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This implies that producers were now facing a greater set of choices, which allowed them to develop new forms of production. Through market exchange economic actors were able to informally work out new institutional arrangements for cooperation outside the boundaries of the established system of state production and allocation.

Second, the rise of free markets provided incentives for institutional innovation as rewards were increasingly based on performance rather than the strength of political connections.

Informal norms, business networks and economic institutions

Finally, markets endogenously expand the opportunities for entrepreneurs and firms to identify new markets and prospects for profit making. This decoupling process typically followed four stages: First, shifts in market competition provide incentives for economic actors to come up with bottom-up institutional arrangements to secure gains from emergent opportunity structures.

Second, entrepreneurial action generated institutional innovations, and through a process of trial and error, successful solutions diffused through the regional economy.

Third, mutual monitoring and enforcement in crosscutting networks of like- minded actors reinforced novel behavioral strategies and norms. Fourth, through mimicking, swarms of followers pile in, and following tipping points, a self-reinforcing social movement dynamic evolved, which in turn facilitated local collective action to lobby for changes in the formal rules consonant with informal norms. Industry-based associations and lobbyists acted as agents representing social interests. Politicians eventually responded to bottom-up innovations by changing formal rules to accommodate and regulate emerging economic realities.

In an established economic order dominated by state-owned enterprises and banks, entrepreneurs endogenously developed economic institutions that enabled them to compete and cooperate in spite of discriminatory rules that privileged the state-owned firms.


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These endogenous institutions—i. In this way, despite discriminatory treatment by the state, weak property rights, and stigmatized status on the periphery of the favored state-owned firms, it was the private enterprise economy that emerged as the fastest-growing sector. By , through bottom-up endogenous processes private industrial firms and family-run businesses had developed into a key economic sector employing more than million people. Too much potential value would go unrealized; therefore groups and societies have much to gain if they create alternative institutions to provide the necessary economic governance.

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New Growth Theories: Transition and Institutional Change - Oxford Scholarship

The informal norms that play such a pervasive and important role in enabling and guiding private economic growth in transition economies seem to operate effectively beyond the shadow of the law. Not surprisingly, this includes both the illegitimate shadow economy controlled by criminal elements and legitimate private firms that develop into leading manufacturing and technology firms such as Alibaba. It is easier to get together a circle of friends who inform each other. A broad consensus across the social sciences agrees that social norms and networks are mainly effective in the governance of exchange in close-knit communities of like-minded economic actors.

An encompassing state ensures the survival and legalization of viable institutional innovations amidst the competition among different political groups. Volitional pragmatism enables the political entrepreneurs to hold a realistic attitude toward institutions while keeping an open mind to all future possibilities.

Economic reform and institutional innovation / Yao Yang.

The interplay between these three factors has shaped China's reform trajectory. Along the path though, there have been constant interactions between local experiments and the central government's ideological adjustments.

This has created many mid-way institutions that do not fit into any existing institutional framework. However, it is the accumulation of these mid-way institutions that has stimulated China's transition from a planned to a market economy. To troubleshoot, please check our FAQs , and if you can't find the answer there, please contact us. All Rights Reserved. OSO version 0. University Press Scholarship Online. Sign in.

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Rise of private manufacturing firms