China's Transition to the Market : A Paradox of Transformation and its Institutionalist Solution

In many respects, the specifically Chinese way of transition from the planned to the market economy contradicts conventional wisdom of economics. This paper proposes an institutionalist explanation of the seeming paradox, which starts out from the structural diversity of the Chinese economy and the role of traditional social structures in market development. Following North's distinction between formal and informal constraints, a conceptual framework is created in which competition among political entrepreneurs plays a central role. I confront "allocative" with "coordination efficiency" and argue that the Chinese transition followed a trajectory which maintained high levels of coordination efficiency, in particular with regard to the use of human capital. The sequence of reforms is explained as an outcome of a very specific institutional structure, starting out from the two main facts of "regional property rights" and "involution" in the pre-reform economy