Home Political science Dancing with the devil : the political economy of privatization in China
The story of Wenzhou’s early privatization yields some useful clues for further exploring the variations in the evolving fate of private ownership in the reform era. What it suggests is that three important factors combined to influence the calculus of local political actors, thereby conditioning the development of private business before the exhaustion of public enterprises in the mid-1990s as the leading force of marketization. First, the tendency of local governments to tolerate or even facilitate the private sector hinged upon the initial strength and sustainability of the local public sector, which posed a major competing incentive in their decision-making. Second, to benefit from economic development led by the private sector, local political actors needed to tackle the pertinent cost—that is, the political risk of rule bending. Doing so required plausible and strong justifications, which in turn depended greatly on the economic conditions shaped by local geography and history. Third, the strength of the local entrepreneurial forces could directly affect the intensity of the initial impetus for rule bending for private business, as well as the delivery of immediately demonstrable results necessary for sustaining and expanding the rules bent.
To see these implications from a broader view, it is useful to take a comparative snapshot of Wenzhou and other regions in Zhejiang province. The year for this comparison is 1993, when industrial SOE employment ceased to increase and the fiscal contract system between central and local governments was about to end. Table 5.3 shows that in 1993 the prefectures in northern Zhejiang mostly had higher levels of remaining public ownership than those in southern Zhejiang. The strength in public enterprises at the start of economic reforms was probably what retarded early privatization in the northern region despite its strong entrepreneurial traditions (especially in places like Ningbo and Hangzhou) before the revolution and despite efforts to revive such traditions after the start of economic reforms (Shang Jingcai 1989).
Sources: CSY1998; ZJSY1987; SYZJS; gazetteers of the cities included in the table.
In contrast the generally faster paces of early privatization in the southern region were correlated with less favorable resource endowment (topography and land-population ratio), poorer initial economic conditions (industrial output, GDP per capita, and fiscal imbalances), and weaker initial strength of public enterprises (SOEs and commune and brigade enterprises). As the Wenzhou case illustrates, all these conditions were unfavorable to sustaining the expansion of local public enterprises but conducive to justifying rule bending for private business.
A twist that merits attention is that southern prefectures in Zhejiang had lower levels of industrial output per capita in 1949. This raises the question of how local entrepreneurial forces might have mattered to the pace of early privatization. What the lower levels reflect is the relative weakness of southern prefectures in modern industries at the time of the communist revolution, as the output from household-based handicraft activities was counted as part of agriculture in statistical reporting. Ironically, privately owned modern industries tended to be more completely wiped out during the subsequent socialist transformation than household sidelines in rural areas. The latter tended to be more difficult to eradicate, especially in face of shallow state penetration and deeply divisive local politics in places like Wenzhou, thereby offering a niche for the persistence of private economic pursuits. For the initial burst of entrepreneurial forces after reform, what mattered most was the private economic elements that had managed to survive socialism, rather than the level of prerevolution industrialization per se. In this regard, southern prefectures appear to have had an edge, as indicated by their lower levels of CBE share in nonfarm output in 1978.
A case in point is Taizhou. Located on the coast and with a vibrant precommunist local business culture, this prefecture had a geographic and socioeconomic profile very similar to that of neighboring Wenzhou (table 5.4). It was also a fast mover in early privatization. As in Wenzhou, local politics in Taizhou featured dominance by “southbound” officials and serious divisiveness (which affected local state governance capacity) during the Mao era, as can be seen from the accounts of recent local history in city and county gazetteers. But early privatization in Taizhou proceeded without much fanfare during the 1980s and early 1990s. Such a low profile might have partly been the result of a calculated strategy to free-ride on the initial political risks Wenzhou had taken. In the words of a former deputy mayor (informant,
16/1997), “We were always half a step behind Wenzhou in these matters [concerning the private sector]. That gave us an opportunity to steer clear of the land mines, so we were more than happy not to take the lead.”
On the other hand, post-1949 industrial buildup could have implications for the pace of early privatization. In 1993, for example, Quzhou retained the highest level of public ownership among the prefectures in southern Zhejiang. It had been given sizable industrial investment in the Mao era and developed into a major base of Zhejiang’s chemical industry dominated by large SOEs. That investment had a spillover effect on the development of local support industries, including those organized both as SOEs and as collective enterprises, as well as an enhancing effect on the local economy. In 1980 Quzhou had the highest GDP per capita in the southern region, though it remained far below the levels of the prefectures in northern Zhejiang. Although the prefecture is more mountainous than Wenzhou, the relief brought about by the modern sector (e.g., through revenue it generated) helped alleviate local economic hardship, making it difficult to justify policies favoring the private sector if attempts had been made in that regard during the early years of reform. In the meantime, as an inland region with limited transportation links, Quzhou did not have a significant presence of modern industry and commerce before the revolution, as indicated by the low level of industrial output per capita in 1949; nor did it have a strong tradition in rural handicraft industries, as may be inferred from the low level of nonfarm output per capita in 1980. That reality affected the development of entrepreneurial forces that otherwise could have brought about significant pressures for early liberalization of policies toward the private sector. Like many other locales in the country the local public sector experienced significant expansion in the 1980s, especially the second half of the decade (1985-1989), when industrial output on average grew at 19% per annum for SOEs and 41% for collective enterprises (SYZJS, 2:1403). The growth rate of these enterprises sharply slowed down to an average of 11% and 16% respectively during 1990-1997 years. But public enterprises, while experiencing some erosion, remained dominant through 1997.
