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Focusing on China’s auto industry, this paper questions how the central government’s growth-promoting industrial policies failed to realize their intentions but nonetheless produced rapid growth outside the scope of the policies. The paper explains how other macro-institutional reforms that accompanied China’s implementation of the socialist market economy—central government reshuffles, central–local fiscal reforms, state–business relations —interacted with the auto industrial policy (AIP) by taking the political process seriously. Drawing on archival sources and interviews, the study argues that even when the functioning of state institutions is deficient, industrial policy in a transitional economy can facilitate rapid growth by relieving the commitment problem and, along with other market-based institutional reforms, opening up a limited amount of market competition. Although limited, this market competition had the unintended effect of promoting rapid growth. Therefore, even with deficient market mechanisms and state institutions, governmental policy interventions that facilitate limited market competition can give rise to development. Although such government interventions, fraught with substantial policy failures, would not work in a developed economy, it is better than no intervention at all in a transitional economy.
