Home Political science Dancing with the devil : the political economy of privatization in China
Political Actors as Change Agents: The Main Storyline
The political actors examined in this study are decision-makers throughout the hierarchy of public administration in China. My analysis centers on officials in the executive branch of the state, known as the People’s Government. In terms of both personnel and range of functions it is by far the largest among the four constitutionally defined branches of power in the Chinese state system, and the actions undertaken by officials in the executive branch have had the most immediate impact on the decline of public ownership and the evolution of private ownership. Despite inconsistencies and contradictions between the institutional logic of the CCP and that of the government (Zheng 1997), in practice the CCP has been the guiding and integrating force of governmental decision-making throughout the reform era. In this study, therefore, I will not explicitly treat them as separate analytical units.
In terms of their roles in the economy, the political actors in public administration can be categorized into four groups: (a) political leaders at each level of government, (b) economic bureaucrats who have broad regulatory, extractive, or allocative authority over economic activities in each jurisdiction, (c) administrators of agencies overseeing public enterprises, and (d) noneconomic bureaucrats with other government functions (in education, cultural and religious affairs, social services, etc.). I assume these political actors to be self-interested decision-makers who take calculated risks, though none of the groups is internally homogenous. Differences in rank, administrative function, ideological predispositions (e.g., regarding communist orthodoxy versus pragmatism), role differentiation between the CCP and the state apparatus, factional divisions, personal rivalry, variations in time discount rate, and so forth may all result in considerable heterogeneity in the interest calculus used by the actors in each group and thereby affect the coherence of their decisions and actions. What is interesting, however, is that over time the effects of their decision-making driven by diverse motivating forces have converged in the direction of creating increasing space for the growth of private economic activities.
The story began with post-Mao CCP leaders. Despite internal differences, they shared a common concern about collective survival, which was rendered highly precarious by the disastrous consequences of Maoist radicalism. In face of the threat posed by serious job creation pressures and fiscal shortfalls at the end of the Cultural Revolution (1966-1976), they expanded the space for selfemployment and initiated fiscal decentralization. They also made the historic decision in 1978 to shift the focus of policy from class struggle to economic development, which was followed by a corresponding retooling of the performance assessment system for local political leaders. These centrally initiated measures set off a chain of responses and interactions that contributed to the decline of the public sector in the 1980s and 1990s. They opened the door for new players—private entrepreneurs and foreign investors, whose efforts to seek further growth not only diluted public ownership in the economy but posed competition to public enterprises and demonstrated a viable alternative. The initial measures introduced by central decision-makers also changed the incentives and constraints faced by local political actors. While these actors were driven to focus their policies on the economy, three types of opportunism grew and consequently combined to expand the space for private ownership and paved the way for the massive privatization around the turn of the century.
First, public enterprises were overexpanded as a way to facilitate the pursuit of careerist and revenue-related benefits for local officials. Second, similar agendas drove local officials to bend centrally set restrictions on private business and foreign capital. Third, illicit use of public office for self-enrichment by political actors of different ranks and administrative functions became a widespread phenomenon. What led to the overexpansion of public enterprises was a widely used strategy by local officials to promote, with the aid of financial leverage, the growth of industrial sales delinked from profitability. It boosted the expansion of output, revenue, and employment, all of which were important for the self-interest of local officials. The strategy was shaped by two important features of the fiscal system: heavy reliance on indirect taxes (realized in or through sales) and existence of gray areas for revenue manipulation through off-budget and (public) enterprise accounts. It was further reinforced by a high time discount rate among local political leaders who faced periodic rotation, transient tenure, and lack of clear administrative cost accounting. Moreover, it was also seemingly consistent with the centrally defined mandate of making public enterprises the leading force of marketization.
