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Institutional Stability and Unintended Consequences of Rule Compliance

The process of privatization in post-Mao China represents a case of fundamental institutional change largely driven by endogenous forces. Explaining this change requires an examination of what affects institutional stability. The beginnings of the process can be traced to the end of the Mao era, when the state faced increasing difficulties in addressing the employment and revenue imperatives, as discussed in chapters 2-3. What the post-Mao leaders sought to do was to tackle the cumulative challenges by shifting their policy priority from class struggle to economic development and by ameliorating the central planning system with limited market mechanisms. But unlike the former Soviet bloc, where political revolutions ushered in drastic ownership transformations, China did not set out to privatize existing property right arrangements.[1] Instead the initial focus of reform was on changing the behavior of political and economic actors by altering the incentives and constraints within a framework of predominant public ownership. Among the measures to facilitate this dominant strategy were fiscal decentralization, use of new metrics for political performance assessment, and marketization of public enterprise (chapter 4).

These new arrangements induced active efforts by local officials to promote economic growth and marketization in the 1980s and early 1990s.[2] Yet the formative institutional platform supported by these arrangements was unstable in that the progrowth and promarket responses from local officials were mixed with pursuits of self-i nterest that rendered the new rules increasingly unsustainable. A major consequence of such pursuits in the face of the demographic and fiscal legacies of the old system is the delinking of financial health from sales expansion among public enterprises. It was driven by a widely used strategy that served the interests of local officials (in terms of career benefits and resource control) and at the same time brought about short-term outcomes in line with what the central rule-makers intended to achieve—that is, addressing employment and revenue imperatives through the marketization of public enterprises. With the growth of the moral hazard that accompanied the rule-compliant behavior under this strategy, however, the sustainability of public enterprises became increasingly untenable. What unfolded as a result was a paradoxical story: the stewards of public ownership turned out to be its main destroyers.

My analysis of the mechanisms leading to the debacle of public enterprises illustrates that rule compliance is a necessary but insufficient condition for institutional stability. This, of course, is by no means a novel finding. There is a long-standing tradition in the study of organizations and institutions that focuses on the potential of institutional rules being used as multipurpose tools that can engender consequences unintended by rule makers (e.g., Perrow 1986; Scott 2001, 2013; Selznick 1949). While the pertinent theories are largely developed or applied to account for “aberrations” in relatively stable systems in the West, this focus is equally relevant for the study of nonWestern systems that undergo fundamental transformations. Yet it appears to be sidelined in the more recent literature on institutional change, where considerable attention has been drawn to directionally predictable correlation between rule following and institutional stability.

As I have highlighted in the introduction, in explaining the sources of institutional instability and change, the “rationalist” perspective in institutional economics focuses on the breakdowns of rule-compliant behavior due to exogenous shocks and/or the ramifications of quasi-exogenous factors, whereas the “historical institutionalism” school in political science emphasizes the cumulatively eroding effects of noncompliant behavior from within an existing system. What I have presented in the preceding chapters shows that rule-compliant behavior may be a Janus-faced phenomenon. Investigating how this potential duality plays out in the process of institutional change helps bridge the gap between the two contrasting views on institutional (in)stability and complements their strengths. It also complements theories that emphasize the role of the local developmental state (e.g., Oi 1992, 1999) and federalism (e.g., Montinola, Qian, and Weingast 1995) in China’s economic change. A common focus of these theories is the immediate stimulating effect of progrowth policies adopted by local officials in response to new political incentives and fiscal decentralization. What my account seeks to illuminate is the implications of these policies for institutional change over a longer time span and in ways deviating from centrally intended course.

A key factor for understanding the unintended consequences of rule- compliant behavior is opportunism. It is widely considered to be a major threat to the governance capacity of established institutions (e.g., Williamson 1985). As an extension of this view, my analysis suggests that opportunism embedded in rule compliance may also play a catalytic role in shaping and timing the ebb and flow of superseding institutional orders. In the post-Mao era this role grew partly because of the lack of effective safeguards against opportunistic uses of newly adopted rules, and partly because of the initially promising outlook of the rule-compliant behavior that accommodated such uses. I shall further discuss these issues in the later section on path dependence. What should be noted here is that opportunism is not only a widespread behavioral trait among local officials. Central leaders of the CCP have also been opportunistic in their policymaking and adjustment. Although they are preoccupied with more encompassing agendas than local officials, what ultimately drives their behavior is the calculation of their own self-interest, which is closely tied to regime survival. In seeking to address this fundamental concern under the constraint of new and evolving realities, they have had to resort to short-term fixes at the expense of further drifting away from communism, making it harder for subsequent leaders to use the Party’s ideological mantle for the legitimation of their political rule.

  • [1] Decollectivization of agriculture and permission for off-farm self-employment in the countrysidedid lead to the creation of new private assets. But land as the most important resource in the rural economy remained publicly owned. New forms of private ownership also appeared in urban areas with theentry of foreign capital and the legalization of urban self-employment. Their significance in the economy was nevertheless insignificant in the early years of reform.
  • [2] As noted in chapter 4, there is a sizable literature on the impact of such efforts on output (GDP)growth and on the patterns of political elite mobility. In contrast, the focus of my investigation is theimplications for economic institutional change.
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