CHINA'S TOWNSHIP AND VILLAGE ENTERPRISES 

     China has developed several halfway forms of industrial
enterprise that are neither state owned in the classic sense nor
privately owned in the capitalist sense.  One important
configuration is the township and village enterprise (TVE), owned
by local governments and citizens.  These mainly produce consumer
goods for domestic and international markets.  TVEs are generally
of two types.  The first, owned by the local government, acts like
a holding company, reinvesting profits in existing or new ventures
as well as in local infrastructure.  The second, more recently
developed type is much closer to private enterprise in that most
are effectively controlled if not formally owned by an individual. 
Still, they too maintain close fiscal ties to the local government.
The growth and performance of TVEs have been extraordinary.  Their
share in GDP rose from 13 percent in 1985 to 31 percent in 1994. 
Output has grown by about 25 percent a year since the mid-1980s;
TVEs now account for a third of total industrial growth in China. 
The nonstate share of industrial output in China climbed from 22
percent in 1978 to a startling 66 percent in 1995.  TVEs have
created 95 million jobs in the past fifteen years.  Capital-labor
ratios in collective industry in China are only 25 percent of those
in the state sector.  Yet labor productivity (output per capita) is
close to 80 percent of the level in state enterprises-and rising at
more than 10 percent a year.  Total factor productivity in TVEs is
higher than in the state sector and is growing at 5 percent a year,
more than twice the rate in state enterprises.
Several factors explain this remarkable growth and superior record
of efficiency:

1.   Kinship and implicit property rights.  Strong kinship links
among rural Chinese villagers encourage responsibility in
entrepreneurs.  The sharing of implicit, if fuzzy, property rights
leads to a productive combination of risk and reward sharing
between entrepreneurs and local governments.  Nonetheless,
incentives facing TVEs are more like those of private firms in that
the residual profits accrue to a limited group:a traditionally
stable local community and, in particular, its government and TVE
managers.  Studies show the enormous importance of TVE profits in
local budgets and the close links between local economic
performance and the status, income, and career prospects of local
officials.
2.   Decentralization plus financial discipline.  The 1984
decentralization of fiscal power in China allowed subnational
governments to retain locally generated revenues, creating powerful
incentives for the development of local industry.  Under this
system a nonperforming TVE becomes an unaffordable drain on a
limited local budget.  In the end persistent money losers are
closed and the work force is shifted to more profitable lines.
3.   Competition.  Studies also show intense competition for
investment (including foreign investment) among communities with
TVEs.  Success in attracting investment is affected by reputation
and local economic performance.
4.   Market opportunities and rural saving.  A past bias against
light industry and services has created vast market opportunities,
buttressed by high rural saving and demand following the
agricultural reforms of 1978 and by the limited scope for
emigration from rural areas.
5.   Links with the state enterprise sector.  The large state owned
industrial sector provides a natural source of demand, technology,
and raw materials for many TVEs.  Foreign investment from Hong Kong
and Taiwan (China) plays the same role for many others.

     TVEs will continue to grow, but they must also evolve.  As
their demands for finance increase and extend beyond their
communities, and as people become more mobile, the TVEs' limited
and implicit property rights will need to be better defined and
made more transferable.  Aspects of the TVE phenomenon are specific
to China, but the experience holds important lessons for other
transition economies: the importance of liberal entry, competition,
hard budget constraints, and appropriate fiscal incentives for
local governments.

From World Bank, FROM PLAN TO MARKET: WORLD DEVELOPMENT REPORT
1996, Oxford University Press, 1996, p. 51