An equally interesting case in the southern region is Lishui, a prefecture adjacent to Wenzhou (map 5.1). A landlocked mountainous region, it has more rugged terrain and higher elevation than Wenzhou and has always been the poorest prefecture in the province. Such severe economic hardship should have provided a very strong ground for justifying early privatization. Yet that does not appear to be what had happened. In 1993 it had the second highest share of industrial output accounted for by local public enterprises in the southern region (table 5.4). Throughout the 1980s and early 1990s, when Wenzhou experienced fast growth in the local private sector, Lishui saw continued dominance of the public sector. Unlike Quzhou, which had received sizable government investment for the development of the chemicals industry in the prereform era, Lishui only had a moderate buildup of small and medium-sized SOEs and collective enterprises located in and around county seats in the region, which accounted for only 1.7% of the provincial industrial output in 1980 (ZJSESY1986, 193, 596). Like many other regions in the country, however, both SOEs and collective enterprises experienced significant growth in the early years of reform, with an average rate of 25.7% and 29.8% per year during 1984-1988 respectively. The growth rate slowed down to l8.6% and 6.2% per year respectively during 1989-1993 (ZJSESY 1986, 193, 596; ZJSY1988, 383-384; ZJSY1989, 420-422; ZJSY 1990, 424-426; ZJSY 1991, 481-482; ZJSY 1992, 472-473; ZJSY 1993, 484; ZJSY 1994, 403). Yet the private sector did not achieve a concurrent growth that was fast enough to overtake the public sector as the leading force of the local economy.
The contrast between Wenzhou and Lishui was a reflection of the different attitudes of their local governments toward private business. Despite severe economic hardship, local authorities in Lishui sought to rely primarily on public enterprises to address their political and economic interests. An important reason for this is that entrepreneurial forces were much weaker in Lishui at the start of economic reforms. As can be seen from table 5.4, it had not only the lowest level of industrial development in 1949 but the lowest private share in nonfarm rural economic activities in the southern region at the start of reforms. As a result of such initial conditions, private economic elements neither generated strong enough pressures for drastic relaxation of existing restrictions nor demonstrated (through their rule-breaking behavior) sufficient supporting evidence for local officials to justify such a move. It is not surprising that local officials pursued a “play safe” strategy. As a leading official in the prefectural Economic Commission explained (informant, 18/1996):
We are different from Wenzhou. Even though we are neighboring regions, our starting point was lower. Our SOEs and collective enterprises were the weakest in the province, but they were the strongest part of the local economy. We have to count on them to invigorate Lishui’s reform and development. ... I must also admit that, overall, private entrepreneurs in Wenzhou are savvier and more enterprising. They have a long-standing tradition from before the liberation [in 1949]. They pushed the government hard, oftentimes by doing things illegally, yet the [Wenzhou] government has managed the situation quite well, and as a result their economy has prospered. That’s not the case here—we have overseen more orderly changes. Of course, we have gradually relaxed the rules on private business as well, partly by learning from Wenzhou. We cannot go too far and too fast, though. What would happen if we took big steps to promote private business, but the private sector did not quite measure up ? That would be very risky.
However, the expansion of public enterprises in Lishui during the 1980s and early 1990s did come with a cost that became increasingly unbearable. In 1993 the debt-equity ratio was 287% for industrial SOEs and 242% for industrial collective enterprises at or above the level of township; the percentages of loss-making enterprises were 37% and 46% for these groups respectively. The fiscal restructuring and banking reform in 1994 dealt a further blow to the local public sector, making it harder to keep public enterprises afloat through manipulation of tax burdens and to leverage bank loans. The majority of local SOEs nevertheless managed to linger on until the massive privatization in 1997-1998. But the decline of collective enterprises quickly became irresistible. The total number of collective enterprises in the industrial sector fell from an all-time high of 1,823 in 1992 to 1,013 in 1995 and then to 447 in 1997 (SYZJS, 2:1810).
Some of the causal links suggested by the Wenzhou case and the cursory cross-sectional comparisons within Zhejiang are examined more systematically in a data analysis with greater geographic coverage and time span (Li and
Lin 2016). It finds a strong correlation between early movers in private business in the post-Mao era and their prior (unauthorized) involvement in private economic pursuits under Mao. Another finding is that early slowdown of sales growth among local public enterprises and deterioration of their financial health and local fiscal conditions are not strong predictors of early privatization. But their effects on early privatization are enhanced when proxies for both local economic hardship and strength of entrepreneurial forces at the start of reform are included in the regression analysis. These results are consistent with what the Wenzhou story reveals. Finally, also noteworthy is a finding from another data analysis, mentioned earlier in the chapter (Chen and Lin 2016), of factors affecting the promotion of prefectural officials. That is, during the 1990s there was no significant difference in the likelihood of promotion between leaders in locales with early privatization and those in locales with a strong and predominant public sector. Rather it was “adequate” economic performance, however achieved, that served as a necessary enabling condition for the career advancement of local leaders. This sheds some light on the motivating forces behind local officials’ behavior where the initially dominant strategy played out differently.
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