Entities and Structures in the Embedding Process

Social Development Experiences in China

Qingong Wei Hanlin Li

Entities and Structures in the Embedding Process A Sociological Analysis of Changes in the Government-enterprise Relations

Social Development Experiences in China Chairman of Editorial Board: Li Yang Editorial Board Members: Ge Daoshun, Li Hanlin, Liu Baiju, Qu Jingdong, Shen Hong, Zhe Xiaoye

This book series brings together the latest research results of Chinese sociologists to summarize and analyse the process, mechanism and experiences of China’s social development since the economic system reform. The analyses are tackled by looking into seven inter-relationships that are most often discussed among sociologists in observing the social transition in China: the relationship between the state and society; the relationship between the state and market; the relationship between the state and peasants, the relationship between the central and local governments; the relationship between government and enterprises; the relationship between urban and rural areas; the relationship between labour and capital.

More information about this series at http://www.springer.com/series/15691

Qingong Wei Hanlin Li •

Entities and Structures in the Embedding Process A Sociological Analysis of Changes in the Government-enterprise Relations

123

Qingong Wei Chinese Academy of Social Sciences Beijing, China

Hanlin Li Chinese Academy of Social Sciences Beijing, China

Translated by Longgao Deng Beijing International Studies University, Beijing, China; Jinwei Wang Beijing International Studies University, Beijing, China

Published with financial support of the Innovation Program of the Chinese Academy of Social Sciences ISSN 2520-1557 ISSN 2520-1565 (electronic) Social Development Experiences in China ISBN 978-981-13-2389-8 ISBN 978-981-13-2390-4 (eBook) https://doi.org/10.1007/978-981-13-2390-4 Jointly published with China Social Sciences Press, Beijing, China The printed edition is not for sale in the Mainland of China. Customers from the Mainland of China please order the print book from China Social Sciences Press. ISBN 978-7-5161-5114-3 Library of Congress Control Number: 2018953291 © China Social Sciences Press 2019 This work is subject to copyright. All rights are reserved by the Publishers, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Contents

1 Introduction: A Holistic Analysis Framework and the Research Question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Government and Enterprises “Embedded” in Multifold Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Embeddedness: The Concept and Significance . . . . . . . . . . . . 2.2 The Government-Enterprise Relations in the Interaction of the State and Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 The Government-Enterprise Relations in the State-and-Society Interactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3 The Government and State-Owned Enterprises (SOEs) . . . . . . . . 3.1 Historical Evolution of SOEs and the Analysis of Their Nature . 3.1.1 Historical Tradition: State Control of Market and Domination of Industry . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Historical Development of SOEs in the People’s Republic of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Government and SOEs from the Perspective of “Work Unit System” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Structural Environment: Constraints on the Unitized SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Integration and Control: A Path for Unitized SOEs . . . . 3.2.3 Institutional Changes: The Continuance of Unitized SOEs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 State Marketism: Revisiting the Relations Between Government and SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 State Marketism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 State Marketism and Public Sector of the Economy . . . .

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3.4 Brief Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 4 The Government and Rural Collective Enterprises . . . . . . . . . . . . 4.1 Unintended Consequences of the Institution . . . . . . . . . . . . . . . 4.2 Supplement to Rural Collectivity: Germination and Initiation of Rural Collective Enterprises (from 1958 to 1978) . . . . . . . . . 4.2.1 The “Great Leap Forward” Movement and Establishment of the “People’s Commune” . . . . . . . . . . . . . . . . . . . . . 4.2.2 Advancing in Twists and Turns: The Commune and Brigade Enterprises from 1961 to 1978 . . . . . . . . . 4.3 Unanticipated: The Development and Prosperity of TVEs (from 1978 to 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Structural Environment . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Unintended Consequences of Institutional Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 The Ending: Privatization of Rural Collective Enterprises (1994 and After) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 Structural Environment . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 Unintended Consequences of Institutional Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Brief Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Government and Private Enterprises . . . . . . . . . . . . . . . . . 5.1 Institutional Evolution and the Development of Private Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 The “Pre-institution” Stage of the Private Sector of Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 The Institutionalization Stage of the Private Sector of Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.3 The Institutional Construction Stage of the Private Sector of Economy . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Private Enterprises and the Structural Environment . . . . . . . . 5.2.1 “Hatting” and “Unhatting” of Private Enterprises . . . . 5.2.2 Establishment of Party Organizations by Private Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Political Connections of Private Enterprises . . . . . . . . . . . . . 5.3.1 Economic Manifestations of the Political Connections of Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 The Motivation Behind the Political Connections in Private Enterprises . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Brief Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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6 The Government-Enterprise Relations Change Model . . . . . . 6.1 Interactions Between “Hard Core” and “Protective Belt”: Internal Impetus for Changes in the Government-Enterprise Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 Political Control . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 Ideology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.3 Economic Income . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Structural Environment: The External Constraints Over the Relational Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Macroscopic Environment . . . . . . . . . . . . . . . . . . . 6.2.2 Institutional Environment . . . . . . . . . . . . . . . . . . . . 6.2.3 Relationship Structure . . . . . . . . . . . . . . . . . . . . . . 6.3 The Intersection Model and Internal Mechanism of the Relationship Change . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Embeddedness: Structural Environment for the Relation Change . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Path Dependency: Institutional Arrangements and Inertia of Change . . . . . . . . . . . . . . . . . . . . . . 6.3.3 Ideology: The Social Process of the Relationship Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.4 Unintended Consequences of Institutional Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Brief Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 1

Introduction: A Holistic Analysis Framework and the Research Question

Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. —Karl Marx Scientific explanation consists not in moving from the complex to the simple but in the replacement of a less intelligible complexity by one which is more so. —Claude Lévi-Strauss We seek for the cause, the reason and the balance of things, yet men’s actions in history are generally frenetic, and if not frenetic, often hysterical. Perhaps we should not expect to find any clue from them, but this is our mission. —John King Fairbank

The relations between the government and enterprises are an important part of the social adjustments in the historical course of China’s economic transition, transformation of the government functions and changes of social organizations, and will remain at the core in a rather long period of time. The complexities of these relations and the variability of their change path reflect typical characteristics of China’s holistic reform experience. From the sociological point of view, these political and economic relations are embedded in the broader social structures and relations with very rich connotations of structures, institutions, mechanisms and behavioral rules that can be elevated into the experience. The trace and summary of the changing process of these relations are not only an essential part of the analysis of China’s social development, but also helpful for us to reexamine the basic change path of social relations in China from the perspectives of organization and institution. As a matter of fact, the relations between the government and enterprises in China are not new but a much-researched issue. However, virtually no holistic interpretation has ever been given because the government is hierarchized at different levels and enterprises divided into different types, and moreover, their relations interweave with the relations of central and local authorities, state and market, and state and society, thus becoming particularly complex. The government-enterprise relations are de © China Social Sciences Press 2019 Q. Wei and H. Li, Entities and Structures in the Embedding Process, Social Development Experiences in China, https://doi.org/10.1007/978-981-13-2390-4_1

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facto linked to China’s economic development and a core issue to understand the social development of China. For example, according to related studies on the “work unit system” (danwei) clearly, the unitary organizational form of enterprises and the strict top-down state regulation and control play a vital role in the constructing of the social structure and social relations. In an economic system where enterprises of diversified ownership types coexist, China’s social structure is manifested in a different form from that in the past. If the social development is regarded as a dependent variable, the government-enterprise relations are one influencing variable that contains a number of attributes. In this book, we only study these “attributes”, as well as their relations and internal mechanisms. A holistic analysis framework is presented to expound the change path of the government-enterprise relations within a time span of 60 years and explain the internal mechanisms of their occurrence, progress and evolution. First of all, our study of these relations is primarily grounded on the three basic facts in the development of China: 1. China’s development is driven by the government-dominated economic growth; 2. In many cases, the government takes the initiative to regulate the economy by visible means; 3. Over a long period of time, China’s politics is deeply embedded in the economic structure and the organization of enterprises. Based on the observed three basic facts above, the two basic judgments below are considered during our analysis of the government-enterprise relations: 1. In China, the changing process of the government-enterprise relations is a process of realizing multiple goals under the government’s domination; 2. In China, the changing process of the government-enterprise relations is a gradual process of institutional changes (on a trial-and-error basis). It is these considerations that lay a basis for our attempt to put forward four hypotheses for the theoretical framework of this book, all of which are governmentcentered and opine that the government is dominant in its relations with enterprises. The four hypotheses are: 1. The Chinese government has the strong ability of resource mobilization, organization and coordination; 2. Enterprises are the economic production organizations and also the entities for the social governance of the government that are affected by the state-dominant ideology; 3. The relations between the government and enterprises are constrained by the dual restrictions of the structural environments and the goal orientations; 4. Institutional arrangements are the principal means by which the government guides its relations with enterprises. The four hypotheses have different natures of restrictions over different types of enterprises, and the ways and degree of such restrictions are varying at the distinct developmental stages of the government-enterprise relations. This is one of the main

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questions we will solve. Based on these four hypotheses, considering the three basic facts of China’s development and the two basic judgments as to the relational analysis, the five important social facts and experiences on the changes in these relations are verified and used as the basic framework for our analysis. Firstly, the changes in the government-enterprise relations are governmentcentered, and the government’s pursuit of dominant goals is accompanied by unintended consequences. Secondly, the changes in the government-enterprise relations are not a unidirectional linear development but show a “spiral” dynamic trend with the changes in the external structural environments and the government’s goal setting. Thirdly, institutional arrangements are the main ways for the government to achieve its dominant goals and guide the changes of its relations with enterprises. In different structural environments, faced with different enterprises, the means and goal orientation of institutional arrangements are different. Fourthly, when the dominant goals are achieved through institutional arrangements, the government often institutionalizes the government-enterprise relations by legislation and ideologization. Fifthly, the institution already formed becomes a structural environment for the subsequent changes in the government-enterprise relations. In respect of the first point mentioned above, as major participants in the economy, enterprises are entities under the government’s regulation and control to pursue economic development; and as social organizations, they are entities under the government’s social governance. The government at all levels desire for continued economic growth and social stability and spare no efforts to control the economic lifeline in their respective administrative region. Karl Marx ever points out that the stability of the political power is built on its possession of the means of production. Even to a different degree from that of the government, enterprises still enjoy some autonomy. If a contradiction exists in their key goal orientations, the government is more powerful for achieving its dominant goals.1 The domination of the government depends on its power. A powerful government is more easily dominating the development of enterprises, but the institutional unexpectedness is inevitable and can propel or resist the further evolution of its relations with enterprises. As for the second point, only state-owned enterprises are allowed under the planned economy, but after the transition to the socialist market economy, enterprises of different ownership types begin to compete with each other. Considering the relationship between the degree of marketization and the organizational forms, in a state under the sheer planned management, enterprises do not exist because of the integration of government functions and corporate management, but in a highly marketized state, the degree of liberalization is higher, enterprises are more diversified. 1 The

autonomous development is a process full of contradictions and paradoxes, and is obtained and lost in a same process. An autonomy is often achieved at the expense of another autonomy and some people’s autonomy is often realized at the cost of other people. In a hierarchical system, there are contradictions between autonomies of organizations at different levels, which may arise in the form of conflicts or in a coordinated manner. The conflicts are fundamental, but the coordination is unstable (Li 2008; Xiong 2010).

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This is an ideal division, but going to extremes is not conducive to the economic and social development, which is the focal point for a debate over “government failure” and “market failure”. Besides changes in enterprise types, owing to constraints of the structural environments, the government’s motivation to pursue its dominant goals, and the tension and conflict between them, the resulting force controls the evolution of the government-enterprise relations, which neither develop entirely towards the intended direction of institutional arrangements, nor develop arbitrarily and deviate from the established path, but shows a spiral trend in a geometric sense. On the third point, it is found from China’s economic development over the past 60 years that the government integrates administrative control with economic regulation to guide the development of enterprises. In the traditional system, the government primarily achieves the all-embracing and in-depth management of enterprises from top to down by issuing administrative orders. The economic means is weak, and the spontaneous market regulation is abandoned. Under the market economy, the economic means becomes increasingly important, especially for various forms of non-state-owned enterprises. The macroscopic regulation is attained by the market allocation of resources under tax and financial policies. The defining and protection of property rights and the supervision of market trade are still dependent on administrative means and legislation. It is noteworthy that state-owned enterprises under the market economy must undertake policy-oriented tasks while making profits, such as maintaining the national economic stability, provision of public goods, and creating employment, which are non-economic goals subject to the government’s administrative guidance. About the fourth point, in fact, the government-enterprise relations are constantly evolving between changes and institutionalization. The realization of the government’s goals is one motive of these changes. Then, accomplished goals can be strengthened by institutionalization, which includes laws and regulations and adjustment or revision at the higher level of ideology, to provide a further legitimacy basis for the government’s goals and consolidation. For example, “keeping public ownership as the mainstay of the economy and allowing diverse forms of ownership to develop side by side”. In the light of the fifth point, the “path dependency” means that the past institutional choice more or less influences the current or future behaviors of the government. Any institutional change cannot be separated from the structural environment in which it exists. This kind of macroscopic structural stress not only constrains the behaviors of the government and enterprises, but also becomes another motive for the changes of the government-enterprise relations. According to the initial conditions and the process of institutional and organizational changes, China’s reform and transition attach importance to marginal institutional innovations by the existing economic and social organization,2 which are progressive and continuous reform and adjustments on the basis of the original institution, so as to achieve the intended goals.

2 Li

(2006, p. 219).

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Fig. 1.1 Number of industrial enterprises and production units of various economic types from 1957 to 2007 (Wu 2010)

Based on the above analysis framework, the main research questions are presented. First of all, the analysis begins with two figures. Figure 1.1 shows changes in the number of state-owned, collective and other types of enterprises from 1957 to 2007. In the figure, the curve has undergone significant changes in the two historical periods, namely the late 1970s and the second half of 1990s. In the late 1970s, other types of industrial enterprises begin to mushroom3 and increase from 400 in 1980 to 303,100 in 2007, seeing an increase of about 10,800 per year. In the late 1990s, the number of state-owned and collective enterprises begins to decrease. The number of stateowned enterprises reduces from 113,800 in 1996 to 20,700 in 2007, with an annual average of 7800; and the number of collective enterprises decreases dramatically from 413,600 in 1995 to 130,000 in 2007, witnessing an annual average of 30,800. Figure 1.2 shows changes in the proportions of the gross industrial output value of different types of industrial enterprises. It can be clearly observed that there are two periods when changes are evident, namely from 1958 to 1980 and after the end of the twentieth century. From the completion of the first five-year plan (1953–1957) until the reform and opening up, urban and rural individual enterprises and other economic forms completely “disappear” under the planned economy and their proportions are negligible.4 However, from the beginning of the 21st century, the proportion of other 3 Other

types of enterprises include (1) private enterprises with more than seven employees; (2) foreign capital and “three kinds of foreign-invested” enterprises; and (3) other types of joint ventures (such as those established jointly by state-owned and private enterprises). These forms of ownership emerge until the early 1980s. The urban and rural individual economy in Fig. 1.1 mainly refers to the family (or individual) enterprises hiring no more than seven employees, which appear in the early 1980s (For explanations on the enterprise types, see Qian and Xu 2008). 4 According to the Report on the 1st Five-Year Plan for Development of the National Economy of the People’s Republic of China delivered on July 5, 1955, “we must foster the growth of agricultural producers’ co-operatives, whose system of ownership is partially collective, and handicraft producers’ co-operatives, thus laying the preliminary groundwork for the socialist transformation of

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Fig. 1.2 Proportion of the gross industrial output value of different types of enterprises in China from 1949 to 2007

types of enterprises begins to exceed those of state-owned and collective enterprises and show a virtually linear growth trend from 0.47% in 1980 to 73.42% in 2007, about 2.6% on average per year. Then, a question is raised on the evolution path of the aforesaid forms of enterprises: why can such big changes occur to the organizational types and proportions of their output value in a short historical period? This is one of the main questions that need to be resolved in this book and a primary topic of academic research in China. For example, what are the motivations for the reorganization of property rights (such as the transformation of ownership) of state-owned enterprises? Why are township and village enterprises “short-lived”? Why do the private sectors grow rapidly and play an important role in China’s economic development? Numerous studies have been performed on similar questions, but the holistic analysis in the historical context is very insufficient. Although attempting to summarize and sort out the governmententerprise relations since the 1960s or the reform and opening up, the related studies are still superficial and only narrative explanations of history without in-depth interpretations from the perspective of structural powers and institutional changes.5 As agriculture and handicrafts; and in the main, we must incorporate capitalist industry and commerce into various forms of state-capitalism, laying the groundwork for the socialist transformation of private industry and commerce” (Bo 2008). 5 In this book, we focus on the explanatory research, which is different from the interpretative research made by many scholars on the government-enterprise relations. We aim at figuring out the internal mechanism of the changes in such relations as well as the corresponding causal, dialectical or

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for the aforesaid analysis framework, the government-centric analysis logic requires us to explain the following three questions: 1. In different structural environments, what institutional arrangements will the government make for enterprises to achieve its objective of dominance? 2. What kind of mechanisms will these institutional arrangements form? 3. How will these mechanisms affect and shape the relations between the government and enterprises? These questions will run through the analysis of this book and become the main logic of our analysis of the Chinese government-enterprise relations. Our government-centered analysis emphasizes that the changes in the government- enterprise relations are mainly dominated and facilitated by the government, but some results are unintended consequences “interstitial” relative to the institutionalized government-enterprise relations. These “interstices” and such institutionalized relations combine to constitute important motivations and structural environments for the subsequent evolutions.6 The rise of township and village enterprises can largely be regarded as the “interstitial emergence” and an unintended consequence of the institutional arrangements. As pointed out by Deng Xiaoping, “In the rural reform our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just spontaneously came into being. These small enterprises engage in the most diverse endeavors, including both manufacturing and trade. The Central Committee takes no credit for this… But this result was not anything that I or any of the other comrades had foreseen; it just came out of the blue.”7 Here the concept of “institution” must be made clear. According to the institutional economist Douglass C. North, “the major role of institutions in a society is to reduce uncertainty by establishing a stable (but not necessarily efficient) structure to human.”8 In this sense, “rule” and “stable structure” constitute the main content of an institution and which kind of rules have the stable structural effects becomes a prerequisite for the existence of the institution. Moreover, if the institution aims to reduce uncertainty, the type of institution determines how this function is effective. Despite being parts of the institution, the culture, custom, morality and ethics are not rigid constraints on human behaviors, while the political and legal systems are more constraining. Given that the institution can regulate behaviors, new institutional historical relations (Zhao has deep insight into the applicability and comparison of the interpretative and explanatory research paradigms, see Zhao 2004). 6 The concept of “interstice” has been introduced into the sociological studies by Mann when explaining the source of social power. In his opinion, the driving force of human society is not institutionalized, but various broad and deep power relation networks. The networks are further developed by human beings in the pursuit of their goals or originated from a direct challenge of the existing institution or by “interstitial emergence”, which means creating new relations and institution in the interstices and around the edge of the institutions (Mann 1986). 7 Deng (1993). 8 North (1994).

