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The Tipping Point and Beyond

in September 1 997, two months after the outbreak of the Asian financial crisis, the Chinese Communist Party held its Fifteenth Party Congress. In the concluding report to the congress, General Secretary Jiang Zemin announced three important changes in the CCP’s policy on ownership-related issues. First, public ownership could take diverse forms, including not only public sole proprietorship but various public-private shareholding arrangements with public controlling interests. Second, the state sector needed to be downsized and restructured according to market principles, whereas the remaining SOEs should consist mainly of large enterprises and concentrate in strategically important sectors. Third, the private sector should be encouraged to “play an important part in meeting the diverse needs of citizens, increasing employment, and boosting the development of the national economy” (Jiang Zemin 2006, 2:20).

What followed was a massive wave of privatization. Within a few years the size of the public sector was substantially reduced. From 1997 to 2000 the total number of industrial SOEs went down from 98,600 to 53,489. It further dropped to 34,280 in 2003, when the SASAC was established to consolidate the control over the remaining nonfinancial SOEs (CIESY 2005, 279). Although the collective sector was not explicitly mentioned for restructuring and downsizing at the Fifteenth Party Congress, the repercussion of the policy change was equally profound. From 1997 to 2003 the total number of township and village enterprises (TVEs) declined from 1.29 million to 0.29 million (SCTE, 55; CTEY2004, 105). Altogether, the share of the entire public sector in nonfarm employment during the same period decreased from 57% to 23%, as shown in table 1.7.

The retreat of the CCP leadership from a full-front approach to curbing the erosion of public ownership was a response to the evolving realities in the first two decades of reform. In particular, the inability of the public sector to cope with growing job provision pressures and the deteriorating financial health of public enterprises made it imperative for the central authority to change strategy. But their subsequent decline was far more precipitous and widespread than CCP leaders had anticipated. It was hastened by a bandwagon reaction among local governments to the central policy change in 1997. The challenges faced by public enterprises were further exacerbated by a shift in the focus of the self-interest calculus of local officials from industrial development to urbanization, and by insiders’ strategic manipulation and pursuit of self-enrichment opportunities during ownership restructuring. Together these forces combined to accelerate and deepen the process of privatization.

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