governments, in response, invested or diverted assets outside of the state sector where central supervision was weak. This began a trend that was accelerated, and to a certain extent legitimized, during the reform period when local governments became a major force in promoting the growth of the nonstate economy, and thereby China's transition from state socialism.