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ADAPTIVE INFORMAL INSTITUTIONS AND ENDOGENOUS

INSTITUTIONAL CHANGE IN CHINABy KELLEE S. TSAI*

SHORTLY after the third wave of democratization, Francis Fuku-yama’s “The End of History” and Lucian Pye’s “Political Science

and the Crisis of Authoritarianism” became oft-quoted readings for political scientists, alongside the existing core of regime transition lit-erature.1 For a brief moment, it seemed as if it were just a matter of time before the remaining authoritarian regimes experienced democratic transitions. By the late 1990s and early 2000s, however, these teleologi-cal accounts had given way to a spate of nuanced, typological analyses concerning “democracy with adjectives” and “hybrid regimes.”2 The rise of “illiberal democracy” and “competitive authoritarianism” created an intermediate category of regimes that fell short of meeting classic defi nitions of either liberal democracy or authoritarianism.3 It is in this

World Politics 59 (October 2006), 116–41

* A National Science Foundation grant (INT-0107326) provided funding for the research in this article. While many people have commented on the larger project, I would like to thank Eva Bellin, Mark Blyth, Chen Guangjin, Bruce Dickson, Richard Doner, Stephan Haggard, Scott Kennedy, Andrew Nathan, Kevin O’Brien, Margaret Pearson, Ben Ross Schneider, Aseema Sinha, Dorothy Solinger, Sidney Tarrow, three anonymous readers, and audiences at the annual meetings of the Amer-ican Political Science Association and at Columbia University, Cornell University, Harvard University, Indiana University, Johns Hopkins University, the University of Havana, the University of North Carolina-Chapel Hill, and the University of Pennsylvania for more recent and detailed input. They are, of course, absolved of responsibility for any inadequacies.

1 Francis Fukuyama, “The End of History?” National Interest 16 (Summer 1989); Samuel P. Hun-tington, The Third Wave: Democratization in the Late Twentieth Century (Norman: University of Okla-homa Press, 1991); Guillermo O’Donnell and Philippe C. Schmitter, Transitions from Authoritarian Rule: Tentative Conclusions about Uncertain Democracies (Baltimore: Johns Hopkins University Press, 1986); and Lucian Pye, “Political Science and the Crisis of Authoritarianism,” American Political Sci-ence Review 84 (March 1990).

2 David Collier and Steven Levitsky, “Democracy with Adjectives: Conceptual Innovation in Comparative Research,” World Politics 49 (April 1997); and Larry Diamond, “Thinking about Hybrid Regimes,” Journal of Democracy 13 (April 2002).

3Steven Levitsky and Lucan Way, “The Rise of Competitive Authoritarianism,” Journal of De-mocracy 13 (April 2002); Michael McFaul, “The Fourth Wave of Democracy and Dictatorship: Non-cooperative Transitions in the Postcommunist World,” World Politics 54 ( January 2002); and Fareed Zakaria, “The Rise of Illiberal Democracy,” Foreign Affairs (November–December 1997).

context that various scholars have criticized the transition paradigm for being misleading, even “fundamentally fl awed,” calling instead for a focus on “what is happening politically.”4

Following this recommendation, this article examines the most pop-ulous nontransition case in the world, the People’s Republic of China (PRC). Although China shows no signs of making a transition to de-mocracy, the country’s political economy has experienced substantial structural and institutional changes relating to the development of the private sector. Whereas in 1977 China did not even keep offi cial sta-tistics on private fi rms because they were illegal and negligible in num-ber, by 2005 there were 29.3 million private businesses, employing over 200 million people and accounting for 49.7 percent of the GDP.5 Clas-sic structural explanations of political change might expect a growing capitalist class to make liberalizing demands in the spirit of “no taxa-tion without representation.”6 This raises a fundamental puzzle: even though China’s private entrepreneurs are not mobilizing politically, much less agitating for democracy,7 major reforms in China’s formal institutions have enhanced the private sector’s political legitimacy and economic security. In a complete reversal of its founding principles, the Chinese Communist Party now welcomes capitalists and, at least on paper, the PRC constitution protects private property rights. How can this be explained? I argue that adaptive informal institutions can serve a vital intermediate role in explaining the process of endogenous institutional change.

Without denying the proximate causal role of elite politics and decisions, this article contends that under certain circumstances, the etiology of formal institutional change lies in the informal coping strategies devised by local actors to evade the restrictions of formal in-stitutions. The argument starts from the premise that formal institutions

4 Thomas Carothers, “The End of the Transition Paradigm,” Journal of Democracy 13 ( January 2002), 18; Howard J. Wiarda, “Southern Europe, Eastern Europe, and Comparative Politics: ‘Transi-tology’ and the Need for New Theory,” East European Politics and Societies 15 (September 2001), 486; cf. Valerie Bunce, “Rethinking Recent Democratization: Lessons from the Postcommunist Experi-ence,” World Politics 55 ( January 2003).

5 China Daily, December 14, 2005. A 2006 report issued by the Chinese Academy of Social Sci-ences estimated that in fi ve years the nonstate sector would account for three-quarters of China’s GDP and 70 percent of the country’s firms would be privately owned. See China Daily, September 22, 2006.

6 Barrington Moore, Jr., Social Origins of Dictatorship and Democracy: Lord and Peasant in the Mak-ing of the Modern World (Boston: Beacon Press, 1966).

7 Bruce J. Dickson, Red Capitalists in China: The Party, Private Entrepreneurs, and Prospects for Political Change (New York: Cambridge University Press, 2003); Margaret M. Pearson, China’s New Business Elite: The Political Consequences of Economic Reform (Berkeley: University of California Press, 1997); and Kellee S. Tsai, Capitalism without Democracy: The Private Sector in Contemporary China (Ithaca, N.Y.: Cornell University Press, 2007).

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comprise a myriad of constraints and opportunities that may motivate everyday actors to devise novel operating arrangements that are not of-fi cially sanctioned. With repetition and diffusion, these informal cop-ing strategies may take on an institutional reality of their own. In con-trast to deep-rooted, “primordial” informal institutions, which tend to resist change, the resulting norms and practices can be called adaptive informal institutions because they represent creative responses to for-mal institutional environments that actors fi nd too constraining. Wide-spread use of adaptive informal institutions may then motivate—and, indeed, enable—political elites to reform the original formal institu-tions. Examining the life cycle of adaptive informal institutions can thus demonstrate how some formal institutions manage to undergo sig-nifi cant transformations in the absence of external intervention, crisis conditions, or societal demands. Relatedly, focusing on the emergence and impact of adaptive informal institutions can reveal the processes through which apparently incremental reforms yield radical change.

To illustrate this iterative logic, the article examines the dynamics of private sector development in China since the late 1970s by focusing on three institutional spaces in which major changes have occurred: fi rst, the offi cial policy adjustments that sanctioned the revival of China’s private sector; second, the incorporation of capitalists into the Chinese Communist Party (CCP); and as a complementary institutional effect of the fi rst two changes, third, the amendments to the PRC constitu-tion that formally recognized and protected private property. Taken to-gether, these three cases represent dramatic transformations in the most important formal institutions in the country, namely, economic policy orientation, the party, and the state. They also show that even in non-democratic contexts, the etiology of formal institutional change may lie in the informal coping strategies devised by local actors to evade the restrictions of formal institutions. To be sure, reform-oriented elites in Beijing were instrumental in making the offi cial decisions to reform the Communist Party and the PRC constitution. But this article proposes that the accumulation of informal interactions between local state and economic actors provided both the impetus and the legitimizing basis for these key reforms. When viewed from this perspective, the remarkable institutional changes promoting private sector development become less puzzling. Ultimately, both the designers and enforcers of China’s formal institutions have proven to be fl exible, and even responsive, to the actors driving the country’s economic growth—private entrepreneurs.

The article proceeds as follows. The fi rst section shows how expla-nations for endogenous institutional change derived from advanced

industrial democracies may be extended to elucidate the processes of institutional innovation in nondemocratic contexts, including con-temporary China. I propose that the emergence and incorporation of adaptive informal institutions are key processes in a broader sequence of endogenous institutional change. The article then examines three empirical cases to illustrate how adaptive informal institutions underly-ing private sector development have stimulated sequential changes in China’s formal institutions. The conclusion refl ects upon the theoreti-cal implications of the argument.

