such as an independent judiciary or political parties to make them work. In
Sub-Saharan Africa tribal collective property rights and loyalties gradually
re-emerged to replace colonial innovations in private property rights and
multi-party democracy. Institutional reform needs to be carefully mapped to
the existing underlying informal institutional and organizational constraints.
Good examples are the US legal changes of the nineteenth century and the
reform process in China after the late 1970s. China has experienced rapid
economic growth over more than three decades, during which property rights
were neither private, clearly defined nor protected by a clear and enforceable
legal system independent of the ruling Communist Party. This did not prevent
investment exceeding 40 per cent of GDP during the 1990s. If not conven-
tionally efficient, the peculiar nature of institutions in China sustained
economic growth and made reform compatible with the interests of those
holding political power (Qian, 2003). Among the most important examples
was an innovative type of firm ownership, the Township and Village
Enterprises (TVEs). TVEs were not private but owned collectively by local
communities and managed on their behalf by the local government. In 1980s
China there was a strong anti-private property ideology inherited from the
communist era so any private ownership was vulnerable to predation by well-
connected government-linked officials. The state did attack private property
during several crackdowns, particularly after the 1989 Tiananmen demon-
strations. Being collectively owned by the Communist Party/local govern-
ment protected the TVEs from predation. This institutional reform was
underpinned by fiscal decentralization in China from the late 1970s. This
decentralization hardened the budget constraints faced by local governments
who were unable to rely on financial transfers from central government. This
gave local governments a powerful incentive to nurture TVEs, to boost their
profits and so create a revenue base with which to provide local public goods
such as irrigation, roads and health care (Nolan, 1995; Qian, 2003;
Mukherjee and Zhang,2007). A second relevant incentive mechanism was
that promotion through the Chinese Communist Party and government hier-
archies was closely linked to the achievement of economic goals such as
ra pid growth of TVEs, provision of public goods, and expansion of employ-
ment (Ho,1995). From negligible levels in the late 1970s, by 1993 there were
1.5 million TVEs, employing more than 50 million people and responsible
for 72 per cent of China’s industrial output and 58 per cent of industrial
employment.
There are broadly two ways of nurturing institutional change: the top-down
and bottom-up approaches. William Easterly labels these ‘the two contrasting
worldviews of institutional economics’. The top-down view of institutions
sees them as determined by laws written by politicians and regulators and often
pushed by international donors. The bottom-up view sees institutions as
emerging from the social norms, customs,traditions, beliefs and values of indi-
viduals within a society and the written law only formalizing an existing infor-
mal practice. The top-down approach imports an institutional blueprint from
226 Patterns and Determinants of Economic Growth