Yet the abilities to carry on the strategy varied among different locales. Where it fell short or faltered, alternative or parallel strategies, such as use of unauthorized measures to promote private business and foreign investment, assumed greater potential importance. These strategies involved political risks, however. Where the risks could be contained or managed, the space for private ownership tended to experience early expansion. At the same time local rule-bending for private capital was often intertwined with private exchanges for political actors’ self-enrichment at the expense of public ownership. Similarly damaging effects also resulted from the pursuit of the initially dominant strategy (of promoting sales growth among public enterprises), which not only undermined the financial health of public enterprises but weakened their organizational governance due to increased monitoring cost and collusion between supervising officials and managers.
By the mid-1990s the (over)expansion of the public sector reached its limit. Financial liabilities became increasingly unbearable, which was compounded by a series of centrally adopted measures to address dysfunctional consequences of earlier (especially fiscal) reforms. The problem was also exacerbated by a triple crunch from demographic factors—the swelling of personnel redundancy in public enterprises, the persistence of vast job creation pressures, and the rising wave of urban retirement. To cope with the challenges, in 1997 the central leadership resorted to ownership restructuring among SOEs. But both the tempo and the scope of what followed went far beyond their initial plans. Within six years the entire collective sector collapsed, and SOEs laid off some half of their workforce and lost the leading positions in the majority of the economic sectors they had dominated. Among the forces that contributed to such precipitous decline were a political bandwagon effect from among “laggard locales” of earlier economic development, a shift in the focus of the self-interest calculus of local officials from industry to urban development, and asset stripping by insiders. The following decade saw continuing erosion of the public sector, though the state tried to “rationalize” the new economic order by consolidating and reinforcing the remaining SOEs in a handful of strategically important sectors while letting private and foreign capital dominate the bulk of the Chinese economy.
The central theme of this story is that political actors have been important change agents in China’s ownership transformation. With a close bearing on jobs and revenue, demographic forces and the evolving fiscal system have had significant influence on the decision-making of these actors and shaped the consequences of their behavior. Both national and local officials have played important roles in the decline of public ownership. My account of this decline focuses on the first three decades of the post-Mao era (1977-2007), when private economic activities gradually became the mainstay of the economy and took hold in an increasingly free and institutionalized space. I must stress that recognizing this phenomenon should by no means be interpreted as negating the fact that public ownership still dominates a number of important economic sectors and accounts for a sizable part of the country’s economic assets and output. Nor should it be seen as indicating the state’s unwillingness and inability to hold onto and support the remaining public enterprises and to even reclaim some of the territories already dominated by private capital. What I seek to explain is why the state was unable to retain the overwhelming majority of public enterprises into the twenty-first century and what has constrained its ability to curb the growth of private enterprises in most economic sectors.
I begin my exploration with an overview of the changing fate of the private sector. Chapter 1 traces the evolution of private ownership since 1949, with a focus on several major twists and turns that profoundly changed the space of private business during and after the Mao era. This survey is further substantiated with a descriptive statistical mapping of a number of important features of the re-emerging private sector and foreign investment, including organizational forms, geographic variations, sectoral distributions, and changes over time. In so doing, the chapter brings up a number of key questions that will be addressed in the ensuing chapters.
Chapter 2 provides a macro analysis of the implications of China’s evolving demographics for policymaking. The main story is that the pressure to create jobs was both a most important initial trigger and a persistent force for the shift in government policy—especially central government policy— toward the private sector. The lasting impact of Maoist policies on population and economic development, the aftermath of political radicalism during the Cultural Revolution, structural changes in the economy, and the cohort effects of the population were among the factors that constrained the choice set of CCP leaders and shaped the orientation and timing of their decisions on the private sector.
In chapter 3, I examine the evolution of the fiscal system, with a view to setting up a backdrop for the analysis of its implications for privatization in subsequent chapters. What the chapter illustrates is that the post-Mao fiscal structure was path dependent in that it continued to bear some essential features of the old system while seeking to address some of its main problems through decentralization and with the incorporation of a contractual element in fiscal relations. These features and changes had a profound impact on the economic strategies of local governments concerning public and private enterprises. Unintended consequences of earlier reforms led to a major fiscal restructuring in the mid-1990s. It redefined the self-interest calculus of local political actors, whose responses hastened the decline of public enterprises.
