Institutional Change and Adaptive Efficiency: A Study on China's Hukou System Evolution

• In Event: Institutional Design and Civic Engagement in China

Abstract

Every Chinese citizen who has dealt with the household registration system (hukou) has questioned its role, with some even complaining about its existence. Despite the attention the social science community has paid to identifying “good” or “bad” institutions, when studying economic dynamics, especially in a transition economy, understanding institutional change is another essential task. Consequently, analyzing the evolution of the hukou system as a case of institutional change, we can focus our attention on the interaction between this evolution and China’s economic transformation. This provided us with a different perspective when studying hukou evolution. First, many observers have often maintained the stereotype of a “strong government” in China. If that was true, institutional change should have been exogenous for most Chinese citizens because the government would play the decisive role. However, the question remains – who or what drives the government to change an institution? We found some interesting but easily overlooked historical facts. Individuals and local governments began to deviate from the rigid hukou system even before reform officially took off in the mid-1980s. This led us to pay more attention to the endogenous forces of institutional dynamics. Second, the dichotomy of “good” or “bad” institutions for development has been studied extensively. Conventional approaches would classify the hukou system squarely as a “bad” institution. Counterintuitively, however, this “bad” institution did not retard or cause a failure in China’s economic transformation. The puzzle leaves a challenge for conventional institutional theories. We argue that the traditional evaluation of institutional efficiency fails to take environmental dynamics into consideration. The concept of adaptive efficiency aligns better with the reality that institutions are located in uncertain, non-ergodic, and a dynamic economic environment. Thus, the hukou system may not qualify as a “good” institution, but the system and its reform are by and large adaptively efficient. Third, while we did not develop a formal model to produce explicit prediction about institutional change and adaptive efficiency, we did construct a conceptual bridge between the two. Arguably, this is sufficient to suggest a significant implication: endogenous institutional change does not necessarily guarantee adaptive efficiency, but most it will.

Author

• Kunling Zhang, Belt and Road School, Beijing Normal University