EXPLAINING ENDOGENOUS INSTITUTIONAL CHANGE

Although revolutions, economic crises, wars, natural disasters, and for-eign intervention/occupation provide a readily identifi able context for major institutional transformations, the literature on historical insti-tutionalism and American political development offers various typo-logical concepts for describing institutional change during “normal” periods. The notion of “reactive sequences” draws attention to the man-ner in which certain events may produce backlash effects.8 Institutional “layering” focuses on the potential for different types of institutions either to confl ict with one another or to coexist in a synthetic manner.9 Relatedly, “institutional conversion” refers to the use of institutions in ways that deviate from their intended purpose.10 Building on these con-cepts, I examined the informal coping strategies inspired by the formal institutional environment and identifi ed a key, yet typically overlooked dimension in endogenous accounts of institutional development. This is not to say that all informal interactions are causally relevant in ex-plaining formal institutional change. Rather, it suggests that under the political circumstances such as those found in reform-era China, ex-tensive reliance on adaptive informal institutions may foreshadow the possibility of institutional reforms that bridge the gap between offi cial regulations and everyday practices. Institutional change is possible in the absence of cataclysmic events or institutional collapse.

8 James Mahoney, “Path Dependence in Historical Sociology,” Theory and Society 29 (August 2000).

9 Robert C. Lieberman, “Ideas, Institutions, and Political Order: Explaining Political Change,” American Political Science Review 96 (December 2002), 703.

10 Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan (New York: Cambridge University Press, 2004). This notion of organizational appropriation may be traced back to Selznick’s classic study of the Tennessee Valley Authority; Philip P. Selznick, TVA and the Grass Roots (Berkeley: University of California Press, 1949).


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PATH DEPENDENCE AND SEQUENCING

The sequencing approach to institutional development typically focuses on the self-reinforcing dynamics of path dependency and institutional continuity.11 As Douglass North explains: “Path dependence comes from the increasing returns mechanisms that reinforce the direction once on a given path.”12 But path dependence does not preclude change over time. In particular, Paul Pierson distinguishes between “self-re-inforcing event sequences” and “non-reinforcing event sequences” in path-dependent arguments. A common expression of a self-reinforcing event sequence is evidenced when certain political actors consolidate power during an early formative period and end up promoting institu-tions and rules that enable them to maintain their authority over time.13 By contrast, in “non-reinforcing event sequences,” or what James Ma-honey calls “reactive sequences,” certain events occur in reaction to ear-lier events, and these propel subsequent developments along an alter-native trajectory.14 As in self-reinforcing event sequences, events that occur earlier in a particular sequence can have a much greater impact on the fi nal outcome of events than later events—but as Pierson points out, “not necessarily by inducing further movement in the same direc-tion. Indeed, the route might matter precisely because it sets the stage for a particular kind of reaction in some other direction.” 15

The concept of reactive sequences is fruitful for appreciating the potentially nonlinear trajectory of institutional development. That is, short of authoritarian breakdown, it is plausible that signifi cant changes could nevertheless occur within the apparent limits of the existing po-litical system. Some institutions may elicit responses that undermine the dynamics of institutional reproduction and reinforcement.16 This raises the question of when reinforcing processes are likely to shift to reactive ones, a question addressed in terms of the notions of institu-tional layering and friction, discussed next.

11 Brian Arthur, Increasing Returns and Path Dependence in the Economy (Ann Arbor: University of Michigan Press, 1994); Paul David, “Clio and the Economics of QWERTY,” American Economic Review 75 (May 1985); and cf. Paul Pierson, “Increasing Returns, Path Dependence, and the Study of Poli-tics,” American Political Science Review 94 ( June 2000).

12 Douglass C. North, Institutions, Institutional Change, and Economic Performance (New York: Cambridge University Press, 1990).

13 Paul Pierson, “Not Just What, but When: Timing and Sequence in Political Processes,” Studies in American Political Development 14 (Spring 2000), 77.

14 Mahoney (fn. 8).15 Pierson (fn. 13), 84.16 On self-reinforcing versus self-undermining institutions, see Avner Greif and David Laitin,

“A Theory of Endogenous Institutional Change,” American Political Science Review 98 (November 2004).

INSTITUTIONAL LAYERING AND FRICTION

The second category of explanations for endogenous institutional change emphasizes institutional layering and complexity as a product of multiple sources of human action. “Layering” refers to the fact that most institutional environments comprise a variety of institutions, some of which may have inconsistent or competing objectives. Thus, the re-ality of multilayered institutional contexts limits the degree of coher-ence that particular formal institutions (for example, the United States Congress) may have at any given point.17 As for the potential timing of endogenous institutional change, Robert Lieberman hypothesizes that “signifi cant extraordinary political change” is more likely when there is “friction among multiple political orders.”18 In other words, the impe-tus for institutional change may emerge out of confl icts occurring in otherwise stable patterns of politics. And the “causal mechanism link-ing structural friction and political change is the reformulation of the incentives and opportunities for individual political action that friction produces.”19 Due to this friction among various institutional layers, ac-tors may establish adaptive patterns that are simultaneously new, yet familiar.

The transformative potential of multilayered institutional environ-ments is also apparent in the PRC. Even though China has a unitary rather than a federal political system, political scientists have described its regime type as “fragmented authoritarianism” because the vertical bureaucratic entities are structurally prone to confl ict with horizontal levels of territorial-based governmental administration.20 Meanwhile, its policy-making process has been characterized as “protracted, dis-jointed, and incremental.”21 We will see in the forthcoming examples that the growth of the private sector in a transitional economy has brought about its share of intrabureaucratic and central-local confl icts, as various political actors have grafted new institutions onto socialist-era

17 Karen Orren and Stephen Skowronek, “Beyond the Iconography of Order: Notes for a ‘New Institutionalism,’” in Lawrence C. Dodd and Calvin Jillson, eds., The Dynamics of American Politics: Approaches and Interpretations (Boulder, Colo.: Westview Press, 1994); and Eric Schickler, Disjointed Pluralism: Institutional Innovation and the Development of the U.S. Congress (Princeton: Princeton Uni-versity Press, 1994).

18 Lieberman (fn. 9).19 Ibid., 704. On political entrepreneurs as key sources of endogenous institutional change, see

Adam Sheingate, “Political Entrepreneurship, Institutional Change, and American Political Develop-ment,” Studies in American Political Development 17 (Fall 2003).

20 Kenneth G. Lieberthal and David M. Lampton, eds., Bureaucracy, Politics, and Decision-Making in Post-Mao China (Berkeley: University of California Press, 1992).

21 Kenneth G. Lieberthal and Michael Oksenberg, Policy Making in China: Leaders, Structures, and Processes (Princeton: Princeton University Press, 1988).


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ones, while subnational offi cials have adapted national policies to local conditions. In short, the concepts of layering and friction in explaining endogenous institutional change are well suited for analyzing political dynamics in China’s complex bureaucratic and administrative context.

A related phenomenon within the layering approach to institutional development is what Kathleen Thelen calls “institutional conversion,” meaning the use of existing institutions for new or alternative purposes.22 In contrast to the self-reinforcing view of institutions, this perspective recognizes that even when the formal attributes of institutions remain in place, their substantive roles may change quite dramatically. More-over, Thelen’s analysis demonstrates that “more subtle and smaller-scale changes in ‘settled’ rather than ‘unsettled’ times are also worthy of our attention, as, over time, they can cumulate into signifi cant institutional transformation.”23 The empirical cases in this article provide additional examples of how institutional conversion can result from endogenous processes of economic and social change during normal times.24

In sum, the sequencing, layering, and conversion approaches portray institutional development in an evolutionary manner, while empha-sizing its politically contested processes and potentially discontinuous consequences. The next section builds upon these insights by showing how the study of adaptive informal institutions may contribute to iden-tifying the origins of institutional fl exibility.

