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By Bowra, C.M.

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This example should, of course, only be seen as a very rough proxy. But, even if we were to double the share achieved by the reallocation, we would still get similar results. Hence, a large part of growth remains unexplained. ' This was an argument for institutional reforms, and frequent references to this statement indicate that institutional changes have been understood as crucial for the Chinese development over the last few decades: a change that has been neglected, for example, by Krugman in his famous paper on the Asian `miracle' (Krugman, 1994).

Reforms are also underway with respect to state-owned enterprises. Five hundred central `industrial groups' are being reorganized. Such reorganization is likely to affect about 70 per cent of those employed in the state sector. The reforms mean that the state would be establishing its control and ownership via `control stock companies', in which it would be a major shareholder thereby allowing it to control the individual companies. These companies are allowed to establish new companies under their ownership.

Institutions are in many respects connected with increasing returns which make them change incrementally. This makes the development of institutions and economies path-dependent. It cannot be taken for granted that ef®cient institutions will develop. The increasing returns connected with an initial set of institutions will create organizations and interest groups with a stake in the existing constraints. Rosenberg and Birdzell (1986) carried out a historically-based institutional analysis where they tried to disentangle the main institutional factors that help explain the industrial breakthrough that took place in Western Europe as opposed to Asia.

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