Markets Over Mandates: How Decentralised Innovation Outpaced State-Led Reform in China
For Britain and much of the West, China is a paradox glimpsed through the looking glass - half miracle, half challenge; a formidable force both admired and misunderstood.
Western narratives often cast their rise as a vindication of technocratic developmental state governance where liberalising reform was delivered through statist coordination. Yet this gaze from afar misses a deeper truth, one that can often only be seen clearly from within: their most productive economic decade emerged not from central design, but from the flourishing of Hayekian spontaneous order.
And history like this proves, again and again, that mandates, even with liberalising intent, rarely outperform permissionless innovation.
Sure, the era broke the iron grip of central planning. But it doesn’t mean that it didn’t remain fundamentally a top-down blueprint.
Of course, they decollectivized agriculture. They launched special economic zones. They opened a semi-autarkic economy.
All this made sense in the 1980s. But over time, the system began to show its limits—particularly in its inability to absorb and respond to dispersed local knowledge.
As Hayek prophesied, it became clear how the central government started to be trapped by increasingly uniform policies. There’s no doubt that early SEZs like Shenzhen thrived: but it only thrived because it was experimental and localised.
Attempts to replicate that success in places like Harbin very often failed to attract the foreign investment needed or even generate enough exports. These later zones became reliant on subsidies under the “Revitalise the Northeast” campaign. And if that’s not reason enough to revisit what went wrong with these later efforts, then what is?
Part of the answer lies in how the SEZ model evolved. As it expanded, it became increasingly tied to standardized regulatory frameworks that bred bureaucratic rigidity and ignored local conditions—such as the absence of nearby foreign capital hubs like Hong Kong.
Now, the pattern is clearer than ever: what began as an incubator of innovation was later misused as a tool for GDP-target chasing. In provinces like Inner Mongolia and Gansu, industrial parks were built without underlying market demand—this is a classic symptom of top-down pressure overriding bottom-up growth. Local innovation, once vibrant, slowed under layers of supervision and intensified audits from above.
Agricultural reforms faced a similar fate. The Household Responsibility System, which contracted land use rights to households but kept state ownership, initially boosted output but saw uneven adoption across provinces due to managerial delays by township cadres. This led to inconsistent grain yields across counties within the same province, like Henan and Hunan. In Sichuan, early pilot programs showed promise but were soon held back by cautious officials worried about backlash or misinterpreting reform signals.
Those are just one of countless tales about how potential was curtailed by the complexities and contradictions that cling like shadows to forced reform.
It wasn’t until a pivotal visit in the early 1980s that reformers got the green light to spread the Household Responsibility System (HRS) all over Sichuan. By 1983, Sichuan was a grain powerhouse. But that success came more from political muscle than from any natural, bottom-up momentum.
When reforms come from the top in a country as vast and varied as they are, things don’t always go as planned. Local realities differ wildly. And with so many layers of rural bureaucracy, policies often get watered down, twisted, or just stuck somewhere along the way.
But underneath all that control, something else was happening. Something quieter—and way more powerful.
In the ’90s and early 2000s, after senior leaders stepped back from daily politics, entrepreneurs, township and village enterprises, and local officials started making moves on their own. They stopped waiting for orders from Beijing and began trusting what they knew about their own places.
A famous southern tour in 1992 was like a fresh push for market reforms. It loosened the reins, letting provinces experiment. Plus, fiscal reforms from the ’80s gave local governments a cut of the tax revenue. Suddenly, they had skin in the game. People perform better when there’s profit on the line. It’s classic Adam Smith.
Here’s the irony: weak enforcement of property rights and unclear market rules actually created a playground for experimentation. The phrase “crossing the river by feeling the stones” perfectly captures this vibe—no clear rules, so the quickest to adapt thrived.
While the central government kept its eye on big state-owned giants, township and village enterprises quietly exploded. Their output soared from RMB 49 billion in 1978 to a whopping RMB 7.4 trillion by 1996. They employed 135 million people and accounted for around 42% of GDP. Their productivity jumped 3–4% a year—almost twice what it was in the ’80s. And get this—they weren’t fully state-owned or fully private. Talk about in-between.
This decentralized energy powered their push into global trade. By 2000, more than half of exports came from private or semi-private firms, not the usual state-owned behemoths.
The coastal provinces—Zhejiang, Guangdong, Fujian—where local governments had more freedom, pulled ahead. Inland areas, stuck with heavy bureaucracy, lagged behind.
Informal trade flourished. Migrants moved to cities and started small businesses—not because the government told them to, but because they smelled opportunity.
And what about their tech giants? They might be assumed to be products of tight state control. But actually, they grew from this very spontaneous spirit.
Huawei? Grew thanks to Shenzhen’s fiscal freedom—a special economic zone where central government kept its hands off.
Alibaba? Started with no political backing, fueled by private money during a time when internet rules were fuzzy at best.
Tencent’s QQ messenger? Thrived in a regulatory gap—before anyone even knew how to regulate it.
BYD, founded in 1995 as a private battery maker, succeeded through innovation and R&D, not some state mandate.
The big takeaway: this is not merely a lesson from the past or a chapter sealed in history from the East, far removed from us, but an alarm bell for future policymakers everywhere.
Entrepreneurship cannot be commanded from the top, nor can creativity be ordered.
Real innovation comes when millions of people with local knowledge get the freedom to experiment, adapt, and take risks.
That’s where the magic happens.
Alisa Ye