Emerging Business Ventures under Market Socialism

Ping Zheng, Richard Scase

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135069933
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The rapidly changing market environment in China requires more research to understand fully the empirical processes of management practice and the business landscape in which they operate.

Based on longitudinal case study research between 2005 and 2010, this book explores the distinctive characteristics of emerging forms of economic enterprise under market socialism in China. Adopting a holistic view, it explores how rapid environmental and institutional changes in economic reforms are impacting upon their practice, and assesses the role of government policy in shaping their ownership and management processes. Through the changing patterns in the development of business ventures, it outlines the dynamics of industrial and organizational change under the transitional phases of a market socialist economy, and explores the tensions which emerge.

This comparative perspective will be of interest to academics, researchers and advanced students of business growth and enterprise management, particularly those wishing to explore China, Chinese business and emerging economies.

1	Chinese market socialism A summary account

Introduction

The aim of this chapter is to introduce the main features of market socialism and the general environment within which organizations operate: the economic and political environment. Originally “market socialism” was the attempt by Soviet regimes to introduce market elements into their socialist economic systems in order to address the inefficiencies of their economies. It is the analogous system introduced in the People’s Republic of China (PRC) by Deng Xiaoping in the late 1970s, which has evolved into what some economists, outside of China, would argue is modern Chinese capitalism.

The core difference between socialism and capitalism as far as the relations of production are concerned, is in the nature of ownership and control (Davis and Scase 1985). As Marx (1969) originally defined it, under capitalism, producers create the economic surplus, which becomes the personal wealth and property of non-producers; that means the capitalists exploit the proletariat. However, socialism is characterized by public ownership of the means of production, workers are masters or owners of the enterprises, so there is no exploitation. The distribution and deployment of social resources and economic surplus are conducted and determined by a centralized planning system of government rather than through market forces. Pierson (1995: 85) has outlined the core principles of market socialism:

At its simplest, market socialism describes an economic and political system which combines the principles of social ownership of the economy with the continuing allocation of commodities (including labor) through the mechanism of markets. For market socialists, it is not markets but capitalist markets, that is, markets which inscribe the social and economic power of private capital, that are objectionable. They offer an alternative model in which markets are combined with varying forms of the social ownership of capital. Amongst its supporters, the market is recommended not only as a way of attaining greater economic efficiency under socialism, but also as a way of securing greater individual liberty or a more equal value of liberty, of increasing democracy and of enhancing social justice.

Socialism in China initially adopted the Marxist theory and the Soviet model when it was established in 1949. Through its own practices over decades, the Communist Party of China (CPC) has gradually developed its own socialist model and radically redefined many of the terms and concepts of Marxist theory from the Chinese point of view, to justify its economic policies. The Communist Party of China has proceeded from China’s realities and integrated the fundamental tenets of Marxism with these concrete realities, developing new ways of building socialism in China. It has argued that socialism is not incompatible with economic policies such as markets, free trade, or anything else that appears to work. In current Chinese Communist thinking, China is in the primary stage of socialism, and this redefinition allows the People’s Republic of China (PRC) to justify the existence of an economic market. China’s transition from planning towards a market system has many surprising features. The Communist regime remains intact. Reforms have meant a gradual erosion of state economic control rather than a quick retreat from planning. Reforms began with no clear objectives other than a determination to improve performance. Even Deng Xiaoping’s dictum— “seek truth from facts and just do whatever seems to work” (a guiding principle for reforms), presents a false image and a great deal of uncertainty. The goal of creating a “socialist market economy with Chinese characteristics” is itself an outcome of the reform process that has emerged well into the second decade of transition.

China’s hybrid economic system is a political economy with both socialist and capitalist characteristics (Lichtenstein 1992; Opper 2001; Qian 2000). It is not simply a socialist economy like the old Soviet model or Stalin economy, nor does it imitate Western capitalism; it has hybridized both features. To understand this, it is necessary to grasp some knowledge of how the administration is structured and how power and control are wielded by the Communist Party.

