Home Political science Dancing with the devil : the political economy of privatization in China
Noncompliance and Political Risk Management
Unintended consequences of compliant behavior in the administration of public enterprises were not the only contributing force to privatization in the post-Mao era. A parallel path to the rise and spread of private ownership is rule bending by local officials for genetically private enterprises and foreign capital. This represents a form of noncompliant behavior, as it often stretched or exceeded the limits of the formal rules defined by the central leadership at different stages of the reform process. Such behavior was motivated by efforts to seek the same kind of career benefits and resource control under the new political incentive system, by responses to private incentives from collusive alliances and/or favor seekers, or by both.
Noncompliance with institutional rules inevitably involves varying degrees of political risk for local officials. How they managed such risk during the 1980s and 1990s is a recurrent theme throughout this book (especially chapters 5-6). Four major findings are particularly noteworthy. First, noncompliance was often a corollary of the weak ability or failure of local officials to stay the course prescribed by the prevailing institutional rules. In most of the regions experiencing early privatization, bending formal rules for private business did not become the dominant strategy before the faltering of public enterprises. Even in Wenzhou—the most-cited case of early “aberration" the initial policy stance of the local government was to promote public enterprises.
Second, a common tactic for containing the risk of local officials’ noncompliance with the central policy bias toward public ownership is to fabricate justifications in relation to the twin imperatives of revenue and employment. Case study findings and statistical analyses both point to the importance of such maneuvering among early movers of privatization. It should also be noted that the political risk taken by many local officials in this regard was a calculated one. It was often buffered with claims of severe economic hardship beyond the responding capacity of local public enterprises, and with attempts to portray policy deviations as innovative coping measures under the vague rubric of “reforms" as illustrated by the story about the political leadership in Wenzhou during the 1980s (chapter 5). My investigation into the relationship between risk management and variations in ownership change among different regions and locales also points to a need to expand the analysis of the role of factionalism in economic institutional change.
Existing studies of factions in Chinese politics focus on the personal characteristics of political leaders at various levels, such as policy preferences or factional affiliations (e.g., Bo 2002; Cheung, Chung, and Lin 1998; Huang 2000; Shih 2008). Considerable efforts have been made to ascertain their ideological persuasions or inclinations, to delineate factional origins and boundaries among shifting political alliances, and to separate the policy changes introduced by incumbents from those initiated by their predecessors under a generally transient tenure system. What my study shows is a different angle from which to analyze the roles of factionalism for understanding institutional change. That is, factional divisions (and more discrete personal rivalry as well) are an important factor that engenders and sustains political risks, thus posing a major constraint on noncompliant behavior and conditioning its cost and outcome. Moreover, intense factional divisions may also weaken the governance capacity of the state and thus leave open opportunities for the persistence and survival of entrepreneurial forces under Maoism and for social and economic actors to break away from the existing system. A case in point at the local level is Wenzhou, discussed in chapter 4. The rule-breaking behavior of nonstate actors in turn may also affect the political strategies of state actors, which pertains to the next finding.
Third, the extent and sustainability of local policy deviation from the centrally defined focus on public ownership depended greatly on the demonstrable results it could help deliver. This is where the strength of entrepreneurship among local economic actors could have a major catalytic and reinforcing effect on institutional change. Where economic hardship was severe but both the local public sector and the local entrepreneurial forces were initially weak, early privatization often failed to materialize, partly due to the risk aversion tendencies among local officials in the absence of deliverables. In contrast, such tendencies were reversed in places like Wenzhou because of a long-standing and tenacious business culture rooted in local history, damage rendered by divisive politics to the governing capacity of the local state in the Mao era, and the initial weakness of local public enterprises in the nonfarm sector. What this analysis represents is an extension of the investigation into the role of entrepreneurship in China’s economic change. Existing studies focus on the interactions between entrepreneurs and political actors (e.g., Huang 2008; Tsai 2002, 2007). My findings suggest that it is equally important to consider the impact of such interactions on those between political actors and, through the latter, on institutional stability.
Fourth, noncompliant behavior is also conditioned by the dependence relationship between rule-enforcing authorities and subordinate political actors under an organizationally potent, Leninist state system. The more the former depends on the latter, the greater the space for the latter to maneuver for leniency in enforcement against noncompliance (and hence containment of the political risk for local policy deviations); and vice versa. In the analysis of the role of FDI in privatization I have discussed two types of dependence of a superior level on a subordinate level of government in China’s multilevel political system (chapter 6)—that is, dependence for contribution of revenue and employment and dependence for alleviation of resource strain on spending. This helps explain the bipolar pattern of rule bending for the organizational forms of FDI and the varying depths of privatization driven by foreign capital across different regions. It also points to an important mechanism of intragovernmental interaction that has yet to be more clearly demonstrated in the existing literature on central-local relations (e.g., Cheung, Chung, and Lin 1998; Montinola, Qian, and Weingast 1995).
The above findings are all consistent with what the “historical institutionalism” school emphasizes—that is, the impact of noncompliant behavior of change agents on institutional stability. Yet at the same time they also illustrate the importance of an issue that is not explicitly explored by the school— that is, risk management or containment for noncompliance. This issue is of particular relevance for understanding evolutionary processes of institutional change, where the degree to which deviant behavior can be sustained and expanded hinges greatly on how costly it is to break or move away from the formal rules. As I have pointed out in the introductory chapter, accounting for the role of noncompliance in institutional change may benefit from an extension of the “new institutionalist” view in sociology and organization studies, which considers the difficulty of legitimizing deviant behavior to be a key factor in institutional stability. The findings just summarized illustrate two related conditions under which such difficulty may be reduced, resulting in increased likelihood of institutional instability and change. That is, rule makers and enforcers are made to perceive certain deviant behavior as beneficial, and the perceived benefit of tolerating such behavior is deemed greater than that of suppressing it. Understanding how these mechanisms develop and how they subvert an existing institutional order in a transitional economy like China requires a close examination of the path-dependent contexts in which the choice sets and cost-benefit calculus of political actors are defined and redefined.
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