a1 New York University
a2 Stanford University
China's remarkable economic success rests on a foundation of political reform providing a considerable degree of credible commitment to markets. This reform reflects a special type of institutionalized decentralization that the authors call “federalism, Chinese style.” This form of decentralization has three consequences. First, it fosters competition, not only in product markets, but also among local governments for labor and foreign capital. This competition, in turn, encourages local government experimentation and learning with new forms of enterprises, regulation, and economic relationships. Second, it provides incentives for local governments to promote local economic prosperity. Finally, it provides a significant amount of protection to local governments and their enterprises from political intrusion by the central government.
Gabriella Montinola is Assistant Professor of Politics at New York University. Her current research interests include corruption, interest representation, and economic development in the Third World.
Ylngyi Qlan is Assistant Professor of Economics at Stanford University and National Fellow at the Hoover Institution. He is currently working on several research projects in the economics of organization and institution with applications to transition economies, particularly China's.
Barry R. Weingast is a Senior Fellow at the Hoover Institution and Professor in the Department of Political Science at Stanford University. His current research focuses on the political foundations of markets and economic development in both modern and historical contexts.
* The authors gratefully acknowledge the helpful conversations of Masahiko Aoki, Nina Halpern, Anne Krueger, John Litwack, Ronald McKinnon, Paul Milgrom, Ramon Myers, Douglass North.Jean Oi, Gerard Roland, Susan Shirk, and Dorothy Solinger; and the research assistance of Jiahua Che. This paper was prepared under a cooperative agreement between the Institute for Policy Reform (iPR) and the Agency for International Development (AID), Cooperative Agreement No. PDC-0095-A-00- 1126-00. Qian's research was also supported by the Research Incentive Fund from the Office of Technology Licensing (OTL) at Stanford University. Views expressed in this paper are those of the authors and not necessarily those of IPR, AID, or Stanford.