THE ROLE OF ADAPTIVE INFORMAL INSTITUTIONS IN A RELATIONAL APPROACH

Theoretically, this article makes two complementary suggestions for furthering our understanding of institutional development—fi rst, adaptive informal institutions may play an analytically meaningful role in explaining endogenous institutional change; and second, the causal process underlying endogenous institutional change is relational, mean-ing that it derives from interactions among various grassroots actors. When combined with the concepts of reactive sequences and institu-tional layering, these contentions provide a more compelling explana-tion for endogenous institutional change in China than the conven-tional theories reviewed above.

22 Thelen (fn. 10).23 Ibid., 292.24 In the Chinese context, X. L. Ding refers to a similar phenomenon as “institutional amphibi-

ousness.” Ding, “Institutional Amphibiousness and the Transition from Communism: The Case of China,” British Journal of Political Science 24, no. 3 (1994).

The case of China demonstrates that even in nondemocratic settings where formal institutions appear to be imposed in top-down fashion rather than subject to popular suffrage, everyday actors may quietly ap-propriate formal institutions to serve their own ends. This is most likely to occur when there is a gap between the original intentions of formal institutions and the perceived needs and interests of local actors. At the same time, local state agents may collaborate with ordinary people by intentionally misinterpreting the formal institutions that they are sup-posed to uphold. Such bureaucratic deviance is more likely to be found in situations (1) where different formal institutions have confl icting mandates (a situation that facilitates ignoring one set of rules in order to comply with another); (2) where policy implementation is relatively decentralized; and (3) where local offi cials have convergent interests with local citizens in a particular policy area (for example, promoting local economic growth, hiding revenues from higher levels of govern-ment, protecting local industry, bending rules to attract external invest-ment, and so on). In turn, these collaborative interactions may generate adaptive informal institutions that provide a powerful demonstration effect and prompt policy elites to transform key attributes of the offi cial political and economic orders. Institutions depend on human interac-tion for their survival and transformation. They are not simply imposed and enforced by state agents and other proprietors of formal institu-tions. The analytical basis and implications of these claims are clarifi ed below.

THE FORMAL ORIGINS OF ADAPTIVE INFORMAL INSTITUTIONS

The cliché that rules are meant to be broken may indulge latent rebellious sensibilities, but the argument advanced here starts from the assump-tion that rules are meant to be observed, enforced, and followed. This view of formal institutions resonates with that of sociological insti-tutionalism, which views them as being behaviorally prescriptive and normative: institutions tell actors how they should or should not act.25 Formal institutions are intended to provide a certain element of predict-ability and stability to human interactions. Given this assumption, certain outcomes should predictably follow from certain institutions. Even complex multilayered institutional environments can be modeled elegantly to yield convincing explanations for why counterintuitive be-

25 Walter W. Powell and Paul J. DiMaggio, eds., The New Institutionalism in Organizational Analy-sis (Chicago: University of Chicago Press, 1991).


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haviors or policy choices occur.26 However, formal institutions do not always function as intended: unintended consequences can fl ow from formal institutions and cases of institutional failure abound throughout the world. This reality, in turn, has inspired entire research agendas devoted to explaining the gap between intended and unintended insti-tutional outcomes.

It is in this context that institutionalists have paid greater attention to “softer variables,” such as ideas, norms, and culture27—or what others might call informal institutions. The underlying rationale for turning to less formal variables is relatively straightforward. If formal institu-tions are expected to produce X outcome, but Y occurs instead, then the noise must stem from exogenous informal variables. The analytic shortcoming of this reasoning is that informal institutions effectively become residual variables that are expected to bear the explanatory slack whenever formal institutions can no longer account for the varia-tion in outcomes. And more typically, informal institutions are blamed for inhibiting the normal functioning of formal institutions. Cultural explanations for why certain countries are neither more developed nor more democratic are often cited as cogent examples of how informal institutions may undermine formal ones.28 As Douglass North ex-plains, in certain contexts “the formal rules change, but the informal constraints do not. In consequence, there develops an ongoing tension between informal constraints and the new formal rules,” which may be attributed to “the deep-seated cultural inheritance that underlies many informal constraints.”29

This observation leaves us with the analytic confl ation of informal constraints, informal institutions, and cultural inheritance—and the vague impression that all three compromise the intended functions of formal institutions. The tendency for explanations to privilege infor-mal institutions only when formal ones have failed at their prescribed tasks ironically demonstrates the normative power that scholars refl ex-ively ascribe to formal institutions. Formal institutions implicitly rep-resent the baseline from which we evaluate the desirability of various

26 George Tsebelis, Nested Games: Rational Choice in Comparative Politics (Berkeley: University of California Press, 1990).

27 Robert Bates, “Contra Contractarianism: Some Refl ections on New Institutionalism,” Politics and Society 16 (September 1988); Sheri Berman, “Ideas, Norms, and Culture in Political Analysis (Review Article),” Comparative Politics 33 ( January 2001); and Mark Blyth, “Any More Bright Ideas? (Review Article),” Comparative Politics 29 (1997).

28 For example, Lawrence E. Harrison and Samuel P. Huntington, eds., Culture Matters: How Values Shape Human Progress (New York: Basic Books, 2000).

29 North (fn. 12), 91.

outcomes. More recently, however, efforts have been made to theo-rize directly about the causal impact of informal institutions. Gretchen Helmke and Steven Levitsky, in particular, have proposed a typology for classifying the relationship between formal and informal institu-tions, such that they may be complementary, accommodating, com-peting, or substitutive.30 The typology represents a helpful fi rst step in clarifying the nature and function of informal institutions relative to formal ones, but it does not develop a theory about the processes by which informal institutions emerge and change or are formalized. And indeed, a large part of the challenge in inserting informal institutions into causal explanations is determining where to place them temporally, given that almost no society is completely devoid of some semblance of formal institutions.

For the purposes of capturing the causal effects of informal institu-tions at a more manageable intermediate stage, this article thus brackets the “deep-seated cultural inheritance” underlying informal institutions and starts with the blank slate of formal institutions, which I defi ne as rules, regulations, policies, and procedures that are promulgated and meant to be enforced by entities and agents generally recognized as being offi cial.31 As in my earlier work, this study regards formal insti-tutions as being both constraining and enabling.32 On the one hand, formal institutions limit the range of offi cially permissible behavior. On the other hand, multilayered institutional environments offer transformative possibilities; in particular, formal institutional contexts with overlapping jurisdiction and inconsistent or unrealistic mandates provide opportunities for actors to adjust, ignore, or evade discrete por-tions of formal institutions.

Initially, many of these adaptive responses may appear to be idio-syncratic or isolated. However, over time they may evolve into “adap-tive informal institutions,” which I defi ne as regularized patterns of interaction that emerge as adaptive responses to the constraints and opportunities of formal institutions, that violate or transcend the scope

30 Helmke and Levitsky, “Informal Institutions and Comparative Politics,” Perspectives on Politics 2 (December 2004). Five types of informal institutions are identifi ed in Hans-Joachim Lauth, “Informal Institutions and Democracy,” Democratization 7 (Winter 2000).

31 This defi nition draws from Helmke and Levitsky (fn. 30, 727) but also includes public policies because they typically have institutional consequences. Pierson suggests: “[I]t makes good sense to think of public policies as important institutions. For the individuals and social organizations that make up civil society, public policies are clearly very central rules governing their interactions”; Paul Pierson, Politics in Time: History, Institutions, and Social Analysis (Princeton: Princeton University Press, 2004), 165.

32 Kellee S. Tsai, Back-Alley Banking: Private Entrepreneurs in China (Ithaca, N.Y.: Cornell Uni-versity Press, 2002).


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of formal institutions, and that are widely practiced. In order for this intermediate stage of institutional adaptation to develop, at least the base-level guardians of formal institutions need to be complicit in al-lowing the institutional distortions to occur, over and over again. As such, adaptive informal institutions are more likely to arise and thrive in localities where the enforcers of formal institutions and the creators of informal adaptations have convergent interests. By defi nition, this means that while local state and nonstate actors benefi t mutually from the resulting adaptive informal institutions, those arrangements trans-gress existing formal institutional mandates. This is the fi rst part of my argument in a longer sequence explaining endogenous institutional development.

