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The "Wenzhou Model" of (Early) Privatization

Understanding the mechanisms that kept local entrepreneurial forces from being stifled by Maoist socialism helps explain the development of the private sector in Wenzhou after 1978. This process was an outgrowth of the persistent private economic elements in the prereform rural household sector, but it was by no means a smooth sail. There was continued suppression of the private sector after the start of economic reforms, as the official policy was to promote economic growth through public enterprises. In May 1982, for example, there was a major crackdown on private business in Wenzhou. Eight prominent entrepreneurs, known among locals as ba dawang, or “the eight kingpins,” in the township of Liushi were given jail sentences for engaging in “speculative buying and selling” (touji daoba), which was an economic crime at that time.

The crackdown campaign took place under the aegis of Yuan Fanglie, the party secretary of Wenzhou.[1] Yuan was appointed to the post in 1981 to clean up the Maoist legacies of political divisiveness and to turn the local economy around. A former vice governor of Zhejiang and a “southbound cadre” from Shandong,[2] he was a pragmatic official as well as a shrewd observer of the party line. When he first arrived, he had yet to consolidate his power base,[3] and the macropolitical environment was still quite hostile to private business. While he went along with the prosecution and sentencing of the “eight kingpins,” which was initiated by a special investigation team from the provincial government, Yuan quickly realized that the local entrepreneurial force was so strong that any attempt to suppress it would likely be futile. Equally important was the realization that given the weak base of SOEs and the lack of independent ability for CBEs to grow, private business held a key to local economic growth, which was the mandate of the local government in the postreform era. During the year following the “eight-kingpin incident,” for example, industrial output grew only by a lackluster 3% in Wenzhou as a whole, whereas it shrank by 53% in Liushi, the township where the incident occurred.

Concerns about the negative impact of the incident on the local economy led Yuan to make a series of policy adjustments concerning the private sector. In the month following the incident, the city government issued a note cautioning against expanding the scope of the crackdown campaign to “legitimate” businesses. In December 1982 it convened a mass meeting with some 1,200 representatives of private businesses. Thirty-five of the attendees were invited to share their stories of success, and 171 were honored with a plaque of praise for their contributions to the local economy. The political message was clear: private business would not only be tolerated but encouraged. In a number of internal documents that followed, city government departments and lower-level governments were instructed to facilitate the growth of self-employment, which was the only legally allowed form of private economic activities at that time. In January 1984 the city government reversed the verdict on the “eight kingpins” and set them free. In response, private business rebounded.

Yuan was transferred back to the provincial government in December 1985 (first as head of the Political and Legal Affairs Committee of the CCP and then as head of the provincial court). His successor, Dong Chaocai, was a native ofJiangshan county in western Zhejiang and had been the party secretary ofJinhua prefecture before the appointment. Although he was instructed by the provincial party authority to try to restore the strength of SOEs in Wenzhou, he came to the same realization as Yuan Fanglie after working on the job for a few months (Dong Chaocai 2005). That is, in Wenzhou the private sector was both unrelentingly resilient and indispensable. During his tenure through January 1990, Dong continued Yuan’s approach toward private business. Moreover, under his leadership a number of local regulations were instituted to facilitate the expansion and governance of the private economy in 1987. Among these was a provisional regulation that legalized the longstanding practice of guahu—a fee-based service where public enterprises provided organizational sponsorship to private business people who had no legal-person status under the existing system and thus had difficulty in opening bank accounts, fulfilling bookkeeping requirements, signing contracts, and issuing receipts. Also important was a set of provisional guidelines on the registration and issuance of business licenses to private economic entities with a workforce exceeding the legal limit (of no more than seven people), which effectively granted formal recognition to these organizations before the lifting of the limit in 1988. Another document, entitled Provisional Guidelines on Issues Concerning Rural Shareholding Cooperatives, defined entities that pooled funds from more than two shareholders as shareholding cooperatives—a new and politically less sensitive category between “collective” and “private” enterprises, thereby creating an opportunity for private business owners to gain a legitimate cover for larger-scale operations. In the following six years shareholding cooperatives proliferated in Wenzhou and provided a vital organizational platform for the elevation and expansion private economic activities beyond the confines of the household.

