LOCAL GOVERNMENTS AS INDUSTRIAL FIRMS - AN ORGANIZATIONAL ANALYSIS OFCHINA TRANSITIONAL ECONOMY

Despite widespread skepticism about government ownership in transition al economies, China's rapid industrial growth has been led by public e nterprises. Kornai's theory of soft budget constraints, born of the fa ilure of earlier Hungarian reforms, fosters such skepticism-but it ass umes as fixed organizational characteristics that in fact vary widely across government jurisdictions. Local governments with smaller indust rial bases have clearer financial incentives and constraints, fewer no nfinancial interests in enterprises, and a greater capacity to monitor them. In China's vast public sector, the fastest growth in output and productivity has occurred where government ownership rights are deare st and most easily enforced, which enables officials to manage public industry as a diversified market-oriented firm.