The second part concerns what happens after adaptive informal in-stitutions emerge. At the most basic level, the proliferation of adaptive informal institutions may undermine the legitimacy of formal institu-tions. The relevance of institutions, whether formal or informal, de-pends on their capacity to guide human perceptions and practices. But do the enforcers of formal institutions discipline, ignore, or incorpo-rate the actors sustaining adaptive informal institutions? The answer to this question is historically and nationally contingent. In the case of China, adaptive informal institutions that threaten to undermine social stability or to compromise the CCP’s political monopoly are likely to provoke offi cial censure. Offi cial tolerance for mass mobilization and political dissent remains limited. Meanwhile, crackdowns on adaptive informal institutions in the economic realm are most likely to occur during political campaigns against corruption and at other times when there is heightened political sensitivity to local deviations from national mandates.33 But if the law enforcers themselves are party to the offend-ing activities, then efforts to curb them are unlikely to be sustainable beyond those priority moments.

Beyond China, we may expect that when adaptive informal institu-tions constitute fl agrant forms of criminal activity, they will elicit the attention of law-enforcement entities. Yet even the defi nition of “fl a-grant” criminal behavior is contextually variable. In some cases, em-bezzlement of state assets would constitute fl agrant criminal activity, but under other circumstances, asset stripping of public enterprises by managers and workers might be so common that it fails to trigger

33 For example, distinct cycles of crackdowns on local fi nancial institutions such as trust and invest-ment companies were apparent and corresponded with the broader policy reform cycles through the late 1990s, when Zhu Rongji was premier. Correspondence with Yi-feng Tao, November 10, 2006.

strong offi cial reactions. For the present purposes, I will simply defi ne fl agrant forms of criminal activity as illegal practices that are readily discernible and have immediate social costs that would be diffi cult to cover up. An example of this would be Ponzi schemes: by the time they collapse, they have usually entangled large numbers of enraged people.34 Another example would be violation of food and drug safety standards, which endangers lives and motivates regulatory development.35

In contrast, adaptive informal institutions that merely stretch the limits of formal institutions or create new patterns of interaction not explicitly governed by formal institutions may endure and even thrive unencumbered for some length of time. The adaptive practices dis-cussed in this article fall into these quasi-legal and extralegal gray areas. They are institutions that arise in a context where some local political and economic actors face incentives to promote private sector develop-ment but where formal institutions at the national level lag in adjusting to new businesses and their associated externalities.

This focus on the origins and effects of adaptive informal institu-tions resonates with the logics of nonreinforcing event sequences and structural friction found in the multiple institutional layers of historical institutionalism and American political development. When adaptive informal institutions arise in response to the dissonance between exist-ing formal institutions and the operational preferences of actors, adap-tive informal institutions start to redirect and undermine the previously self-enforcing formal institutions.36 In this narrative, the use of preex-isting formal institutions as the analytical baseline against which actors devise coping strategies is important. Indeed, the formal-informal-for-mal sequence represents the core of the argument. The next section il-lustrates this contention more concretely with three instances of major institutional changes relating to private sector development in China.

THE POLITICAL ECONOMY OF ADAPTIVE INFORMAL INSTITUTIONS IN REFORM-ERA CHINA

As historical institutionalists have pointed out, most institutions do not exist in isolation from one another. Instead, instances of “institu-tional coupling” may be observed among clusters of institutions that are

34 Mitchell Zuckoff, Ponzi’s Scheme: The True Story of a Financial Legend (New York: Random House, 2005).

35 Waikeung Tam and Dali Yang, “Food Safety and the Development of Regulatory Institutions in China,” Asian Perspective 29, no. 4 (2005).

36 Cf. Greif and Laitin (fn. 16).


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mutually dependent.37 The following cases of institutional transforma-tions relating to private sector development in China should be viewed in this light. Certain changes in formal institutions may be traced to particular informal practices and adaptive informal institutions. In turn, the resulting changes in formal institutions facilitate complementary adjustments in other formal institutions. Specifi cally, the examples be-low show how informal practices at the ground level paved the way for legalization of the private sector, which attracted the participation of party members in entrepreneurial activities. The rise of “red capitalists” then infl uenced the formal incorporation of capitalists into the CCP. In turn, the preceding adaptive informal institutions enabled reform-oriented elites to justify revisions to the PRC constitution that recog-nize the existence and contribution of the private economy.

RED HAT DISGUISES AND PRIVATE SECTOR DEVELOPMENT

In contemporary China “wearing a red hat” (dai hongmaozi) refers to the practice of registering a business as a collective enterprise when it is really privately managed and owned. A related disguise is paying a state-owned enterprise for use of its name in running a private busi-ness; those are called “hang-on” enterprises (guahu qiye) because they are registered as appendages to established government operations. Red hat operations emerged as an adaptive informal institution during the fi rst decade of economic reform, when private enterprises with more than eight employees (siying qiye) were not legally permitted.38 There-fore, until 1988, China’s private sector technically consisted of only “individual households” (getihu) with fewer than eight employees.39 In reality, however, many of the collective enterprises were larger private businesses wearing red hats.40 One entrepreneur I interviewed in Hui-zhou, Guangdong, for instance, explained that he was able to open a sizable piglet store as early as 1978 because he ran it under the auspices of the local township’s communal supply shop.41 Another entrepreneur in Nanjing, Jiangsu, proudly recounted that in 1982 she was able to run

37 Pierson (fn. 31), 224–27.38 The eight-employee limit has an ideological rationale: in Das Kapital (1867), Marx indicated

that capitalist producers with more than eight employees were exploitative and surplus accumulating, while those with fewer than eight workers were nonexploitative household producing units.

39 For more detail, see Susan Young, Private Business and Economic Reform in China (Armonk, N.Y.: M. E. Sharpe, 1995).

40 Barry Naughton, “Institutional Innovation and Privatization from Below,” American Economic Review, Papers and Proceedings 84 (May 1994).

41 Author interview with anonymous entrepreneur, Huizhou, Guangdong, October 16, 2002. As part of a larger project, I conducted interviews with more than three hundred Chinese entrepreneurs and offi cials over the course of 2001 to 2005. A list of interviewees is available in Tsai (fn. 7).

a large and lucrative clothing business as a collective enterprise, while running the same business as a private one would have been “impos-sible.”42 By the time private enterprises were permitted, an estimated half a million businesses were already using the red hat disguise. And in certain localities, it was commonly known that between 90 and 95 percent of registered collective enterprises wore red hats.43

After the 1988 regulations permitting private enterprises—and the politically rooted economic downturn of 1989–92 following the Ti-ananmen Square crisis—the private sector boomed. Between 1990 and 2000, the average annual growth rate in the number of registered pri-vate businesses was 32.8 percent, the number of people employed in the private sector grew at an average annual rate of 29.2 percent, their registered capitalization grew at 65.1 percent, their value added to the GDP grew at 58.7 percent, and their volume of retail sales grew at a rate of 70.2 percent.44 In the interim a network of formal institutions gov-erning the private sector had developed throughout the country.

On the most superfi cial level, it is tempting to attribute China’s rapid private sector development to offi cial policies and institutions regulat-ing the nonstate economy. I would argue, however, that China’s formal institutions have presented local state and economic actors with more of a constraining than a permissive environment for private capital ac-cumulation—and key to our purposes here, local actors have exercised agency in manipulating formal institutions to their advantage.

Throughout the 1980s and most of the 1990s, private entrepreneurs experienced not only a social stigma but also political persecution for be-ing profi t oriented. There was considerable political uncertainty about the trajectory of economic reform, and private entrepreneurs were pub-licly criticized during the national campaigns against “spiritual pollu-tion” in 1983–84 and against “bourgeois liberalization” in 1987. On a day-to-day basis, entrepreneurs were also subjected to arbitrary treat-ment by tax collectors and harassment by other bureaucrats. By con-trast, state and collective enterprises received favorable treatment rela-tive to private ones in terms of tax breaks, bank loans, and use of land. Those were the operating realities that business owners faced beneath the impressive statistics.