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arrangements (administrative means and economic means) may regulate the relations between the government and enterprises and achieve the dominant goals. Meanwhile, institutional innovations and changes cannot be separated from the conditions that can be provided by our real social environment and institutional resources. In other words, an institution must be embedded in specific social structures and culture and the pressure of the macro-environment becomes an impetus for institutional innovations and changes.9 For the government-enterprise relations dominated by the government, the motivation for institutional innovations and changes is originated both from the pursuit of internal goals and under the external structural pressure. At another facet, the already formed institution becomes an integral part of the social structures and restricts the behaviors of government and enterprises. The research of the new institutional economics reveals that the survival and development of enterprises should not just focus on the technical environment on the market, but also take account of its appropriate institutional environments, that is, the social facts widely accepted by the public in a society, such as legal system, cultural expectations and social norms. If the technical environment is considered as emphasizing the efficiency of enterprises, the institutional environment provides a “legitimacy” basis for their survival.10 Enterprises “wearing red hat” at the beginning of China’s reform and opening are one means used to “legitimize” themselves for adapting to the institutional environment at that time. In this sense, the institutions affecting the government-enterprise relations include formal rules and arrangements and provide an institutional environment with the structural influence. Therefore, the term “institutionalization” has two totally different meanings. The first meaning refers to the forming process of the institution, which is, forming a regulatory institution by certain arrangements or rules through the continuous development; the second meaning refers to the isomorphism between entities and the institutional environment; in other words, enterprises utilize similar adaptive behavioral patterns and organizational forms under the influence of the institutional environment. Both two meanings are involved in this book. The first type of institutionalization mainly indicates the constraints of enterprises by the government through some formal institutional regulations when dealing with its relations with enterprises; and the second type of institutionalization lays stress on the institutionalized characteristics of enterprises, namely enterprises are entities influenced by the social structure and environment. The influence of the structural environment on the government-enterprise relations has repeatedly stressed by us. Our so-called structure is a domain corresponding to behaviors of entities. The structure can regulate and impact behaviors of entities, and the latter is also constantly shaping the former. However, our analysis is not the structural determinism, but highlights the nature of the structural environment in which the Chinese government-enterprise relations are located and its influence on the interactions. That is to say, we cannot forecast the relationship model after the reform based on the structural environment before the reform. As constantly emphasized by us, the social development and institutional changes are path dependent and 9 Li

(2006, p. 213). and Rowan (1977), Zhou (2003).

10 Meyer

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9

unintended. It is in this sense that our understanding of the relationship model, on the one hand, puts stress on its structural characteristics because it is not intended towards the path planned by any organization or individual in advance; meanwhile, under the historical and cultural influence and the political and economic system, the government-enterprise relations in China exhibit characteristics different from other countries. On the other hand, although the model largely influenced by the structural environment, its development and evolution depend on the interactions between the government and enterprises. All key intersections formed by such interactions constitute the “skeleton” of their relations. Therefore, different from the dichotomic analysis of structure and behaviors, we need to introduce the interactions between behavioral entities into a specific structural environment and historical context. In this book, both the government and enterprises are regarded as the empirical entities, so the constructed explanatory framework is empirical and verifiable. Moreover, the government-enterprise relations are an intersection model because we explore the relationship model. The book is divided into five chapters. The first chapter gives an introduction to the relations of state and market as well as state and society, in which the government-enterprise relations are embedded. The second chapter discusses the relations between the government and state-owned enterprises. The third chapter focuses on the relations between the government and rural collective enterprises. The fourth chapter investigates the relations between the government and private enterprises. And the last chapter attempts to further make a summary and analysis of the relations and interactions between the government and enterprises with Chinese characteristics by the integration of theories and practice.

References Bo, Yibo. 2008. Review of several important decisions and events, 201. Beijing: Chinese Communist Party History Publishing House. Deng, Xiaoping. 1993. We shall speed up reform. In Selected works of Deng Xiaoping, vol. 3, 238. Beijing: People’s Publishing House. Li, Hanlin. 2006. A social process of organizational change. Shanghai: China Publishing Group Corporation/Orient Publishing Center. Li, Youmei. 2008. The transition of social life in China. Beijing: Encyclopedia of China Publishing House. Mann, M. 1986. The sources of social power: A history of power from the beginning to AD 1760. Cambridge: Cambridge University Press. Meyer, John W., and Brian Rowan. 1977. Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology 83(2). North, Douglass C. 1994. Institutions, institutional change and economic performance, trans. Shouying Liu, 7. Beijing: SDX Joint Publishing Company. Qian, Yingyi, and Chenggang Xu. 2008. Why China’s economic reforms differ: The M-form hierarchy and entry/expansion of the non-state sector. In Compete for growth, ed. Zhang Jun and Li’an Zhou, 6. Shanghai: Truth & Wisdom Press. Wu, Li (ed.). 2010. Economic history of the People’s Republic of China, vol. 2, 1483–1490. Beijing: China Modern Economic Publishing House.

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Xiong, Wansheng. 2010. Strive for Autonomy: An institutionalism analytic framework about the rise and fall of rural collective enterprises. Sociological Studies 3. Zhao, Dingxin. 2004. Explaining tradition or interpreting tradition—What should we do with the modern humanities and social sciences. Social Outlook 6. Zhou, Xueguang. 2003. Ten lectures on the organizational sociology, 71–74. Beijing: Social Sciences Academic Press (China).

Chapter 2

The Government and Enterprises “Embedded” in Multifold Relations

The government-enterprise relations aren’t logically definite with a clear scope, but “embedded” in multifold relations. A holistic analysis of their evolutions must focus on behavioral entities, such as central government, local governments, large, small and medium and non-state-owned enterprises, and also on complex interest relations between these entities, such as the relations between the central and local governments, the local government and the small and medium state-owned enterprises (SOEs), the small and medium SOEs and the non-SOEs, the non-SOEs and the large SOEs, as well as the central government and the large SOEs.1 In such complex intertwined relations, it is difficult to analyze and clarify the logical path of the government-enterprise relations.

2.1 Embeddedness: The Concept and Significance2 The relations and interactions of the government and enterprises are embedded in multifold relations. Among them, the two most important relations, which are of state and market as well as state and society, provide a primary structural environment for the evolution of the government-enterprise relations. To understand this point, we must have a good knowledge of the structural environments of these relations and interactions. The concept of embeddedness was created by the economic historian Karl Polanyi, and further developed by the sociologist Harrison C. White and his student Mark Granovetter. In addition to their academic inheritance, the commonalities of them were reflected by their criticism and rethinking over the research perspective of the institutional economics and an introduction to the social structure and environment 1 Wang

(1999).

2 For more detail on the relations of the “embeddedness”, the institutional changes and the structural

environment, please refer to Li (2006). © China Social Sciences Press 2019 Q. Wei and H. Li, Entities and Structures in the Embedding Process, Social Development Experiences in China, https://doi.org/10.1007/978-981-13-2390-4_2

11

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into the analysis of institution. When institutional economists focus their research interests and enthusiasm on the structure, origin, evolution and innovation, and supply and demand of the institution, they often neglect the social structure and environment giving birth to the institution. The embeddedness theory is an important supplement to the institutional research in this sense. In The Economy as Instituted Process, Polanyi suggested: “The instituting of the economic process vests that process with unity and stability; it produces a structure with a definite function in society… it centers interest on values, motives and policy… that the human economy is an instituted process…. The human economy, then, is embedded and enmeshed in institutions, economic and noneconomic. The inclusion of the noneconomic is vital. For religion or government may be as important for the structure and functioning of the economy as monetary institutions or the availability of tools and machines themselves that lighten the toil of labor.”3 In that paper, Polanyi first mentioned the dependence of economic activities of human on noneconomic structure and institution. It can be said that the human choice of economic action and model are fundamentally the result of the influence of the social structure and social life where they live in. In analyzing the social process of markets, White pointed out that the market was a social structure by closely connected enterprises observing actions of each other and through self-replicate and regeneration of such actions. Market supply is the result of the interaction between manufacturers. According to White, producers are in a same social network from the very outset, and they contact and observe what other producers are doing, especially how they set prices for similar and related products. The social network of producers provides necessary operation and price information to them. Secondly, producers in the same social network pass information and give hints to each other, thus establishing and maintaining a relationship of trust. They make choice of production and operation according to the tacit agreement and mutual trust. Finally, the market system is generated from producers in the same network, rather than out of thin air. In other words, the market system is only the reflection of the hints, trust and rules generated from the interactions inside the network of producers.4 Granovetter further developed the ideas of the above-mentioned two researchers. From the perspective of the new economic sociology, Granovetter and his colleagues proposed that economic activities are a form of social actions and largely influenced by the social environment and structure in which the actions are taken, and the particular economic institutions are an important part of the social structure.5 On this basis, Granovetter criticized two extreme views on the human action analysis (overand under-socialized conceptions of human action), because they ignore the social relations existing among people. He further restated the “embeddedness” for an 3 Polanyi

(1992). from Bian (1999). 5 Granovetter and Swedberg emphasize: “1. Economic action is a form of social action; 2. Economic action is socially situated; 3. Economic institutions are social constructions” [see Granovetter and Swedberg (1992)]. 4 Quoted

2.1 Embeddedness: The Concept and Significance

13

in-depth explanation of the viewpoint of Polanyi and made it clear that economic actions are embedded in the social structure. The core social structure is the social network for people’s social life, but the mechanism embedded in the network is primarily the trust. Fundamentally, efficient social interactions in the economic life or actions of people do not come from institutional arrangements or common morality, but because people in a specific social network establish their mutual trust. Granovetter suggested that the efficient economic trade and interaction often occur between indirect or direct acquaintances, and the concept of “embeddedness” attaches importance to trust rather than information. Furthermore, according to the understanding of Liu Shiding, the embeddedness by Granovetter de facto involves two basic levels: one is the study of human action in social sciences, namely challenging basic assumptions of human action made by the mainstream economics and sociology; the other is based on the specific content of “embeddedness”, with the interpersonal network as important elements and introducing a main field of interest into the sociological research. These are where his study is different from Polanyi, who, on the one hand, did not include the abstraction of basic assumptions of human action, and on the other hand, noticed only the embedded institution instead of the interpersonal network.6 In fact, the study of embeddedness should figure out not just why it exists, but also require an in-depth analysis of its impact on the economic action and institution and the construction of embeddedness. As is known to us, a series of institutional innovations currently ongoing in China are aiming at a better regulation of the behaviors of people, government, enterprises and other social organizations. Indeed, different institutional arrangements can provide the behavioral patterns that are stable, generally accepted and repetitive on some fundamental issues, so as to define different conditions for human action in the new institution, for improving efficiency and smoothly achieving the desired institutional goals. Because the institution can regulate human action, a new institution may utilize a new approach for improving the institutional efficiency. To perfect our socialist market economic system, we need a chain of institutional arrangements and innovations. However, this is only one facet of the problem. More importantly, we should note that the institutional innovations and changes are inseparable from the conditions that can be provided by the realistic social environment and institutional resources. In other words, an institution must be embedded in specific social structures and culture. If a good institutional innovation cannot be successfully embedded in the social structures or has a strong “rejection” effect in the existing social structure in the medium and long term, it is impossible for the institutional innovations and changes to ultimately bring us benefit or social development and stability. Therefore, the social process of institutional innovations and changes is essentially a process of gradually embedding the innovated institution into our social structures. Then, how does the process of embedding a new organization and institution into the social structure and environment take place? In other words, how to

6 Liu

(2003).

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gradually embed such new organization and institution into the social structure and environment? Firstly, the driving force for innovations and changes is the pressure from the macroeconomic environment, and most importantly, the motivation and direction of people for their own changes and innovations in the face of demonstration and simulation of the external environment or groups. Anyhow, we cannot simply copycat external institutions and behavioral rules, which must be altered and changed according to our own social structure and environment. Here, change is a new rule in the institution and organization; it is the first step and also the most important step for embedding new institutional arrangements into a new social structure and environment. Secondly, it is adaptation. Change often refers to the process of gradual embedding of new institutional arrangements and new rules into the social structure and environment, and adaptation means that the behaviors of people must gradually adapt to rule changes in the institution because it plays a dominant role in the choice of individual behaviors. An individual is “embedded” in, created and guided by the institution, so the interpretation of individual behaviors cannot be separated from the institution, and the individual is largely a dependent variable. Here, two issues are worth noting. The first issue is that, once an institution is established, it can regulate further behaviors of people in a mandatory manner. People in specific organizations must observe rules; otherwise, they will be formally or informally punished by the organization’s institution. The institution determines the appropriateness of behaviors according to the relationship between the role and the situation, which includes the definition of situations and roles and the determining of appropriate behaviors in a given situation. It is “a collection of interrelated rules and routines that define appropriate actions in terms of relations between roles and situations. The process involves determining what the situation is, what role is being fulfilled, and what the obligations of that role in that situation are.”7 When an individual makes a decision, the problem he faces is not “how to expand my interests”, but what reactions and behaviors are most appropriate (correct) for me according to my positions and obligations. In most cases, rules and procedures (which are institutions) are clear and definite. Individuals always follow the customary practice and act pursuant to its requirements. The individual action is a passive process of continuously adapting.8 Another issue is that, if restricted by the institution, people’s behavioral adaptation in an organization is not just a passive process, but in more situations, expressed as an active learning process.9 More exactly, with the aid of ideology, people change from passive adaptation to active learning and acceptance of new institutions, new norms and rules. In this process, people are socialized, gradually accept new institutional arrangements and try to make them the code of conduct restricting their behaviors. Finally, these institutional arrangements are “embedded” into and become part of

7 March

and Olsen (1989). (1998). 9 Douglas (1986). 8 Zhang

2.1 Embeddedness: The Concept and Significance

15

the specific social structure and their behavioral structure. Therefore, the adaptation should be observed and understood from passive and active perspectives. It is also important to note that, when an institution is truly embedded in the social structure and social environment on which it depends, this institution is deeply embraced by the social environment, social structure or even social culture and results in the situation of mutual interdependence and gradual mixture. The formation of this situation is significant from at least two aspects. First, at an initial stage of organizational and institutional innovations, if the organization and institution can be successfully embedded in the social structure it survives, this mutual integration may promote its development, so that its innovations and changes are further deepened. Second, when the organization and institution develop to a certain stage and need further innovations and changes, a high degree of integration of this institution with the social structure it relies on will bring serious obstacles to institutional changes. Recognizing this point is very useful for us to have a profound understanding of the positive and negative social functions of the embeddedness. Here, an important revelation is that the changes and innovations of an organization and institution are not an independent social process, because a social process not only includes changes in the organization and institution, but also includes or requires changes in the social structure and environment on which the organization and institution relies for survival. After the analysis of the theoretical basis and the main connotations of the term “embeddedness”, a brief explanation will be given to the government-enterprise relations at the two dimensions, namely state and market, state and society, and furthermore, we will make clear changes in such relations, connections with the structural environment they are embedded into and the significance.