Chapter 4 explores the ramifications of the evolving demographic conditions and fiscal reforms for the careers of local political leaders. The focal issue is the moral hazard embodied in these leaders’ opportunistic use of public enterprises for career advancement and revenue control and manipulation during the 1980s and early 1990s. Their dominant strategy was to promote sales growth without a close link to profitability among the public enterprises under their purview. This strategy helped grow output, revenue, and employment, thereby contributing to the political and economic interests of local officials. Yet it also undermined the financial and organizational health of public enterprises and pushed them down the road to destruction.
Chapter 5 investigates the strategies of local officials in places where the sales growth strategy faltered in the early years of reform. An alternative strategy was to tolerate and even facilitate the expansion of private business beyond centrally set limits, as illustrated by the much-studied case of Wenzhou in Zhejiang province. Echoing a prevailing view on the important role of entrepreneurship in early privatization, the chapter goes further to investigate how and why local entrepreneurial forces survived Maoism in the peculiar local setting, and how their interplay with extraordinary economic hardship developed into both a driving force for local policy change and a shield against the political risks that had to be contained. This re-examination of the case material also sheds light on why Wenzhou was an “aberration” and why many regions that lagged in public-enterprise-led growth did not actively promote private business before centrally initiated ownership restructuring.
Chapter 6 extends the analytic logic of this investigation to the privatization function of FDI. The focal issue is how and why foreign investors were able to overcome centrally imposed regulatory and policy constraints on their entry, expansion, and organization before the implementation of trade liberalization associated with China’s WTO accession in 2001. Again, rule bending by local governments was the centerpiece of the story. As in the case of locales experiencing early privatization, local officials took calculated political risks by using economic hardship and the benefits of FDI for addressing revenue and employment imperatives as justifications. The extent of their deviations from centrally set boundaries nevertheless varied, depending greatly on the bargaining power of local political leaders vis-a-vis their supervising authorities. In particular, I will show that whether a locale was perceived as a major fiscal burden or an important resource contributor to higher-level authorities was a major differentiating factor.
The convergence of the erosive forces discussed in chapters 4-6 culminated in a massive sell-off and closure of public enterprises, as well as wide- ranging relaxation of restrictions on private economic activities, in the second half of the 1990s and beyond. Chapter 7 explores how the tipping point came about and what set the tempo and shaped the scope of the precipitous changes that followed and spread beyond the initial limits set by central leaders. It shows that the trigger came from a confluence of challenges rendered by the sales growth strategy, the 1994 fiscal restructuring, and persistent and evolving demographic forces. The pace and extent of subsequent ownership change were greatly influenced by a political bandwagon effect, a shift in the focus of local officials’ self-interest calculus, and an intensification of insider manipulation in the public sector. The interplay among these forces represented a continuation of the same opportunistic rationality that had driven the behavior of political actors up to the tipping point and beyond, including CCP leaders who, in seeking expedient solutions to historically and structurally engendered problems and challenges, kept sidestepping ideological principles to look after their greatest interest of all—immediate regime survival.
The process of privatization, therefore, mirrors the decline of communism in China. Revealing the underlying mechanisms at work in this fundamental transformation not only enriches the understanding of China’s economic transformation but may yield useful clues for addressing many issues ofbroader theoretical interest and empirical relevance. The concluding chapter discusses the implications of the findings of the book for institutional analysis. I will show how a mechanism-focused view can make integrative and fruitful use of the analytical tools furnished by the existing literature. In particular I focus on the role of unintended consequences of rule-compliant behavior, the sustaining factors for noncompliance and its consequences to institutional instability, and the causal channels of path dependence in an evolutionary process of institutional change. It is the forces associated with these mechanisms that have contributed to defining and redefining the choices of political and economic actors and fashioning the outcomes of their strategies and interactions.
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