Yuen-Yuen Ang, a Professor of Political Science at the University of Michigan, recently delivered a compelling presentation at Harvard, shedding light on her latest book, “How China Escaped the Poverty Trap.” This book offers a fresh perspective on one of the most significant development enigmas of our time: how did China transition from prolonged stagnation and political turmoil to experiencing unprecedented economic growth and poverty reduction?

Conventionally, it’s believed that good institutions lead to increased wealth through heightened productivity, and in turn, greater wealth fosters better institutions. This notion presents a classic “chicken and egg” dilemma. However, Ang challenges this perspective by highlighting the initial hurdle of development: leveraging ‘weak/wrong/bad’ institutions to establish markets.

Historically, this initial step has proven challenging. Gerschenkron’s concept of the “advantages of backwardness” suggests that nations lagging behind can progress faster than pioneers due to available technologies and industries. However, empirical evidence shows significant divergence, with many countries remaining behind, if not falling further back, particularly in terms of state capability.

Various approaches have been attempted to address the challenge of “harnessing weak institutions to create markets.” Some advocate for building institutions from scratch, hoping form will precede function. Others propose swift, market-driven reforms, assuming that liberated markets will naturally cultivate stronger institutions. Another approach involves integration into existing institutional frameworks, such as joining supranational bodies like the EU.

Ang’s groundbreaking insight lies in China’s recognition of the limitations of these approaches. China sought to initiate a process of adaptation, necessitating conditions conducive to “directed improvisation.” This concept aligns with the challenge of “authorizing positive deviation” in the language of PDIA (Problem-Driven Iterative Adaptation).

Ang demonstrates how the Chinese central government balanced between excessive control and lax oversight. Directives were issued in three forms: clear prohibitions, explicit mandates, and objectives with deliberately vague implementation guidelines, allowing for innovation while retaining central oversight. This approach facilitated local experimentation and innovation within boundaries set by the central government.

China’s ability to navigate this “design space” incrementally toward a market system was pivotal. The resulting organizational and institutional forms, such as Township and Village Enterprises, embodied hybrid models that exhibited the functionality and dynamism of a market economy, even before the establishment of private firms and clear property rights delineation.

The concept of “directed improvisation” echoes the spectrum of approaches seen in different countries: from permissive to restrictive governance. The challenge lies in fostering innovation and improvisation while maintaining order. Ultimately, the key to building prosperous economies and capable states lies in creating conditions that encourage innovation without descending into chaos.