Transforming Rural China

Chih-Jou Jay Chen

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781134643615
• Edition: 1
• Topic: Business
• Subtopic: International Business
• Index: Business

It is often assumed that privatization leads to profit, and that well-delineated property rights and a strong private sector will help boost an economy. This book investigates the property rights in Chinese enterprises in the reform era, finding that distinction between the public and the private are blurred, that national reform policies are implemented unevenly across the country, and that enterprises owned by local governments, in Shanghai, for example, are actually extremely profitable.

1 Explaining property rights transformations

Economists were not nonplussed when China opened its markets in the 1980s and its economy took off in double-digit annual growth rates. Free market capitalism at work, economists said. As reforms quickened in the early 1990s, annual GDP growth rose in double digits. Still, China watchers and scholars held that this was a historical trend. The USSR had collapsed, after all, and Eastern Europe was now posting strong growth under a free market economy.

China is not Eastern Europe, however. In fact, China is not even a free market economy, no matter how many special characteristics the country's leaders make up. Although the central government enacted economic reforms beginning in the late 1970s that were a step away from the centrally controlled economy imposed upon the entire country, the market was far from free. In fact it was coming under the control of local institutions that could vary widely in shape, size and power, from one end of the great country to the other. Because of the sometimes rigid control of these local institutions, which allowed them to be flexible to central policy in their own right, the local, and thus national, economy changed and grew. In particular, China's rural economy developed under a variety of local institutions.

The figures are enough to raise eyebrows. Gross value of industrial output of rural nonagricultural enterprises (township and village enterprises – TVEs) jumped from 9.8 percent of the country's total in 1980 to 47 percent in 2000. In the mid-1990s TVEs already employed 34 percent of the country, up from 9.4 percent in 1980, and accounted for nearly half of the country's exports (ZXQN 1997: 3-9). This means that nearly half of China's economy was built on the industrialized countryside; an unprecedented phenomena in the history of modern economics.

How did China's countryside transform in such a monumental way? Central to the analysis and understanding of China's rural reforms lies the question of the types of institutions that have undergone changes and the ways in which they have changed. Village party secretaries, for example, who were once loyal communist party ideologues, have become profit driven capitalist bosses, who have affected, and will continue to affect China's economic development. In fact, there exists a wide variety of paths for local development based on different property rights relations in the localities – these range from the local government-controlled collective economy to the predominance of private businesses.

These observations on Chinese rural reforms and consequent developments lead to the question of how this all came about. What are the specific property rights arrangements of rural enterprises in Chinese reforms? How should we understand the variations of property rights relations across regions in both the reform and post-reform era? Why did rural industries take off in a post-communist society with its political institutions largely intact and property rights and incentive structure poorly defined? Who have exercised property rights over assets, and how were these rights enforced? How do property rights arrangements vary across regions and how (and why) do they evolve through time? If transfers of the collective property rights are carried out thoroughly in pro-collective regions, what are the ramifications for the socialist nature of China's rural economy?

This study takes these issues as both a starting point and a central focus, and seeks to offer a sociological explanation of the Chinese-style market transformations over the past two decades that have played a pivotal role in China's economic growth. It aims to understand the social institutional foundations of the successful developing Chinese economies and account for the mechanisms underlying developmental progress.

Contending explanations of Chinese reforms

Studies of China's economy have painted different pictures of the economic institutions in rural China and the property rights relations that define them. Some studies argue that the driving force behind economic reforms comes from the private sector, in which individual entrepreneurs have continued to push for economic change. This is the Market Transition Account. The other side holds that local bureaucratic organs drive rural economic reform by using village collectives as money making entities – this is to say, the local governments play the role of the entrepreneur, even throughout the privatization process. This is the Local State Corporatism Account.

The Market Transition Account

The Market Transition Account is a line of thinking about market reform in state socialist countries inspired by Kornai (1986), first developed by Szelenyi (1978), and later elaborated into the arresting “market transition theory” by Nee (1989, 1991, 1996). The theory suggests that China's reforms can best be understood as a transition from a redistributive command system to a market system. Under this theory, market reforms drive enterprises to focus on supply and demand in the market, and to achieve cost-effectiveness and competitiveness, thus leading to hard budget constraints. This means that power will shift from “redistributors” (i.e., cadres) to the “direct producers” (i.e., entrepreneurs). As this happens, human capital becomes more salient than political capital in seizing economic gains, and thus inequality of opportunity and rewards will be reduced. This argument predicts a decline in the power of cadres, a corresponding gain in the power of producers, and the lessening inequality in the distribution of resources and rewards.

This perspective assumes that the existence of well-defined private property rights is a basic precondition to the proper functioning of a market economy. Without true private ownership, problems associated with the soft budget syndrome tend to arise since there are no clearly identified owners to pay for mistakes. (Someone else, usually the state, pays (Kornai 1992).) Therefore, the economy tends to perform relatively badly if ownership arrangements remain ambiguous or unstable (Alchian and Demsetz 1972).

The market transition account draws on a dichotomous framework of planned economy versus free market, which can be delineated by such dichotomies as centralization versus decentralization, regulation versus deregulation, vertical ties versus horizontal linkage, and bureaucratic command versus market transaction. The reform process focuses on the transition between two extreme points on a continuum, from the command system to the market system.

