Why China Grew: Understanding the Financial Structure of Late Development

Abstract

This dissertation explores how economic institutions governing finance and investment have con- tributed to growth in reform-era China. Economic and political reforms greatly transformed China\u27s prior centrally-planned economy. Although reforms incorporated elements of market institutions and private enterprise, China\u27s state institutions exercising extensive authority over a wide range of eco- nomic affairs critically and fundamentally played a central role in transforming this economy from one of the world\u27s poorest to the world\u27s second largest in the span of one generation. I explain the emergence of a unique configuration of institutions supportive of industrial policy implemented by largely autonomous local government officials. In combination with state-directed bank credit, this local government industrial policy finance have played a significant and positive role in development of exports in China. Foreign direct investment, too, was positively and significantly associated with export development, though on a more geographically-limited basis. Though private entrepreneurs are often seen as dynamic engines of growth in China\u27s reform-era economy, I show that the vast majority of entrepreneurs are low-skilled, low-productivity, and exhibit non-positive rates of capital accumulation. Most entrepreneurs would experience higher earnings were they not segmented into self-employment occupations by adverse socioeconomic conditions. Rather than engines of growth, China\u27s entrepreneurs resemble more the vast numbers of informal sector self-employment prevalent in many developing countries