In a widely quoted remark, Theodore Schultz (1964) had the following words about the impact of institutions on economic behavior: “Once there are investment opportunities and efficient incentives, farmers will turn sand into gold.” China’s economic growth in the post-Mao era attests to the wisdom of this proposition. Yet the transformation of economic institutions that has fostered such growth also illustrates that economic actors are not simply respondents to the incentives and constraints embodied in the changing rules of the game. But rather they are active participants in making the changes. To understand how such a process of endogenously induced institutional change unfolded, it is important to investigate the interactions between economic actors and the rule makers and enforcers—that is, political actors, and how the structural conditions they face fashion the outcomes of their interactions.
The foregoing analysis of the mechanisms of early privation shows that citizens’ entrepreneurial pursuits could create both the impetus for changing the rules and the political shield (i.e., demonstrable economic outcomes) for defending such change beyond centrally authorized limits. But the initial strength of entrepreneurial forces varied because of different historical and geographic conditions, especially those affecting their persistence and survivability under Maoism. Where such forces were strong at the outset of economic reform, the likelihood of early privatization tended to increase. The responses of local political actors also varied, largely because different selfinterest calculations were shaped by the ecology of the local political economy. Where the dominant strategy of economic expansion through sales growth by local public enterprises was sustained, as in northern Zhejiang, early privatization did not materialize despite a strong precommunist entrepreneurial tradition and postreform efforts to revive it. Where the strategy faltered early, and where strong justifications based on both extraordinary economic hardship and demonstrable benefits from private economic activities could be established to tackle the political risk of rule bending for private business, early privatization was likely to occur and deepen, as illustrated by the case of Wenzhou and with suggestive evidence from Taizhou. Where the second condition was lacking or not strongly present—as was the case of Lishui, however, early privatization would be less likely to proceed at fast and steady pace. Where both conditions were weak—as exemplified by Quzhou, early privatization was least likely to gain quick momentum despite growing difficulties faced by the local public sector. Nonetheless, with the increase of the cumulative cost for relying on the local public sector and a sharp decrease of the political risk for ownership change, many of the “laggard” locales that had managed to hold onto local public enterprises with morbidity or deteriorating health would likely be among the first to react to a political bandwagon effect triggered by the drastic national policy change on private ownership in 1997-1998. That reaction, as I will show in chapter 7, contributed to the precipitous decline of public ownership thereafter.