Business Transformation in China

Henri-Claude De Bettignies

• Publisher: Taylor & Francis
• Year: 2018
• Print ISBN: 9781138366831
• eBook ISBN: 9780429771545
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, first published in 1996, provides an in-depth examination of China's changing business environment as it continues to develop its business infrastructure. Leading experts from Asia and Europe present their research into developments in China. Issues include political evolution, foreign trade expansion, foreign direct investment, the distribution system, economic reform, industrial relations and HR, economic growth and the market entry strategies of foreign manufacturers.

Part I
The political evolution

1 The changing centre/provinces paradigm and the policy-making process in post-Mao China

Shaun Breslin

ECONOMIC TRANSFORMATION AND POLITICAL CHANGE

When the post-Mao leadership initiated reform of the economic system in 1978, they also set in motion a process of political reform. The term ‘political reform’ here is not used to refer to the introduction of a multiparty political system. Nor does it refer to the end of Communist party rule as witnessed in eastern Europe and the Soviet Union, although this cannot be totally discounted as a long-term consequence of economic reform in China. Rather, it refers to the massive changes in both the processes and functioning of political power within the existing framework of CCP rule.

The instigation of political reform was partly a matter of deliberate choice. The post-Hua leadership recognized that a degree of political reform was essential in order to maintain the leading role of the CCP. The Cultural Revolution having resulted in a loss of faith in Communist party rule, it was deemed necessary gradually to transform a politically mobilized society into a primarily economically mobilized society (Wang Huning 1988a). This change in emphasis represented an important political reform in itself, gradually altering the underlying precepts of decision-making within the PRC. But in the process of facilitating the economic growth to which China’s people and key leaders aspired, this transformation has itself generated further unanticipated and often dysfunctional political reform.

The complex interaction between economic and political reform can be demonstrated by an analysis of centre/provinces relationships in the post-Mao era.¹ As Wang Hüning (1988b) commented in 1988:

Even if the change now being made in the relationship between China’s central government and local government mainly originated in the economic realm, it possesses a political significance that cannot be underestimated, and has led to a major conflict within the political system.

The purpose of this chapter is to identify the determinants of the changing centre/provinces paradigm, and to assess their significance for the emerging political and economic system in China. It will attempt to show that the growth in both centre/provinces and interprovincial conflict was partly an inevitable consequence of the reformulation of China’s development strategy. However, these ‘inevitable’ consequences of reform have been exacerbated and compounded by a lack of coordination between reforms in key areas - a lack of coordination which owes much to the decision-making processes that have characterized the era of reform.

THE POLICY-MAKING PROCESS

The relationship between the central authorities and the provinces² is a complex one determined by the interaction of a number of variables. Assessing the impact of the changes in almost all of these variables is therefore an inherently difficult process, and the CCP leadership can hardly be blamed for failing to predict the cumulative impact of economic reform on their relations with the provinces. Nevertheless, the style of policy-making employed in post-Mao China did not increase their chances of success. This is not to say that there was no coordination, or that major economic and political changes were not subject to intense discussion and investigation, but, too often, the direction of national policy was shaped by the culmination and interaction of a fragmented policymaking process.³

A quantum leap to a totally new political and economic system was out of the question, and change has thus proceeded in several small steps. Two key elements should be emphasized here: first, the impact of a lack of elite consensus on the scope and direction of reforms, and second, the fragmentation of decision-making responsibilities in the reform era.

Intra-elite conflict

Although the post-Mao leadership shared a conviction that the Maoist political-economic system had to be reformed, disagreement existed over the pace, scope and ultimate direction of the reform process. This lack of elite consensus at the centre meant that an incremental approach to change became an attractive option for those leaders who favoured fairly radical reform. A full package of reform proposals would leave the radicals open to a full-scale challenge from the conservatives, while smaller changes at the margins made it easier to defend each reform in turn, and also drove a wedge between different groups of conservative leaders (Bachman 1988). Furthermore, if conservative opposition were to hold out against a particular reform, then it was relatively easy to make partial retreat and address specific grievances without jeopardizing the overall direction of the reform process.

