Reform and Development in China: A New Institutional Economics Perspective

Abstract

The success of China's approach to transition has produced many challenges to the conventional wisdom in economic theory. The transition in essence is a process of institutional changes from those of a planned economy to those of a market economy. In the paper we argue that the economic institutions of the planned economy are endogenously shaped by the adoption of a comparative advantage-defying (hereafter CAD strategy) heavy-industry-oriented development strategy in a capital scarce economy. It is, hence, suggested the completion of China's transition to a market economy, which requires the elimination of institutional distortions in the planned economy, depends on final resolution of viability issue of enterprises in CADs priority sectors.