AWAY FROM SOCIALISM - THE ASIAN WAY

This article offers a refined institutional approach to ascertain the main cause of China's economic surge. It first surveys the literature on economic performance of (ex-)socialist countries Then it offers an institution mix to account for Chinese economic success: hard budget c onstraint, state-regulated market, export expansion and bureaucratic a utonomy. It argues that hard budget constraint of the private or quasi -private sector is necessary to concentrate incentives on production, and away from vertical bargaining, while the state regulation of marke ts is conducive to a strategic allocation of resources. In this instit utional framework, export expansion becomes necessary not only for the market outlets it provides, but also for the competition it brings ab out that would otherwise be lacking in a state-regulated market. Final ly, bureaucratic autonomy is necessary to design and implement industr ial policy that serves state capitalism and promotes export expansion. This four-item institution mix explains to a great extent China's eco nomic success in the past decade. With some modifications, it also acc ounts for most of Asia's other economic miracles. By doing so, the art icle rejects the Krugman theme which predicts that East Asia's miracle economies will inevitably slow down as they enter the phase of intens ive growth without being able to raise factor productivity continuousl y. In contrast, this article asserts that the optimal institution mix, if property maintained, may be able to successfully shift East Asia f rom extensive to intensive growth.