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Promoting sales expansion through local public enterprises was the dominant strategy of economic development among local governments before the mid- 1990s. This strategy was lodged in the “regional property rights” structure carried over from the prereform era. It was ideologically consistent with the new thinking of the post-Mao leadership on market socialism and thus involved low political risk. It helped address the career concerns and resource control agendas of local leaders under the new political performance assessment system and fiscal structure. At the same time, it also accommodated the interests of many lower-rank local officials in charge of economic affairs. The pursuit of this strategy, however, undermined the fundamental financial and organizational health of public enterprises. Transient tenures, weak accountability of administrative behavior, and lax financial discipline combined to compound the coevolving moral hazard problem, which eroded the staying power of the strategy and ultimately rendered it self-defeating.

It is important to note, though, that the extent to which local governments pressed on with the strategy was not uniform over time and across regions. A separate study based on analysis using data from the industrial sector (Li and Lin 2016) finds considerable variation both among different sub-provincial locales and relative to the starting years of comparison for the same locales before massive privatization began. In some places, strong sales growth among local public enterprises lasted all the way to 1997, whereas in some other places growth rate peaked as early as in the mid-1980s. Yet the slowdowns were not accompanied by a reduction of financial leverage and improvements in profitability, suggesting the strategy might still have been in play for some time, but with poorer results. Nor was early slowdown alone a reliable predictor of early privatization. Indeed the public sector remained dominant in some laggard locales despite slowing growth and deteriorating financial health of local public enterprises. In the next two chapters, I will explore the conditions under which local officials ventured to develop parallel or even alternative strategies to address their self-interest. In particular, I will examine how they tackled the political risks of tolerating and facilitating private business and foreign capital beyond the limits set by the central authority, and how variations in this endeavor help us understand the diverse patterns of privatization prior to the tipping point in 1997.

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