Why, then, were entrepreneurs willing to enter and stay in business? As suggested above, one way for entrepreneurs to avoid social and political

42 Author interview with anonymous entrepreneur, Nanjing, Jiangsu, October 10, 2002.43 Kristin Parris, “Local Initiative and National Reform: The Wenzhou Model of Development,”

China Quarterly 134 ( June 1993).44 Zhongguo tongji nianjian (China Statistical Yearbook) (various years).


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ostracism was to wear a red hat. This adaptive strategy was so widespread that “wearing a red hat” became (and remains) a common term in every-day discourse. The practice became institutionalized as a standard, albeit informal, operating practice for private entrepreneurs.45 Yet the actual process through which this occurred was not simply a case of entrepre-neurs deceiving local bureaucrats; instead, the actions of agents were collaborative and refl exively strategic. Most local cadres knew exactly what they were doing when they accepted, or perhaps extracted, a regis-tration fee from a local entrepreneur to run a collective enterprise. Due to fi scal decentralization and the hardening of local budget constraints, cadres in many rural localities had a vested interest in allowing profi t-able businesses to operate and contribute to local revenues regardless of their true ownership status.46 As a result, hundreds of thousands of both state and nonstate actors were complicit in popularizing the red hat phenomenon. Meanwhile, China’s collective sector fl ourished and represented the basis of rapid rural industrialization.47

In the spirit of Deng Xiaoping’s dictum to focus on practical results rather than ideology, when central-level elites realized that so many collectives were really private enterprises, it was futile—and indeed, impractical—to insist on limiting the private economy to household producing units with fewer than eight employees. Although conserva-tive or “leftist” political elites would have preferred to restrict the non-state sector, both the popularity and economic effectiveness of wearing a red hat gave reformers concrete evidence and, thus, political support for expanding the scope of China’s nascent private economy. Infl uen-tial scholars, such as Yu Guangyuan and Xue Muqiao from the Chi-nese Academy of Social Sciences, drew on their observations of local empirical realities to help reformist leaders reach a consensus about the appropriate next steps in China’s reform process. During a pivotal academic and policy meeting held in Beijing in 1986, they reasoned that since China was still in the initial stage of socialism, the following points were applicable: (1) it would be impossible to avoid private sec-tor development; (2) the advantages of developing the private economy

45 On local variation in the use of red hat strategies and development of private property rights, see Jean Oi and Andrew G. Walder, eds., Property Rights and Economic Reform in China (Stanford, Calif.: Stanford University Press, 1999); and Susan H. Whiting, Power and Wealth in Rural China (New York: Cambridge University Press, 2001).

46 By the same token, Whiting (fn. 45) points out that local offi cials and entrepreneurs “shared a common interest in the security of shareholding cooperatives” as legitimate collective enterprises in lo-calities that were dominated by genuine collective enterprises, as well as localities that were dominated by private businesses (pp. 163–64).

47 Jean C. Oi, Rural China Takes Off: Institutional Foundations of Economic Reform (Berkeley: Uni-versity of California Press, 1999).

would outweigh the disadvantages; and (3) the private sector could still be subject to state guidance and control under a socialist system.48

Broad-based agreement on these key points about China’s “initial stage of socialism” paved the way for shifts in the offi cial guiding prin-ciples and policies of the party-state. On the party side, at the 13th Na-tional Congress of the CCP in 1987, Premier Zhao Ziyang announced that “cooperative, individual and private sectors of the economy in both urban and rural areas should all be encouraged to expand. . . . [W]e must formulate policies and enact laws governing the private sector as soon as possible, in order to protect its legitimate interest.”49 Follow-ing the party’s lead, on the state side, the National People’s Congress passed a constitutional amendment accepting Zhao’s proposal in April 1988, and two months later the PRC State Council issued regulations governing “private enterprises” with eight or more employees. In an acknowledgment that these regulations were really post hoc sanction-ing of ground-level realities, offi cial publications disclosed that by then China already had 225,000 private enterprises employing 3.6 million employees with an average of 16 employees per business—that is, twice the number of workers that individual private businesses were permit-ted to employ.50

In sum, the practice of wearing a red hat is an example of how an adaptive informal institution contributed to the institutional conversion of a formal regulation, the collective registration status. Camoufl aging the true ownership structure of a business rendered the formal distinc-tion in nomenclature between collective and private enterprises virtu-ally meaningless. By the same token, as an adaptive informal institution, the red hat practice also became an increasingly prominent institutional layer in China’s once-limited fi eld of corporate organizational types. Instead of displacing the collective sector, red hat enterprises repre-sented an additional form of collective enterprise; this innovative layer not only expanded the institutional space in which private businesses operated but also created a politically acceptable rationale for devis-ing a more transparent registration status for larger private enterprises. In this case, the impetus for institutional change stemmed from two strains of “structural friction” in China’s political economy—fi rst, there was tension between preexisting institutions that privileged the collective

48 Author correspondence with anonymous government researcher, Chinese Academy of Social Sciences, Beijing, November 19, 2006.

49 Beijing Review, November 9–15, 1987, cited in Rashid Malik, Chinese Entrepreneurs in the Eco-nomic Development of China (Westport: Praeger, 1997), 15.

50 Beijing Review ( July 18–24, 1988), 6, cited in Malik (fn. 49).


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sector and policies that sanctioned limited development of the private sector; and second, there was an inconsistency between fi scal reforms that enabled rural localities to retain more revenues and national re-strictions on larger private enterprises. Both state and economic ac-tors coped with these institutional incongruencies by popularizing the adaptive informal institution of wearing a red hat. The economic suc-cess and widespread use of this adaptive informal institution then pro-vided reformers with the requisite evidence that expanding the scope of the private sector would enhance China’s productive forces during the initial stage of socialism. As we will see below, ultimately, the adap-tive informal institution of wearing a red hat not only infl uenced the legalization of private enterprises with more than eight employees but also provided the basis for subsequent institutional changes in the CCP and state constitution.

THE CHINESE COMMUNIST PARTY’S INCORPORATION OF CAPITALISTS

The fi rst generation of profi t-oriented business operators in post-Mao China generally came from two different backgrounds. The “individual entrepreneurs” (getihu) consisted of street peddlers, itinerant vendors, and small retail business owners who subsisted on the fringes of the so-cialist-era economy and did not have the benefi ts of state employment. The popular perception of getihu was that they were criminals and so-cial outcasts who lacked alternative employment options; hence, they experienced considerable political and social discrimination. In reality, however, most were simply underemployed farmers who no longer had to work in collectives.

At the other extreme, the other strata of society active in commerce were “cadre entrepreneurs” and “red capitalists” who used their privi-leged political status to run businesses indirectly or help others run red hat operations. Even though CCP members were not allowed to operate private businesses, it was apparent throughout the 1980s and 1990s that many were active participants in the nonstate sector. In-deed, offi cial surveys reveal an increasing proportion of self-identifi ed CCP members among private entrepreneurs over time, such that only 7 percent of business owners admitted to being party members in 1991, but by 2003 over one-third admitted to being party members.51 It is reasonable to assume that the earlier offi cial fi gures underestimate the true proportion of party members in the private sector due to the po-

51 China State Administration for Industry and Commerce (SAIC), Zhongguo siying jingji nianjian (China Private Economy Yearbook) (various years).

litico-ideological sensitivity concerning the appropriate relationship between the CCP and “market socialism with Chinese characteristics.” For many years, the uneasy coexistence or “friction” between China’s offi cial socialist ideology and the reality of private sector development accounted for the simultaneous growth of business owners among party members—and the underreporting of party members in offi cial surveys of private entrepreneurs.

