BARRIERS TO EFFICIENCY AND THE PRIVATIZATION OF TOWNSHIP-VILLAGE ENTERPRISES

from 0 to 9 percent (China Statistical Yearbook, 1994). By 1993, TVEs produced over 40%
of China’s exports and employed more than 40% of the nation’s industrial workers (Bowles
and Dong, 1997). After 1993, however, the economic performance of TVEs in terms of
profit per capita began a downward spiral, and eventually China witnessed the large-scale
privatization of TVEs. According to a recent survey of over 600 firms in Eastern China,
65 percent of these firms were privatized between 1993 and 2000 (Brandt, Li and Roberts,
2000).

This paper uses Nerlovian type measures to compare the economic performance of private
enterprises and Township-Village enterprises during the pre-1994 and post-1994 years, and
introduces decomposition measures to help explain their relative performances.

1.1 TVEs and Economic Reforms

We believe an understanding of the decline in TVE economic performance is benefitted by
examining the relationship between TVEs and local governments. From both a legal and
practical point of view, Che and Qian (1998, page 7) characterize TVE governance as having
three properties:

(i) All community enterprises within one community are owned collectively by the
residents of that community; (ii) The decisions of managers of these enterprises
are restricted mostly to daily operations; and (iii) The community government
exercises strategic control rights over these enterprises on behalf of the community
residents.

Since the community government plays a critical role in TVE governance, we begin our
study of TVE performance with a discussion of the goals of a typical community (village or
township) government. Jin and Qian (1998) claim the major objectives of the community
government include: (i) increasing the government’s revenue, (ii) creating more non-farm

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