Explaining Railway Reform in China

A Train of Property Rights Re-arrangements

Linda Tjia Yin-nor

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781136212321
• Edition: 1
• Topic: Business
• Subtopic: Infrastructure
• Index: Business

Having been state-owned for decades, the railway reform in China confused many people, particularly in terms of its ownership and property rights arrangements. Western literature always prescribes that the best model for railway reform is privatization. China's leadership has also enunciated the state's determination to re-arrange property rights and rejuvenate corporate governance. But is China's railway reform really a story of convergence and will the Chinese government follow the western model of railway reform?

Addressing these questions, this book provides a positive explanation of the reform in China's railway sector between 1978 and the dissolution of the Ministry of Railways. It bridges the socialist reform and transport policy literature, and studies the empirical changes of the property rights arrangements in China's railway system. Refuting the convergence theory, it concludes that the cyclical reform policies of decentralization and re-centralization were actually an exploratory and interactive mechanism of "assets discovery" and "assets recovery". This in-depth study is based on 21 face-to-face interviews with railway cadres as well as field trips to collect first-hand information in Guangzhou, Beijing, Shanghai, Tianjin and Wuhan.

As one of the only empirical studies on the reform of the railway sector in China, this book will be of interest to students and scholars of China studies, Transport studies and Political Economy.

1 Property rights, ownership changes, and the puzzles

Overview

Despite the importance of the railway sector in China, both in terms of its strategic role and economic values, there is little in the way of a thorough empirical study of its reform. Having been state-owned and centrally regulated for decades, the railway reform in China confused many people, particularly in terms of its ownership and property rights arrangements. Western literature on railway reform focused on how to induce competition and enhance profitability. As a result, any discrepancy in the course of reform would be considered as a deviation from the best reform model. In view of the influence of the property rights theory and the global trend on privatization, it was not surprising to see China’s leadership enunciate the state’s determination to restructure the property rights arrangements and rejuvenate corporate governance.

In fact, during the mid-1990s, rural enterprises in China had already undergone massive privatization. But such privatization was different from the type proposed by the Western model, in which the property rights of the state assets are expected to be transferred to outsiders. What happened in China was that most of the rural enterprises were sold to insiders, and yet they were able to improve the performance.¹ So the question becomes whether the Chinese government will follow the Western model of railway reform, or copy the successful experience from its other enterprises, or develop a different strategy to reform the country’s last batch of centralized sectors?

To answer these questions, this book bridges the gap between socialist reform literature and transport policy, and studies the empirical changes of property rights arrangements in China’s railway system. The research questions that guide this research to understand China’s railway reform can broadly be divided into two areas.

The first set of questions target the normative approach of socialist reform theory and ask: Was China’s railway reform a story of convergence to the Western model? Were the property rights of the railway assets clearly demarcated, if not privatized eventually? Was China’s leadership willing to give up its control over railway assets? Did the Chinese government pay lip service to the idea of decentralization, and if so, why? Did China’s railway reform deviate from the efficiency model of reform, and if so, how?

The second set of questions was a response to the positive research on various reform experiences, and asks: What were the differences between the property rights changes of the railway sector and those of the rural enterprises? What were the endowments or institutional factors that contribute to the differences? Could the experience of the reform of rural enterprises aid in understanding China’s railway reform?

In brief, this book concludes that the convergence theory of privatization cannot explain China’s railway reform. Although the positive characteristics of property rights theory are appealing for their logical and forceful policy implications, it remains a theoretical reference and fails to explain the actual property rights re-arrangements in the real world.

What we have seen in the past two decades in China was that the central government undertook a problem-solving approach to decentralize and re-centralize the property rights arrangements of many large-scale state sectors, including the railway system. In responding to such cyclical reform policies and the resulting fuzzy fiscal arrangements, local cadres rushed to discover the idle or hidden productive resources. This “assets discovery process” has not been described in detail in the reform literature, mostly because the reform of the strategically important, longstanding, and highly centralized state sectors was more complicated than that of the rural enterprises, and thus the central government had to grope for the most feasible way to restructure the last batch of state sectors.

In view of the limited information on these huge state sectors and the finite computational resources, the central government could hardly have a very long-term view down the road of reform. However, it was indeed these short-sighted but pragmatic measures that together shaped the reform in a way that encouraged local cadres to uncover the idle productive assets. Without committing to a process of outright privatization, the central government was able to recover the recently discovered assets. For productive assets relating to those industries in which market competition alone could not improve the efficiency, the Chinese government would maintain the state’s ownership in order to re-regulate and re-arrange the respective property rights; otherwise the government would decentralize and, perhaps, privatize them. By studying the railway reform in China, this book is thus aimed at uncovering the “assets discovery mechanism” and the “assets recovery mechanism.”

This chapter first conceptualizes the idea of property rights by referring to the orthodox property rights theory. Although the book focuses more on the positive theory of reform, it is necessary to set the scene by first introducing the normative origin of the reform theory and describing where reality falls short of the conditions to realize the normative implication. In fact, the newly developed “assets discovery mechanism” will be hinted at from here by putting forward an alternative view that focuses on the capture of the residual property rights of the state assets.