The accommodating policy environment under Yuan and Dong was conducive to the fast growth of the private sector in Wenzhou before it became a national trend, as can be seen from figure 5.1. What drove their decisions was the benefit of private business for the performance of the local economy, which on average grew by 13.2% per year during 1981-1990 (WZSY1999, 25),

Rule Bending for the Necessary Evil 155

Share of public enterprises in nonfarm workforce, 1984-2004

FIGURE 5.1 Share of public enterprises in nonfarm workforce, 1984-2004

Sources: CSY2001; ZJSY1999; WZSY1999.

higher than the provincial average of 12.7% and the national average of 9.9% (ZJSY2010, 7; CSY 2010, 22). Although both Yuan and Dong were subsequently given “lateral transfers” to similarly ranked positions in the provincial government instead of being promoted, they probably would not have fared better if they had chosen to adopt a hard-line policy against the private sector.

The reason, as Yuan explained more than a decade after his departure, is that “the likelihood of promotion would be next to zero if the local economy was a big mess.”[4] As was the case under the prereform system, however, the act of tolerating or even facilitating private business was politically risky. Indeed throughout their tenures both Yuan and Dong faced warnings, criticisms, and challenges from conservative elements in the central leadership, the provincial party establishment, and the local party-state apparatus. As Yuan told Huang Huang, the party secretary of Anhui province who during a visit to Wenzhou in 1985 expressed admiration for Yuan’s boldness in dealing with the private sector, “There would be a political price to pay” if the matter was not “handled properly” (Huang Huang 2005).

The key to handling the political risk of rule bending was to find strong justifications. To defend the extraordinary measures on the private sector, both Yuan and Dong resorted to the same argument used by local cadres to justify their rule bending for the private pursuits of local citizens in the Mao era. That is, Wenzhou had poor economic endowments and faced tremendous demographic and fiscal pressures. Evidence to back this up was not hard to find. According to one report (Wang Xiaoqiang and Bai Nansheng 1983), decollectivization in the early 1980s released some 1 million surplus rural laborers (out of a rural workforce of 1.85 million) from farming that could not have been absorbed by the weak nonfarm public sector in Wenzhou. Also, given the underinvestment under the old system and the limited increases in revenue in the early years of reform, the city government could barely make the barest ends meet in the provision of public goods and services. In 1982 six (i.e., Yongjia, Dongtou, Pingyang, Cangnan, Wencheng, and Taishun) of the nine counties under the prefectural city were unable to cover their basic spending with the revenue they collected (ZJSY 2010, 543-648). On the other hand, thanks to the remarkable potency of local entrepreneurial forces, there was also immediately demonstrable evidence about the positive role of the private sector in response to the policy adjustments. In 1981 the public sector accounted for some 73% of the net gain in nonfarm employment; in 1990 all the net gain came from the private sector (WZSY 1999, 36, 75). Of the six counties with a budget deficit in 1982, two (Pingyang and Cangnan) generated positive fiscal flows in 1990, and two (Yongjia and Dongtou) reduced the gap between revenue and spending by nearly 50% (ZJSY2010,543-648).

The political risk that Yuan and Dong took was also a calculated one. Both were fully aware of the evolving nature of the CCP’s reform policies (as epitomized in the saying “crossing the river by touching stones”), as well as the division and cleavage within the central leadership over the direction, pace, and depth of reforms. They bet, by and large correctly, on the predominance of proreform leaders and figured that offense would be their best defense. In Yuan’s words, “If you always hide your xifu (wife or daughter-in-1 aw) from public view, people will think she must be ugly.” He seized upon every possible opportunity to raise the profile of Wenzhou through the media and to pitch the case to visiting dignitaries from the proreform camp, including Premier Zhao Yiyang and the influential scholar Fei Xiaotong (who subsequently wrote approvingly about Wenzhou’s private economy and served as a deputy chairman on the Standing Committee of the National People’s Congress during 1988-1998). In May 1985 the term wenzhou moshi or “Wenzhou model” (of household-based economic development) appeared in an article by a reporter from Jiefang Ribao (.Liberation Daily) in Shanghai after interviewing Yuan and touring the city. To capture the attention from higher levels, Yuan used the term to denote a path of economic development parallel to the sunan moshi, or “southern Jiangsu model” (of marketization led by public enterprises) in a report submitted to a proreform think tank (the Rural Policy Research Office of the CCP Secretariat) of the CCP. In 1987 Dong successfully lobbied the central government to make Wenzhou one of the twelve “experimental zones of rural reforms,” where the local governments were given a certain degree of latitude in experimenting with more liberal policies of reform. This gave the city leadership an extra buffer against the political risk of going beyond centrally authorized limits.

