The entrepreneurial decade

China in the 1980s witnessed an explosion of indigenous, completely private entrepreneurship, but almost all of this entrepreneurship occurred in the rural areas of the country. It was not an agricultural phenomenon.

Township and village enterprises spearheaded China's massive rural industrialization.

In the 1980s, Chinese peasants experienced the most rapid income gains in history. Per capita rural income between 1978 and 1981 grew at a real rate of 11.4 percent, the urban/rural ratio of the purchase of consumer goods fell from 10 to 1 in 1978 to 6 to 1 in 1981. According to a rural survey, rural per capita income more than doubled between 1978 and 1984, and real rural per capita consumption increased by 51percent between 1978 and 1983.

The consensus view is that rural reforms accounted for the largest segment of the income gains.

Chinese capitalism is heavily rural in origin. Rural entrepreneurship was also virtuous because it emerged first and developed fastest in the poorest regions of China.

Many of the largest manufacturing private-sector firms hail from backward, predominantly agricultural provinces of China.

The Cultural Revolution might have laid the foundation for the post-reform takeoff of rural entrepreneurship.

In the 1980s, there were two cross-cutting dynamics in the income distribution trends. One was a rise of  within-rural inequality; the other was a decrease in rural/urban inequality.

Township and village governments assumed controls of private firms as a matter of political prerogative rather than on the basis of their share of capital contributions. In 1980s, China did not have a legal framework to accommodate large-size private firms. The logic of township control had nothing to do with economics; it was deeply political.

The very reason for the failure of township and village enterprise is that the business environment for rural entrepreneurship turned dramatically adverse in the 1990s.

Are TVEs really public?
 The TVE label owes its origins to the commune and brigade enterprises created during the Great Leap Forward. But the cast majority of TVEs had nothing to do with the Great Leap Forward. Instead, they completely new entrants during the first half of the 1980s.

Enterprises sponsored by townships and villages are the collective TVEs. The rest of the firms under the TVE label are all private businesses or entities.

In general, the developed parts of China were more state-owned. 

The initial triggers of growth can often be "humble" in nature. These reforms amount to nothing more than some relaxation of existing constraints on the private sector. No fundamental institutional reforms--those aiming at property rights protection, for example-- are needed. 

Property rights protection in China, now or in 1980s, is very poor, but relative to the Cultural Revolution period, the marginal improvement was huge. Directional liberalism was the source of Chinese incentive to go into entrepreneurship.  (Directional liberalism describes the idea of an economy that lacks many key features of liberal capitalism, but is nevertheless moving in that direction with sufficient speed to reassure investors that they’ll be able to keep their gains.)

The price of directional liberalization: property rights is not institutionalized.