2.2 The Government-Enterprise Relations in the Interaction of the State and Market Related studies on the state-and-market relations at the macroscopic level can be roughly divided into two perspectives: market induced and state-dominated. In terms of the market-induced changes in the social structure and organization form, the “Market Transition Theory” of Victor Nee is of the pioneering significance and has sparked long-term academic debates. Based on the division of economic patterns by Karl Polanyi,10 the market-oriented reform of socialist countries is regarded as the process of transition from “redistribution economy” to “household economy”. He argues that in the market transition period, the market capacity of direct producers will replace the redistribution power to become the major benefit mechanism in the marketization process, thus the political capital of the redistribution power

10 Polanyi

argues that there are three general types of economic systems: redistribution, reciprocity and householding (Polanyi 2007).

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is devalued, and the human capital of direct producers increases in value.11 As an “originator”, Nee’s idea has become the focus and “target” of subsequent studies and sparked off the so-called “MTD” (Market Transition Debate). Many scholars argue that the market economy is not an independent operating process, but constrained by the existing social institution during its development, so it is biased to use the market economy as the only logic to explain the social changes of Chinese society. The main viewpoints different from Nee include the politics-market theory, the government-firm theory, the state regulation theory and the covariation model of politics and market.12 In our opinion, the studies from the perspective of market domination have an unclear division of some economic sectors. With the deepening of the marketization process, the original “redistributive” sectors, such as state-owned and collective enterprises, have already entered into the market economy, so that it becomes increasingly difficult to make judgement over whether the state-owned and collective enterprises in the process of reform can be regarded as “redistributive economy sectors” or “market economy sectors”.13 What’s more, the inevitability of the market-oriented reform is taken for granted without demonstrating how it occurs, thus elaborating the results while ignoring the reasons. Parish William et al. argued that if the logical path of the market transition is regarded as the causal chain of A → B→C, then A contains the background conditions that form the market results, B contains the market results and C contains the power and the income results from the market. Nee’s research only focuses on B → C, without discussions on A → B.14 From our point of view, the division of market penetration by Ivan Szelenyi and Eric Kostello is more reasonable. They argued that the three primary issues about the market transition debate, namely market and inequality, cadres and market and whether the market transition theory was teleological, were too general and vague if without considering the structure and conditions. On this basis, they distinguished three types of market penetration, that is, market in the redistributive economy; mixed economy characterized by the coexistence of market and redistribution when the latter occupies a dominant position; capitalism-oriented economy. Under this division of types instead of stages, they considered that the main reason for the decline in social inequality from the reform to the mid-1980s was the reduction of the redistributive economy and the constant introduction of the market. In this case, peasants and migrant workers benefited from this situation, but the losers were the redistributors. The socialist mixed economy formed from the mid-1980s to the mid-1990s shapes an unequal dualistic system. Some technical bureaucrats have “commercialized” their privileges and benefited from the mixed economy, but socially marginalized groups who are not well educated became losers in the market.15

11 Nee

(1989). and Michelson (2002), Walder (2002a, b), Zhou (1999). 13 Liu (2006). 14 Parish and Michelson (2002, p. 553). 15 Szelenyi and Kostello (2002). 12 Parish

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17

From the above-mentioned, the market transition of the socialist economy is not what the theorists have described, but a process of constantly adjusting the existing system, so as to adapt to the changing socio-economic environment.16 In The China Miracle: Development Strategy and Economic Reform, Justin Yifu Lin et al. argued that in the traditional economic system of China, for the purpose of accomplishing the development strategy giving priority to the capital-intensive heavy industries under the condition of scarce capitals, the country formed a macroscopic policy environment distorting the prices of products and production factors, a highly centralized resource allocation system and a microscopic management mechanism without autonomy. The success of China’s economic reform first depends on the decentralization of the microscopic management mechanism and the improvement of the incentive mechanism, so as to continuously enhance the economic efficiency and gradually approach to the resource allocation system and the macroscopic state policy environment.17 It is the reform logic of “feeling for stones to cross a river” and the gradual reform strategy of approaching from microscopic to macroscopic that avoids big shocks and fierce conflicts in the continuous marketization process; hence, China’s marketization and constant transformation are achieved under the domination of the government. Marketization does not spontaneously occur. The direction and degree of China’s market-oriented reform are mainly initiated by the state. As pointed out by Polanyi, there is no road to the market, and “the road to the free market was opened and kept open by an enormous increase in continuous, centrally organized and controlled interventionism.”18 The state-dominated marketization reform is a state-based political and economic process, while its important goal is to transform the original economic growth structure and economic development pattern through the market economy model, so as to enhance the state’s economic strength and comprehensive competitiveness and improve the life quality of nationals, rather than spontaneously change the state by the market.19 Since the late 1970s, social sciences researchers in western countries refocused their attention on the above-mentioned state domination and they claimed to bring the state back to the center of analysis. The state-centered analysis paradigm mainly emphasizes state autonomy and state capacity, which, however, are not totally different, but overlap in some aspects. In the book Bringing the State Back In, Peter Evans et al. used the term “embedded autonomy” to describe and explain the interactions between state and market20 and made an analysis on how underdeveloped countries could be industrialized. He 16 Stark

(1992). et al. (2012). 18 Polanyi (2007). 19 Liu (2006). 20 Evans et al. (2009). As far as the concept of “state autonomy” is concerned, while making a comparative analysis of the social revolutions in France, Russia and China, Theda Skocpol argued that the state is potentially autonomous, with its own logic and interests, but the logic and interests of the state are not necessarily equivalent to or fused with the interests of the ruling class in the society. The state is not just the arena for interest groups, its form reflects the dominant means 17 Lin

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argued that the state could play four major roles in the economic development: custodian, midwife, husbandry and demiurge.21 Later, based on the “embedded autonomy”, Zhao Dingxin and J. A. Hall proposed the concept of “bounded autonomy” to explain the economic development of late-developed countries. They held the opinion that the autonomy of a state is composed of a series of factors, including geopolitical factors, old regime structure, nationalism, characteristics of the political system and cultural factors, which, alone or combined in some way, enable the state to organize and rationalize the society to some extent, so that the industrialization is not achieved under the social pressure. Additionally the degree of autonomy of a state is also restricted by the geopolitics, nationalism, legitimacy and dominant ideology.22 In a highly autonomous state, the elite group can launch the state-centered social, economic and political transformation projects. The actions of the state are not consistent but bounded by a variety of factors, such as international environment, political nature, social pressure and internal consistency within the elite group. Even the state has framed some policy, it cannot be assured that the policy will be implemented well. This involves another dimension of the state, state capacity. In this regard, Mann measures the state capacity by the infrastructural (or penetrative) power, which refers to the ability of the state to penetrate society from which it extracts fiscal revenues or mobilizes the public for other purposes.23 The analysis made by Mann does have a certain strength and insight, but two deficiencies. First, the greater the penetrative power is, the stronger the state ability of control and mobilization is, but this hard power requires the legitimacy of the state. For example, the collapse of the communist regimes in the Eastern Europe is not because of too weak penetrative power, but because these states can neither preserve the unity within the elites, nor win the social acceptance of their legitimacy. Second, the state is only a vague concept and framework. Although Mann defines the state as “a complex, territorially centered organization with a differentiated set of functions and natures”, this definition lacks a real actor, in other words, who represents the state to perform its functions for enhancing the autonomy and improve the ability. In contrast, Wang Shaoguang et al. go further in their study on the decentralization of Chinese government by defining the “state capacity” as “the capacity of the state to convert its preferences and goals into the realities” and making clear that the state capacity mainly refers to that of the central government instead of the public authoritative power. They summarize four types of state capacity, namely extractive capacity, steering capacity, legitimation capacity and coercive capacity.24 Wang regards the of production, and it is also a macroscopic structure for levying tax, using coercive means and managing the organization of residents in many aspects (Skocpol 2007; Liu 2010). 21 Evans (1995). 22 Zhao and Hall (1994). 23 Mann distinguished two types of state power: infrastructural power and despotic power and argued that human beings have four basic needs that are the sources of social power, namely economic, military, political and ideological power (Mann 1988, 2007). 24 Wang and Hu (1994).

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19

extractive capacity as the most fundamental capacity because the state can achieve other functions only after controlling necessary financial resources. The degree of state autonomy and the integration within the state apparatus are determinants that affect the extractive capacity.25 In fact, the state and market are considered as contradictory from the above two analysis perspectives. As proposed by Zhou Xueguang, in understanding China’s organizational and institutional changes, the coevolution of the political power and the emerging market economy must be recognized while clarifying that they are the main driving forces of the institutional changes.26 Some scholars point out that two questions are not answered by this interactive explaining mechanism. What are the functions of state and market in the socialist market transition process? Why can the interaction between state and market promote the market transition rather than the opposite?27 In our opinion, the evolution of these relations depends largely on what role the government plays in the economy of the state because the political institution is inseparable from the economic institution. The political institution established by a society to preserve its values can construct economic operations and market activities. The fact that the political values of the state embedded into its economic institution explains why the economy cannot be completely isolated from politics.28 If the relations between the government and enterprises in China are explored in terms of the state-market relations, the following two points need to be emphasized: The first point is about the reform of corporate ownership. Before the reform, almost all enterprises belong to public ownership under the state control, and the production, sale and acquisition of means of production are achieved through the strict state planning. Enterprises, depending entirely on their superior government authorities, are not just production organizations, but also units for political control and social management by the state. After the reform, with the introduction of the market, the forms of ownership of enterprises have undergone great changes. China’s reformers design a hierarchical mix of different ownership types. The state management and operation continue in the important industries and key areas of the national economic development. The diversified types of ownership realized through the collectivization, privatization, state investment and shareholding are allowed in other industries and areas, thus the state-owned, collective and private enterprises coexist in the economy.29 China’s overall socio-economic structure is gradually disintegrated and replaced by an economic logic based on the symbiosis of state regulation and market operation—the economy of mixed ownership. The reform of ownership is not only a change in the form of corporate property rights, but also involves changes in the microscopic management and incentive mechanisms. Under the traditional planned economy, for both people’s communes in rural areas and enterprises and work units in cities, the enthusiasm of operators and pro25 Wang

(1997). (2000). 27 Liang (2007). 28 Lehne (2007). 29 Ren (2009). 26 Zhou

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ducers cannot be well mobilized. At the beginning of the reform, the decentralization of power and transfer of profits to state-owned enterprises, the support and encouraging of collective enterprises in townships and the recognition and guidance of private enterprises can be regarded as the path selection and institutional changes to achieve the economic growth goals through an effective allocation of resources by the market after the progressive introduction of the market mechanism. The coexistence of diversified ownership types should not be regarded as the state’s compromise to the market, nor the market’s coercion of the state, but the state-dominated marketization of practical significance for China. First of all, the dominant position of public ownership is a prerequisite for all economic actions of the state, that is to say, the coexistence of diverse forms of ownership must be under the state domination. The dominance of public ownership is an essential requirement of the state for economic control and provides a foothold for the state in politics and ideology. It is difficult to imagine that a fully privatized state flaunts itself as a socialist state. Second, the entry of non-state-owned sectors in the economy forces state-owned enterprises to undertake a series of institutional reforms and innovations in the face of market competitions and improve their operating efficiency. The large-scale transformation of state-owned enterprises in the middle and late 1990s can be considered as a top-down institutional arrangement for better adapting to market competitions and enhancing efficiency. Moreover, as claimed by related studies, continuous expansion of non-state-owned sectors in the economy enables China’s economic reform process smoother.30 The most significant manifestation of the way in which the economic stock is preserved, and an overall economic breakthrough is finally achieved through continuously approaching of the market increment, is the “dual-track” economic operation model of China in the 1980s. The dual track of traditional economic system and market is reflected in the prices, as well as in the economic pattern, resource allocation and business operation mechanisms. According to Justin Yifu Lin, states adopting the dual-track economic system, which is the worst in the eyes of most people, can attain a stable and rapid growth, and on the contrary, those who wish to achieve the market reform just in one step become generally stagnant or even collapsed.31 The second point is the change in the governance of the government. The prereform Chinese society is called a “totalitarian society”,32 in which all the powers are in the hands of the “totalitarian” government.33 Since the reform, the autonomy of enterprises as economic organizations has been continuously enhanced with 30 Qian

and Xu (2008). (2012). 32 A “totalitarian society” refers to a society in which all important resources monopolized by the state, and based on such monopoly, the state has total and strict control of all social life. For example, both work units in cities and people’s communes in rural areas are the social governance structures in the totalitarian society (Sun et al. 1994; Qu et al. 2009). 33 The totalitarian governance model of China is summarized as the centralized management, prison style management, countdown management, containment management and campaign management. The government has broad and profound functions and is the combination of custodian, manager, protector, benefit creator and instructor (Yan 2011). 31 Lin

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21

the sustained advancement of the separation of government and enterprises and the decentralization of powers to enterprises by the government. The governance of enterprises by the government transitions from depending entirely on administrative means to gradually relying on economic and legal means, from direct control to indirect control, and from the complete rejection of market to the decisive role of the market in the allocation of resources. Under the traditional planned economy, the work units serve as the most fundamental instrument and approach for the government to achieve the corporate governance, thus being a major ruling method of the state. In other words, under such a system, the rule of coercive and authoritative power is integrated with the power relying on interests and based on exchange, and the state merges the property rights into the administrative power and hence realizes its rule of society and governance of enterprises.34 This type of governance is most obviously embodied by the following four aspects. (1) The government controls all the resources. It is difficult for the enterprise units to go into production or meet the resource needs of their staff out of the political system, so they are entirely dependent on the superior government for redistribution of resources. (2) All enterprise units are organized into an administrative affiliation relationship and hierarchized at different administrative levels like administrative units. The resources accessible to them and their powers are linked with the administrative levels. (3) Their leaders are not selected through bottom-up elections but appointed by higher-level leaders, and they can “move” around different types of units. The government firmly controls the appointment and removal of enterprise leaders, thus realizing the control of enterprises and rule of society. (4) The branches of the Communist Party of China are established at all levels of enterprise units for the ideological and organizational control. In the planned economic system, due to overlapping functions of the government and enterprises, penetration and control by the government power, and bureaucratization and hierarchy of enterprise units, distinguishing economic production functions of enterprises from their social governance functions becomes a difficult task. The combination of government administration with enterprise management is the most conspicuous feature of the work unit system. At the beginning of the reform, some researchers have made a proposal for changing the ownership types of the socialist economy. In their eyes, the main problems then are that “enterprises do not have independent operation and management rights and their economic interests, direct producers have no right to be involved in the production, distribution and exchange, the autonomy of production teams is violated, the production means, capitals and labor force are arbitrarily and freely used, and some cadres impose patriarchal and paternalistic rule and so on.”35 These problems are essentially ascribed to the combination of government administration with enterprise management so that enterprises are lack of independence under the unified leadership of the state, their enthusiasm for production cannot be effectively mobilized and their operating efficiency is difficult to be improved. The fundamental reason 34 Li

(2004, p. 10, 87). (1979).

35 Dong

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is that under the mechanism of combining government functions with enterprises, economic organizations are unable to conduct business accounting independently and assume their sole responsibility for profits and losses. Owing to the “soft budget constraints”, enterprises are “about the same regardless of profit or loss, good or bad performance”. Meanwhile, economic organizations have difficulty in independent operation and autonomous development. The combination of administrative and economic organizations by the state results in the allocation and use of various resources not according to the market information, but as arranged and instructed by administrative orders of the government. Furthermore, the corporate governance structure is also very imperfect. Among the “old three committees” in the traditional sense, the party committee works, but the trade union and the employees’ representatives committee play a limited role. In the period when the ownership and the operation rights of enterprises are not substantially separated, work unit leaders not just represent publicly-owned enterprises, but more importantly undertake the tasks of ruling and resource allocation by the party and the government. Decisions of enterprises mostly reflect the top-down will of the government and often ignore the rights of workers and other stakeholders. The most obvious fact is that during the restructuring of state-owned enterprises, ordinary staff and workers are unable to effectively participate in the decision-making process. Another critical issue is the “iron rice bowl” (secure job) in the work unit system, which is de facto a lifelong employment of employees. Even when the parents retire, their children can inherit the jobs. As a result, enterprises cannot constrain their employees by means of “dismissal” under the non-market contract condition, and furthermore, it is a thorny problem to ensure their microscopic efficiency. Some researchers point out that in this mechanism, a paradox forms in the daily production of enterprises, that is, although managers play their role and have the power, they have very limited means to effectively control non-cooperative behaviors of employees in production, and therefore enterprises run at low efficiency and managers are unable to attain their management and control of the production process.36 To improve the low efficiency of enterprises under the planned economy, the basic logic for the reform of the government-enterprise relations (mainly state-owned and collective enterprises) is the separation of enterprises from the government. Until the early 1990s when the market economic system is basically established,37 the governance of state-owned enterprises is primarily achieved by the administrative decentralization of power by the government, which cannot solve the key problems 36 Lu

(2000).

37 According

to the Decision on Some Issues Concerning the Establishment of the Socialist Market Economic System adopted on the Third Plenary Session of the 14th CPC Central Committee, “The establishment of the socialist market economic system aims at enabling the market to play the fundamental role in resource allocations under macro-economic control by the state”. To turn this goal into reality, it is necessary to further transform the management mechanism of state-owned enterprises, and to establish a modern enterprise system which meets the requirements of the market economy and in which the property rights as well as the rights and responsibilities of enterprises are clearly defined, government administration and enterprise management are separated and scientific management is established.