The reshuffling of the central leadership following the June Fourth Incident in 1989 and the subsequent slowdown of reforms cast a dark cloud over Wenzhou. Six months later, Dong Chaocai was transferred out of the city, though he was not demoted.[5] Nonetheless, the policy path that he and Yuan had started continued to be followed by his successors, who used the same defense to justify their treatment of the local private sector. Deng Xiaoping’s call for the resumption of reforms and opening in 1992 shifted the focus of national policy from politics back to economic development (Fewsmith 2008), thereby taking some of the pressures off the local leaders in Wenzhou. But it was the exhaustion of the once dominant strategy to promote sales expansion of public enterprises in many other regions, as discussed in the preceding chapter, that before long rendered moot the controversy over Wenzhou and led to the start of the endgame for the dominance of public ownership.

Size of Wenzhou’s public sector, 1978-1997

FIGURE 5.2 Size of Wenzhou’s public sector, 1978-1997

Sources: SYZJS; WZSY1999.

It should be noted, though, that the early privatization in Wenzhou was mainly driven by faster growth of private business rather than a drastic decline of public enterprises in the 1980s and early 1990s. Figure 5.2 shows that the local public sector experienced substantial expansion through the mid-1980s, suggesting that like those elsewhere, the local authorities in Wenzhou initially sought to make heavy use of public enterprises as vehicles of economic growth. The chart also shows that the subsequent erosion of the public sector was gradual. It was not until 1995 that massive closure of factories began, and it was not until after 1997 that significant downsizing of the public sector workforce took place. Table 5.2 further shows that the extent of early privatization also varied among different counties in Wenzhou, though even the county with the slowest pace still had higher level of privatization than the provincial average (to be shown in the next section). In particular, the extent of privatization was generally lower in economically less developed counties (with the exception of Lucheng District, the old city center and home to the majority of the larger SOEs and urban collective enterprises established before the reform). This is interesting in that underdevelopment was a major argument used by the prefectural leaders to justify their rule bending for private business and, given the political shield provided at the prefectural level, it would have been less risky for the poor counties to go farther beyond the national policy limits.

The twist here may be a reflection of the context-specific, multidimensional cost-benefit calculation by local officials in face of the lasting impact of history and changing structural constraints. In comparison with other



% of public enterprises in industrial output in 1993

% of mountains Industrial output and hills in per capita in 1949 surface area (yuan)

Arable land per capita in 1980 (hectare)

GDP per capita in 1980 (yuan)

Industrial SOE output per capita in 1980 (yuan)

Budgetary balance in 1980










Wenzhou city








































































Note: Cangnan was separated from Pingyang in 1981. Information is unavailable for some pre-1981 indicators.

Sources: SYZJS; Chen 1989.

counties in Wenzhou, entrepreneurial forces were relatively weaker in these counties, which have more rugged terrains and thus economically less favorable natural environment than those with more flat areas and shorter distances to the coast and city center (where industrial and commercial activities traditionally clustered). The three counties (Dongtou, Wencheng, and Taishun) with the highest levels of remaining public ownership, for example, had the lowest levels of per capita industrial output in 1949. The initial weakness in the modern sector, coupled with their geographic disadvantages,[6] tended to constrain the capacity of these counties to boost the level of local private industry and commerce quickly, even with more accommodating policies, and to develop a “virtuous cycle” of positive feedback.

