Chinese / English
Home >> Academic NewsAcademic News




E. Morris Cox Professor of Economics and

Professor of Political Science

University of California, Berkeley

Yingyi Qian and Chenggang Xu are the two most prominent senior economists to have studied economic reforms and transition from central planning to market in the context of China. Their research published in top journals and in major scientific outlets has shaped the profession’s understanding of the transition processes in Chin compared to Eastern Europe, why it was different, and also why it was more successful. Their research also led to provide explanations for the growth miracle that has taken place in China since the beginning of economic reforms after 1978. These are original explanations base on economic thinking based in institutional economics. These explanations now form the consensus view in top universities about the main reasons for China’s growth miracle. They also shed light on developments in recent years and help us better understand the fundamentals of the Chinese economy.


Yingyi Qian and Chenggang Xu were among the very first Chinese students to enter into Harvard economic department’s Ph.D program. They studied under the supervision of famous microeconomic theorist (2007 Nobel prize laureate ) Eric Maskin and famous theorist of the socialist economic system Janos Kornai. This combination of interests provided very fertile ground for research that proved fundamental in understanding China’s transition.


Both Qian and Xu have a very full CV. We will only focus on some of their contributions that have passed best the test of time, and that are fundamental to understand China’s reforms.


In a very early article published in Economics of Transition (1993), Qian and Xu made a surprising analogy between the theory of the firm and the organization of central planning. They found that the famous distinction made by Alfred Chandler and Oliver Williamson between the M-form (M for multi-divisional) and U-form (U for unitary) applied fully to the comparison between the organizational forms China (M form) and the Soviet Union (U form) inherited from central planning. They draw detailed comparisons of this difference.


This early work led to research that produced two important papers , one with Eric Maskin (“ Incentives, Information and Organizational Form” , Review of Economic Studies 2000) and one with Gerard Roland ( “Coordination and Experimentation in the M form and U form Organization”, Journal of Political Economy, 2006).


The paper with Maskin shows that the M form (territorial organization of government) in China made it much easier to organize yardstick competition than the U form (sectoral organization of government) because the former gave more easily comparable measures of performance than the latter. In other words, comparing growth in one province with growth in another province gives a less noisy comparison of performance than comparing say growth of the steel sector with that of agriculture. Their model shows that when this is the case, the optimal incentives for yardstick competition will be stronger under the M form organization. They showed that conditional variances of shocks in Chinese industry were smaller when one aggregated based on territory than on sector. They also showed that provinces that did better in relative performance evaluation than others also got to have a better representation in the Central Committee of the Chinese Communist Party (CCP). This was the first paper to highlight the fundamental importance of meritocracy and relative performance evaluation as a fundamental driver of growth performance in China, a key factor to understand the growth miracle in China. This generated a whole literature on meritocracy and the extent to which growth performance, as well as other measures of performance, play a role in the promotion of cadres in the hierarchy of power (party and government) in China. The role of meritocracy in China’s growth performance over the last decades is central in the frontier economic research on China.


The paper with Roland shows that the M form organization makes it much easier to organize local reform experiments that are not too costly to reverse if they fail and that can be popularized and diffused if successful. Building partly on an earlier paper by Dewatripont and Roland (American Economic Review 1995) on the optimal speed and sequencing of reforms under aggregate uncertainty, the paper shed new light on why experimentation, and especially local experimentation, was used much more widely in China than in Eastern Europe. It also shed light on the difference between the experimental approach to reforms in China, initially called gradualism, and the big bang comprehensive approach in Eastern Europe. China’s organization of government, already under central planning was based on territorial principles whereas the Soviet Union’s organization of government was based on sectoral principles. China’s M form organization of government based on territorial subdivisions made it much easier to experiment locally as local leaders concentrated all the local powers necessary to run such experiments. The success of the special economic zones is the best known example of this, but there are many more, including policies of enterprise restructuring in the 1990s. In contrast, the U form organization of government that existed in the Soviet Union made it impossible for local authorities to organize reform experiments as policies needed to be coordinated with the sectoral ministries and agencies at the central level. It is no exaggeration to state that the experimental approach to reforms has been central to economic transition in China. This paper not only explains with a simple formal model the advantages of the experimental approach but also explains why it was successful in the Chinese context.