2.2 The Government-Enterprise Relations in the Interaction …

23

due to the combination of government functions and enterprises.38 Exactly, stateowned enterprises are under the dual influence of planning and market, and the goals of both the government and enterprises are diversified. On the one hand, the government as their owner still gives orders of mandatory planning; on the other hand, with the gradual reduction of the planned production tasks and the gradual increase of the market regulation, enterprises begin to be more profit-oriented.39 After the mid1990s, the governance of state-owned enterprises by the government changes from the “decentralization” to the “transformation of enterprise operation mechanism”, which aims at the establishment of a modern enterprise system so as to adapt to the increasingly perfect market economy and enable enterprises to become autonomous entities operating independently and being solely responsible for their own profits and losses. Through invigorating large enterprises while relaxing control over small ones, different reform measures are taken for different types, sizes and natures of state-owned enterprises. Particularly, enterprises with poor operating efficiencies are “closed, suspended operation, merged with other enterprises or shifted to a different line of production” and redundant employees are laid off. In the early 21st century, most of the state-owned enterprises turn losses into gains. The State-owned Assets Supervision and Administration Commission of the State Council was set up in 2003 to manage central and local state-owned enterprises. The organizational forms and governance structures of enterprises have also undergone great changes, such as reorganization and listing, the introduction of the shareholding system and establishment of more reasonable corporate governance structures. Stateowned enterprises seek profits and development more through market competitions. Of course, a batch of “monopolistic” state-owned enterprises emerges in this course 38 As is widely accepted in the academic world, from the reform and opening up to the early 1990s, the relations between the government and state-owned enterprises can be divided into the following stages. In the first stage (from 1979 to 1982), the government implements the profit retention policy, expands the autonomy of operation and gives enterprises control of partial proceeds to stimulate them for the improvement of production efficiency. However, the profit retention policy leads to the problem of “wages eating into profit margins”. To solve this problem, some local governments adopt the economic responsibility system of profit contracts. In the second stage (from 1983 to 1986), the main drawback of economic responsibility system is that enterprises are enthusiastic for increasing their own income even at the cost of damaging interests of the state. Consequently, this causes chaos in the economic order and continuous financial deficits due to “more work for more profits, less work for less profits, and no work for no profits”. In order to deal with such unfavorable situations, but without dampening the enthusiasm of enterprises and damaging interests of the state, the government has introduced new measures, which are mainly the reform of the tax system (replacement of profit delivery by taxes) and the factory manager responsibility mechanism. These measures can avoid the phenomena of “contending for the benchmark and quarrelling with the proportion” between enterprises and government owing to the profit retention policy and the economic responsibility system. Later, this practice shows that the tax reform is far from solving the fundamental problems of state-owned enterprises, but results in “whipping the fast and hardworking ox”. Overall, the operating efficiency of state-owned enterprises continues to decline. In order to change this situation, the reform by the government at the third stage (from 1987 to the mid1990s) aims at reinvigorating enterprises through various forms of responsibility systems (contract, lease and shareholding etc.). 39 Dong et al. (1995).

24

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Fig. 2.1 The development and changes of township and village enterprises (TVEs) from 1991 to 1997. Source Zhang and Songsong (2001)

and become new interest groups while increasing their profits and competitiveness. They have a constant influence on government policies and the fairness of the market economic order, thus becoming the major governance target for the government in the new period. As for township and village enterprises, their predecessors called “commune and brigade enterprises” initially emerge only as a supplemental form of the collectivized agricultural production and one of the organization forms within people’s communes complete with the sectors and functions of “farming, forestry, animal husbandry, sideline production and fishery, workers, peasants, merchants, students and soldiers”. However, the development speed, value creation and absorption of the surplus labor force by township and village enterprises go beyond expectations. According to statistics, by 1978, there are 1.52 million enterprises at the two levels of communes and brigades, which employ 28.26 million rural surplus labor force and achieve the output value of 49.1 billion yuan. At the peak time in 1993, the gross output value created by them (enterprises run by townships, villages, households and individuals) accounts for half of the gross industrial output of China and one-third of the gross domestic product. They also provide the employment for 127 million rural labor forces. The development of township and village enterprises is not all plain sailing, but constantly experiences twists and turns, which are summarized by researchers as the “four peaks and four valleys” waveform development (Fig. 2.1). The central government and local governments at the grassroots level are quite different in the behavioral logic and policy goals towards the relations between the government and township and village enterprises. On the development of commune and brigade enterprises in rural collectives, it is an academic consensus that the state’s original intention for running industrial enterprises in rural areas is “making up agriculture by industry”. In rural areas, various small industries earn profits out of the planning system and under the imperfect market conditions, for supporting the agriculture and reducing the dependence of rural areas on the state and the large-

2.2 The Government-Enterprise Relations in the Interaction …

25

scale mobility of the surplus rural labor force. Thus, the existence and development of commune and brigade enterprises under the planned economic system are considered as a concession of the state policy. Ever since the reform, the state policies on the township and village enterprises (commune and brigade enterprises) are not consistent, but inconstant and adjusting. Whenever they develop rapidly, especially when the local economy is overheating, the state always regulates and shackles township and village enterprises, or even sees them as one of the external reasons for the difficult operation and poor efficiency of state-owned enterprises, and considers that the rapidly developing township and village enterprises are competing with state-owned enterprises in the market of products and production factors. Given that state-owned enterprises have not yet been fully market-oriented, the central government naturally places them in a more important position. Thus, the development of township and village enterprises in the early 1980s is regarded as “competing for energy resources, market, capitals and raw materials” with state-owned enterprises and leading to “four out-of-controls, namely infrastructure investment, credit loan, foreign exchange and consumption funds” in the mid-1980s. And in the late 1990s, township and village enterprises are deemed as the non-public sector of the economy, and the policy of “resolutely suppressing township enterprises and protecting the state-owned enterprises” is an institutional choice of the central government for different types of enterprises. This differentiated institutional arrangement is closely linked to the central government’s dominant goals as well as the structural and environmental pressures it faces, which will be explored in detail in Chap. 4. The dominant goals and the structural and environmental pressures of local governments at the grassroots level are different from those of the central government, so they are far more realistic than the central government. In the institutional environment of “the financial contract system” in the 1980s, local governments are more motivated to actively operate township and village enterprises,40 whose rapid growth is attributed by researchers to the effective governance of local governments. Township governments supervise and control all township and village enterprises based on the community within their respective territory. The proceeds from operating these enterprises can increase the state tax revenues and provide public goods for the community. Resultantly local governments can accomplish the tasks assigned by the higher level of government and enhance their performance. In this case, township governments mobilize various institutional and economic resources to develop township and village enterprises, such as land use, infrastructure, loan guarantee, risk sharing and ideological protection, which are benefits that private enterprises are unable to get access to. This can also explain why their operating efficiency and development speed are much better than private enterprises in a very long period.41 Compared with state-owned enterprises, the budget constraints of township and village enterprises are much “harder”. Even if the township government can provide the loan guarantee, the capitals accessible in this manner are very limited, so they must be 40 Oi

(1992). (2008).

41 Zhou

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very careful and enterprising and thus improving their operating efficiency. Through an analysis of structural differences in the administrative affiliation of enterprises, Andrew Walder points out that township and village enterprises are at the bottom of the administrative hierarchy. Compared with state-owned enterprises, local governments govern fewer enterprises and therefore exercise stronger supervision and control. Faced with harder budget constraints and having a stronger awareness of risks, township and village enterprises are more efficient than state-owned enterprises.42 According to the above analysis, as the marketization further goes deep, the ownership types of enterprises undergo changes, and the government has very different governance modes and dominant goals on different types of enterprises. Therefore, to understand the government-enterprise relations in China requires the analysis from the state perspective or the market logic, the grasp of key intersections of these relations in a historical context, and the detailed expatiation of their internal correlation mechanism. The specific analyses of the following chapters of this book are made under this logic.

2.3 The Government-Enterprise Relations in the State-and-Society Interactions The state-society relation is a very broad concept, and more precisely, a theoretical analysis framework because different researchers investigate it from different perspectives and no consensus has been reached on its definition. Studies focus on the state penetration and control of society, pay attention to the “bottom-up” influence of the society, distinguish different types of the state-society relations according to the political regime of the state, highlight the societal nature and the development of intermediate organizations, emphasize the wholeness of these relations, explore their complexity and diversity, show a “Western-centric” social development landscape through the comparison of different states, or make an analysis of the particularities of these relations by analyzing specific issues. The relations between the natural state and the society have arisen since the birth of the state, but systematic and frequent academic studies in the theoretical framework of state-society can only be traced back to the middle of the twentieth century. Previous mainstream sociological theories mostly center on the society and place the state in a peripheral position, so the state-society relations are seldom considered. Compared with the separate research perspectives of the state or the society, the state-society relations emphasize the structure and nature of the state and society and attach importance to the connections between them, thus this perspective can provide more balanced explanations for some problems. This is the main reason why the state-society research is booming.43 42 Walder 43 Zhao

(1995). (2001).

2.3 The Government-Enterprise Relations in the State-and-Society Interactions

27

The American sociologist Richard Madsen takes the China studies in the USA since 1960s as an example, divides the studies on China’s state-society relations into five generations, and tries to demonstrate that the shifts in research topics and analytical frameworks result from the interactions of dominant theories in different periods, empirical data available, and potential atmosphere of public opinion. According to his classification, the five generations of studies are listed below. The first generation concerns the replacement of a traditional society by the modern state (represented by Franz Schurmann’s Ideology and Organization in Communist China and Ezra F. Vogel’s Canton under Communism: Programs and Politics in a Provincial Capital, 1949–1968); the second generation is about the compromise between state and society (represented by Martin K. Whyte’s Small Groups and Political Rituals in China); the third generation involves the mutual penetration of state and society (represented by Richard Madsen’s Morality and Power in a Chinese Village and Andrew Walder’s Communist Neo-Traditionalism: Work and Authority in Chinese Industry); the fourth generation studies the transformation of the state by the civil society; and the fifth generation studies mean the research and trend emerging in the post-liberalistic and post-socialistic global order.44 Probably researchers who are divided into different periods by Richard Madsen or readers disagree with such classification and reasons, but it is noteworthy that the dominant theories in different periods are used as important dimensions for such division. This means the state-society theoretical framework is not a static analysis, but a process of continuous development and change. The evolution of theories reflects social changes. Walder insightfully points out that, “to continue as a useful exploration of knowledge, the studies on the state-society relations must change the research focus in the past, from the description of reality to the explanation of changes”.45 In fact, the simplest practice is analyzing specific problems at the associated intersections regarding the nature of the state, nature of society and state-society connections when there isn’t a consensus on the state-society relations. Among numerous studies, the Communist Neo-traditionalism: Work and Authority in Chinese Industry (hereinafter “Neo-traditionalism”) written by Andrew Walder can be regarded as a systematic and complete masterpiece exploring the relations between the government and state-run factories under the state-society theoretical framework. Although this book is familiar to the academic world, it is still necessary to make a summary of how to use the theoretical framework of state and society, as well as its problems and deficiencies. First, in defining the state-society relations, Walder argues that studies on this topic are essentially the studies of the political authority, the relationship between leaders and followers, and to put it simply, use of power. Starting from this basic presupposition, the Neo-traditionalism opines that the power model of China’s state-run factories (dependent and vertical) is isomorphic to other institutions of the communist society and that within the factories the model is embodied by workers’ social and economic dependence on the enterprises, political dependence on factory lead44 Madsen 45 Walder

(1999, pp. 35–56). (1999).

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ers, and personal dependence on superiors. These highly dependent relations reflect the relationship structure of the whole Chinese society at that time. The institutional culture for maintaining the authority structure is the patron-client network (“principled particularism”). In this vertical dependent relationship, the ties between activists and leaders divide the workforce at the social and political levels. On the one hand, activists get closer to leaders; on the other hand, this divides the united workforce and highlights the authority of leaders. Meanwhile, under the redistributive economic model, the channels for workers to pursue their own interests are not completely blocked by the formal institution, but exist in the form of subculture—a practical private relationship network. Walder’s analysis logic firstly simplifies the complex state-society relations to be the study of political power. This is certainly a general practice of the social science research because it is impossible for a theory to embrace all aspects, and social facts are far more complicated than any masterpiece. Thus, to capture the key essence of certain social problems is quite difficult but very important. The question is whether it is credible to explain the government and state-run factories under the state-society relations from the perspective of power. In our opinion, power and its mode of operation are critical key issues in the development of a society. For the Chinese society under the planned economic system, whether the particularity of this power model is a vertical dependent relationship as pointed out by Walder? In the planned economic system of China, since the resources and opportunities are fully occupied by the government, social individuals “benefit” from the redistribution only by means of getting closer to, flattering and sending gifts to leaders. These are not peculiar to the communist society, but result from the traditional “guanxi philosophy” of Chinese people. It is not the power model that leads to the “patron-client” network, but the other way around. Second, Walders’ analysis of the communist society under the planned economic system with the concept of “neo-traditionalism” has led to the refutations by other researchers. According to Walder, previous studies on the communist society are mainly dominated by the two theoretical paradigms, namely totalitarianism and group theory. He points out that the two theoretical paradigms have serious flaws. In the case of the totalitarianism, the state recognizes no limits to its authority and strives for strict and tight control over every aspect of the society; and meanwhile, leaders in a totalitarian society are seldom bound by law and morality and their behaviors are arbitrary. The two most distinctive characteristics are that the ideology is a prerequisite for the relationship between the totalitarian party and its active followers and totalitarian states are generally based on the legitimacy of ideology, and that social organizations are restricted and all social networks that cannot achieve the goals of the state must be cleared (at least on the surface). The totalitarian analysis tends to be strongly ideological, definite but often ignore actual actions of the members of the society. However, the group theory or pluralism analysis emphasizes that socialist states have interest groups based on identity and interests, which are same as those in capitalist states and can influence the government behaviors from up to down. And there are also disputes over interests among different sections and bureaucrats of the state.

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29

The Neo-traditionalism attempts to achieve a breakthrough of the two theoretical frameworks that analyze the socialism, and jump out of the inevitability of modernity based on the western rationalism. In this sense, Walder’s study is pioneering and lays stress on the analysis of concrete problems and use of interview data (despite criticisms on the sources and credibility of these data). He presents and depicts a relatively realistic picture of the daily life and the power structure of factories in the communist society and provides a new perspective for western scholars to understand the structural characteristics of the Chinese society. In other words, the Neo-traditionalism, in respect of the identification of the state structure and nature, replaces the totalitarianism and the pluralism with a seemingly contradictory concept of “neo-traditionalism”. Then, what is “neo-traditionalism”, why is it new and what are the connections with the traditionalism? Walder has repeatedly stressed that the “neo-traditionalism” is a type concept designed for the comparative research and an analysis type that avoids strict defining of this concept. On the premise that the modernity has no widely accepted standards yet, the power structure of China’s state-run factories is still characterized by dependence, obedience and particularism, and the independence, contract and equality that can reflect modernity seem to be nonexistent in the Chinese society. This does not mean that the China is still a traditional society, because some traditional elements are merged into the new institution, some traditions are abandoned, and some seemingly traditional structure and institutional characteristics indeed have no precedents in the history of China. The situation is summarized as neo-traditionalism. Then, did the communist society really break the traditional Chinese culture and rebuild a new Chinese social structure and cultural ideology? In the dynamic research of China’s social changes, is the neo-traditionalism embracive? Critics argue that the structural approach of Walder is far from revealing the diversity and continuity of the society and culture and exaggerates the split between the communist society and the history. According to Deborah Davis, in China’s traditional culture, the emphasis on allegiance to authority and on collectivism has always existed, so the reciprocal dependence of the communist society is not originated, but a fact that exists before the revolution. Elizabeth J. Perry argues that the so-called dependence relationship of Walder does not combine history with politics. In her view, the history of labor movements before the founding of new China is the direct reason for such dependence.46 Of course, the neglect of Chinese traditional history and culture is closely linked to the author’s identity. As an American scholar of China study, he “was mostly wrapped up in the practical work of learning languages and finding materials, so he has neither time nor efforts to create and promote the theory that influences the mainstream of the sociology”.47 In this case, while focusing on the analysis of explicit facts; various potential factors are ignored, such as the traditional culture. Third, if we consider it reasonable that Richard Madsen classifies the study of Walder into the mutual penetration model of state and society, then taking account of the structure and nature of Chinese society at the grassroots level, it is questionable 46 Cited

from Li et al. (2009). (1999).

