Home Political science Dancing with the devil : the political economy of privatization in China
Privatization as a Process of Endogenous Institutional Change: Toward an Eclectic Perspective
Privatization is one of the most fundamental changes that have redefined the economic institutions of post-Mao China. It is a complex process for which existing theories of institutional change do not have directly applicable explanations. The main insights of these theories, however, can be synthesized to form a discerning perspective that helps understand the mechanisms at work. The fact that the ascent of private ownership has taken place under a communist regime is analytically puzzling and indeed politically ironic, as the CCP is ideologically mandated to strive for a society without private ownership. Looking at the entire span of the PRC’s history, one may also see this contradictory development as an institutional reversal—what has been unfolding since 1978 is in essence a resurrection of the mixed economy in the early 1950s. It contrasts with the institutional reversals elsewhere that have taken place by design, by force, or by negotiation, such as adoption of Western-style systems in postcommunist Eastern Europe, return to dictatorship in inchoate or unstable democracies, or deregulation in Western countries. The Chinese case instead involves a largely endogenously derived process that has evolved and prevailed against the political will of rulers who command an organizationally potent authoritarian state.
To be sure, this process is not simply a matter of resuming what had been truncated at an earlier point of time in history. What had happened during the first three decades of the PRC had profound implications for how the process of privatization evolved in the post-Mao era. According to a prominent view in the literature on institutional change (e.g., Sewell 1996; Hausner, Nielson, and Jessop 1995), the orientation of institutional change is subject to the lasting influence of institutional legacies of the past, which are often too deep-rooted to be swept away, even by torrent events like war, revolution, or regime collapse. In contrast, a narrower view of path dependence emphasizes the role of contingencies in triggering and orienting the change in an existing institution. Extending the research on the “lock-in” phenomenon in technological change (e.g., Arthur 1989; David 1985), for example, some scholars seek to illuminate the mechanisms of institutional change by accounting for the positive feedback that may develop in an initially fluid process (e.g., Mahoney 2000; Pierson 2004). The basic argument is that incremental positive feedback (such as newly generated political and economic interests) may make it increasingly costly or difficult to reverse the process of change along certain institutional path.
These seemingly contrasting views of path dependence, while differing in focus, can be complementary. Positive feedback is an important channel through which the influence of institutional legacies may play out, whereas the sources of positive feedback are rarely limited to factors newly derived from the changes (oftentimes in response to a “shock” event) in a particular institution per se. A question that may help join the historical-contextual view and the contingency view is whether the forces that set in motion the process of change and/or build up the momentum therein also have certain temporal and/or structural characteristics that define their influence on the path of the institutional change under investigation. Another question is whether initially strong positive feedback for a newly emerging institutional order may herald the beginning of its ultimate demise. In this study I will show that China’s changing demographics after the 1949 revolution and the prereform fiscal system were among the key triggers for the movement toward private ownership and have since shaped the path of the subsequent process of change. I will also show that the leading role of public enterprises in early marketization generated and disguised forces leading to their subsequent self-destruction.
To explain why Chinese communist leaders have had to accept what they initially suppressed or resisted in the restructuring of property rights institutions, it is important to examine the behavior of change agents, including both economic and political actors. Such behavior is seen as particularly catalytic and consequential during times of institutional instability (e.g.,
Katznelson 2003; Swidler 1986). A predominant view (also known as the “rationalist view”) in economic analysis of institutional change regards exogenous shocks as the main cause of such instability. The underlying rationale is that institutions are self-enforcing, equilibrium phenomena, where “each player’s behavior is a best response ... no one has an incentive to deviate from the behavior associated with the institution” (Greif 2006, 159). It follows that change comes when self-sustained institutional reproduction breaks down.
This view is questioned by the “historical institutionalists” in political science (Hall and Taylor 1996; Mahoney and Thelen 2010). They argue that institutions embody different patterns of power-distributional relations that are fraught with tension and conflict. Change is perennial and oftentimes endogenously derived, as noncompliance is an inherent feature of institutional life, especially when rules are ambiguous, weakly reinforced, and/or vigorously contested. Such deviant behavior, open or covert, stems from diverse motivating sources, and its cumulative and sometimes transformative effects may lead to different outcomes of institutional change in different contexts.
