employment, and (iii) increasing rural income. In addition, Whiting (1996) notes the total
gross output of a community serves as a major indicator of the local government’s political
performance. The importance of total gross output is suggested by the observation that
local leaders index TVE manager compensation to output and profits (Whiting, 1996).
Qian (1999) divides the period 1978 — 1999 into two stages. The first stage, 1978 —
1993, was dominated by incentive schemes called “particularistic contracting.”1 With such
schemes the incentives of economic agents were improved, while simultaneously protecting
the interests of stakeholders. Through experiments and institutional innovations, a variety
of transitional institutions emerged, with many of them taking unconventional forms. Qian
observed that although many of the institutional arrangements were “second-best, they were
quite effective in providing the right economic incentives.”
During the first stage, both state and market institutions were imperfect, and the exist-
ing institutions offered the TVEs and private enterprises both advantages and disadvantages.
First, with community government assistance, TVEs were thought to have better access to
bank loans (Wong, 1988, 1991). During this period, China’s banking systems essentially func-
tioned as government cashiers, and operated on political rather than commercial principles.
Also, state banks were believed to be more willing to lend to TVEs because of “ideological
discrimination” against private enterprises (Jin and Qian, 1998). Second, China’s economy
was characterized by declining, but still functioning central government planning institutions
and emerging, but weak market institutions (Nee, 1992). By using the community govern-
ment’s political power and their own collective identity, TVEs were believed to have easier
access to SOE’s technologies and have better access to inputs that were in short supply
1 Particularistic contracting were contracts between the government and subordinate units. Examples
include: agricultural contracting between the government and farm households; fiscal contracting between
the central and local governments; and industrial profit contracting between the government and state
enterprises (Qian, 1999).