47 Madsen

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whether the neo-traditionalistic Chinese society can influence the state behaviors and the mutual penetration. Under the planned economy of China, the power of the state penetrates to the most grassroots level of the society through people’s communes in rural areas and work units in cities. The state carries out the large-scale mobilization and transformation of the society according to its own dominant goals. In this period, except vertical connections, virtually all horizontal connections of the society are excluded out of the state institution, non-institutionalized social organizations are fully swept away, and the society is highly “atomized”. In the Neo-traditionalism, how the social influence from bottom to up occurs has not been adequately discussed. The state-society relations proposed by Walder pay more attention to the top-down operation of power and the formed power structure. If from the perspectives of collective actions and social movements, the spontaneous or organized resistance and conflicts of the society are related to its structure and nature. Without a focus on the society, we cannot understand how the mutual penetration of the state and society occurs. Next, changes in the state-society relations, in which the government-enterprise relations are embedded, will be explored. In the light of the nature of the state, the political nature of a state largely shapes but not completely determines the behaviors of the state. The dominant goals of and various social transformation plans implemented by the elite group of the state may lead to different relations between the state and society. The achievement of the state’s dominant goals depends on the degree of solidarity and consistency within the elite group and is restricted by the state capacity.48 The nature of the state comprises political structure and nature, organizational features of the elite group, and state capacity. The political structure and nature of China are divided into totalitarianism and authoritarianism before and after the reform, respectively. Of course, this division is strongly ideological. The fundamental differences between China’s political structure and that of western countries lie in the channels and methods of appointing leaders. If the one-party system is simply considered as inferior to the competitive electoral system, it is meaningless for our analysis of specific problems.49 Thus, within a regime, the organizational features of the elite group (degree of solidarity, dominant goals) and the state capacity determine the nature of the state. Before the reform and opening up, under the leadership with Mao Zedong as the representative and the core, the elite group has a high degree of consistency (relatively). The Chinese leadership based on the charismatic authority can break conventional restrictions and initiate different movements for social transformation (People’s Commune Movement, Great Leap Forward and Cultural Revolution) to achieve dominant goals of the state. In the planned economic system, several measurements of the state capacity, 48 Zhao

(2001, pp. 45–46). a considerable number of Chinese scholars praise that “democracy is good”, in the book Four Lectures on Democracy, Wang Shaoguang avoids the normative discussions and demonstrate through an empirical research that the electoral system is not true democracy and that the realistic democratic system is not necessarily linked to economic growth, social justice and human happiness. The rites of election every few years in many states are only a kind of psychological comfort to the general public, whose participation in the real decision marking is still very limited (Wang 2008). 49 When

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31

namely extractive capacity, legitimation capacity and coercive capacity, are developed to a high level, so that the state can fully penetrate the society and the society is in a passive position. State-run enterprises are incorporated by the government into the top-down control through the work unit system. Rural collective enterprises are confined to rural communities and recognized largely as an industrial supplement to the agricultural production. From the viewpoint of the state, the work unit system of urban industrial enterprises exists as a method of domination and control. Work units as a ruling system or structure are an intermediary link for the state to impose its rule. The unit organizations combine the economic control power with the state’s administrative power and hence the state realizes its rule over individuals just as it does to the unit organizations. An individual’s obedience to the unit organization is the obedience to the state, and the unit power over the individuals is largely an embodiment of the state power.50 After the reform, with the gradual collapse of the planned economic system and the introduction and expansion of the market, the ruling structure and power relations of state-owned enterprises based on the work unit system have also undergone changes. Enterprises become more autonomous and absorb more market elements. Compared with the situations before the reform, the totality of the state power penetration is gradually declining, and enterprises and employees have more options and reduce their dependence on the higher-level government or work units. However, at a key facet of the governance structure of the government, the party organization structure of “building party branch at the company level”, the personnel management structure of appointed leadership and the hierarchical structure of administrative affiliation still exist. It can be said that in the transition process from the planned economy to the market economy, the state power has made great concessions in the economic sectors (the formation of non-public economic organizations, such as private enterprises and foreign capital invested enterprises); the all-around and profound control of the society also becomes loosened (disappearance of enterprises burdened with social responsibilities); but in politics, state-owned enterprises are still important for the realization of state-dominated goals and undertake a lot of policy tasks, so the public ownership is enhanced in important industries and key areas. It is also important to note that the ideology of the state has a great influence on the government-enterprise relations and at a deeper level, on the state-society relations. During institutional changes of the government-enterprise relations, the ideology plays an extremely crucial role in explaining the reasonableness of institutional arrangements and substitution. For example, “Four Cardinal Principles”, and “keeping public ownership as the mainstay of the economy and allowing diverse forms of ownership to develop side by side”. Meanwhile, the ideology forms a primary source of legitimacy for the government. The state uses a complete set of ideological statements to persuade the masses to believe its behaviors and logic rules, such as “communism” and “some areas and some people can get rich first, lead and help other regions and people, and gradually achieve common prosperity”. China before 50 Li

(2004, p. 11).

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the reform is largely built on the legitimacy of ideology. Certainly, any state and government can gain support from the people by promise at the ideological level. Therefore, the ideological difference becomes a basis for people to determine the nature of the state. As a matter of fact, the process of institutional changes in a society is also the process of the internalization and socialization of new institutional arrangements and behavioral rules. Good institutional arrangements and design can provide people with a series of behavioral rules and values hidden behind these behaviors. The evolution of Chinese government-enterprise relations, on the one hand, can be regarded as a process of institutional changes; and on the other hand, the new institution becomes legitimized by the ideology. Moreover, the new ideology is transformed into a part of the institutional structure through the institutionalization. The discussion on the nature of society is a long tradition of the sociology, and the social structure relates to the nature of the society. For example, Karl Marx’s division of bourgeoisie and proletariat according to the means of production and Max Weber’s social stratification by power, class and status are analyses of the characteristics of the social structure. In addition to the social classes, in a broader sense, the gender, ethnicity, beliefs, geography and household registration system of China can constitute dimensions of the social structure analysis. From the perspective of the government-enterprise relations, enterprises are considered as the organizational foundation for the social structure because they are both economic and social organizations. When intermediate organizations of the Chinese society are still underdeveloped, enterprises are the mainstream social organizations, which, with different attributes, affect and construct different social structures, and have quite different relational logic with the government. In the work unit system, enterprises burdened with social responsibilities are both workplaces and living areas for individuals. Enterprises serving diversified functions can satisfy a variety of living needs of their employees, such as houses, schools, hospitals, cafeteria and bathhouses, and provide them with the power (rights), social identity and political status within and beyond the work units.51 Enterprises in the work unit system, according to their administrative level and affiliation relationship, exhibit hierarchical differences and status stratification. Generally, the higher the level of the work unit, the more resources, benefits and opportunities available to them, and the higher the economic and social status their employees enjoy. This situation undergoes no big changes before and after the reform. At present, state-owned enterprises that possess monopolistic resources are superior to those at the lower levels in respect of access to means of production, financial support and industry entry, or the economic income and social welfare of their employees. Besides the difference in the administrative levels, the different ownership types are also a major reason for the organizational differentiation. If based on the closeness between enterprises and the state, the higher the level of the enterprise ownership is, the more resources, interests and opportunities this kind of enterprises can occupy. Through various institutional preferences and barriers, the state and the government offer far more investments 51 Li

(1993).

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33

in state-owned enterprises than in collective and private enterprises. Even in today’s market-oriented economy, the ownership type is still a structural factor for the differentiated economic and social status of enterprises and their employees. In an earlier study, we have pointed out that, with the deepening of China’s reform, resources available to a unit is less realized and reflected through the hierarchical levels and the ownership types, but increasingly more through the welfare and the direct use of resources. Chinese enterprises are undergoing new changes, stratification and differentiation. In the process of China’s transition from the traditional planned economy to the market economy, from the great-unity society to the diversified society and from an overall domination of the state over the society to the technical governance,52 the government-enterprise relations are related to not just the economic performance, but also involve the political stability and social development. Therefore, such relations are embedded in the multifold state-market and state-society relations and shape and change the relations and structure of state and market, state and society in China.

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Liu, Jingming. 2006. Marketization and state regulation: income distribution in the urban labor market during the period of transition. Social Sciences in China (5). Liu, Shiding. 2003. Possession, cognition and interpersonal relationship—economic and sociological analysis of institutional changes in China’s rural areas, 72. Beijing: Huaxia Publishing House. Lu, Feng. 2000. The transformation of SOEs: Three propositions. Social Sciences in China (5). Madsen, Richard. 1999. Visions of state and society among five generations of american sociologists. In Social change in China’s reform era, ed. Yimin Lin and Tu Jow-Ching, 38. Hong Kong: Oxford University Press. Mann, M. 1988. State, wars and capitalism: Studies in political sociology. Oxford: Basil Blackwell. Mann, Michael. 2007. The sources of social power: Vol. 1, trans. Liu Beicheng and Li Shaojun. Shanghai: Shanghai Century Publishing Group. March, James G., and Johan P. Olsen. 1989. Rediscovering institutions: The organizational basis of politics, 160. New York: Free Press. Nee, V. 1989. A theory of market transition: From redistribution to markets in state socialism. American Sociological Review 54(5). Oi, Jean C. 1992. Fiscal reform and the economic foundations of local state corporatism in China. World Politics 45(1). Parish, W., and E. Michelson. 2002. Politics and markets: Dual transformations. In Market transition and social stratification: American scholars’ analysis of China, ed. Bian Yanjie, 553. Beijing: SDX Joint Publishing Company. Polanyi, Karl. 1992. The economy as instituted process. In The sociology of economic life, ed. M. Granovetter and R. Swedberg, 34. Boulder, Co.: Westview Press. Polanyi, Karl. 2007. The great transformation: The political and economic origins of our time, trans. Feng Gang et al. Hangzhou: Zhejiang People’s Publishing House. Qian, Yingyi and Chenggang Xu. 2008. Why China’s economic reforms differ: The M-form hierarchy and entry/expansion of the non-state sector. In Compete for Growth, ed. Zhang Jun and Zhou Li’an, 20–22. Shanghai: Truth & Wisdom Press. Qu, Jingdong et al. 2009. From macromanagement to micromanagement. Social Sciences in China (6). Qu, Jingdong, Feizhou Zhou, and Xing Ying. 2009. From macromanagement to micromanagementreflections on thirty year of reform from the sociological perspective. Social Sciences in China (6). Ren, Jiantao. 2009. China miracle’ of market leninism and rethinking on mises’ assertion. Social Science Journal, Winter Volume. Skocpol, Theda. 2007. States and Social Revolutions, trans. He Junzhi and Wang Xuedong. Shanghai: Shanghai People’s Publishing House. Stark, D. 1992. Path dependency and Privatization Strategies in East Central Europe. East European Politics and Societies 6 (1). Sun, Liping et al. 1994. Changes of China’s social structures since reform. Social Sciences in China (2). Szelenyi, Ivan, and Eric Kostello. 2002. The market transition debate: Toward a synthesis? In Market transition and social stratification: American scholars’ analysis of China, ed. Bian Yanjie, 580–582. Beijing: SDX Joint Publishing Company. Walder, Andrew G. 1995. Local governments as industrial firms: An organizational analysis of China’s transitional economy. The American Journal of Sociology 101 (2). Walder, Andrew G. 1999. Perspectives on state-society relations in contemporary China: From description to the analysis of change. In Social Change in China’s Reform Era, ed. Lin Yimin and Tu Jow-Ching, 60. Hong Kong: Oxford University Press. Walder, Andrew G. 2002a. Markets and inequality in transitional economies: toward testable theories. In Market transition and social stratification: American scholars’ analysis of China, ed. Bian Yanjie. Beijing: SDX Joint Publishing Company.

References

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Walder, Andrew G. 2002b. Property rights and stratification in socialist redistributive economies. In Market transition and social stratification: American scholars’ analysis of China, ed. Bian Yanjie. Beijing: SDX Joint Publishing Company. Wang, Jun. 1999. Empirical logic for evolution of government-enterprise relations. Economic Research Journal (11). Wang, Shaoguang, and Angang Hu. 1994. A study of China’s state capacity. Hong Kong: Oxford University Press. Wang, Shaoguang. 1997. The bottom line of decentralization. Beijing: China Planning Press. Wang, Shaoguang. 2008. Four lectures on democracy. Beijing: SDX Joint Publishing Company. Yan, Jirong. 2011. Changing governance of Chinese government. Comparative Economic & Social Systems (6). Zhang, Jing. 1998. Political science and main research directions. Sociological Studies (3). Zhao, Dingxin, and J.A. Hall. 1994. State power and patterns of late development: Resolving the crisis of the sociology of development. Sociology 28(1). Zhao, Dingxin. 2001. The power of Tiananmen: state-society relations and the 1989 beijing student movement. Chicago: The University of Chicago Press. Zhou, Li’an. 2008. Local governments in transition: official motivation and governance. Shanghai: Truth and Wisdom Press, p. 282. Zhou, Xueguang. 2000. Economic transformation and income inequality in urban China: evidence from panel data. American Journal of Sociology 105(4). Zhou, Xueguang. 1999. An overview of western sociological studies of China’s organizational and institutional changes. Sociological Studies (4). Zhang, Yi, and Songsong Zhang. 2001. A brief history of township enterprises of China, 5–6. Beijing: China Agricultural Press.

Chapter 3

The Government and State-Owned Enterprises (SOEs)

The discussions over the government-enterprise relations in China essentially center on the government and SOEs. This is mainly because in a very long period, especially over 30 years before the reform and opening up, China’s economic activities and production totally rely on state-owned enterprises, and even to some extent, it is difficult to separate them from administrative organizations. The government concentrates mainly on SOEs (state-run enterprises) instead of other types of enterprises. While developing their regional economy, local governments put in a great deal of effort to considering how to activate SOEs through making institutional arrangements in the interaction process, such as “flexibility and revitalization” and “decentralization of power and transfer of profits”, and thus driving the local economic development. It is impossible to understand the government-enterprise relations in China if without a clear idea of the relations between the government and SOEs, which are not only the mainstream but also linked with multiple facets, including the state, market and society. Therefore, the aforesaid interaction lies in a core position for our understanding of the government-enterprise relations in China and clearly reveals why the analysis of SOEs is important here. SOEs is a controversial economic sector because they are important pillars of the national economy and the main realization form of the public ownership, thus attaining an intrinsically advantageous position. The special relations between SOEs and the government and their “unequal” competitions with enterprises of other ownership types in the market are often criticized. This kind of controversy, on the one hand, reflects the hardships for the improvement of economic efficiency of SOEs, and China’s long-term institutional reform of SOEs is to improve their overall efficiency and competitiveness. On the other hand, SOEs are not sheer profit-making entities but must fulfill various non-economic functions. According to Jin Bei, SOEs have a dual identity and are subject to the double evaluation criteria. As the market-oriented economic organizations in a general sense, their operating efficiency and market com-

© China Social Sciences Press 2019 Q. Wei and H. Li, Entities and Structures in the Embedding Process, Social Development Experiences in China, https://doi.org/10.1007/978-981-13-2390-4_3

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3 The Government and State-Owned Enterprises (SOEs)

petitiveness must be investigated, and as special organizations, their evaluation needs to consider whether they can reflect the state will and the people’s holistic interests.1 Consequently, at the mention of SOEs, we cannot bypass this controversial issue of the state-owned enterprise reform. It can be said that the development of SOEs is on the one hand accompanied by the reform, and on the other hand, the development and reform of SOEs center on how to deal with their relations with the government. If the state-owned enterprise reform is characterized by the “decentralization of power and transfer of profits”2 within the period from 1978 to 1986, its core purpose is to further ease the control of SOEs by the government. Either “the increase of enterprises’ autonomy”, the implementation of “replacement of profit delivery by taxes” or the execution of the “lease system” aims at the same goal, that is, to enable the behaviors of enterprises gradually return to the norms of economic behaviors. From 1987 to 1992, the reform of SOEs is characterized by “the separation of ownership and control”. A series of institutional arrangements of the government focus on how to implement the economic responsibilities of enterprise operation without changing the form of corporate property relations and through strengthening incentives, so that enterprises become economic entities of independent operation and responsible for their own profits and losses.3 The goal of the reform is trying to make clear the profit distribution relationship between the state or the government and enterprises. In this period, the most obvious institutional arrangements are the trial and promotion of “the contract system” and “the asset operation responsibility system” among SOEs. After 1993, the state-owned enterprise reform puts emphasis on “how to build a modern enterprise system”.4 In the course of the reform, the government tries to make clear its relations with enterprises through a series of institutional arrangements, such as “the reform to convert state-owned enterprises into shareholding corporations”, “strategical reorganization of state-owned enterprises” and “setting up the state capital management system”, in order to make SOEs become modern enterprises with “clearly established ownership, well-defined power and responsibility, separation of enterprise from administration, and scientific management”. Anyhow, after many years of reform, from “decentralization of power and transfer of profits” in the 1980s to “invigorating large enterprises while relaxing control over small ones”, “extrication from financial difficulty in three years”, joint stock reform and building a modern enterprise system in the 1990s, SOEs reduce in quantity but significantly increase their economic efficiency.5 From 1998 to 2010, the proportion 1 Jin

(2010). Institute of Economics (2011, pp. 20–23). 3 Ibid., pp. 23–26. 4 Ibid., pp. 26–30. 5 According to Justin Yifu Lin et al., the reform in the 1980s and 1990s is mainly the reform of SOEs producing non-public goods and revolves around the three major tasks: the competition of asset operation, the liquidity of assets and the asset owners’ constraints and supervision of asset operators. In the timeline, it follows the clues of “adjusting the interest relations between the state and enterprises”, “giving enterprises more autonomy of operation” and “constructing an enterprise system that adapts to the market economy”. Even though SOEs become continuously market oriented and 2 Unirule

