THIS study has analyzed how the actions of local state officials shaped institutions of property rights in rural industry and how the structure of property rights, in turn, influenced the extractive institutions and allocative practices of the state in each of three locales. This local story is set in the context of a larger constellation of national-level institutions and policies. The policies and actions of the central state, refracted through the prism of intervening levels of administrative hierarchy, created incentives and constraints that shaped the behavior of local state officials. In this way, national institutions have been taken as exogenous to the dynamics examined in the study thus far. This stance was appropriate both because the study has focused on incentives and constraints at the local level and because national institutions were relatively unchanging in their fundamentals over the period covered by the core of the study.

This concluding chapter broadens the scope of the analysis by examining interactions between the dynamics of the system at the local level and at the central level. Specifically, the actions of local officials have created pressure for change at the central level. Indeed, since 1994, fundamental changes have occurred in the national institutional environment. This chapter addresses the occurrence of major changes in central state institutions and analyzes their effects on the evolution of property rights at the local level.

AMID predictions that the opening years of the new millennium will usher in a “Chinese century,” we are confronted daily with con-flicting images of the Chinese state – at once predatory and developmental, weak and strong. Indeed, the “reach of the state” is an issue of vigorous debate not only among students of Chinese politics but also among students of comparative politics. The debate centers on the capacity of the state to promote the generation of wealth and to command some portion of that wealth for state purposes. While arguments about state strength or weakness pervade the literature, they are, by their very nature, inconclusive. What the debate fails to capture fully is the extent to which state capacity changes over time and varies across policy arenas and geographic settings. Rather, the “reach of the state” ultimately depends on the nature of the institutions that govern the economy and society. This study moves beyond formulations of state strength or weakness and focuses the analysis on issues of institutional variation and change.

Institutional change is at the heart of the rapid socioeconomic transformation in China since 1978. With one of the fastest growing economies in the world at the beginning of the twenty-first century, China is simultaneously making the transition from agriculture to industry and from socialism to capitalism. This study examines changes in the institutions governing one of the most dynamic sectors of China's economy – the rural industrial sector.

THIS book represents an effort to make the concerns of those engaged in the study of Chinese politics relevant to students of comparative politics, to extend the boundaries of comparative theory, and to shed new light – both empirically and theoretically – on the issue of institutional variation and change in China.

Empirically, the book focuses on the development of China's rural industrial sector since 1949. In theoretical terms, it develops a dynamic approach to the study of institutional variation and change by engaging in theorizing across three levels of analysis. Analysis at the individual level provides careful, empirical grounding for assumptions about individual behavior; analysis at the institutional level examines the ways in which local institutions create incentives for and constraints on individual actions; and finally, analysis at the level of the national political economy focuses on the ways in which changes in the broader environment can transform the incentives and constraints imposed by local institutions.

This approach allows me to explain in a systematic manner not only the striking regional variation in the form of property rights in rural industry during the first decade and a half of China's post-Mao reform, but also the dramatic move toward privatization that has occurred throughout China since the mid-1990s. Moreover, I show that the evolution of property rights and state extractive institutions are integrally related.

THE three counties of Wuxi, Songjiang, and Yueqing were similar in that they were among the wealthiest counties in the country as of the early 1990s, but they differed dramatically in the forms of property rights that characterized the rural industrial sector – the main source of wealth in each of the three local economies. Local government-run firms dominated rural industry in Wuxi and Songjiang, while privately run firms dominated in Yueqing. This chapter employs a case study approach to construct a theoretical explanation for this empirical puzzle. Local officials responded to incentives to generate revenue through the promotion of rural industry by supporting particular forms of property rights within their jurisdictions. However, their choices about what forms of property rights to support were constrained by distinct local resource endowments inherited from the Maoist era and shaped by the nature of national political-legal and market institutions during the reform period.

In the relatively inhospitable political and economic climate of the early reform period, local officials in Yueqing County, Wenzhou, faced a particular challenge in attempting to specify private property rights in order to promote private investment in industry. They responded to the challenge by innovating aggressively in the area of property rights, drafting local regulations that allowed several different forms of private investment to coexist. Most private investors in Yueqing chose to adopt cooperative shareholding (gufen hezuo) – a form of ownership that entailed some attenuation of full private property rights – rather than private (siying) ownership – an ownership form that did not entail the same attenuation.

RURAL industry has expanded dramatically since 1978; indeed, Deng Xiaoping described it as one of the great, unanticipated successes of the post-Mao economic reforms (Ma, Wang, and Liu 1994:2). However, it would be historically inaccurate to characterize rural industrial growth simply as a product of reform. While key changes in the institutional environment of local officials at the outset of the reform period contributed in important ways to the takeoff of rural industry, its development in the 1980s and 1990s also had deeper historical roots. The legacy of rural industrial development during the Maoist period has had profound implications for the subsequent development of rural industry during the reform period.

