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Local Rule Bending and National Policy Constraints and Changes

The entrepreneurship thesis draws mainly on findings from studies of the entrepreneurial drive and savvy of private business people in face of the initially adverse political environment. As Tsai (2002, 264) succinctly puts it, these entrepreneurs devised diverse and ingenious ways to conduct and grow business “behind the state, with the state, and despite the state.” A large part of their political strategies, however, involved efforts to neutralize and/or manipulate state authorities, as invisibility from the state tended to decline with the growth of a business and there was a limit to what could be achieved through open defiance or confrontation with an organizationally potent state apparatus. Indeed much of the pertinent analytic attention focuses on how private business people interacted with local officials and secured from them tolerant or even facilitating administrative and regulatory actions and policies beyond centrally imposed restrictions. The common story is that such rulebending behavior stemmed from a convergence of shared interests between local officials and private entrepreneurs. In some instances, the rule bending by local officials even facilitated the creation of informal institutions that served as the prototypes for eventual conversion or evolution into formal institutions (e.g., Tsai 2007).

This is a useful perspective, focusing primarily on the role of mutual benefits between local political and economic actors. To enhance its explanatory power, however, an in-depth analysis of the costs of pursuing such benefits is necessary. In particular, it is important to further investigate how local officials justified their rule-bending behavior, which involved various degrees of risk (and hence cost) under the ideological and political constraints imposed by the CCP. Understanding how such risk was contained and managed in different local contexts will not only clarify what shaped the cost-benefit calculus of local officials and why genetically private enterprises were able to grow despite the initially adverse institutional environment. It will also help explain the varying paces of their growth across space and over time.

A widely shared view about regional variations in the development of the private sector is that local government policies are path dependent (e.g., Liu 1992; Tsai 2002; Whiting 2000). Locales that entered economic reforms with a strong preexisting base of public enterprises tended to have more restrictive policies on the private sector than those without such a base. This is by and large true, especially in rural areas. But it tells us more about why some local governments favored public enterprises over private enterprises than why some local governments actively promoted the private sector during the first two decades of reform. In fact, governments in locales with similarly weak legacies of public enterprises demonstrated a wide range of differences in terms of their tendency to promote the private sector. A narrow view of path dependence focusing on initial organizational endowment, therefore, is an inadequate explanation for the variations among poorly endowed locales, which encompass more space than organizationally well-endowed locales. As I will show in chapter 5, a broader view that incorporates local demographics, public finance, and entrepreneurial forces before and after the revolution offers a more revealing account of such heterogeneity in causal effects, as these factors directly conditioned how local officials perceived the benefits of rule bending and dealt with the political risks associated with policies favoring the private sector.

While interactions between private business people and local authorities are important for understanding the expansion of private business, it should be noted that sweeping policy changes at the national level, where regime survival is a much greater concern than at local levels, have also played an important part in redefining the institutional environment for genetically private entities. Examples include the landmark decisions to legalize selfemployment in 1979-1980, to remove the size limit on private employment in 1988, to further legitimize the private sector as part of China’s “socialist market economy” in 1992, to provide constitutional recognition for the status of private business in 1999, and to place public and private property rights under “equal protection” in 2007, as will be elaborated in chapter 1.

Not all these national policy changes can be adequately explained with an account of the entrepreneurial pursuits of private business people in local contexts. The decision to legalize self-employment, for example, was made at a time when the revival of entrepreneurial forces was still inchoate and could not possibly have been the predominant driving force. The trigger for that decision, as I will show in chapters 2 and 3, came both from growing pressures to create jobs and from fiscal shortfalls, which had resulted from population policies and development strategies of the Mao era. Understanding these historical factors and their national policy implications helps illuminate the beginnings of the changing fate of private business.

Where local influence did lead to national policy changes, questions remain as to how the micro-macro causality played out. As will be elaborated in the following chapters, a key factor in this connection is how both local and central leaders perceived and assessed the seriousness of the growing crises in job creation and public finance in light of the coping capacities of public enterprises at different times and various levels of the system. To account for the gradual relaxation of restrictions on genetically private enterprises, an analysis of the interactions between local officials and private entrepreneurs needs to be complemented by an understanding of concurrently emerging problems in the public sector. Furthermore, decision-making by central leaders about private business was also an incremental process in which earlier decisions made at the national level engendered responses from various actors—including local authorities and private entrepreneurs—according to their own self-i nterest calculus. A large number of such responses went beyond the initial limits but nevertheless managed to hold on, oftentimes in the name of experimental reforms to address key policy imperatives, thereby both creating pressures and signaling directions for further change. A careful examination of what went into the argument to justify local rule bending is therefore necessary.

The tempo of national policy change toward the private sector can also be better understood through a broader view that incorporates both historical structural factors and the consequences of interactions among local political and economic actors and between local and central authorities in the reform era. The drastic relaxation of restrictions on private business in the second half of the 1990s provides an example. For reasons to be discussed below, by the mid-1990s the financial performance of the public sector had seriously deteriorated. Coupled with a fiscal recentralization aimed to tackle problems spawned or exacerbated under the fiscal decentralization before 1994, this reality generated a strong motivation for local governments to jettison the vast majority of public enterprises under their purview. At the same time, as a result of entrepreneurship and local rule bending, the private sector had grown beyond centrally defined limits and proved to be a viable alternative for the state’s employment and revenue imperatives. Moreover, public-sector employees who joined the nonfarm workforce during the massive industrial buildup in the 1950s and 1960s began to retire in large and increasing numbers, exacerbating the financial plight of the public sector and accentuating the need to shift the growing responsibility for social security provision away from the public sector. What followed was a massive and precipitous wave of privatization.

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