Both views are useful in that they draw attention to different forces that shape the fate of institutions. An issue that is recognized by both views but remains underexplored is that compliant behavior with existing institutions may lead to unintended consequences that increase institutional instability from within (Greif and Laitin 2004; Mahoney and Thelen 2010). In my analysis I will investigate how this scenario materialized as a result of growing moral hazard among the stewards of public ownership that significantly undermined the financial and organizational health of public enterprises in the 1980s and early 1990s. I will also seek to explain institutional change by understanding what renders institutions relatively stable in light of a modified version of the rationalist view. That is, institutional stability hinges on making the vast majority of players, rather than all of them, consider it to be in their best interest to follow, most times if not always, dominant institutional rules, provided that the unintended consequences of rule compliance are contained. This will broaden the space for investigating what the historical institutionalists emphasize—that is, the role of change agents, who often are among the noncompliant actors and play an instrumental role in subverting the existing institutional order. In order for institutions to be relatively stable, not only do most actors need to be motivated to follow dominant rules, but the erosive and contagious effects of noncompliant behavior need to be deterred and contained. Otherwise the opportunities for institutional change will significantly increase, which is what happened during the process of privatization in China. To account for institutional change, therefore, it is important to consider the incentives and constraints faced by both rule followers and noncompliant players. In particular, what shapes the risks faced by change agents merits close analytic attention.
A relevant factor to consider in this connection is the ability of rule breakers to justify their behavior. Assuming individuals are risk-averse, the stronger such ability, the weaker the coherence of the institutional order concerned and vice versa. This brings up questions about what may be called the homogenizing function of institutions, which legitimizes (e.g., through coercive, normative, and/or mimetic mechanisms) and thereby diffuses and rou- tinizes rule-abiding behavior while deterring deviance through pressures or punitive sanctions on risk-takers. Such a function is a central issue addressed by the “new institutionalism” in sociology and organization studies (Powell and DiMaggio 1991; Scott 2001, 2013). Yet this school of institutional analysis has been criticized for overemphasizing the tenacity of institution and falling short of providing a useful theory for explaining change (Hall and Taylor 1996; see also Greif 2006). Indeed its generalizations are mostly based on cases where institutions are strong enough to constrain noncompliance. There is only scant coverage of institutions that are weak and unable to contain rule breaking effectively. It also is largely silent about the conditions under which justification of noncompliance is rendered difficult.
Despite these inadequacies, however, the main insight offered by the sociological view should not be dismissed. That is, the difficulty or costliness of justifying noncompliant behavior holds a key to understanding institutional stability, which is the flip side of the story about institutional change. As I will show in this book, a major contributing factor to the deepening of privatization in post-Mao China is the growth of a gray area in the institutional space for property rights. It undermines the enforcement of existing rules and greatly reduces the risk of rule breaking. Investigating how such a gray area grew and what affected the cost function of justification for noncompliance therefore will enrich the understanding of what drives the institutional change under investigation.
To sum up, it is possible and useful to synthesize some of the main thrusts in institutional analysis that are often presented as antitheses. In particular, the study of the mechanisms of endogenously derived institutional change may benefit from (a) a comprehensive view of path dependence that incorporates both the lasting influence of historical legacies and the possibility of sequentially opposing effects rendered by contingencies arising from the process of change; (b) a revisionist view of institutional stability that does not require universal rule following and considers subversive effects from both rule compliance and deviation to be key to understanding institutional change; and (c) an extended view of the homogenizing function of institutions that recognizes the costliness of justifying noncompliance as well as the variations in the pertinent cost in different contexts. This eclectic perspective will guide and inform my research on the driving forces behind the decline of public ownership in post-Mao China. I will discuss the theoretical implications of my findings for institutional analysis in the concluding chapter. Let me begin my search for explanations with a brief review of the existing empirical scholarship on China’s privatization.
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