In the meantime, the existing public enterprises could still serve as useful vehicles of revenue generation as long as the near-term benefits (taxes— especially indirect taxes—fees, and savings on severance expenses and social governance cost associated with layoffs of existing employees) were not outweighed by the immediate costs (interest payments, nondeferrable principal repayments, and subsidies for losses). Moreover, some of the counties with slower paces of early privatization received fixed fiscal subsidies in the 1980s and early 1990s because they were included on the national list of poverty- stricken counties (Wencheng and Taishun), the provincial list of poverty- stricken counties (Yongjia), or the provincial list of less developed counties (Dongtou, which was recategorized as a district in 2015). These subsidies, however, were conditional on their fulfilling the revenue targets specified in the fiscal contracts with the provincial government. Before 1994 fiscal subsidies were largely administered as lump-sum payments without clearly earmarked spending stipulations. That left open an opportunity for the recipient governments to channel part of the funds to facilitating the cash flow of the local enterprises they owned (especially SOEs and urban collective enterprises at the county level) so that these enterprises could continue to contribute to the generation of revenue (especially sales-related taxes) required by the fiscal contracts. This loop of financing extended the longevity of some local public enterprises. But it faced increasing difficulty with the expansion of more clearly earmarked spending programs in fiscal subsidies after 1993, thus weakening the sustainability and relative significance of the remaining local public sector. The policy behavior of different local officials in the Wenzhou region, therefore, was shaped not only by their broadly shared history but by varying strategic calculations of what would serve their best interest in concrete and evolving subregional settings.

  • [1] Discussion in this paragraph and the following one is based on author’s interviews with Yuan inJune 1998.
  • [2] Yuan was the last “southbound cadre” leading the city. After his departure in 1985, none of the partysecretaries of Wenzhou was a northerner. At the county level, the fading of nonnative leaders startedimmediately after the Cultural Revolution. According to the rosters of county leaders in the countygazetteers of Wenzhou, by 1984 all the county party secretaries were natives of Zhejiang. That effectively brought to an end the three-decade-long divide between native and nonnative leaders in localgovernments.
  • [3] Before Yuan’s appointment, there had already been several rounds of purges throughout the localgovernments in Zhejiang to remove from leading posts officials actively involved in the CulturalRevolution. The merger of the prefectural government and the city government in 1981 gave Yuan a further opportunity to realign the local leadership by excluding those he called “problematic cadres” fromthe downsized party-state establishment. The massive retirement campaign launched by Deng Xiaopingduring 1982-1983 (Manion 1993) resulted in the removal of additional old-timers in Wenzhou’s localleadership teams. While seeing these developments as conducive to reducing political divisiveness,Yuan considered the shift of policy focus from class struggle to economic development, especially thenew political performance assessment system, to be the most important factor that helped rebuild andconsolidate local party-state authority.
  • [4] As to why he was not promoted, his answer was: “I would have fared much worse if not for thepolicies I adopted. Besides, I was too old [note: he was born in 1929] for a more important position.Deng Xiaoping said we old cadres should let younger people take over” (author’s interview with YuaninJune 1998).
  • [5] Dong was transferred out to head the provincial Economic Reform Commission. Other than theunfavorable political climate at that time, age might be a factor for his remaining career in officialdom after Wenzhou. Born in 1932, he was fifty-eight when the reassignment came in 1990. In contrast,Dong’s successor, Liu Xirong, has had much greater upward mobility despite his extensive work experience (1981-1991) in the controversial policy environment of Wenzhou. Born in 1942, Liu was a deputyparty secretary (1983-1989) and a deputy mayor (1983-1988) in charge of economic affairs under YuanFanglie. He was promoted to the position of mayor in 1988, when Lu Shengliang, the fifty-nine-year-oldincumbent, was semiretired to chair the local people’s congress. Liu took over Dong’s position as partysecretary in 1990. A year later he was appointed as the head of the provincial Discipline InspectionCommission of the CCP. He was subsequently elevated to be a deputy provincial governor, a deputy provincial party secretary, and eventually a deputy secretary of the Central Discipline InspectionCommission of the CCP. It is interesting and a bit ironic that Liu’s deputy, Chen Wenxian, who wasmayor when Liu Xirong left Wenzhou to head the provincial antigraft body, was not promoted to succeed him. Chen was later jailed on corruption charges, in part related to his tenure in Wenzhou. Hiscase is a reminder of a parallel force influencing the relationship between local political and economicactors (Lin 2001).
  • [6] Dongtou consists of islands, and Wencheng and Taishun are the most mountainous counties inWenzhou.
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