However, this largely reactive style of policy-making also had its costs. Naughton argues that: ‘Unable to dominate events, the government has had to scramble repeatedly to “put out fires” and prevent disastrous outcomes’ (Naughton 1985: 224)⁴. As a result of this preoccupation with short-term problems and solutions, the CCP elites were unable to ‘formulate a consistent programme of economic changes’ (Naughton 1985: 224). Notions of intra-elite conflict had other implications for centre/provinces relations. Opponents to market reforms were relatively strongly represented within the central planning and finance agencies – not least because the wider extension of market reforms threatened their authority and in some cases their very existence. As such, decentralizing decision-making powers away from the centre to the provincial authorities can be seen as an attempt to undercut the authority of more conservative central planners, and simultaneously build a reform coalition with provincial leaders (World Bank 1990: 3; You Ji 1991). Thus, it can be hypothesized that the administrative decentralization undertaken in the post-Mao era (and, in particular, the 1984 decentralization movement) was not so much an end in itself, as a means to achieving other ends, namely the facilitation of the expansion of market decentralization.

Fragmented decision-making processes

The problems associated with this lack of elite consensus were compounded by the second important feature, concerning the way in which policy changes in individual areas were concluded. Given the sheer number of reforms undertaken in recent times, it has not been possible for a single central agency to formulate specific reform packages. Individual ministries and agencies have thus been granted a significant degree of autonomy to oversee policy changes in theirfields.⁵ This has resulted in what Kenneth Lieberthal has termed ‘fragmented authoritarianism’ (Lieberthal 1992), which further exacerbated the problems of coordination.

The resulting restructuring of the economic system meant that the traditional winners and losers under the old system could no longer be certain of their position. In order to placate the fears of existing ‘winners’ and subsequently prevent strong opposition to reform emerging, an ethos of fairness came to dominate policymaking which Shirk calls an ideology of ‘balancism’ (Shirk 1992: 77). In practice, this meant that policy options were chosen so as to ensure that no unit or actor lost too much, rather than on the basis of what was best for the country as a whole. In short, rather than choosing the best policy, decision-makers chose the most ‘satisficing’ policy – that which did just enough to satisfy and suffice.⁶

Incremental decision-making and centre/provinces relations

The wider implication of this style of policy-making on the trajectory of China’s political evolution will be dealt with in detail in the conclusion to this chapter. In this section, I will assess the relevance of an uncoordinated reform process to the specific question of centre/provinces relations.

The first point to be made is that insufficient time and expertise were expended on thinking through the consequences of reform. Where such prior planning did exist, the hoped for consequences were often distorted by the impact of later reforms. For example, Li Xianguo argues that strategic planning ahead of policy implementation is crucial for successful regional development policy (Li Xianguo 1988). The local environment (both physical and economic) has to be fully researched and recognized before the impact of policy changes on that area can be fully understood. But Li argues that the need to push ahead with reform quickly meant that effective prior planning did not occur, and problems became apparent only after they had already become problems.

Second, for both political leaders and enterprise managers in the provinces, the inherent problems of coming to terms with the demands and rigours of the new system were further complicated. Of course, experience is most often gained just after it is most needed. Decision-making powers were decentralized to economic decision-makers who lacked the experience to utilize them effectively. Part of this problem arises simply from ignorance of the demands and rigours of the new system. For example, after decades of being told what to do by superiors in the planning administrative machinery, enterprise managers were suddenly faced with difficult decisions themselves. It is not surprising that many acted without adequately assessing input costs, raw material supplies and potential markets. They had neither the experience nor the entrepreneurial spirit to use effectively the new powers they had been granted.

It is difficult to see how this problem could have been avoided given the modernizing priorities of the state. Nevertheless, the process of assimilation was further complicated by inconsistencies in the reform programme. Reforms in different areas were frequently not compatible, and pulled in different directions. For example, Ferdinand has demonstrated how the reform of the system of remitting profits to the centre was at odds with earlier changes in centre/ province revenue sharing arrangements (Ferdinand 1987). This problem was recognized by the Chinese economist Chen Zhao, who noted that ‘contradictions often arise between China’s monetary policy and other economic policies’ (Chen Zhao 1987), and with different policy changes pulling in different directions, ‘the central bank is often at a loss as to what to do’.⁷

In addition, the central authorities have responded to their own financial crises by deploying emergency methods to gain finances from the provinces. At various stages, the provinces were forced to lend money to the centre, buy central government bonds, and renegotiate financial arrangements to the centre’s benefit. These ad hoc interventions in the economic system contributed to the financial uncertainty caused by the lack of coordination in reforms, and undermined the certainty in planning that the original revenue-sharing reforms were supposed to have brought. It is difficult enough to adapt to a rapidly changing environment at the best of times, but much more so when a multiplicity of changes frequently conflict with each other.

