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Causes of Privatization in China Essay

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Economics of Transition Volume 13 (2) 2005, 211–238

Causes Original of Yao 13 and Publishing, Ltd. © The UK 0967-0750Privatization in Reconstruction and Development, 2005. The Economics Bank for China ECOT Europeanof Transition Guo Oxford, Article Blackwell

Causes of privatization in China

Testing several hypotheses*
Kai Guo* and Yang Yao**
*Dept. of Economics, Harvard University **China Center for Economic Research, Peking University, Beijing 100871, China. E-mail: yyao@ccer.pku.edu.cn

Abstract
We test five hypotheses regarding the causes of privatization in China by using firm-level panel data collected in 11 cities in the period 1995–2001. We have found that privatization is positively linked with hardened firm budgets and the extent of market liberalization, but is constrained by excessive debts and worker redundancy. Firm efficiency and state-owned enterprises’ financial liabilities imposed on local governments are not factors of influence. These findings match the broad flow of events in China and highlight the role of market building in bringing about efficient institutional changes. JEL classifications: L2, O5, P3. Keywords: Privatization, institutional change, transition economics.

*We thank International Finance Corporation for its permission to use the data. Yang Yao thanks the Stanford Center for International Development for hosting part of the study. We appreciate the comments of two anonymous referees.
© The European Bank for Reconstruction and Development, 2005. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

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Guo and Yao

1. Introduction
China has undergone massive yet quiet privatization since the mid-1990s (Cao, Qian, and Weingast, 1999; Lin and Zhu, 2001; Garnaut, Song, Tenev, and Yao, 2003). The number of state-owned enterprises (SOEs) fell by 40 percent in the period 1996–2001 and most of the remaining SOEs were scheduled for privatization...

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