ABSTRACT
The New Institutional Economics emphasizes the central role of institutions and institutional change in framing the economic behavior and performance of individuals, organizations, and nations. While every national economy is engaged in some form of evolutionary institutional change, perhaps nowhere have these changes been as continuous, comprehensive, and consequential as they have been in China over the past three decades. Having operated as a relatively pure, if unstable, system of socialist central planning during 1957 to 1978, China is now emerging as a largely market-driven capitalist system. The nature of the economic institutions that define present-day China is increasingly converging to resemble aspects of the mix of institutions represented by the OECD economies. The evolution of these institutions over the past three decades provides a unique opportunity in which to understand the dynamics of institutional change, both the forces that drive the change of key economic institutions and the way in which changes in China’s economy are forcing changes in that country’s basic political institutions. China has become a laboratory of institutional change, which this chapter seeks to examine using the still formative economic literature that examines the analytical approaches and body of research relating to the study of induced institutional innovation. Specifically the chapter identifies and analyzes three vivid examples of institutional change that capture key features of China’s institutional reform experience. These are: the household contract responsibility system, the creation of markets in labor quality, and the shift of China’s political system from a top-down managerial system to one focused on the provision of mediation services needed for the functioning of a modern capitalist system. These basic reforms have been induced through identifiable economic disequilibria that have shifted both the demand and supply for institutional change across farm households, state-owned enterprises, and actors within China’s political system. The purpose of the chapter is to characterize the disequilibria and the processes of institutional innovations that have framed each of these basic reforms. The paper also identifies four common features of these realms of institutional change that serve to frame China’s larger dynamic of induced institutional innovation.
