Property rights developments and productivity gains in China: A law and economics perspective

A number of empirical studies have found that private firms did not achieve as much productivity gains as collectives did [in China]. This seems to suggest that privatization did not materialize what the property rights theory had claimed, and that the rapid growth of the Chinese economy in the past twenty years resulted mainly from the productivity gains achieved in the intermediate forms of ownership – the collectives. To counter this challenge, this article argues that the poor performance of the private sector and the successes of the collective sector were attributed to the legal environment that favoured collectives over private firms in the 1980s, not due to the assumed superiority of collectives over private ownership. In a discriminatory legal environment, private property rights progressively developed within, or under the disguise of, collectives in the 1980s, and thereby contributed to the successful performance of the collective sector in that period. Along with the changes in the legal environment to strengthen protection of private property rights, private ownership developed in a more open manner and began to outperform collectives in the 1990s. Accordingly, the Chinese experience cannot pose a challenge to property rights theory, but rather, demonstrates economic gains from progressive, albeit hidden in the beginning, privatization and the importance of legal protection of private property rights