BARRIERS TO EFFICIENCY AND THE PRIVATIZATION OF TOWNSHIP-VILLAGE ENTERPRISES

Barriers to Efficiency and the Privatization of Township-Village
Enterprises

1 Introduction

In 1978, China opened its borders to the West and initiated several social and economic
reforms. Since that time, the world has watched China rapidly evolve into an economic
power, with an annual growth rate in per capita gross domestic product of over 8 percent.
Rural reforms have had the longest history and are considered among the most successful
of the reforms implemented by the Chinese Central Government: e.g., the rural household
contract responsibility system and the development of rural enterprises.

As noted by Liu (2000) much of the growth has been attributed to the emergence of
China’s non-state sector. In 1978, state-owned enterprises (SOEs) accounted for 78% of
national industrial output; by 1993 that percentage had shrunk to 43%, with non-state
enterprises providing 57% of total production. During this period, a particularly dynamic
segment of the non-state sector had been the rural enterprise sector, which grew from provid-
ing 9% of national industrial output in 1978 to providing 36% in 1993 (Che and Qian, 1998).
Rural enterprises consist of two ownership types: Township-Village Enterprises (TVEs) and
private enterprises. TVEs are not private enterprises, nor state-owned enterprises (SOEs).
Instead, they are rural community (township or village) enterprises that, in principle, are
owned by local residents, but in fact controlled by community governments (Chang and
Wang, 1994; Che and Qian, 1998).

Unlike the large-scale privatization of SOEs in Eastern Europe and the former Soviet
Union, China relied heavily on TVEs to transition from a planned economy to a market
oriented economy. Between 1979 and 1993, the TVEs share of national industrial output
expanded from 9 percent to 27 percent, while the share of rural private enterprises increased

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