According to Nee, as the source of power shifts from hierarchies to the market, economic transactions will be embedded more in societal networks between buyers and sellers and less in political networks dominated by officials (Nee 1989: 663). Private entrepreneurs, by forging horizontal ties on the market, create resources that lie outside of the discretionary powers of officials. This in turn obviates the need for entrepreneurs to cultivate guanxi (personal connections; network) with officials (i.e., creates vertical ties), and erodes the patron-client ties that form the basis of the political order in socialist societies. The advantage of cadre status for entrepreneurial pursuits diminishes in the course of market transition because stronger market institutions reduce the strategic value of redistributive control over the movement of goods and services.

The market transition account has certain affinities with the logic espoused by a group of economists who Wing Thye Woo (1999) has termed “the Convergence school,” who, among other recommendations, advised post-communist regimes to make a clean break with such past arrangements as government ownership. This group attributes China's remarkable economic performance since 1978 to market forces, including the increasing liberalization, internationalization, and privatization of economic activities. As to the interpretation of rural reforms, this school argues that the collective ownership of TVEs, which is a typical non-capitalist institution, has been proven to be unsuccessful and should evolve toward private entities (Wu 1998; Shirley and Galal 1994). It holds the assumption that a normal economy is characterized by market-based transactions between private agents. Therefore, faster privatization of collective TVEs in a transparent and equitable manner and more sweeping industrial and trade deregulation will produce faster growth. For this group, any half measures in a reforming post-communist economy would be ineffective compromises, and alternative non-western-style institutions would be wishful thinking (Sachs 1993, Peck and Richardson 1992). In short, this perspective highlights a universal and necessary role played by market forces that can bring transitional economy onto a development track heading toward capitalist market economy.

Local state corporatism and market-bureaucracy interaction account

In contrast to the Market Transition Account, the second perspective, local state corporatism and market-bureaucracy interaction, or Local State Corporatism Account, emphasizes the pivotal role played by local governments in engineering rapid economic growth in rural China. Local bureaucratic organs substitute for the private sector, which is traditionally identified as the vanguard of entrepreneurial effort. This view criticizes the market transition account for ignoring the fact that much of China's post-Mao rapid rural industrialization – at least for most of the 1980s and 1990s – was due to the collective enterprises owned and managed by local governments. Reforms transferred power from the central government to the local governments, allowing local cadres to not only preserve their power by controlling resource allocation and redistribution, but also increase it by playing a predominant role in economic decision making (Oi 1995, 1999; Walder 1995a; Blecher and Shue 1996, 2001).

This account also examines how the course of economic reforms has been shaped by political institutions in the localities. Fiscal decentralization has altered incentives for political actors in local governments; officials seek to promote extensive economic growth as a means to increase government revenues (Wong 1992; Oi 1992). Strong economic performance of rural industry in the reforms can therefore be explained in terms of the greater capacity local governments now wield to monitor and to draw income from township and village firms (Walder 1995a; Oi 1992). This perspective questions the commonplace assumption that public bureaucrats cannot behave as efficiently as private entrepreneurs in the capitalist market economy (Oi 1995).

One important theme of this account is Oi's “local state corporatism,” which draws an analogy between local community governments and profit-seeking corporations, in which local governments act as the headquarters of large corporations (Oi 1995, 1999). Contrary to some scholars who stress the financial predatory behavior of local governments, this view argues that “mutual dependence rather than predation is a more apt description of the relationship” between local governments and local enterprises (Oi 1999: 98). This view claims that while the reforms decentralized power to the regions and localities, cadres not only retained power by controlling resource allocation and redistribution, but also dominated in the symbiotic and clientelist ties between local state officials and private entrepreneurs. Access to resources for societal actors is embedded in the cultivation of personal-instrumental ties with the officials in the administrative hierarchy. Clientelism not only existed under the Mao era, but also still persisted under the reform period (Oi 1986, 1989; Walder 1986; Wank 1999). Oi (1999) argues that institutional change has led local governments to act more as principals than as agents, thus gaining autonomy within their jurisdiction. The clients of local government, comprised mostly of private entrepreneurs and peasants, seek patrons in the bureaucracy for political protection as well as for commercial advantage, and thus strengthen local cadres’ positional advantage (Wank 1999).

This view diverges sharply from the market transition account in arguing that there is not necessarily a correspondence between the emergence of markets and the decline of patron-client relations. The vision of a future China held by this group is close to a society of “clientelist capitalism.”

The limitations of an economic paradigm

Each of the above perspectives presents incomplete conceptualizations of the transition process, while creating empirical inconsistencies. How did rural industries get from collectively owned to privately owned? And why do profitable privately run small businesses in Fujian exist at the same time as do profitable collective enterprises in Sunan? Studies in rural China have found that China's TVE sector demonstrated a remarkable degree of local and regional diversity in areas such as ownership structure, property rights relations, local policies toward TVEs, and the level of development and industrialization (Byrd and Lin 1990; Sen 1990; Zhou and Zhang 1991; Putterman 1993: 51-81; Ma et al. 1994; Oi and Walder 1999; Ronnas 1993; Whiting 2001; Hsu 1999; Liu 1992; Chen 2001a, 2001b). Differ...