Xian officials may sometimes be corrupt，but over the years I have never met a stupid one.They know that equalizing marginal social returns from similar sites isthe way to maximize income for the xian and for them-selves，and if the prices of similar sites are equal there is no way they can achieve that.They also knowthat it isvery difficult to make accurate judgments in investment,and therefore they send researchers all over the countryvisiting successful xians.In numerous discussions with xian officials I have been impressed by their generalknowledge of things，and know they are forever con-cerned with matters such as complementarity，drawingpower，transportation，electricity，water，entertainment,and so on.I am not saying that xian officials are never corrupt，but the truth is that I have never met an investorwho did not believe in exploiting special connections.Yes，xian officials are world-class in convincing eachand every investor that he or she is special!
Let me repeat that while the rate of value-added taxand the division of that tax is uniformthroughout thecountry，the other percentages are not.In particular，thesharing of the proceeds fromland sales is not uniform,and less popular xians would receive higher shares topartially cover land costs.Additional mention must bemade of award figures in the formula.Based strictly oninvestment money deposited in local banks，in one xian I know that officials receive 1.5 - 2% that amount，if theinvestment is from outside the country.For investorsfrom inside China，the award is 1% .These are essential-ly commissions paid by the xian.For the xian in ques-tion the award rate in earlier years was 5% ，which gradu-ally fell as the xian grew.In one hot spot，the award rateis 0.05% .The rate is negotiable，in the way that com-missions on property transactions in China are nego-tiable.Most xian officials I talked to felt that awardrates were adequate to keep them running.
Ⅷ.Economic Interpretation of the Xian Phenomenon
The intensity of competition among xians is remark-able.It is submitted to be the chief reason why Chinawas able to sustain rapid growth during some very diffi-cult times in the 1990s.Vietnamcopied China’s systemnearly verbatimbeginning fromaround 2004——some say tipped off by my writings——and their economy，too,has taken off.It is not difficult to copy this system，pro-vided that a country is not burdened with vested interestsat local levels，and that it possesses an organization like the Chinese Communist Party to force things through.My viewis that countries like North Korea and Cubawould have a good chance of success if they want to try.
Not difficult to copy，but very difficult to explain.It isdifficult to explain why the systemworks so well.It took me only one evening to crack open the riddle of sharecropping，but three long years to decipher the Chinacode.The difficulty stems from the fact that what we have here is a complex systemof contracts，the like of which has never been seen.Its evolution has been rapid,andin the process different localities adopted differentarrangements before things finally settled into a compre-hensible pattern.It takes time to see the essential linksand elements，and by the time I thought I have distilledthe beer from the froth some key pieces were still miss-ing.I have learned a great deal following the economicreforms in China.My understanding of contracts andtransaction/institution costs had been elevated to a levelwhich enabled me to locate the missing pieces with ageneral theory，and then put the pieces together to for mapicture that makes sense.
Perhaps I should begin by relating an episode in thespring of 1969，when Coase and I were in a conferenceon fisheries in Vancouver.Someone remarked that ifocean fishery is privatized，because the fish swimforlong distances the granting of monopoly is essential,therefore monopoly pricing in fishery would prevail.Iinstantly responded: “If I alone own all the agriculturalland on earth，I would have to rent themout to numerouspeasants to farm; the peasants will compete，and there-fore agricultural products must have competitive prices.”Now Beijing is the largest landlord in the world，hold-ing the title to all land under the Chinese sky.Theauthorities let the land out for a variety of use with fiftyyear leases，and in 2007 it was declared that all leaseswould be automatically renewed upon expiry，subject tothe proviso that the government may see fit to take backland subject to compensation.The authorities haveaccepted the principle that all use rights must be delin-eated as exclusive.They also knew that to do so com-prehensively，they have to allowthe delineated use rights to go all the way down to each and every household.Tomaintain control of an orderly downward transmission of economic forces and knowing that responsibility con-tracts worked，the layer-by-layer responsibility arrange-ments emerged.For an outsider studying the rules and regulations fromdocuments of the different layers，thereis little chance he could figure out that a chain of respon-sibility contracts is implied.These documents are actu-ally revised and evolved versions of the earlier responsi-bility contracts.
