Lessons from the Rise and (Possible) Fall of Chinese Township-Village Enterprises

The success of Chinese township-village enterprises (TVEs) poses a puzzle for a property rights approach to the theory of the firm, since no one really holds well-defined, transferable property rights to control and claim the residual profits of TVEs. TVEs also pose a second puzzle: in the last five or seven years, they have started to experience serious problems, despite reforms which have improved TVEs from a property rights perspective. This paper takes ideas from property rights and institutional approaches to economics and examines whether those ideas can help explain both of these puzzles. As to the first puzzle, reforms in the seventies and eighties created product market competition and gave local governmental officials and TVE managers enough of a stake in the success of the enterprises to encourage investment in them. TVEs were less imperfect than their leading alternatives, state-owned enterprises and private enterprises, the latter of which faced much discrimination. As to the second puzzle, although property rights reforms have improved TVE performance, reforms reducing the discrimination against private enterprises have made them more attractive. The paper also draws four general lessons from the TVE experience about the relationship between property rights and economic development. First, defining property rights properly is important to development, but other institutions (e.g. norms, financial institutions, capital markets, labor markets, political structure) are also quite important. Second, would-be reformers need to carefully consider the political constraints facing proposed changes in property rights. Third, property rights reforms are at least as much the effect of economic development as they are its cause. Fourth, the development path followed may affect the end states which can be feasibly reached.