The evolution of economic reforms in China

The essential content of China’s reforms is the transformation from a planned economy to a market-oriented economy under the political regime of socialism. Initially the intention of economic reforms at the early phase only focused on adjustments of economic policies to improve China’s economic performance. Until the middle 1980s, the objective of market-orientation appeared to be clarified, but the means to achieve it remained equivocal and controversial. Many policies were implemented as experiments, and often resulted in political conflicts. The evolution of economic reforms in China can be systematically clarified in three phases over the past half century (see Wu 1985; 2003), described below.

First phase: administrative decentralization 1958–78

Since New China was established in 1949, after three years of economic recovery from the distortion of civil wars, the Communist Party of China proposed the general route of socialist construction and reformation for the transition to socialism. Mao (1953a: 89) described this general route as follows:

Firstly, during a quite long period, it was to gradually realize the national socialist industrialization, constantly expand socialist economic forces, in order to construct the lagging agriculture country to be an advanced industrial country. Secondly, it was to gradually realize the state’s socialist reconstruction in agriculture, handicraft and industry.

The objective of this general route was the reconstruction of the institutions from privatized production to a socialist-owned regime, with the aim of rapidly increasing productivity. In line with this general route, the state implemented the first Five Year Plan (1953–7). The principle task was to rapidly industrialize through the construction of 694 major industrial enterprises (Li 2004; Peng et al. 2004: 6). This built the foundation for socialist industrial construction. The annual average industrial and agricultural GDP (gross domestic product) growth in these five years (1953–7) was 10.9 percent (Ren and Ren 1993: 335). In this period, the centralization of administration appeared to be an effective means of allocating and distributing resources to where they were most needed for the country’s reconstruction.

At the end of 1957, Mao Zedong launched the “Great Leap Forward” in order to push the speed of industrialization. The reforms in 1958 were supposed to decentralize administration and give autonomy to enterprises and employees, as well as to local governments. Liu Shaoqi and Shun Zhifang were the main representatives for this proposition. However, Mao always advocated the “spiritual incentive” and opposed the “material incentive” for people, as he regarded this as the distinctive difference between capitalism and socialism. Therefore, giving autonomy to enterprises and employees was a contradiction to Mao’s main ideology, as the empowerment would inevitably involve material incentive for enterprise management. It was criticized as “Yugoslavian Revisionism” and “Capitalist Individualism,” which should be abandoned. Decentralization focused only on local government, which was all about the distribution of authority from the central administration. This decentralization of authority involved seven elements: “planning,” “enterprise jurisdiction,” “resources allocation,” “administration of approval,” “investment and loans on construction projects,” “finance and taxation,” and “labor management” (Wu 2003). With the prerequisite of a planned economy regime remaining unchanged, the decentralization of authority in layers of hierarchy to local governments formed the institutional infrastructure for the “Great Leap Forward.” Under this institutional support, different levels of local governments fully utilized the authority of deploying resources to launch basic construction projects, to employ labor and to freely use peasants’ material assets, in order to complete Mao’s unrealized and impossible missions, such as “Double steel production in one year’ ‘Exceed Britain in three years and overtop America in ten years,” etc. (Bo 1993: 679). The inevitable consequence was failure. The negative effects appeared in many aspects of the economy, such as a reduction in production, large losses in industrial and commercial enterprises, serious scarcities in the supply of subsistence consumer products, and a slump of the whole economy. Between 15 and 30 million people died from starvation and famine in 1959–61 (Ashton et al. 1984).

