ABSTRACT
This chapter investigates the emergence and rapid development of private businesses in Wenzhou during the reform period and how the government responds to the development. The main objective of economic reform is to establish a genuine market economy, which improves the overall economic efficiency. The process of economic reform, however, is fundamentally political in the sense that various interest groups struggle to advance their own objectives in the distributional game. The deteriorating fiscal position led the central government to implement radical fiscal reforms in 1994. The revenue-sharing system was replaced by a tax assignment system which redefined the three categories of revenue sources. The chapter deals with the development of economic freedom enjoyed by private entrepreneurs as a consequence of strategic interactions among rational government players at the central and local levels. The transition to the modern corporate form demands a more formal and effective property rights system.
