Case | HBS Case Collection | November 2002 (Revised June 2003)

China's Rural Leap Forward

by Bruce R. Scott and Jamie Matthews

Abstract

Collectively owned township and village enterprises (TVEs) played a pivotal role in China's rapid growth during the 1980s and 1990s. Although they originated in the policies and institutions of the Maoist era, TVEs thrived only after Deng Xiaoping's economic reforms redistributed property rights, taxing powers, and responsibility for the provision of public goods. These reforms made local governments dependent on their TVEs for tax revenues and gave party cadres powerful incentives to promote economic growth. Local officials often helped TVEs under their jurisdiction to gain access to technologies, capital, and production permits. Instead of rapidly privatizing its state-owned enterprises (SOEs), China gradually liberalized aspects of its economy in a controlled manner, often establishing a "market track" alongside its planned system. As the SOEs' share of output and employment shrank, that of the TVEs dramatically increased. By the mid- to late 1990s, TVEs accounted for nearly 40% of China's industrial output and had created about 100 million jobs. Nevertheless, party officials questioned whether the TVEs were a viable form of organization for an economy with ever-larger firms, more complex products and production processes, and the need for more capital and more skilled managers.

Keywords: Business and Government Relations; Public Sector; Public Ownership; Development Economics; Governing Rules, Regulations, and Reforms; Macroeconomics; Emerging Markets; China;

Citation:

Scott, Bruce R., and Jamie Matthews. "China's Rural Leap Forward." Harvard Business School Case 703-024, November 2002. (Revised June 2003.)