In 1962, the Communist Party remedied the chaos caused by decentralization, and returned authority back to the centralized government administration. This allocated and deployed resources by executive commands from the Central Committee of the Party. However, decentralization allowed for the growth of local market relations. For instance, the creation of township-village enterprises (TVEs) was the outcome of this period of decentralization. Local governors utilized the power they were granted from administrative decentralization to support funding for the development of their own regional enterprises, in order to pursue local benefits and achieve target performance (Qian 2000). TVEs were cooperative agreements between local governments and enterprises, which represented mutual benefits. It was argued by Boisot and Child (1996) that at this time, this was more a network than a market economy in so far as it was built on a tight web of interpersonal obligations based on trust rather than on atomized competitive relations. It later became clear that the emergence of TVEs became a major contributor to rapid growth in GDP in China for the later development of a market-oriented economy. By 1991 these enterprises were producing almost 60 percent of the total output in the countryside, as measured in market terms (Gabriel 1998).

Second phase: incremental reforms 1979–93

After the Communist Party had failed to reform the state-owned economic sector and faced a standstill in the growth of the state economy, the main force of reform began to focus on the non-state economic sectors in order to provide opportunities for growth. This was called the “Incremental Reforms Strategy” (Wu 2003).

The creation of this Incremental Reforms Strategy was initiated in 1976 after the collapse of the “Gang of Four.” When political power returned to the right wing of the Communist Party, the concept of state-owned enterprise reform was advocated by Shun Zhifang in 1957 and became promoted by the Party at this stage. In 1979, Xue Muqiao published his work—A study of the problems in China’s socialist economy. This had a big impact on ideas of reform at this time. He argued that:

The economic reform needed to solve two problems – one was reform of administrative institutions in the state-owned enterprises (including collective enterprises); the other was reforms of the state administration in order to make it adequate for large social production.

(Xue 1979: 185)

Influenced by these ideas, experiments on extending autonomy to state-owned enterprises were implemented in Si Chuang province. Between 1978 and 1979, over 100 state-owned enterprises were adopted as “experimental units” in this province, achieving significant improvements in performance as a result. The experiments were then expanded nationwide. By the end of 1979, 4,200 state-owned enterprises had been reformed. By 1980, this had increased to 6,600 units and their productivity accounted for 60 percent of total budgeted national industrial productivity, and 70 percent of total national industrial and commercial profitability (Wu 2003: 57). However, this positive effect didn’t last for long; the limitation of these reforms soon appeared. The operation of these enterprises with their new autonomy did not trade according to the rules of market competition, nor in relation to normal “supply and demand” pricing mechanisms of mature market economies. Therefore, the exertion of power and autonomy by these enterprises was not propitious to the effective deployment of economic resources.

An important turning point in economic reform took place in September 1980. Headed by Deng Xiaoping, the Communist Party introduced policies that allowed peasants to contract land for farming on the basis of individual/family responsibility. This replaced the model of the “peoples communes.”¹ The TVEs, on the basis of collective ownership, began to prosper after this change. Since then, China has launched a series of reform strategies and policies that have distinguished it from Soviet Russia and Eastern Europe with their focus on state-owned economic sectors. China abandoned attempts to reform the state economy and transferred its focus to non-state sectors, where the market-oriented enterprises were embedded. Since then, the growth of non-state sectors has driven the development of the whole economy.

Generally speaking, the success of reforms in the rural non-state economic sectors encouraged the Communist Party take further steps in other sectors to promote the growth of the non-rural, non-state economy. An increasing number of “mixed-ownership” enterprises emerged along the coastal areas, including foreign joint ventures, and these became the main force for China’s economic growth. The performance of this incremental strategy can be illustrated in three dimensions:

Promoting measures for the growth of the non-state economy

Whether the existence and further development of the non-state economy should be permitted was a politically sensitive issue in China. The socialist doctrines of Mao’s era, such as “more communes and the larger the better”; “the task of communists is to vanish capitalism.” (Mao 1953b: 298), still shaped people’s thinking for a long time. This changed with the legitimation of land being contracted to individuals and families. The growth of TVEs also opened up the possibilities of a new form of socialism. Because the non-state-owned enterprises were market-oriented, not planned, their emergence and prosperity gradually formed regional m...