Another pillar of China’s successful transition has been decentralization of government. Qian and Xu have again been pioneers in explaining its role in the reform process. Several contributions need to he highlighted here.


In several papers coauthored with Barry Weingast and other co-authors (summarized in Qian and Weingast “Federalism as a Commitment to Preserving Market Incentives”, Journal of Economic Perspectives 1997, Qian has showed how decentralization of government in China aligned the incentives of local leaders with that of economic growth. A key feature of the first two decades of Chinese transition is the fiscal decentralization arrangements. Provincial leaders were to transfer to the Center a certain amount of tax revenues, either as a lump sum or as a share of revenues, and were allowed to keep additional revenues. With lump sum transfers, the marginal revenue retention for provincial authorities was 100%, but even with shared revenues the marginal retention rate for provincial governments was very high (above 70%). Moreover, these fiscal arrangements were at the time relatively credible and the correlation between local raising of revenues and local expenditures was very strong. Combined with the fact that local leaders usually have better information about local conditions than central leaders, this fiscal arrangement gave provincial leaders incentives to maximize the tax base in the long run, which meant maximizing growth. Fiscal arrangements thus gave provincial leaders incentives that were aligned with the objective of maximizing growth. Note that since the nineties, fiscal decentralization has mostly been undone. Whether or not to go back to more fiscal decentralization is a big policy issue in China.


Xu produced a remarkable synthesis of the reform process ( “The Fundamental Institutions of China’s Reforms and Development” Journal of Economic Literature 2011) that explains in a comprehensive way the effects of decentralization on the reform process and its interaction with meritocracy and incentives for promotion. In a nutshell, promotion incentives and yardstick competition led local leaders to want to maximize growth. Fiscal decentralization gave them the tools and authority at the local level to reach that objective. Xu’s paper is highly cited (610 Google citations for a paper published only in 2011) and is currently considered the consensus view on China’s reform process.


Both Qian and Xu also made important contributions to the literature on soft budget constraints. In a joint paper (“Innovation and Bureaucracy under Soft and hard Budget Constraints” Review of Economic Studies 1998), they show that innovation in large organizations leads to soft budget constraints whereas in a decentralized setup, hard budget constraints are the norm. Therefore, centralized organizations will do more ex ante screening of innovations since they know that bad projects will be refinanced. This leads to too strict screening of innovations under centralization and to more dynamic innovation under the decentralized market mechanism. This can be seen as an explanation for why innovation was weak under socialism and why it is strong under capitalism.


Both have also contributed to the political economy analysis of China’s transition and more generally to issues of institutions in the context of Chinese transition. Qian, in a paper with Lau and Roland (“Reform without Losers: An Interpretation of China’s dual-track approach to transition” Journal of Political Economy 2000) showed how the mechanism of dual-track price liberalization implemented in China had very favorable political economy features. Indeed, the dual track system allows by design to achieve efficiency gains of market allocation without hurting the welfare of any economic agents. The reason is that the maintain of the plan track protects existing rents agents may have had under planning while the addition of the market track creates additional welfare gains on the market both on the demand and on the supply side. Another important property of dual track liberalization is that it prevents an aggregate output fall from the disruptions created by the abrupt elimination of the planning system. China was the only country to liberalize its prices by the dual-track method, It was also the only transition country to have avoided an output fall associated to price liberalization. Xu’s Journal of Economic Literature paper does a masterful synthesis of institutions in post-Mao China and relates them to imperial institutions, showing a striking continuity.


Overall, both famous researchers have played a leading role in understanding the main economic issues of China’s reform and transition as well as its growth miracle since 1978. They have paved the way for new generations of scholars to study the Chinese economy and its role in today’s world.




Copyright © National Economics Foundation  

Photo:National Economics Foundation