3 The Government and State-Owned Enterprises (SOEs)

39

of SOEs reduces from 39 to 4.5%; and from 2002 to 2011, the total assets of centrally administered state-owned enterprises increase from 7.13 to 28 trillion yuan and their operating revenues increase from 3.36 to 20.2 trillion yuan.6 Since 1995, China speeds up the pace of transforming SOEs. By the end of 1996, 70% of small SOEs in some provinces are privatized and 50% in other provinces.7 As indicated by more detailed statistics, although the number of SOEs decreases year by year, their profit margins continues boosting, their number of employees is decreasing, and their total profits and taxes paid to the state are on the increase. Concretely, the total number of enterprises diminish from 238,000 in 1998 to 114,000 in 2010; the number of state-owned industrial enterprises grows from 38,000 to 56,000; the proportion of profit-making SOEs rises from 31.3% in 1998 to 58.6% in 2010; their total number of employees drops from 88.09 million in 1998 to about 35.4 million in 2010; the total amount of taxes paid increases from 668.3 billion yuan to about 2654.4 billion yuan in 2010; and their total profits grow from about 52.5 billion yuan to 1182.6 billion yuan in 2010 (see Table 3.1). On October 24, 2012, Wang Yong, the Director of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), delivers the Report of the State Council on State-Owned Enterprises Reform and Development to the 11th Standing Committee of the National People’s Congress, which has been reported by major newspapers and media and arouses great concern. In the eight years from 2003 to 2011, the overall economic efficiency of SOEs is continuously improved with the increasingly enhanced competitiveness (the number of SOEs listed on the Fortune’s Global 500 increases from 6 to 54). The operating revenues of SOEs grow from 10.73 trillion yuan in 2003 to 39.25 trillion yuan in 2011, with an average annual growth of 17.6%; their net profits rise from 320.23 billion yuan to 1.94 trillion yuan in 2011, with an average annual growth of 25.2%; and their taxpaying to the state increases from 836.16 billion yuan in 2003 to 3.45 trillion yuan in 2011, with an average annual growth of 19.4% (see Fig. 3.1). At the same time, SOEs are still facing many problems to be solved and improved, such as enterprise rules, development model, layout structure, management system, regulatory system and social burden (Table 3.2). It can be found that SOEs are still restricted by the institutional mechanism, historical carryover and other development bottlenecks while increasing their revenues and profits. Since the establishment of the SASAC in 2003, the number of SOEs under the direct supervision of the central government decreases from 189 to 117 in self-optimized, they still fail to get out of the predicament and suffer serious losses in the middle and late 1990s (Lin et al. 2012, pp. 154–155). Our so-called significant improvement of economic efficiency of SOEs starts from the late 1990s (after the Asian financial crisis and transformation of many state-owned enterprises). Therefore, it is not contradictory between the improvement of economic efficiency in our opinion and the serious losses of enterprises pointed out by them, which come one after another in time. 6 May 21, 2012, “Original intention achieved of state-owned enterprise reform, new difficulty in withdrawal of state capital”, Finance, http://finance.ifeng.com/news/macro/20120521/6491643. shtml. 7 Bai et al. (2005).

40

3 The Government and State-Owned Enterprises (SOEs)

Table 3.1 Statistical indicators of state-owned enterprises (SOEs) Year Number of Number of ProfitTotal debts Number of Total SOEs industrial making (billion employees taxpaying SOEs SOEs (%) yuan) (million) (billion yuan)

Total profits of industrial SOEs (billion yuan)

1998 238,000

–

31.3

8440.93

88.09

–

1999 217,000

–

46.5

9147.49

83.36

–

52.51 99.79

2000 191,000

–

49.3

10,209.24

78.78

–

240.83

2001 174,000

–

48.8

10,527.33

74.09

668.26

238.86

2002 159,000

–

50.1

11,367.58

69.24

679.41

263.29

2003 146,000

37,868

47.4

12,871.89

66.21

78.65

308.05

2004 136,270

34,692

48

13,883.91

64.38

1008.61

476.92

2005 126,000

32,122

50.1

15,517.32

62.32

1173.66

594.57

2006 116,090

30,658

53.6

17,929.37

61.70

1400.08

748.92

2007 112,000

29,506

56.5

20,247.25

61.48

1744.37

979.06

2008 110,000

28,943

56.8

25,000.84

61.26

1953.65

656.0

2009 111,000

29,521

58.6

31,541.69

35.103

2181.96

785.5

2010 114,000

56,286

60

40,604.32

35.407

2654.43

1182.56

Note “–” means no data available Data source China Economic and Social Development Statistical Database

Fig. 3.1 Economic efficiency of SOEs (a comparison of 2003 and 2011)

2012. After these enterprises grow bigger and stronger, the voices of “saving stateowned enterprises” in the 1990s seemingly have been forgotten, and “breaking up the monopoly” currently becomes a most “popular” opinion on them. As a matter

According to the SASAC statistics, the total output value of SOEs accounts for less than 10% in 18 of 39 industrial sectors. At present, the development of SOEs is extensive and the layout structure needs further adjustment. For example, SOEs are distributed mostly in traditional industries, but few in strategic emerging industries. Some enterprises still rely on the scale expansion and increase of investments. In some industries, the industrial concentration is low, the resource allocation efficiency is not high, and the redundant construction, vicious competition, waste of resources, environmental pollution and other problems haven’t been well solved. Compared with those international leading enterprises, SOEs are weak in technological innovations, lack of key technologies and well-known brands with independent intellectual property rights, and confined to the introduction of core technologies. Their transnational business index is much lower than the international level. Some enterprises have no overall strategy and development planning of international operations, so significant risks and asset losses in overseas business often occur The problems of the combination of the government administration with the enterprise management and with the state assets still exist. Some important matters that should be decided independently by enterprises must seek approval from the government. Some local governments tend to increase interventions on daily business activities of enterprises and various types of repeated inspections. Currently, the evaluation of the board of directors and the selection, appointment and evaluation mechanism of external directors of SOEs are not perfect. The relations among the state-owned assets regulatory body, the board of directors and management need to be further rationalized

Layout structure and development mode

(continued)

According to the SASAC statistics, more than 90% of SOEs have completed the company and shareholding system reform, and the proportion of reformed central enterprises increase from 30.4% in 2003 to 72% in 2011. The management by the board of directors has been piloted in some local SOEs and 50 central enterprises. The SOE reform still does not meet the requirements for establishing a modern enterprise system: the governance structure is not perfect, the company and shareholding system reform at the parent level of large companies is relatively slow and the construction of the board of directors is in the exploration and perfection phases; the administrative management of operators still exist, and especially due to the lack of market exit channels, the market-oriented screening and employment mechanism has not been really formed yet; some SOEs attach more importance to development and less to reform and more to speed and less to efficiency, and the reform progress in key areas is relatively slow

Establishment of modern enterprise system

Management system

Description

Status

Table 3.2 Description of problems confronted by SOEs in development

3 The Government and State-Owned Enterprises (SOEs) 41

Operating state-owned assets have no centralized and unified regulation. Many state-owned assets are still managed by multiple government authorities and result in the fragmentation of administrative institutions, inconsistent regulation rules, decentralized allocation of resources and low operating efficiency. The timeliness, effectiveness and pertinence of state-owned asset regulation are insufficient. The institution and system of SOEs in income distribution management, capital operation budget and overseas asset supervision need to be further improved

Central enterprises have over 8000 organizations with social functions, such as hospitals, schools and administrated communities, which are subsidized with the fund of tens of billions of yuan. Central enterprises now have 5.236 million retired employees and over 1 million needy employees, so they need to bear a lot of management and other burdens. It is very difficult to reform the collective enterprises established by state-owned enterprises. To solve this problem, tremendous reform cost must be paid

Regulatory system

Social burdens

October 25, 2012, “Four difficulties remained for the state-owned enterprise reform”, China Business News Daily; October 25, 2012, “Tens of billions used by the “small society” of central enterprises: over 8000 institutions established for social functions, heavy social burdens”, Beijing Times; October 25, 2012, “Ease of market access to telecommunications, petroleum and petrochemical sectors”, The Beijing News

Description

Status

Table 3.2 (continued)

42 3 The Government and State-Owned Enterprises (SOEs)

3 The Government and State-Owned Enterprises (SOEs)

43

of fact, the monopoly of SOEs has always existed, but to different degrees and in different forms (in the ideological sense, China is a socialist state where the dominant position of the socialist public ownership must have a solid economic foundation, and SOEs as “the eldest son of the republic” are undoubtedly the “best choice” for undertaking that responsibility; out of the political and economic needs, important industries and key areas that are related to the people’s livelihood and the lifeline of national economy should be controlled in the hands of the state in order to more effectively regulate the market, stabilize the economy, conduct the social control and governance and enhance the state capacity; at the facet of the society, dominant SOEs can better achieve the government functions, such as the provision of public goods and employment). However, today people are eager to break the business model of state dominance and industry monopoly for different reasons. First, at the individual level of the society, the monopolistic interest pattern has been formed and the “involution” turns out to be increasingly prominent when SOEs continue to grow strong. Becoming SOE employees means high welfare, high income and low risk. The widening income gap leads to the enhanced sense of relative deprivation of employees in non-state-owned enterprises (according to a survey made by us, the sense of relative deprivation of employees in other types of enterprises is significantly higher than those in SOEs8 ). Second, SOEs, particularly central enterprises, are concentrated in the energy, minerals, transportation, electricity, telecommunications, finance and other key sectors concerning the national security and people’s livelihood. It is difficult for other types of enterprises to participate in these sectors, thus forming an unfair atmosphere of market competition. Finally, as argued by those who hold the opinion that “the state advances, the private sector retreats”, entities in the seemingly fair market competition are faced with different constraints of resources and capitals. Especially when the upstream of major industries is controlled in the hands of SOEs, private enterprises have no choice but are tied with the government and SOEs to get orders, resources and other necessary production factors for their growth, or even become subordinate to SOEs. The capitals required by enterprises for expansion and investments must be obtained from banks, which are monopolistic SOEs in the financial sector. It is because of the special status of SOEs, some studies have found that since the 21st century, the profit growth of China’s industrial SOEs is realized not by the improvement of efficiency, but due to their monopoly in some fundamental sectors and the resultant pricing power. Therefore, for the entire society, the high profits by monopoly lead to the inefficient allocation of industrial resources and the deficiency of social welfare.9 Anyway, it can be ascertained that the development of SOEs in the new century is the result of their improvement of operating efficiency on the one hand and the enhancement of their advantageous status on the other hand. Of course, we cannot figure out the direction of the relationship between the two factors, but it is undeniable that the advantageous status can improve the economic efficiency of SOEs.

8 Li

(2012). (2009).

9 Han

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3 The Government and State-Owned Enterprises (SOEs)

In 2012, the report, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, jointly published by the World Bank and the Development Research Center of the State Council of the People’s Republic of China, has put forward a series of views on the reform of SOEs. This report points out that the state-owned enterprise reform is faced with two challenges: how to make the best use of public resources and how to transition the state-owned capital management from the existing system to a new system to accomplish China’s identified longterm development strategy. The report further argues that the countermeasure for the first challenge is to use the state-owned capital primarily or exclusively for the provision of public goods; and the countermeasure for the second challenge is to first promote the securitization of the equity of SOEs and then set up one or more state-owned capital management companies or investment funds by the government, which, as the holders of state-owned capital in enterprises, may carry out professional management and transactions on the financial market. The dividend income from the state-owned capital is paid by these capital management companies or investment funds to the finance authority and gradually incorporated into an extended budget system.10 No matter whether these countermeasures hit the nail on the head, the state-owned enterprise reform is far from enough. With the economic and social development, the functions and orientations of SOEs and their relations with the government are necessarily subject to further reform. In fact, besides the analysis of the historical evolution of SOEs from the microinstitutional changes, the exploration of the relations of the government and SOEs cannot be separated from the macroeconomic system. Under the planned economic system, SOEs are the major form of economic organizations and the principal means for the state to achieve its political, economic and social control of urban areas in the work unit system. SOEs are not purely economic entities, but also serve political and social functions. In a sense, they have the features of quasi-governmental organizations. For example, their leaders are appointed by the higher-level authority, “the party branch is built at the company level”, and more specifically, leaders of SOEs can exchange between “officialdom” and “business circles”. SOEs in the market economic system inherit the features of the work unit period on the one hand and develop new features on the other hand; they obtain resources from the institution and seek opportunities in the market; and they actively pursue economic efficiency to maximize their benefits and are controlled by the government to undertake some nonprofit functions to realize the state will. If SOEs in the planned economy run under the unitary logic, they have the characteristics of the “dual logic” in the market economy. The historical evolution and the concept of SOEs will be analyzed in the following sections and then the relations between the government and SOEs will be elaborated from the perspective of structural changes. In our opinion, under the planned economy and the dual track economy, the work unit system is an institutional environment for analyzing such relations, and the SOEs themselves are an integral part of the 10 World Bank; Development Research Center of the State Council, the People’s Republic of China (2012).

3 The Government and State-Owned Enterprises (SOEs)

45

overall unit structure (Andrew Walder revealed the characteristics of the factory system under the planned economy of China and called this form of institution “neo-traditionalism”, which will be analyzed in detail later). Compared with the previous period, we made clear the political and economic characteristics of the market economy as the “state marketism” in the 1990s and explained the relations between the government and SOEs within this conceptual framework. Of course, the two periods are difficult to be divided by a precise time point. The work units as a system, a social structure and a ruling method are bound to have the path dependency in the process of the reform. Even today numerous people who have experienced the work unit period still have the behavioral habits and ways of thinking of that period, and the relations of SOEs and the government have features of the work unit system at some facets and to some extent.11

3.1 Historical Evolution of SOEs and the Analysis of Their Nature The term “state-owned enterprises” is de facto an empirical concept without a strict definition and differentiation. It is generally accepted by us that the SOEs are enterprises owned by the state or the whole people, or run, controlled or invested by the state. The state has so far not strictly defined the “SOEs”. Logically, the state ownership or the ownership of the whole people is very abstract, and the government at all levels acts as the state or the capital contributor for the whole people. In this sense, the extent to which the government can keep control of enterprises reflects the degree of state ownership. Considering the historical evolution, SOEs have different functions and natures in different historical periods. In view of this, on the one hand, we briefly describe the historical evolution of SOEs, and on the other hand, try to analyze the nature of SOEs from the relevant theoretical and research perspectives.

11 As emphasized in our previous studies, although the dependence of units on the state and of individuals on the units gradually weakens when the reform and opening up deepens, the basic structure of Chinese society formed by two poles, namely state and work units, becomes loose and gradually disappear. However, the basic structure dominated by the unit organization are not completely changed in a short period. The coexistence of unit organizations and non-unit organizations as well as two kinds of behavioral norms for social organizations, and their interactions, mutual influence and mutual restraints are maintained for a long period. It is not the right time to radically restructure such integration and control mechanism of Chinese urban communities based on this basic structure (Li 2004).

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3 The Government and State-Owned Enterprises (SOEs)

3.1.1 Historical Tradition: State Control of Market and Domination of Industry According to the historical tradition of China, the state always maintains monopoly and control of key areas and important industries, and the market has never been completely developed. This historical tradition or economic model also deeply affects the government-enterprise relations in the subsequent period. Different from the western capitalism, our economic model is closely linked to the national tradition and government-dominated goals of China. Today the economic development is connected with the market. Even in the discourse context of China, the market is often seen as exotic and associated with the capitalism. The market has emerged very early in the history of China and there are numerous statements in our historical writings on the material abundance produced by the market. Sima Qian has given a description in the “Biographies of Money Makers” section of his masterpiece Shi Ji (Records of the Grand Historian), “Each man will play his part, doing his best to get what he desires. Cheap goods will go where they will fetch more, while expensive goods will make men search for cheap ones. When all work willingly at their trades, just as water flows ceaselessly downhill day and night, things will appear unsought and people will produce them without being asked. Is it not true that these operations happen naturally in accordance with their own principles?” Sima Qian advocated the acquisition of wealth by spontaneous circulation of goods and argued against the intervention by the government. In his opinion, “the best of men leave it alone, and the next in order come those who try to guide it, then those who moralize about it, then those who try to adjust it, and lastly come those who get into the scramble themselves.”12 China has never developed a mature market economy in history. The economy is controlled by the state, which dominates the economic development and monopolizes the market but without guiding the market. Sometimes “superiors and inferiors try to snatch profits one from the other”, resulting in the difficult life of people and the interregnum. Scholars have summarized that feudal states in the history of China share a common feature in each dynasty, that is, after the initial economic development, the state “rationally” controls economic activities of the people and further prosperity of the economy and the government monopolizes the key areas and important industries related to the national economy and people’s livelihood. This seemingly abnormal governance is “rational” for the government. To maintain political stability, the government does not leave alone economic development, but monopolizes resources in key industries and important areas to achieve its governance and control of people.13 This strategy of governance can indeed play a role in maintaining the political stability of the state in certain historical periods, but it is difficult to balance between control and development of the economy. Once the people are extremely dissatisfied with their life, they attack the rulers or even overthrow the rule. As pointed out 12 See 13 Cao

Records of the Grand Historian · Biographies of Money Makers. (2013).