The second section shifts to review various positive theories of ownership change. While most of the positive literature focuses on local cadres and how they shape the transformation process, the “assets discovery mechanism” brings in the role of the central government and explains the exploratory process through which idle state assets are gradually discovered. This discovery mechanism is followed by a closely related “assets recovery mechanism” through which the central government gradually realizes the existence of idle assets and selectively re-organizes these newly discovered assets to form a state-owned property rights hybrid. This chapter will conclude by combining the relevant theoretical puzzles and paving the way for the next chapter, which will bring in the railway reform theories and set four working hypotheses.

Conceptualizing “property rights”

There are many views as to the definition of property rights and how they can be used to explain economic behavior. The orthodox property rights theory comprises the control, income, and transfer of rights, and argues that the best way to coordinate resources is to concentrate the ownership of the three bundles of rights by privatization and de-politicization.

Economic theory of property rights bundles

Economic analysis of property rights assumes that, under two sets of conditions, individuals will always maximize self-profits, optimize resources distribution, and benefit the society as a whole. First, property rights have to be legally enforced and explicitly protected so that the related parties can negotiate for the best possible allocation of the rights of the resources exclusively.² Second, property rights can be clearly dissociated into three bundles: the right to use an asset; the right to retain the returns from an asset; and the right to transfer an asset to others.³

Accordingly, under the pure private ownership arrangement, all three bundles of rights are concentrated in the same owner, who is bound to put the assets in the best use in order to maximize the reward. The owner will take into consideration not only the instant result, but also any future possible impact.⁴ Pushing the claim to the extreme case, the owner “will attempt to take into account the supply and demand conditions that he thinks will exist after his death.”⁵ Since people have different talents with different assets, the comparative advantage can only be materialized if ownership rights are transferable.⁶ Hence the right to transfer assets is no less important than the use and income rights. Otherwise people are prevented from acquiring property with which they could produce more effective outcomes than others.

To recap, property rights theory logically deduces that the best way to restructure ownership is to delineate clearly the trio of rights and legally enforce the transferability of property rights. Market transactions will mold the ownership structure into the most effective arrangements, under which the three bundles of rights are concentrated in the same owner, who can make the best use of the assets for his own benefit and for the sake of the society.

Communal and state ownership

Theoretically, communal ownership refers to a collective property rights arrangement in which all members of the community have equal right of access to the trio of rights. In practice, communist and post-communist countries lack well-developed systems of property protection and contract enforcement. The idea of collectivity thus results in not only ineffective ownership arrangements, but also unfair allocation of resources to the people who are in power as gatekeepers to the common resources. Since everyone in the community is said to possess the right to claim the award from the resources and bear the cost of the use of the resources, the gatekeeper would exhaust the available resources, maximize their personal gains, and ignore the detrimental effects of the excessive use of the common resources. After all, such costs will be diluted and shared among all the members of the community.⁷

State ownership is even more problematic than communal ownership, as the party/state confiscates private property and puts it under state control in the people’s name.⁸ Generally speaking, the central leadership controls the right to transfer the property, the state treasury controls the right to receive and allocate the reward, and the local cadres control the right to use the productive assets. Very often the central leadership also exerts its influence in the income and control rights as well.⁹

Since the central leadership does not have direct cash flow rights, they are not necessarily motivated by efficiency concerns. In addition, different pressure groups may lobby the politicians for various political and social interests other than efficiency. On the other hand, loss-making cadres always expect external financial assistance from the state in terms of subsidies, tax exemptions, generous credits, state loans, or other preferential policies. They are, strictly speaking, spared from any disciplinary consequences of inefficient operation. As such, price responsiveness declines, entrepreneurial innovations dissipate and excessive demand for inputs leads to what Kornai refers to as the “soft budget constraint” and “shortage economy.”¹⁰

Moreover, benevolent politicians are rare. Many of them favor private gains over efficiency. Knowing that any improvement in the business performance would only invite the supervising treasury to set more demanding targets in the next year’s budget, cadres tend to under-perform, which leads to inefficient performance. In addition, assuming partial or de jure property rights of the state assets, local cadres are opportunistic and tend to carry out unproductive rent-seeking behavior.¹¹ Boykco et al. concludes that state ownership implies “political control of poorly defined property rights,” which further endangers the problematic communal ownership.¹²

De-collectivization and de-politicization of state ownership

State and communal ownership is characterized by political control of economic activities and lack of well-developed systems for property protection and contract enforcement. To solve the problem of poor property rights arrangements, state- or collective-owned assets should de-collectivized and de-politicized by re-allocating the trio of rights from politicians and state treasury to private owners.

In addition, the neoliberal theory, encompassing the classical liberal theory, public choice theory, and free market theory, suggests that government should promote freedom through minimizing coercion and transferring state power back to the “liberated,” “risk-taking,” and “competitive” individuals.¹³ Agency theory also believes that highly vertical and bureaucratic integration will induce interlocking constraints and inflict ineffective monitoring of multi-level principal–agent relationships. Accordingly, property rights reform should include de-collectivization and de-politicization.¹⁴

However, the planned system was embedded with interlocking links which cannot be simply cut across and taken away. These networks are ready to undergo re-composition and adaptation in the process of disintegration, and are likely to integrate again in another form. In fact, in spite of the collapse of the communist regime in many Eastern European countries and the subsequent political compromise, it has already been proved extremely difficult to de-collectivize and de-politicize the ineffective system.¹⁵ Without doubt, it is complicated to regularize the planned system so as to deregulate it. The Eastern European countries had tried various forms of priv...