More than 630 million Chinese have escaped poverty since the 1980s, reducing the fraction remaining from 82 to 10 percent of the population. This astonishing decline in poverty, the largest in history, coincided with the rapid growth of a private enterprise economy. Yet private enterprise in China emerged in spite of impediments set up by the Chinese government. How did private enterprise overcome these initial obstacles to become the engine of China’s economic miracle? Where did capitalism come from?
Studying over 700 manufacturing firms in the Yangzi region, Victor Nee and Sonja Opper argue that China’s private enterprise economy bubbled up from below. Through trial and error, entrepreneurs devised institutional innovations that enabled them to decouple from the established economic order to start up and grow small, private manufacturing firms. Barriers to entry motivated them to build their own networks of suppliers and distributors, and to develop competitive advantage in self-organized industrial clusters. Close-knit groups of like-minded people participated in the emergence of private enterprise by offering financing and establishing reliable business norms.
This rapidly growing private enterprise economy diffused throughout the coastal regions of China and, passing through a series of tipping points, eroded the market share of state-owned firms. Only after this fledgling economy emerged as a dynamic engine of economic growth, wealth creation, and manufacturing jobs did the political elite legitimize it as a way to jump-start China’s market society. Today, this private enterprise economy is one of the greatest success stories in the history of capitalism.
Chinese leader Deng Xiaoping’s decision to open China to global markets is often identified as the beginning of the transition, but Victor Nee and Sonja Opper argue in their book Capitalism from Below that the Chinese economic miracle is based on the actions of ambitious entrepreneurs who did not wait for Beijing’s sanction to launch their ventures. Nee and Opper claim, ‘the emergence and robust growth of a private enterprise economy in China was neither envisioned nor anticipated by its political elite.’ This bold assertion is substantiated by the findings from a meticulous study of more than 700 manufacturing firms in the Yangzi region that set up shop following the modest economic reforms of 1978. These companies decoupled from the traditional socialist system and, through informal lending, were able to finance small manufacturing outfits supported by their own networks of suppliers and distributors. While Nee and Opper do not ignore the role communist party leaders played in initiating the shift to a market economy, they ultimately credit entrepreneurs motivated by profit with China’s success… Nee’s and Opper’s hypothesis is especially intriguing considering the current state of the Chinese economy, which in recent months has shown clear signs of a slowdown. The country has entered a new era. If China is to continue its unparalleled growth, it will have to rely on ambitious entrepreneurs to take its economy into a new phase of development. In short, it will need another ambitious wave of the type of people Nee and Opper credit with leading China’s last great economic transformation.
[Nee and Opper’s] main point is that the Chinese market economy was created not from above, by the state, but from below, by entrepreneurs. The state came in later, to legitimize and regulate the institutions that the economic actors created. This is not a new idea, but Nee and Opper’s extensive interviews with entrepreneurs in the Yangtze Delta region give a detailed picture of how it happened… Nee and Opper find that political connections were valuable to entrepreneurs when the state began privatizing its assets and that well-connected individuals have been better able to acquire land-use rights and credit from state banks. But they argue that success in the private sector is ‘increasingly independent of the direct involvement of politicians.’ Rather, it comes from building a reputation for trustworthiness among networks of business peers.
In contrast to the conventional wisdom of many economists that government-run institutions are essential for economic performance and growth, Nee and Opper explain how China’s private entrepreneurs created institutional innovations that promote economic growth and development despite the lack of appropriate government policies. This well-researched, well-written volume will be a point of reference for many years to come. Combining economic theory, history, empirical data on enterprise formation (studying more than 700 manufacturing firms), and more than 100 interviews, the authors explain why China’s economic reforms were more effective in promoting market-driven structural change and economic growth than the economic reforms recommended for and implemented in eastern Europe and Russia by the IMF and World Bank. The authors splendidly answer challenging, complex questions regarding the emergence and rapid growth of China’s private enterprise economy—e.g., why did a dynamic private enterprise economy and institutions of capitalism, initially so disadvantaged, not only survive but thrive in China’s transition to a market economy? …This outstanding contribution should attract broad scholarly attention and stir meaningful discussion as well as controversy.
Capitalism from Below explains how entrepreneurs, operating in collaborative networks, guided by the reputations and informal sanctions that constitute governance in such networks, were responsible for the economic miracle that is contemporary China. Combining history, industry analysis, community analysis, and hundreds of interviews, the book is a story—rich and remarkable, yet readable—about productive economic institutions emerging as a byproduct of individuals granted a little bit of wiggle room to pursue their interests. This book will be a point of reference for a long time.
Refuting the conventional wisdom that state-centered institutions are necessary for economic performance and growth, Nee and Opper demonstrate how norms and networks promote economic development in the absence of good government policies. Their approach illuminates the phenomenal transformation of the Chinese economy and promises to explain other cases standard institutional theory cannot.
A splendid book, brimming with ideas and full of important insights. This is a massive undertaking, superbly done, combining theory, empirical data on business formation, comparative regional analysis, and insight into profound issues about the governance of the private economy. This will clearly be a major book, one that should be welcomed across disciplines.
- 456 pages
- 6-1/8 x 9-1/4 inches
- Harvard University Press
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