3.1 Historical Evolution of SOEs and the Analysis of Their Nature

47

by a related study, since the Zhou Dynasty, the legitimacy of traditional states is largely based on their performance, and the performance-based legitimacy not only determines the model of the Chinese history, but also profoundly affects contemporary China’s political form.14 In this sense, the ruler’s emphasis on the political performance and their monopoly and control of the economic development, although seemingly contradictory, are integrated well in the history of China. This integration is reflected in three aspects. Firstly, as an agricultural country, China adheres to the principle of “agriculture first and commerce second”.15 The government performance is mainly embodied by its defense against invasion, development of agriculture, combatting drought and flood control, disaster relief and people saving. The excessive focus on the development of the business economy is regarded as a threat to the political stability and thus being excluded. The so-called “merchants pursue profits” and “no merchant is not tricky and sly” penetrate the idea of valuing righteousness rather than material gain into the state and the people. Secondly, in the traditional China with the Confucianism as the philosophy of rule, it is not only stressed that “under the heaven, every spot is the emperor’s land”, but also that “to a state, the people are the most important thing, the state comes second, and the ruler is the least important”. Therefore, the traditional centralized state cannot be and is reluctant to assume allembracing and in-depth control of the production and operation of the entire society, and the special governance model of running by officials and individuals is gradually developed. The state dominates the development of the industry and commerce and restricts private sectors, especially over the circulation, such as exclusive operation, mandatory business size and heavy taxation.16 Thirdly, the performance-based legitimacy requires specific commitments to the people. When the commitments are honored, there are new wishes that can give rise to the public dissatisfaction if can14 Zhao

(2012).

15 A lot of studies argued that the late Qing government shifted from “suppressing” to “encouraging”

the commerce because it had the urgent need to develop the economy, cover the financial deficit and enhance the state strength at the time of getting into internal and external troubles. Then in this sense, whether its attention to the development of the business economy broke through the historical development model of the state monopoly of the market and control of the economic development? Feng Xiaocai specifically distinguishes the two meanings of the mercantilism: firstly, the attention to and protection of merchants and business by the government and its recognition of the importance of commerce for the people’s livelihood; and secondly, an economic concept corresponding to the physiocracy emphasizing the control of the public sector of the economy by the government and the intervention of the economy by the state. In his opinion, the so-called mercantilism in the late Qing dynasty is de facto a manifestation of the economic nationalism. The government’s stress on the business and commerce only aims at developing it as an instrumental means of the state (Feng 2003). 16 Researchers have summarized several forms of the traditional Chinese state-run commercial systems. The first is the monopoly system (exclusive operation), which means that some important production and business activities, such as salt and iron, are monopolized by the government, and private operation is prohibited; the second is equalizing transportation, which means that the government purchases and sells commodities in different regions according to the characteristics of local products and regional differences of demands, so as to obtain profits; and the third is “price balancing”, which means that the government purchases and sells a variety of materials to stabilize the market prices (Wang et al. 2000, pp. 29, 39).

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3 The Government and State-Owned Enterprises (SOEs)

not be further realized. So, in terms of the economic development, ancient states and monarchs need “to enrich the state and the households”, and “to control the hugely profitable industry and commerce by the government and restrict the free private business, and thus reducing the tax burdens and the government required labor forces, averaging the land ownership, and restricting the development of the industry and commerce so that there are no very rich or very poor people”.17 The monopoly of the market by the dynasties of China aims at maintaining the political stability and rarely considers the socio-economic development. Then, since the modern times, what are the trends of the state control of the market and development of the industry and commerce? Whether do the dominant goals of the state undergo changes? A consensus view is that China’s modern industry begins from the “Self-Strengthening Movement”. The construction and development of the military industry aim to suppress foreign invaders and strengthen the state. The deterrence by the “warships and guns” of western countries and the constant failure in wars lead to the late Qing government’s investments in the military industry for the purposes of seeking internal stability and defense of national security.18 According to incomplete statistics, the Qing government had 61 official-run factories and 22 official-merchantrun factories from 1861 to 1912, including the earliest Anqing Arsenal founded by Zeng Guofan in 1861. The first official-merchant-run factory was Huaxin Textile New Bureau jointly operated by the Intendant of Circuit Tang Songyan and merchants.19 It is undeniable that these official-run and official-merchant-run enterprises quickened the pace of the industrialization in modern China, but the government still mastered and controlled key areas and important industries. Estimated according to other statistics, the number of factories in the late Qing Dynasty (before the First Sino-Japanese War) was very few (inclusive of 31 official-run factories and 77 merchant-run factories). The metallurgy, minting and armaments industries were mainly run by government officials, and the textile, food, chemical, machinery and hardware industries were mainly run by merchants. Until the 1920s, although their number increased, factories were still very scarce in this big country (see Table 3.3). The industrial factories were primarily concentrated in regions along the coast or rivers, such as Shanghai, Hankou, Guangzhou, Tianjin, Fuzhou and other cities. 17 Cao

(2013). the core official of the Self-Strengthening Movement, Li Hongzhang expressed his idea in a letter to Zeng Guofan, “I had ever been to Britain and France to get back our warships and witnessed the exquisite cannons, delicate ammunitions, brilliant armaments and might army, which China is unmatchable with. Although their land forces are not the best, we do not own the arms used by them for laying siege to cities. I did not see their use of pontoon bridge, ladder and emplacement … I dare not to believe in cults, but only reap benefit for us. I feel deeply humiliated by our weapons inferior to foreigners. I often tell our generals and soldiers to learn some secrets from the westerners … If we stay in Shanghai for long without learning the skills of foreigners, we would regret”. It can be said that the Self-Strengthening Movement centered on the military construction, because at that time “the navy is decadent, the air force just starts, and the transport relies only on cattle and horses, and we lag far behind foreign powers”. The Self-Strengthening Movement facilitated the development of modern industry and transportation, but the corruption caused by the “merchant run under the official supervision” led to losses of many enterprises (Chen 1961, pp. 4–5, 7, 27). 19 Chen (1961, pp. 22–25). 18 As

3.1 Historical Evolution of SOEs and the Analysis of Their Nature Table 3.3 Numbers of modern factories from the late Qing period until 1920

Industries

Before 1895

49 Before 1913

Before 1920

Run by merchants

Run by officials

54 14 4 12

4 2 – 2

231 153 105 101

475 383 280 252

2

–

25

51

Metallurgy –

2

8

12

Minting

2

5

5

18

23

23

Textile Chemical Food Machinery and hardware Printing

–

Armaments –

Data source Department of International Politics, Peking University (1985)

After the Revolution of 1911, due to the regime change and long period of wars, the industrial economy during the period of Republic of China was very complex.20 The state-dominated industrial development model remained unchanged. The development of national industries underwent ups and downs, but it was far from enough on the whole. Firstly, in terms of the economic structure, it had the obvious statedominated rather than the market-oriented industrialization features. Researchers roughly estimated the change of China’s economic structure from 1911 to 1936 according to the variation of Hoffmann Ratio. The ratio was 1.09 in 1911/1913, 1.46 in 1920 and 2.66 in 1933, reflecting a trend of de-industrialization.21 Secondly, it could be found from the growth and composition of the industrial capital that, despite the increase of the national bourgeoisie capital faster than that

20 This complexity in the development of the industrial economy was first manifested in the changes of the economic organs of the government. After an analysis of the evolution of the central economic institutions during the Republic of China, in the opinion of some researchers, the functions and names of central economic institutions varied with the continuous regime change, but in general, the institutional changes had little impact on the national economy (Zhang 1997). 21 The Hoffmann ratio was proposed by the economist Walther Hoffmann to measure the degree of industrialization of a state or region (the ratio  net output of the consumer-goods industries/net output in the capital-goods industries). According to the changes of this ratio, the industrialization process was divided into four stages. The lower the ratio, the higher the gradual process of industrialization. Gong Huilian calculated the ratio of the industrial structure in relevant years based on the historical data. She found that in the early period of the Republic of China, the economic structure showed a high degree of industrialization due to the advancement of the military-centered heavy industries by the Self-Strengthening Movement in the late Qing Dynasty, but this structure was obviously abnormal and could not conform the laws of the market. The ratio gradually tended to be rational when the economic structure changed by demand during the period of Republic of China (Gong 2010).

50

3 The Government and State-Owned Enterprises (SOEs)

Fig. 3.2 Proportions of bureaucrat capital and national bourgeoisie capital in the industrial capital from 1894 to 1948

Fig. 3.3 Growths of bureaucrat capital and national bourgeoisie capital from 1894 to 1948. Source Xu and Wu (2003, pp.741–742). Note 1 The industrial capitals used by researchers for the statistical purpose include the industrial capitals (modern chemical manufacturing, utilities such as water and electric power, mining and metallurgical industries) and transport and communications capitals (railways, highways, ships, civil aviation, post and telecommunications). Note 2 In the industrial capital statistics of 1936 in Fig. 3.2, the original data distinguishes northeastern provinces and non-northeastern provinces, but we took the mean of them during the plotting of this figure

of the bureaucrat capital, the latter played a dominant role considering its proportion in the industrial capital (Figs. 3.2 and 3.3). Changes of Hoffmann ratio in modern China (Unit million yuan) Year Industries Consumer goods Production factor industries industries 1911/1913 1920 1933

150.84 335.45 1036.515

138.48 229.39 389.262

Hoffmann ratio 1.09:1 1.46:1 2.66:1

3.1 Historical Evolution of SOEs and the Analysis of Their Nature

51

A lot of studies hold the opinion that during the First World War, the Western countries ran into the trouble of war and had no time to disturb China, so that a relatively peaceful environment was created for the development of China’s industrial economy and in this period, China’s industrial sectors experienced a fast growth. After the First World War, especially after the outbreak of the Chinese People’s War of Resistance against Japanese Aggression, the internal disorder and foreign invasions led to not only the very slow growth of China’s economy, but also an abnormal economic structure. However, if taking account of the domestic affairs at that time, the government’s shift of economic policies and its institutional arrangements and means that sought private gains and ignored the overall national interests largely resulted in the slow or even worsening industrial development. Some researchers pointed out that from 1927 to 1937, the business policy of Nanjing National Government was basically private operations supported by the state, but after the start of the War of Resistance against Japanese Aggression, the policy was transformed from the support of private enterprises to the direct operation by the government through its control of circulation, development of bureaucratic businesses and making profits.22 In fact, there were no strict distinctions among state-run enterprises, official-run enterprises and bureaucratic capital. A large part of official capitals was dominated and operated by the four big families, Chiang, Song, Kong and Chen.23 According to an estimate, by the year 1947/1948, the total bureaucratic capital amounted to 7,670,790,000 yuan of the paper currency issued by the KMT government from 1935 onwards, but the national bourgeoisie capital was only 5,457,890,000, and the ratio was 1.405:1.24 Through the brief historical and process analysis above, it can be said that in the traditional dynasties of China, the ruling blocs administrated and controlled the market and dominated industries by means of state operations (inclusive of officialmerchant operation, merchant run under the official supervision, and monopoly by the bureaucratic capital). They maintained the stability of ruling by restricting private industrial and commercial businesses with a very large top-down bureaucratic group. The state-dominated economic development is not just linked to the national tradition of centralization, but in a feudal state of agriculture, the bureaucracy is an independent interest group that maintains its autonomy relative to peasants and merchants.

22 During the reign of Nanjing National Government, the Resource Committee controlled and administered large numbers of industrial enterprises. Its capital was double of private industries and the number of affiliated factories and mines increased from 16 before the War to 105 after the War, involving industry, mines and electricity. In the early period of the War, the state capital laid more emphasis on the establishment of new factories and mines, but after the War, it acquired private factories and mines or changed them to be state owned enterprises by investment (Chen 1961, p. 709; Wang et al. 2000, pp. 180–182). 23 “The government-operated enterprises of Kuomintang accounted for over 60–70% of the total, or even more, and could reach 80% if the northeastern provinces and Taiwan were included, or 90% if the bureaucratic capital disguised in the form of private business” (Li and Zhang 2007, p. 43). 24 Xu and Wu (2003, pp. 763–776).

52

3 The Government and State-Owned Enterprises (SOEs)

3.1.2 Historical Development of SOEs in the People’s Republic of China After the founding of new China, in order to speed up the transition to the socialism, the state began the socialist transformation of the original capitalist industry, confiscated the bureaucrat capital (a total of 2858 industrial enterprises confiscated until 1949, including Japanese, German and Italian enterprises in China taken over by the Kuomintang Government after the victory of the War of Resistance Against Japan), and implemented the state capitalist economic model for private industrial enterprises (divided into primary form and advanced form; the primary form of state capitalism mainly refers to the means of transformation of private industrial enterprises, such as processing, order, purchase, sale and acquisition; and the advanced form refers to the public-private partnership from individual enterprises to the whole industries). A related study pointed out that five types of economic sectors existed in the transition period of the socialism, namely socialist state-operated, cooperative, state capitalism, individual and capitalist sectors. During the “First Five-Year Plan” from 1949 to 1957, the private industrial capitalism had been eliminated, the proportion of state-owned enterprises in the total industrial output of the country increased from 34.2 to 64.8%, with an average annual increase of 3.8%, and the proportion of public-private partnership enterprises grew from 2% in 1949 to 31.7% in 1957, with an average annual increase of 3.7%. The state-owned and public-private partnership enterprises achieved the absolute dominant position in the industrial output25 (see Table 3.4). As to the economic organization form absolutely dominated by SOEs, which were created as a result of the planned economic system and a rapid transformation into the state ownership after the founding of new China, according to some scholars, in addition to the purpose of imitating the Soviet Union’s economic system and solving various social problems (such as inflations, speculation, unemployment, labor conflicts, public and private contradictions, etc.), it was influenced to a great extent by the revolutionary tradition of the communist party, the leap-forward industrialization of the agricultural state and the legitimacy pressure of the socialist ideology. Some researchers argued that the origin of the planned economy in China was largely a manifestation of the state will. The economic model in revolutionary bases before the founding of new China had far more historical and practical influence on the subsequent economic system than the planned economy of Soviet Union. Meanwhile, leading cadres who came from the army were more accustomed to completing the economic construction of new China through issuing militarized administrative orders.26 Justin Yifu Lin et al. indicated that the planned economic system of China was an economic model that must be and had to be formed in an agricultural state, which had a very low level of development and extremely scarce resources and where the leap-forward industrialization with the priority to heavy industries was the goal. 25 The

Central Administration for Industry & Commerce, and Capitalist Economy Transformation Research Office, Institute of Economics, Chinese Academy of Sciences (1960, pp. 12–50). 26 He (1998).

34.2 0.5

2.0

63.3

State owned Cooperatives

Publicprivate partnership

Private

51.8

2.9

44.5 0.8

1950

50.1

4.0

44.9 1.0

1951

39.0

5.0

52.8 3.2

1952

36.8

5.7

54.1 3.4

1953

24.9

12.3

59.0 3.8

1954

16.2

16.1

62.9 4.8

1955

0.05

32.5

65.5 2.0

1956

0.06

31.7

64.8 3.4

1957

Data source The Central Administration for Industry & Commerce, and Capitalist Economy Transformation Research Office, Institute of Economics, Chinese Academy of Sciences (1960, p. 50)

1949

Industries

Table 3.4 Proportions of private and public sectors in the gross industrial output (excl. handicrafts) (Unit %)

3.1 Historical Evolution of SOEs and the Analysis of Their Nature 53

54

3 The Government and State-Owned Enterprises (SOEs)

To ensure that the scarce resources flew to heavy industries that did not have the comparative advantages, the state and the government must issue the administrative orders and assume the planned control to meet the needs for the development of industrial enterprises, including raw materials, capitals, labor force and so on. In the meantime, to ensure the resource allocation of the planned economy, SOEs in cities and people’s communes in rural areas were necessary.27 The new regime of China built on the ideology, to be legitimatized, must pursue not only an excellence in the economic performance, but also win the popular support of the masses. Especially in cities, the full employment was treated as politically important. In the state where the people were the masters, to achieve the full employment, the planned economy became an inevitable choice of this socialist state. SOEs fulfilled social functions of providing employment and welfare, or even have the “involution” as proposed by some researchers.28 After the rapid transformation into the state ownership, SOEs approximately experienced three stages before the reform and accompanied with the centralization and decentralization of powers between the central and local governments for two times. These three stages were the “Great Leap Forward” period (1958–1960), the economic adjustment period (1961–1965) and the “Cultural Revolution” period (1966–1976). The twice changes of powers were respectively the decentralization and centralization during the “Great Leap Forward” and the decentralization and later centralization during the “Cultural Revolution”. During these periods, the size, output value and affiliation of SOEs varied with the power changes within the government, but the economic system underwent no substantive reforms and the government-enterprise relations remained the domination and affiliation. The decentralization movement of 1958 and the changes of SOEs. The later statistics (Table 3.5) and the research findings suggested that the economic efficiency during the “First Five-Year Plan” was the best before the reform and opening up. According to John K. Fairbank, the economic growth data revealed the great success of the First Five-Year Plan, the national income saw an average annual growth rate of 8.9%, the agricultural and industrial outputs grew at the speed of 3.8% and 18.7% per annum; compared with the economic growth pattern in the first half of the 20th century—when the output growth was only comparable to the population growth—the First Five-Year Plan played a decisively accelerating role; and China’s experience was also successful when compared with other developing countries, which newly gained independence in the 1950s and had an average annual growth rate of 2.5%.29 After the completion of the First Five-Year Plan, the central government began to decentralize powers to local governments (according to statistics, in 1952, there were a total of 9517 state-owned industrial enterprises, inclusive of 2245 directly under the central government, which accounted for 23.6%, but by 1957, about 9300 enterprises were directly under ministries of the central government), and SOEs originally under the central government were distributed to local governments, and reduced from 9300 27 Lin

et al. (2012). and He (1996), Li and Zhang (2007). 29 MacFarquhar and Fairbank (1987). 28 Zhang