On the CCP’s eightieth anniversary on July 1, 2001, however, then General Secretary Jiang Zemin gave a landmark speech widely inter-preted as inviting private entrepreneurs to join the party. Although the rationale was weaved into Jiang Zemin’s “Theory of the Three Repre-sents,” which was supposed to represent the theoretical extension of Marxism-Leninism, Mao Zedong Thought, and Deng Xiaoping The-ory, it actually made the controversial recommendation that the party should represent “the most advanced forces of production, the most advanced cultural forces, and the interests of the overwhelming major-ity of people.” The CCP had launched a mass-media campaign publiciz-ing the Three Represents leading up to the anniversary, but it was the July 1 speech, followed by the 16th Party Congress in late 2002, that clarifi ed the implication of the “theory,” that is, that the CCP should not discriminate against private entrepreneurs and should in fact embrace them because they are contributing (the most) to China’s economic de-velopment. A number of the party’s old guard disapproved of the sharp ideological turn advocated by Jiang and his supporters. Even online chat rooms and message boards fi lled with colorful, passionately argued objections to the selling out of the CCP.52

As such, it is remarkable that the CCP agreed to change—and indeed, reverse—its former ideological depiction of capitalists as exploitative “class enemies.” Bruce Dickson suggests that allowing private entrepre-neurs into the party was a strategic decision to incorporate a growing and increasingly wealthy portion of Chinese society.53 It was an effort to preempt autonomous political organization on the part of private business owners. While this interpretation of the party’s decision makes sense, I would add that the underlying causal mechanisms leading to this decision were rooted in the growing power of the informal rules of the game that had evolved over the fi rst two decades of economic reform. Party members were already active in the private sector well

52 For example, “Deng Liqun, Others, Criticize Jiang Zemin for Agreeing to Admit Capitalists into the CPC,” originally posted on http://www.renminbao.com on July 20, 2001, translated text from FBIS-China, July 28, 2001.

53 Dickson (fn. 7).


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before private entrepreneurs were formally permitted to join the party. But how was this possible, given that China remains an authoritarian regime dominated by a Leninist party?

As discussed, the adaptive informal institution of wearing a red hat offered Communist Party members an ideologically appropriate cover for participating in for-profi t activities. This, in turn, led to the adap-tive practice of being a “red capitalist” (hong zibenjia). Because private entrepreneurs were explicitly banned from joining the party after 1989, wearing a red hat became a safer way for party members to run large businesses. And local party cadres were willing to look the other way because red capitalists often contributed more to the local economy than did ordinary entrepreneurs. For illustrative purposes, consider the experience of a furniture manufacturer in rural Hebei province.54 After earning his bachelor’s degree from the local Communist Party school, Mr. Hong (pseudonym) worked as a high-ranking manager in a state-owned enterprise for more than a dozen years. By the time he was thirty-six years old in 1991, however, Mr. Hong was ready for a big change. He had harbored dreams of running his own business for a while but knew that it would “look bad” if a party member entered the private sector. To avoid political trouble, he registered his furniture fac-tory as a collective enterprise. Given that Mr. Hong was well regarded in his locality, he had little diffi culty negotiating with the local bureau-cracy for the right to wear a red hat. In fact, I met Mr. Hong through local offi cials who introduced him as “an upstanding red capitalist.” Be-sides being an economically successful party member, Mr. Hong serves as a deputy in the local People’s Congress and serves as the vice direc-tor of the local chamber of commerce. Mr. Hong is hardly the typical business owner, but local government hosts selected him, despite his wearing a red hat, as an interviewee because they were proud of his local commercial and political stature.

By the early 2000s the spread of red capitalists presented the party with the critical dilemma of whether to condemn their economic ac-tivities or embrace them: 19.8 percent of entrepreneurs surveyed by offi cial entities in 2000 indicated that they were already CCP members.55 Should such a large percentage of business owners remain politically marginalized? After consulting with provincial and subprovincial of-fi cials throughout China, the party’s core leadership decided that it was in the interest of continued economic growth, as well as party re-

54 Author interview with anonymous entrepreneur, Liangfeng, Hebei, August 20, 2002.55 SAIC, Private Economy Yearbook (2005).

juvenation and survival, to legitimize the existing red capitalists and co-opt other private entrepreneurs.56 Shortly after the party lifted the ban on cultivating capitalist members, a party theoretician explained, “If our Party doesn’t build more branches [under the circumstances of rapid growth in the nonpublic economic organizations], then other so-cial forces will attract those people. If the Party doesn’t open up its organizations [to private entrepreneurs], then other organizations will hold activities for them.”57 The report further highlighted the relative underrepresentation of business owners in the party: “[B]y the end of 2002 there were 2.1 million Party members in non-public economic organizations, which accounts for only around two percent of the total membership, and over 80 percent of foreign-invested enterprises and private enterprises do not have Party members.”58

Within a relatively short period of time, the party line shifted from banning capitalists to welcoming them. Such a policy reversal would have been diffi cult to justify in the absence of preexisting grassroots deviations from the party line. Wearing a red hat enabled party mem-bers to become red capitalists, with the result that the occupational composition of the party was changed from within. As employees of the party-state began running their own businesses, albeit disguised as collective ventures, the party’s ban on private entrepreneurs became increasingly unrealistic, if not anachronistic. Although Jiang Zemin is generally credited (or blamed) for allowing capitalists into the party, the decision was not the impulsive act of a dictator. The decision did not occur in a societal void, as evidenced by the series of discussions with local offi cials throughout the country. And at a deeper causal level, all of the informal coping strategies that both state and nonstate actors had reproduced in their daily interactions took on an institutional real-ity of their own, thereby challenging national leaders to adapt preexist-ing formal institutions to assimilate these hitherto informal practices. The cumulative effects of this dynamic can also be seen in revisions to the PRC constitution that have become increasingly favorable toward the private sector.

56 These consultations “took place over a period of perhaps two years.” Joseph Fewsmith, “Re-thinking the Role of the CCP: Explicating Jiang Zemin’s Party Anniversary Speech,” China Leadership Monitor 1 (Winter 2002), 3.

57 Li Yan, “Qieshi jiaqiang fei gongyouzhi jingji zhuzhi dangjian gongzuo buduan guangda dang de gongzuo de fugai mian,” in SAIC, Zhongguo siying jingji nianjian 2002-2004 (China Private Economy Yearbook) (Beijing: Zhonghua gongshang lianhe chubanshe, 2005), 107.

58 Ibid., 108.


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PRIVATE SECTOR–FRIENDLY REVISIONS TO THE PRC CONSTITUTION

Revisions to the PRC Constitution have generally lagged behind de-velopments in practice. Of the various constitutional changes that have occurred since 1982, the fi rst two revisions represent reactive formaliza-tion of local practices and realities. Meanwhile, the most recent revision puts forth an ambitious objective that was inspired by the two adaptive informal institutions discussed above—the wearing of a red hat and the proliferation of red capitalists. Of all the institutional changes discussed thus far, the following sequence of constitutional revisions illustrates most organically the article’s argument about the causal mechanisms underlying endogenous dynamics of formal institutional change.

First, as mentioned earlier, in 1988 the First Session of the Seventh NPC added a paragraph to Article 11 that “permits the private sector of the economy to exist and develop within the limits prescribed by law.” The paragraph also stated, “The private sector of the economy is a complement to the socialist economy.” This new section provided the legal basis for allowing “private enterprises” (siying qiye) with more than eight employees to operate, while indicating that the private sec-tor would still be subject to state control, as indicated in the fi nal clause of the paragraph: “The state protects the lawful rights and interests of the private sector of the economy, and exercises guidance, supervision, and control over the private sector of the economy.” This formal recog-nition of larger private businesses trailed ground-level practices, as am-bitious entrepreneurs were already scaling up in the guise of collective enterprises, but going forward, legal recognition of private enterprises also rendered the adaptive informal institution of red hat disguises less necessary.

Second, in 1999 the Second Session of the Ninth NPC amended the aforementioned paragraph in Article 11 to say, “Individual, private and other non-public economies that exist within the limits prescribed by law are major components of the socialist market economy.” The 1999 revisions also included a statement indicating, “The People’s Republic of China governs the country according to law and makes it a socialist country ruled by law.” The combination of elevating the nonstate sector to a “major component” of the economy and introducing the notion that the country is governed by the rule of law signaled a more legitimate and secure status for the private sector. The reason these amendments may not appear to be ground breaking is because, once again, the con-stitutional revisions followed changes that were already taking place in the Chinese economy. By 1999 spontaneous “privatization” or restruc-

turing (gaizhi) of collective enterprises had already been occurring in rural China for fi ve years.59 Due to various local innovations in property rights structures, the nonstate sector was already a “major component” of the economy by the time the constitution acknowledged it.