Third, and related to the second point, the CCP’s reluctance to expose economic decision-makers to the penalties as well as the benefits of the market economy further complicated this learning process. Fearful of the political consequences of rising unemployment and the economic consequences of wasting investment capital, party and government officials proved reluctant to allow loss-making enterprises to go bankrupt. As a result, managers at different levels were not exposed to the range of experiences (both positive and negative) needed for them to become effective decision-makers in a more fully functioning market economy. According to Zhuang Qidong and Wang Di (1987), such administrative interference gave decision-makers the benefits of both the planned and market systems, and the penalties of neither:

Under the current double structure, enterprises can continue ‘eating from the same big pot’ of the old structure and enjoy the benefits of commodity producers, thus gaining advantages from both sides.

This brings us to the fourth issue. The transition from a planned to a market economy was (and still remains) incomplete. Whilst the instruments of state planning were dismantled, their replacement with effective and functioning market macro-control mechanisms was slow. With the national economy uncoordinated either by plan or market, provincial planners were allowed (almost forced) to make decisions on largely local considerations.

Fifth, this tendency was reinforced by both the style and structure of economic planning at a local level. The intention of market decentralization reforms was to distance (or remove) the hand of the state from economic decision-making. But the only partial introduction of market reforms combined with administrative decentralization to prevent market decentralization reforms from reaching their intended target. This is a particularly important point for the study of centre/province relations in China in the 1980s.

The partial nature of reform meant that although the price and allocation of many goods were increasingly set by the market, key industrial inputs (most notably energy inputs) remained under state control. This ability to influence local economic activity was compounded by an attitude to local planning that remained largely rooted in the past. What is wrong with allocating scarce energy resources to local enterprises, leaning on banks to provide loans, or erecting trade barriers against ‘imports’ from other provinces? For the Chinese economist Chen Yizi, this factor was the fundamental obstacle to sustainable economic progress.⁸ He argues that these attitudes to economic interference (and even direct management at times) are reinforced by the structure of the political system (Chen Yizi 1987). The structures of provincial bureaucracies from the old days of economic planning remain fundamentally unreformed. Where changes in the economy demanded administrative changes, new structures were simply added to existing ones, rather than replacing the outmoded organizations. With the instrumentalities of the old system still in place, they inevitably continued to be used to control economic activity. Furthermore, this pattern of behaviour was replicated at lower levels, where administrative control over local economic activity was, if anything, more of a problem given the more intimate relationship between party, state and enterprise (He Ganghui 1987).

Perhaps the central element here is the crucial failure to formalize the independence of enterprises from the state. Lee (1992) argues that rather than granting autonomy to enterprises, the reforms have merely redistributed power between bureaucratic agencies – central administrative control was swapped for local administrative control. As a result, Walder (1992: 331-2) believes that businesses in China should not be considered to be independent economic entities, but should instead be categorized as ‘quasi-autonomous divisions within a corporate structure’. This failure fully to separate enterprises from the state is usually cited by Chinese authors as the key failing of the reform process in the 1980s.⁹

Impact on centre/provinces relations

Specific decentralization policies and the move towards the market have combined to diffuse decision-making power to a much greater extent than at any time since 1949. Indeed, at the Fifth Plenum of the Thirteenth Central Committee in November 1989, the official communique argued that power had been diffused to too great an extent. As a consequence, local economic activity had not always coincided with the needs and requirements of the national economy as a whole. The plenum’s communique maintained that one of the major problems facing the economy at the time was ‘over-decentralization of power and the ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• List of figures
• List of tables
• Abbreviations
• Preface
• Introduction
• Part I The political evolution
• Part II The economic dynamics
• Part III Business and social transformation
• Part IV Perspectives
• Index