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At the end of the Mao era China entered a new phase of demographic transition, with an abundant and increasing supply of labor and a declining ratio of nonworking to working people. It coincided with the start of economic reforms. The timing of the coincidence was in part quickened by the family planning policy started in the early 1970s. The resultant potential of a “demographic dividend” not only represented enormous opportunities for economic growth but posed formidable challenges of job creation to the new CCP leaders. Like rulers in other political regimes, they could hardly afford to ignore these challenges, which were of essential importance to the livelihood of citizens and therefore to the CCP’s attempt to shore up legitimacy after the turmoil and devastation of the Cultural Revolution. To accommodate the employment need of massive numbers of job seekers and to make productive use of the large and fast-growing workforce, a new economic space had to be created and expanded outside the existing institutional framework, especially the property right arrangements based on public ownership.

The trigger, extent, pace, and form of the policy responses in the years to follow were nevertheless conditioned by the spatial, occupational, and cohort characteristics of the population. These characteristics in turn had been shaped by the long-lasting impact of past institutions under the Maoist population policies and industrialization strategy, and by contingencies that immediately preceded the post-Mao reforms, such as the short-lived radicalization of schooling and rustication of urban youths. With greater concern than local governments about regime survival and as the main initiator of most of the relevant policies to cope with the challenges from demographics, the central government played an important part in this causal story of endogenously induced institutional change.

In face of the hardening constraints from changing demographics, it made a series of moves to reset the rules on private ownership, including the decisions to legalize self-employment in 1980, to lift the size limit on private enterprises in 1988, to give formal recognition to the private sector as an “integral part” of China’s new economy in 1992, and to undertake ownership restructuring among public enterprises starting from 1997 while concurrently relaxing remaining restrictions on the private sector. Within the state system, it redefined the criteria of performance assessment for local officials and pushed them to pay closer attention to the issue of job creation and employment. As will be discussed in chapters 3-6, these moves set in motion and further fed into a process of interactions where the responses from local political and economic actors often went beyond the initial limits set by the central authority but many of the earlier deviations were amnestied and even incorporated as elements in subsequent central policy changes because they provided practical solutions to the existential concerns of CCP leaders.

Demographic constraints, however, are only part of the driving forces in the process of privatization. An important question that arises from the foregoing account is why the state became increasingly unable to tackle the challenges of demographic change within the institutional boundaries of public ownership. Addressing this question entails an understanding of the evolving public finance system and a close examination of the job creation capabilities of public enterprises. These are the focal issues of the next two chapters.

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