Third, in 2004 the Second Session of the Tenth NPC made the more radical revision of encouraging private sector development and pro-tecting private property rights under the constitution. Article 11 was changed again to stipulate:

The state protects the lawful rights and interests of the private sector of the economy, including individual and private businesses. The state encourages, supports and guides the development of the private sector, and exercises super-vision and administration over the sector according to law.

And Article 13 introduced the following: “The lawful private prop-erty of citizens shall not be encroached upon.” Meanwhile, the Theory of the Three Represents—which makes the controversial claim that the party represents the “most advanced forces of production” (that is, private entrepreneurs)—was incorporated into state ideology alongside “Marxism, Leninism, Mao Zedong Thought and the Theories of Deng Xiaoping.” Since the 16th Party Congress in 2002 had incorporated up-holding the Three Represents into the CCP’s mission statement, it was not surprising that the state constitution would be similarly amended.

Unlike the fi rst two amendments discussed above, however, the con-stitutional stipulation that private property rights would be protected should be viewed as an objective rather than post hoc recognition of ground-level realities. Although certain adaptive informal institutions enable economic actors to engage in contractual exchanges as if they were guaranteed by a formal legal system of private property rights,60 the rise of serious disputes concerning asset ownership demonstrates that such arrangements are not immune to government intervention/expropriation. This is a risk that all adaptive informal institutions face, of course, but the point here is that because the most recent constitu-tional revisions have more complex systemic implications for China’s political economy, lags in actual implementation should be expected. Formal protection of private property rights requires strengthening the

59 As Whiting (fn. 45) points out, privatization of collectives was the result of changes in the fi scal system, the cadre evaluation system, and the national political economic environment. Furthermore, by 1999 the selling off of small and medium-size state-owned enterprises, announced at the 15th Party Congress in 1997, was gaining momentum.

60 Oi and Walder (fn. 45).


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institutions that support the rule of law.61 As Yu An, a Tsinghua Uni-versity law professor who served on the constitution’s drafting commit-tee, commented:

Some revised articles are an acknowledgement of the current situation, while others are new stipulations. That means adjustments should be made to existing laws, or new laws should be implemented. . . . The Constitution itself can hardly regulate the particular behavior of the government and the people. Without signifi cant adjustment of current common laws, the impact of the constitutional revision may be greatly reduced.62

In the interim, various adaptive informal institutions will continue to serve as self-enforcing substitutes for property rights.

Although the series of constitutional revisions relating to the private sector appears to be a linear progression of increasing offi cial recogni-tion and legal protection of its interests, there was nothing automatic or predetermined about the development of various formal institu-tions to support the private sector. In the context of evolving property rights regimes in rural China, Susan Whiting observes, “[E]ven dra-matic change occurs incrementally. The presence of complementarities among institutions and policies means that singular changes interact to bring about more fundamental changes in the incentives and con-straints in the institutional environment.”63 I would add that in the case of China’s constitutional revisions, the “singular changes” are rooted in the informal adaptive strategies of grassroots actors.

Given the opacity of China’s political system, it is challenging to prove with defi nitive data that the spread of adaptive informal insti-tutions used by private entrepreneurs directly infl uenced the various constitutional amendments. Based on published sources, as well as fi eld interviews with government offi cials, elite intellectuals, and private en-trepreneurs, however, we may infer the plausibility of the counterfac-tual to my argument. That is, in the absence of the adaptive informal institutions discussed above, it is unlikely that reform-oriented elites would have found the pro–private sector constitutional amendments either desirable or feasible. Both the economic success of private busi-nesses and the popularity of private entrepreneurship among party members offered reformers evidence (against “leftist” or conservative

61 Donald Clarke, Peter Murrell, and Susan Whiting, “The Role of Law in China’s Economic De-velopment,” The George Washington University Law School Public Law and Legal Theory Working Paper no. 187 (2006).

62 Yu An, cited in “Constitutional Revision Requires Law Adjustment,” China Business Weekly, March 8, 2004.

63 Whiting (fn. 45), 299.

leaders) that enhancing the scope of the private sector would be in the country’s political and economic interest. Indeed, various legal scholars were already pushing for the protection of private property rights dur-ing the drafting meetings of the 1999 constitutional revision, but their recommendations were shelved due to opposition by more conservative party members.64 Only after the party came to terms with red capitalist members in 2002 was it politically possible to revisit the earlier consti-tutional proposals to protect private property.

While there was still internal debate over the inclusion of protecting private property in the consultative processes leading up to the 2004 constitutional revision, by 2003 and early 2004 proponents of private property rights were able to build their case by implying that there was societal support for constitutional revision along those lines. Even though private entrepreneurs themselves never mobilized from below to lobby for constitutional protection of their assets, reformers stra-tegically solicited input from the offi cial mass association represent-ing private entrepreneurs, the All-China Federation of Industry and Commerce (ACFIC, gongshang lian). In practice, state-sponsored mass associations in Leninist systems usually serve to transmit offi cial policy to constituent members in a state corporatist fashion, but they are also meant in principle to represent the interests of its members. As such, during the earlier rounds of constitutional revision, ACFIC was charged with convening small-scale forums with entrepreneurs throughout the country to gather their opinions about the upcoming constitutional revisions.65 Prior to the 2004 revision, however, the offi cial narrative of the process is that ACFIC initiated the consultative discussions with entrepreneurs and that it played an important role in advocating con-stitutional protection of private property.66 In other words, reformers gave ACFIC credit for representing the voice of private entrepreneurs and pushing for the private property clause to create a stronger politi-cal case for revising the constitution along the lines that they had been hoping for at least fi ve years earlier. In reality, private entrepreneurs themselves were remarkably absent from the actual process, but the cu-mulative effect of their adaptive informal institutions and the changes that they engendered in formal institutions governing the private sec-tor enabled reformers to justify further protections on their behalf. The

64 Lian Xisheng, former vice chair of the China Constitution Society, cited in “Amendments Pro-tect Private Property,” China Business Weekly, January 4, 2004.

65 Author correspondence with Scott Kennedy, University of Indiana-Bloomington, November 2, 2006.

66 Author correspondence with anonymous government researcher, Chinese Academy of Social Sciences, Beijing, November 12, 2006.


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causal mechanisms were indirect, informal, incremental, and funda-mentally political.

CONCLUSION

How can we explain major institutional changes when they occur in the absence of external shocks, domestic crises, or societal demands? Recent literature on institutional development is effective in describing different manifestations of endogenous institutional change, but the causal mechanisms in these accounts remain vague, especially when it comes to change in nondemocratic regimes. This article thus builds upon the notions of institutional sequencing, layering, and conversion in historical institutionalism by proposing the following: fi rst, that the causal mechanism for institutional change depends on interactions between various state and nonstate actors; and second, that adaptive informal institutions may play an important role in endogenous ac-counts of such change. Specifi cally, adaptive informal institutions may emerge out of the collaborative coping strategies of state and nonstate actors when they fi nd formal institutions too constraining. In the case of reform-era China, the contextual conditions that are conducive to the emergence of adaptive informal institutions include confl icting mandates among different formal institutions, a bureaucratic structure with a certain degree of decentralization in policy implementation, and policy areas in which local state and nonstate actors have convergent interests. Over time the diffusion of adaptive informal institutions fa-cilitates substantial transformations in formal institutions by providing elites with political support for introducing key reforms. This reactive sequence of institutional change can occur even in authoritarian re-gimes where political institutions are not necessarily expected to be responsive to grassroots interactions.

