Towards a Worldwide Index of Human Freedom

208 • Towards a Worldwide Index of Human Freedom
In the 1980s, urban and industrial reforms complemented agricultural
reforms. The comparative-advantage-defying strategy was replaced by a
comparative-advantage-exploiting strategy (Lin, Cai, and Li, 2003: 101).
The preferences for heavy industry and import substitution were overcome.
Township and village enterprises (TVEs) were established. In the
first two reform decades they enabled 120 million peasants to move from
agricultural to industrial employment (Lin, Cai, and Li, 2003: 199). In
the absence of the rule of law, or even legitimacy of private property ownership
in the means of production, Western-style property rights would
have been insecure (Rodrik, 2007: 24). Entrepreneurs could not yet
become owners of the means of production. Instead they were forced into
some kind of partnership with the local administration, i.e., with those
who might be tempted to expropriate them and who had the power to
do it. But local governments lost interest in expropriation because they
could share TVE profits. Although the necessity to reward entrepreneurship
was respected, private property in the means of production was legalized
only after the reforms had already succeeded. At the beginning of the
reform process TVEs were an efficient institution.
TVEs had to compete with each other. The reach of “their” local government
was not long enough or strong enough to protect them. Even if
the ownership was still public or collective, most TVEs had to compete,
as if they were private enterprises. Although not protected by law, managers
and local cadres became de facto residual claimants of profits and
therefore had an incentive to monitor the workforce and to prevent shirking.
Later, truly private enterprises were tolerated. Prices were permitted
to reflect supply and demand. By the early 1990s, most prices were determined
by scarcities rather than political fiat (Lin, Cai, and Li, 2003: 172).
Only 6 percent of the Chinese farm produce was sold in open markets in
1978; that proportion rose to 80 percent in 1993 (Bardhan, 2010: 44).22
By contrast to TVEs and the increasing number of truly private enterprises,
state-owned enterprises (SOEs) incurred losses for a long period
without suffering bankruptcy.
While making SOEs profitable has been difficult and elusive for a long
time, China had succeeded in quickly reducing their weight and importance.
In the late 1970s when the reform process began, they accounted
for more than three-quarters of the industrial output. Two decades later,
their share was down to about one-quarter of it (Lin, Cai, and Li, 2003:
187). Of course, the transition from a state-dominated economy to a more
capitalist one was costly. During the late 1990s about 30 million workers
lost their jobs in state-owned or collective-owned enterprises. Whereas
22 Agricultural productivity is better in China than in India, about twice as high per hectare
for rice, and one-and-a- half times as high for wheat (Bardhan, 2010: 43).
Fraser Institute ©2012 • www.fraserinstitute.org • www.freetheworld.com