By Gang Lin, Program Associate

Xiaobo Hu, Wilson Center public policy scholar and assistant professor, Clemson University
Nicholas Lardy, senior fellow, Brookings Institution

The conversion of socialist systems to market economies during the past two decades is without precedent in world history in terms of scale and depth of transformation. At the nucleus of this conversion is reform of the property rights system. Contrary to Russia's shock therapy approach to privatization, which was described by some as leading to "only shock, but no therapy," China's gradualist strategy has achieved economic prosperity and political stability over the transition period, at least for the time being.

What are the basic characteristics of China's gradualist strategy of reform of the property rights system? Who are the players in shaping China's economic transformation? What are the principal advantages and disadvantages of China's gradualist approach? To explore these and related issues, the Wilson Center's Asia Program hosted a seminar titled "How China Privatizes—A New Institutional Perspective" on July 31, 2001, featuring Xiaobo Hu, Wilson Center public policy scholar and assistant professor of Political Science at Clemson University, and Nicholas Lardy, senior fellow of the Brookings Institution. Both speakers offered their insights on the process of China's privatization, as well as its implications for economic development in China.

In examining China's property rights transition from the state to the non-state sector, Professor Hu provided a theoretic framework that makes a distinction among three components of property rights—user rights, extractor rights (rights to returns from the assets), and seller rights. According to Hu, transformation of property rights in China is a piece-meal transition--not only because each of the components of property rights began transformation at a different time, but also because the rights are transferred part by part within each component. The origins of property rights transformation in China can be traced back to earlier institutions where the holders of political authority controlled virtually all aspects of the society.

As Hu explained, the initial process of transformation started with marketization of institutional political power in the late 1970s and early 1980s through various economic reforms. The second stage of the transformation commenced with the development of informal property rights in the mid-1980s through the multi-layer contracting, the director responsibility, and the dual-track price systems, and township and village enterprises (TVEs). The third stage of the transformation began around 1997 with formalization of property rights through merger, shareholding, and sale of state-owned enterprises. Hu highlighted the political and institutional factors in the creation and formalization of informal property rights. With the development of informal property rights, bureaucrats and managers gained chances to experience risk-taking, explore market mechanisms, and accumulate private capital, and therefore demanded formal protection of their property rights. However, formalization has not yet ended informality in exercising and protecting property rights, Hu concluded.

In his commentary, Nicholas Lardy argued that China's step-by-step privatization has contributed to social injustice and economic inefficiency. Because seller rights have not fully developed in China, bureaucrat-managers are likely to manipulate their user rights and extractor rights, engaging in rent-seeking activities. Selling state enterprises at low prices for personal purposes has resulted in a swift draining of state assets and severe corruption. According to Lardy, the formalization of property rights in China is very limited. The 3,000 enterprises merged in 1997, for instance, account for only a tiny part of China's troublesome state enterprises. It will take decades for China to complete property rights transformation if the transition maintains such a slow pace, Lardy cautioned.

This seminar focused on privatization in China from a new institutional approach. It looked at the various institutional players, with different political strategies and interactions, in shaping the scale and path of China's property rights transformation, as well as the future of the entire Chinese economy. As Hu argued, property rights as an institution, formal or informal, are not only created for gross national economic performance, but more often reflect the development of vested interests, such as state leaders, bureaucrats, and managers of enterprises. Both speakers agreed that China's gradualist strategy in the reform of property rights offers the advantages of maintaining economic growth and preventing social turmoil, but also has the disadvantages of creating social injustice and political corruption.