Furthermore, a central component of my argument is that this ap-parent political “responsiveness” occurs through indirect means. Private entrepreneurs as a group have not lobbied directly for protection of their property rights or for membership in the Chinese Communist Party.67 Instead, people from different social backgrounds entered the private sector as a self-help strategy to enhance their material welfare and in the process appeared to party-state elites as an increasingly im-portant constituency. In the course of their daily interactions with one

67 Business owners lobby for narrower, sector-specifi c issues such as setting industry standards and prices. Scott Kennedy, The Business of Lobbying in China (Cambridge: Harvard University Press, 2005).

another and with local staff of the party-state, business owners have had a structural impact on the direction of formal institutional reforms. Therefore, even though the regime has pursued policies that imply a strategy of corporatist inclusion of private capital, this article suggests that the causal mechanism underlying these preemptive corporatist ef-forts lies in the cumulative effect of informal interactions at the local level rather than in purely economic or social pressures.

Ultimately, the ability of the nominally socialist regime to accommo-date private sector development is only one expression of the broader transformation that has occurred in China’s institutional context. Al-though the PRC is still an authoritarian regime, the nature of its politi-cal economy has changed so dramatically that China scholars have felt compelled to qualify its categorical nomenclature with various adjec-tives to distinguish it from the party-state of the 1950s and 1960s.68 Rather than worrying about whether contemporary China is now a bureaucratic-authoritarian regime or a capitalist developmental state, however, greater attention should be paid to the causal mechanisms and processes underlying the regime’s institutional resilience. Informal interactions and informal institutions may represent an important, yet typically overlooked part of the story.

Indeed, beyond the case of China there is comparative analytic value in viewing adaptive informal institutions as vehicles for change in for-mal institutions. Attending to the rise of informal adaptive responses expands the scope of those factors that we typically deem to be relevant in political analysis. Local innovations, evasive tactics, and other extra-legal practices often seem distant from the hallowed ranks of political elites and their associated formal political institutions. The concept of adaptive informal institutions brings them a little closer. Sporadic acts of noncompliance or random criminality are not at issue. By contrast, strategic responses that are repeated, widespread, systematically repro-duced, and therefore “institutionalized” through informal praxis gener-ally attract offi cial attention in some form or other. Determining when and whether adaptive informal institutions will have such catalytic ef-fects is politically contingent and requires empirical study of both the high politics and the apparently apolitical low politics of grassroots ad-aptations to formal institutions.


68 Richard Baum and Alexei Shevchenko, “The State of the State,” in Merle Goldman and Rod-erick MacFarquar, eds., The Paradox of Post-Mao Reforms (Cambridge: Harvard Contemporary China Series, 1999).

World Politics, Volume 59, 2006 - Table of Contents

Abstract: This article presents evidence that electoral institutions affect the geographic distribution of both candidate electoral support and government resources. The author exploits two electoral reforms in Japan to identify the effect of institutional incentives: (1) the 1994 electoral reform from a multimember single nontransferable vote (SNTV) system to a mixed-member majoritarian (MMM) system with a single-member district (SMD) component and a proportional representation component; and (2) the 1925 electoral reform from a predominantly SMD system to a multimember SNTV system. Using several new data sets, the two main findings of this article are that (1) Japanese representatives competing in multimember SNTV districts had more geographically concentrated electoral support than those competing in SMDs and that (2) intergovernmental transfers appear to be more concentrated around Liberal Democratic Party (LDP) incumbents' home offices under the multimember SNTV system than under the MMM system. The findings in this article highlight the connection between institutions and geographic patterns of representation.

Darden, Keith. Grzymała-Busse, Anna Maria, 1970-

● The Great Divide: Literacy, Nationalism, and the Communist Collapse [Access article in HTML] [Access article in PDF] Subject Headings:

❍ Nationalism and communism -- Europe, Eastern -- History -- 1945-1989. ❍ Democracy -- Europe, Eastern. ❍ Europe, Eastern -- Politics and government -- 1945-1989. ❍ Europe, Eastern -- Politics and government -- 1989-

Abstract: As communist regimes collapsed in the years 1989–91, communist parties and leaders exited power in roughly half the cases. The causes and the impact of this variation have generated considerable controversy. The authors show that the combined timing and content of the introduction of mass literacy was responsible for generating the national standards and comparisons that either sustained the legitimacy of communist party rule or led to its rapid and complete demise during the collapse of communist regimes. Mass literacy explains more of the patterns of the communist exit than do structural, modernization, or communist legacy accounts, and it provides a clear and sustained causal chain.

Tsai, Kellee S. ● Adaptive Informal Institutions and Endogenous Institutional Change in China

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❍ China -- Economic policy -- 1976-2000. ❍ China -- Economic policy -- 2000-

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❍ China -- Economic conditions -- 1976-2000. ❍ China -- Economic conditions -- 2000-

Abstract: Under certain circumstances, the etiology of endogenous institutional change lies in the informal coping strategies devised by local actors to evade the restrictions of formal institutions. With repetition and diffusion, these informal coping strategies may take on an institutional reality of their own. The author calls the resulting norms and practices adaptive informal institutions because they represent creative responses to formal institutional environments that actors find too constraining. Adaptive informal institutions may then motivate elites to reform the original formal institutions. This contention is illustrated by three major institutional changes that have occurred in the course of China’s private sector development since the late 1970s—the legalization of private enterprise, the admission of capitalists into the Chinese Communist Party, and the amendment of the state constitution to promote the private economy.

Estévez-Abe, Margarita. ● Gendering the Varieties of Capitalism: A Study of Occupational Segregation by Sex in

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Abstract: This article explores the unintended gendered consequences of employment protection and vocational training systems. It develops a micrologic of skill investment by workers and employers to identify the mechanism by which specific skills become disadvantageous for women. The central claim of the article is that institutions that encourage male investment in specific skills exacerbate occupational sex segregation. The article finds that coordinated market economies, because of their robust institutional protection of male skill investments, are generally more sex segregating than are liberal market economies. The empirical section provides cross-sectional analyses of advanced industrial countries.

● The Contributors [Access article in HTML] [Access article in PDF]

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http://muse.jhu.edu/journals/world_politics/v059/59.1contributors.html

http://muse.jhu.edu/journals/world_politics/v059/59.1contributors.pdf

T H E C O N T R I B U T O R S

KRISTIN M. BAKKE is a Ph.D. candidate in the Department of Political Science at the Univer-sity of Washington. In 2007–8, she will be a postdoctoral fellow at Harvard University’s Belfer Center for Science and International Affairs. Her dissertation examines federal states’ diverse capacity to contain intrastate struggles, looking closely at the separatist struggles in Chechnya, Punjab, and Quebec. She can be reached at [email protected].

ERIK WIBBELS is an associate professor of political science at the University of Washington. He is the author of Federalism and the Market (2005). He is currently working on two projects, one aimed at explaining the emergence of diverse social spending regimes in the developing world and the other examining the resource curse literature in light of unusual empirical settings. He can be reached at [email protected].

SHIGEO HIRANO is an assistant professor of political science at Columbia University. He has published journal articles and book chapters on elections and representation and is currently working on several projects related to intraparty competition and to the distribution of public expenditures. He can be reached at [email protected].

KEITH DARDEN is an assistant professor of political science at Yale University. He is the author of Economic Liberalism and the Formation of International Institutions among the Post-Soviet States (2007). He can be reached at [email protected].

ANNA GRZYMALA-BUSSE is an associate professor of political science at the University of Michi-gan. She is the author of Redeeming the Communist Past (2002) and Rebuilding Leviathan (2007). Her current research projects focus on political competition and the impact of religion on public policy. She can be reached at [email protected].

KELLEE S. TSAI is a professor of political science at Johns Hopkins University and the author of Back-Alley Banking: Private Entrepreneurs in China (2002), Rural Industrialization and Non-gov-ernmental Finance: Wenzhou’s Experience [in Chinese] (2004), and Capitalism without Democracy: The Private Sector in Contemporary China (2007). She can be reached at [email protected].

MARGARITA ESTÉVEZ-ABE is an associate professor of political economy in the department of government at Harvard University. She is the author Welfare and Capitalism in Postwar Japan (forthcoming) and is currently working on a book titled, “Gendering the Varieties of Capital-ism.” She can be reached at mestevez@wcfi a.harvard.edu.

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