Rural industrialization was in part a legacy of the Great Leap Forward from 1958 to 1961, as epitomized by the slogans of “self-reliance” and “walking on two legs.” However, contrary to the commonly accepted official rhetoric of “self-reliance,” the areas in which rural industries were most successful under Mao were, in many ways, the least self-reliant. Indeed, rural industry in Wuxi and Songjiang Counties received signifi-cantly more state support than is commonly understood and certainly more than is implied by the slogan of “self-reliance.” By contrast, rural industry in Yueqing County received relatively little state support and was arguably much closer to the Maoist ideal of self-reliance. Ironically, however, it was Yueqing that was most frequently and vehemently attacked during the Maoist period for its “capitalist excesses.”

THIS chapter shifts the focus from revenue extraction to credit allocation. As in the case of tax policy, township governments also had clear incentives to intervene in the implementation of credit policy. The rapid development of collective firms and their ability to undertake direct and indirect provision of public goods was supported by access to credit from the state banking system. Like revenue extraction, credit allocation for collective enterprises functioned as part of the larger collective organizational structure.This political backing allowed collectives in areas such as Wuxi and Songjiang to take on high levels of debt relative to equity, and it contributed to softness in the budget constraints of many collective firms. By contrast, private firms were not deeply embedded in this collective structure and were largely shut out of the state banking system through the early to mid-1990s.

Local institutional arrangements involving credit allocation had implications for the ability of the central state to realize its goals at the local level. Among the goals of financial reform in China have been for the central state to shift from direct, administrative means to indirect, economic means of controlling the banking system and for banks to enjoy greater autonomy in decisions regarding the allocation of credit. Yet these goals do not translate simply into a reduction of the state's role.

LOCAL extractive institutions evolved in response to a complex set of incentives and constraints. While all local governments faced a common revenue imperative, their particular institutional arrangements for revenue extraction were shaped by the constraints associated with the local structure of property rights. Different structures of property rights were associated with different levels of transaction costs and different distributions of bargaining power within the local community. Under collective forms of ownership, information about the resources of firms was held by agents situated within a local hierarchy headed by local state officials. Collective ownership entailed lower costs of revenue extraction to the local state, because it provided institutional arrangements that internalized transactions, creating “enforceable norms for the transmission of information” (Evans 1995:26). By contrast, under private forms of ownership, information was held within a firm that was at arm's length from the local state, raising the cost of revenue extraction. As Nicholas Van de Walle (1989:607) points out, information costs are likely to be higher for state regulation than for state ownership, because regulation of an industry requires the acquisition of such extensive information about an industry's costs and technologies. Therefore, as private firms became an increasingly important part of the local economy, local state officials had an incentive to innovate, developing new institutional arrangements to cope with those costs.

THIS chapter provides the foundation for arguments made throughout subsequent chapters of the book by examining the factors that shaped local cadre behavior from the mid-1980s through the mid-1990s. The most powerful of these factors were the incentives contained in the revenue-sharing fiscal system and the cadre evaluation system. First, the fiscal system created a revenue imperative for local officials by requiring that local governments be largely self-financing, and since township governments were heavily dependent on industry to meet their revenue requirements, they had a strong incentive to promote local industrial development. At the same time, the nature of the division of fiscal revenue among levels of government and the inability of higher levels to credibly commit to fiscal contracts created incentives for local governments to evade central tax policy as a means of retaining more revenue at the local level. Second, the cadre evaluation system powerfully shaped local official behavior by linking both the remuneration and advancement of local leaders to performance on economic as well as sociopolitical norms. Economic norms centered around the promotion of industrial development, while sociopolitical norms mandated the financing and provision of public goods and thus reinforced the revenue imperative facing local leaders. These features of the cadre evaluation system, put in place beginning in 1979, are among the often-overlooked aspects of political reform – albeit not democratic political reform – that occurred at the outset of the reform process in China.

Chinese intellectuals from the 1920s through the 1940s torn between antiimperialist nationalism and cultural critique, between the external imperatives of jiuwang and the internal prerequisites of qimeng. When full-scale war with Japan broke out in 1937, they felt compelled to support jiuwang first, accepting that to be patriotic was not to attack China's “greatness,” its culture and civilization. Vera Schwarcz has written of the early war period: “For a brief interval, there was a common cause between intellectuals who were convinced that China must pursue internal self-emancipation simultaneously with resistance to external aggression and activists whose top priority was national salvation.” She draws attention to a New Enlightenment movement (1936–1937) led by May Fourth veterans and young communist theoreticians who departed from the “old” enlightenment path of cultural critique to call for a more systematic and rational synthesis of Chinese and Western cultures. As China suffered defeat after defeat in the first two years of the war, pressures mounted on May Fourth veterans to cease attacking Chinese traditions while the fight for national survival was so perilous. Overwhelmed by a sense of nationalism, some attempted to redefine the Chinese national identity that diminished the appeal of cultural iconoclasm.

But both May Fourth veterans and the liberal intellectuals of a younger generation soon reasserted the priority of qimeng in the midst of the pressure to concentrate on jiuwang. For the prodemocracy activists, the most important thing about qimeng was not cultural critique and iconoclasm.