3.1 Historical Evolution of SOEs and the Analysis of Their Nature

55

Table 3.5 Growth rates of agriculture, light and heavy industries (1953–1957) (Unit %) Total Agriculture Industry Subtotal Average

10.9

4.5

Light industry Heavy industry

18.0

12.8

25.4

130.2 116.3 105.6 128.2 111.4

126.7 114.1 100.0 119.8 105.6

136.5 119.8 114.5 140.4 118.4

MoM growth (taking the previous year as 100) 1953 1954 1955 1956 1957

114.4 109.4 106.6 116.5 107.8

103.1 103.3 107.7 105.0 103.5

Source Wu (2008, p. 78)

in 1957 to 1200 in 1958. Enterprises also had more autonomy (called “independence” by Mao Zedong), the number of mandatory planning indicators reduced from 12 to 4, the profit retention and allocation were implemented between enterprises and the government, and enterprises were given the powers of appointment and removal as well as employment.30 In fact, the decentralization movement of 1958 was the result of the central leaders’ reconsideration of the planned economic system of the Soviet Union and a try taking account of the reality of China. Bo Yibo pointed out that the First Five-Year Plan was basically carried out with the help of the Soviet Union, and the industry, planned administration, finance and statistics approximately copied from the Soviet model. A series of events in the Soviet Union occurring after the death of Stalin reminded the leaders of the Chinese Communist Party of the shortcomings in the Soviet Union experience. At the end of 1955, Mao Zedong put forward the issue of “learning from the lessons of the Soviet Union”. “Particularly worthy of attention is the fact that in the Soviet Union certain defects and errors that occurred in the course of their building socialism have lately come to light. Do you want to follow the detours they have made? It was by drawing lessons from their experience that we were able to avoid certain detours in the past, and there is all the more reason for us to do so now.”31 In 1956, in an article On the Ten Major Relationships, Mao Zedong outlined and expatiated on the “ten major relationships” concerning the national economy and the people’s livelihood. This marked the formation of the earliest form of the socialist economic construction according to the situations of China itself. The statements on the relations between the central and local authorities, and between the state, units of production, and producers significantly influenced the subsequent changes in the relations between the central and local authorities and between the

30 Wu 31 Bo

(2010a, p. 349), Qian and Weingast (2008, pp. 25–26). (2008, pp. 470–472).

56

3 The Government and State-Owned Enterprises (SOEs)

state and enterprises.32 The three regulations promulgated by the State Council in late 1957, comprising the Regulations on Improving the Industrial Administration System (Draft), the Regulations on Improving the Commercial Administration System (Draft), and the Regulations on Improving the Financial Administration System (Draft), institutionally changed relations between the central and local authorities and between the state and enterprises, as well as the (partial) power administration pattern in finance, industry and commerce. On the tide of the decentralization, the government modified its operation and administration of SOEs by the “uniform state control over revenue and expenditure” to some extent and the relations between different levels of the government and enterprises underwent changes that engendered local governments’ enthusiasm for the development of enterprises (for instance, enterprises originally under ministries of the central government were assigned to local governments, 20% of profits were delivered to the central government and 80% retained locally). But this reform did not realize the intent of the central government for decentralization. Local governments taking more powers brought the problems of over-investment and repetitive construction (according to statistics, the total investment in fixed assets amounted to 100 billion yuan in the three years from 1958 to 1960, much more than 60 billion yuan of the planned total investment for the First Five-Year Plan). Without changing the economic system, the decentralization largely meant the strengthening of soft budget constraints over local governments and would inevitably lead to the central government’s control of local governments and the coordination between the central and local governments out of control. Moreover, the three-year natural disaster forced 32 Before writing the article On the Ten Major Relationships, Mao Zedong listened to a large number of reports from relevant authorities. According to the memories of Bo Yibo, the Fifth Office of the State Council presented a report on the economic system and the autonomy of enterprises. “The report said that the state now implemented the unified state control over revenues and expenditures. Enterprises gave all their revenues to the financial authority, which provided for their expenditures. The revenues of enterprises were irrelevant to their expenditures. This restricted enterprises from care about their revenues from the material interests and positivity in increasing revenues and controlling expenditures. For example, in respect of the infrastructure constructions, some projects were insufficiently funded, some projects were excessively supported, and some temporary expenses needed to be resolved, but enterprises had no right to control over them, but must obtain approval from higher authorities. The result was that what should be done could not be done promptly and the money could not be used. The rules provided that: the factory managers of SOEs, depending on the size and nature of different enterprises, only had the power to approve expenditures from 200 to 500 yuan (in new currency), which was even less for enterprises with the public-private partnership. Any expenditure exceeding the limit must be reported for approval, and the purchase of anything valued more than 200 yuan must be recorded as fixed assets and accounted into the basic construction. This hindered production and suppressed enthusiasm of enterprises, and contributed to the bureaucracy of higher authorities” (Bo 2008, p. 478). Later, in the article On the Ten Major Relationships, Mao Zedong expounded the independence of enterprises in describing the relations between state and factories. “It’s not right, I’m afraid, to place everything in the hands of the central or the provincial and municipal authorities without leaving the factories any power of their own, any room for independent action, any benefits. We don’t have much experience on how to share power and returns properly among the central authorities, the provincial and municipal authorities and the factories, and we should study the subject. As a matter of principle, centralization and independence form a unity of opposites, and there must be both centralization and independence” (Mao 1956).

3.1 Historical Evolution of SOEs and the Analysis of Their Nature

57

the central government to suspend the reform and re-centralize powers. Decentralized large and medium-sized SOEs were affiliated to the ministries of the central government again. By 1965, 42% of SOEs became central enterprises, the central government controlled the fixed asset investments in large and medium projects, and the types of goods allocated by the central government increased from 132 in 1958 to 503 in 1961.33 After entering the “economic adjustment” period, the institutional arrangements of the central government directly or indirectly impacted the operation and development of SOEs. First, in order to get rid of the exaggerative practices of high indicators and the surrealism during the “Great Leap Forward” period, the central government began to lower the industrial production planning indicators (compared with 1961, for 1962, the planned gross industrial output decreased from 95 to 88 billion yuan, and the planned production of raw coals and steel reduced from 251 and 7.5 to 239 and 6 million tons, respectively), diminished the scale of industrial construction and the investment in the infrastructure construction, cut off employees of enterprises, and closed, terminated, merged or assigned some industrial enterprises (Table 3.6). Secondly, to make some adjustments and changes to the production organization and management modes and the relationship between the production relations and the superstructure, the central government tried a “trust” in the industrial and transportation sectors (which were joint operation companies consisting of enterprises producing the same products or closely related to each other in the production), including 9 national enterprises and 3 regional enterprises. The original intention for the trial run of the “trust” was strongly linked to the status of industrial enterprises and the problems existing in the management system at that time. The industrial management was intertwined with complex relationships and the government at all levels strived for being independent and self-contained. Enterprises in the “fragmented” system were “large and all-inclusive” or “small and all-embracing”, resulting in a waste of resources, repetitive construction, no joint efforts and serious bureaucracy. The trial took the “trust” as a unified unit for planning and economic accounting, which provided a basis for various economic management arrangements, such as planning, finance, materials and labor. The trust was economically accountable for the state, internally carried out the centralized management, unified planning and arrangements of production and construction, and comprehensive utilization of resources, and gradually built a production system with the convergence of production, supply and sale, combination of professionalism and collaborative production and coordination of small, medium and large factories.34 However, the establishment of the “trust” in the economic system of China then was confronted with a lot of contradictions and problems difficult to solve, such as the relationship between the “trust” enterprises and local governments, hierarchy and unity within enterprises and coordination with the economic management system. Before long, this trial was stopped after the “Cultural Revolution” began.

33 Qian 34 Bo

and Weingast (2008, p. 27). (2008, pp. 823–831).

58

3 The Government and State-Owned Enterprises (SOEs)

Table 3.6 Changes in the national economy related indicators period (1960–1962) Year Number of Investment (million Nationwide industrial yuan) basic conSOEs struction Light Heavy projects industries industries 1960 96,000 2085 20,872 82,000

during the economic adjustment Self-funded investments (million yuan)

Total investment in basic construction (million yuan)

8690

38,848

1961

71,000

772

6907

35,000

3360

12,742

1962

53,000

317

3692

25,000

1100

7126

Source Wu (2008, pp. 388–394), China Statistical Yearbook 1984

The decentralization movement of 1970 and the changes of SOEs. The “TenYear Cultural Revolution” had a lasting and profound economic, social and cultural influence on China. The “second” large-scale decentralization in the history of new China was intertwined with the “Cultural Revolution” movement and changed the relations between central and local authorities as well as the economic management system of China. Even if the central government once again centralized the powers, the economy still had a high degree of decentralization. The decentralization features were fully embodied in the market-oriented economic system reform after the reform and opening up and shaped the so-called “market-preserving federalism” so that in some scholars’ opinion, it reached “the bottom limit of decentralization” in the early 1990s. The decentralization had many connotations and widespread influence, and mainly involved changes in the economic management system for SOEs. Changes in the economic management system during this period primarily included decentralization of enterprises and management powers, decentralization of financial powers and implementation of local “contract responsibility system”. As mentioned above, the number of enterprises under the ministries of the central government reduced to about 1200 in 1958 after the first round of decentralization, but increased to 10,533 in 1965, even more than those in 1957. In 1969, Anshan Iron and Steel Corp was assigned to Anshan City, Liaoning Province, marking the beginning of the decentralization of enterprises directly under the central government, followed by more than the decentralization of over 2600 central enterprises to local governments, including Daqing Oilfield and Changchun Automobile Factory. By the end of 1970, there were only 500 enterprises under the ministries of the central government, 86.5% less than those in 1965 and accounting for only 8% of the total output value of state-owned industrial enterprises. The types of goods allocated by the central government were reduced from 579 in 1966 to 217 in 1972.35 Following the changes in the management powers of enterprises, the central government reformed the fiscal system in 1971 and implemented the contract responsibility system of fiscal revenue and expenditure. The central and local governments set out the proportions of fiscal revenue and expenditure delivered to the central government and retained by local governments, which were determined once a year. 35 Wu

(2010a, pp. 528–531).

3.1 Historical Evolution of SOEs and the Analysis of Their Nature

59

In addition to the taxes paid by the central enterprises, most of the taxes were included in the local fiscal revenue. The ideology or the will of leaders played a decisive role under the system at that time. Mao Zedong always highlighted the enthusiasm of central and local authorities, argued against the centralization of everything, and claimed that “The republic with constitutional monarchy is great. The central government should only focus on policies and guidelines, instead of details. Too many factories have been accepted by the central government. They should be assigned from the central government to local authorities, all of them.”36 Further, the combat readiness was also one of the main reasons. For fear of the invasion from the Soviet Union and the outbreak of the Third World War, the “Third Five-Year Plan” accelerated the third front construction37 and gradually changed the industrial layout of factories clustered in big cities and coastal areas, such as, Jiuquan Iron and Steel Factory, Panzhihua Iron and Steel Factory, Chongqing Conventional Ordnance Industry Base and Chengdu Aviation Industry Base. SOEs before the reform and opening up, as part of the planned economy, constantly varied with the movement-style reforms from top to down. The governmententerprise relations were repeatedly adjusted in the process of centralization and decentralization of powers by the central government. Such decentralization didn’t achieve independent operations of enterprises, but switched the management powers of enterprises between the central and local authorities.38 In essence, under the “shortage economy”, SOEs still reflected the will of the state in the economic sector and lacked for independence and interest orientation. The raw material acquisition, production indicator formulation, personnel arrangements and profit sharing were placed under the unified planning of the state. The overall goals and direction of the state determined behaviors and organizational model of enterprises, such as “combination of government functions and enterprises”, “enterprises burdened with social responsibilities” and “the party branch organized on a company basis”. Besides the criticism of this model from the principle of efficiency in economics, more consideration should be given to the political and economic environment and the specific circumstances of history at that time, so that it is difficult for us to clearly separate the SOEs from the government. Discussions on the changes in the development SOEs were more like a description of the evolution and growth of the entire Chinese society. The concepts of “neo-traditionalism”, “work unit system” or “totalitarian society” had profound insight into the characteristics of China’s political and economic integration in this period of history and also in a long period of time afterward. 36 Fang

(1984).

37 “Three Fronts” are the three front regions divided from coastal and border areas to China’s interior.

The “First Front” refers to the coastal and border areas; the “Third Front” refers to a geographic area in China’s interior, such as Sichuan, Guizhou, Shaanxi, Gansu, Hunan, Hubei and other regions, including the “Big Third Front” regions in the southwest and northwest China, and the “Small Third Front” regions in the hinterland of the Central China and East Coast; and the “Second Front” regions are located between the “First Front” and the “Third Front”. 38 Zhou (2008, p. 266).

60

3 The Government and State-Owned Enterprises (SOEs)

The Chinese researchers, Zhang Yuyan and He Fan, explored the nature of stateowned enterprises under the planned economic system from the perspective of economics. Theoretically inspired by the analysis of the nature of firms by Ronald Coase, the institutional change proposed by Douglass C. North and the discussion of interest groups by Mancur Olson, they put forward that China’s SOEs had two main characteristics, namely, boundary rigidity of state-owned enterprises and market trend in enterprises. Firstly, in terms of the boundary rigidity of enterprises, they argued that in order to maintain and consolidate the legitimacy status of the state, the objectives of planned economy countries mainly included full employment, rapid economic growth and acquisition of financial resources, and for SOEs, when it was impossible to operate and organize production by means of the “state syndicate” as proposed by Vladimir Lenin, the indirect organization and management through SOEs at all levels were a cost-effective means. In this case, SOEs were completely free from constraints by the market and corresponding rules, but controlled by constraints of the state behaviors, thereby the ownership structure, size, organizational goals and acquisition of production factors could not break the original framework. Secondly, under the boundary rigidity of organization, the external transaction cost of enterprises was very high for various reasons. In order to save the cost, enterprises increased profits by pursuing the maximization of their own proceeds under the established conditions and through the internal innovation of the institution, in other words, the internal marketization of enterprises. This kind of internal marketization had distinct boundary characteristics, and a type of market mechanism could be generated by refining the division of labor within the organization, separating the secondary production units and enhancing the transactions between the internal production units.39 The market operating within the boundary of enterprises and the rigid constraints of the state outside the boundary jointly shaped the mode of operation of SOEs. On the one hand, SOEs depended on the higher-level government they were affiliated to and continued the top-down institutional path for access to various resources; on the other hand, without access to external resources entirely through the market increment logic, SOEs could optimize their proceeds by optimizing the internal structure and resource allocation of enterprises. In a period after the reform (the “dual-track” period), collective enterprises within SOEs, which were regarded as “secondary ownership”, in a sense, could be deemed as the establishment of affiliated collective enterprises to adapt to the market system when the change of rigid structure was not permitted by the institution, or even the first choice for SOEs to consolidate, optimize, hide and transfer assets.40 Compared with the pre-reform period, as the reform and opening-up continuously introduced the market, state enterprises (SOEs) had increasingly clear reform objectives and a clearer boundary with the government. In general, it could be divided into several stages, including the profit retention (from 1979 to 1982), the replacement of profit delivery by taxes (from 1983 to 1986), the contract responsibility system (from 1987 to 1992) and the establishment of a modern enterprise system (from 1993 until 39 Zhang 40 Qu

and He (1996). et al. (2009).

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now). These stages were accompanied by the centralization and decentralization of powers between the central and local authorities, primarily the economic decentralization characterized by the “contract responsibility system” from 1979 to 1993 and the economic centralization characterized by the “tax sharing system” after 1994. The economic decentralization and the changes of SOEs since the reform and opening up. After the “Cultural Revolution”, the central government began to “set to rights things which have been thrown into disorder”, broke the ideological bondage of “Two Whatevers”, continued to emancipate the mind in the economic sector, corrected the errors of leftism in commodity economy, distribution according to labor, productivity and laws of economy, shifted the focus of economy to the right direction and hence laid a good foundation for later economic growth.41 Shortly thereafter, the reform and development of SOEs were put on the economic agenda again. The “expansion of enterprise autonomy” pilots in Sichuan, Beijing, Tianjin, Shanghai and other places gave enterprises more autonomy pursuant to the economic logic of “decentralization”. Provided that the state planning tasks could be completed, partial powers were assigned to pilot enterprises for profit distribution, production planning, sale of products, labor and personnel, and technological transformation, among which the profit retention system aroused the enthusiasm of enterprises and employees in the planned system. On the one hand, being conferred with operation and management autonomy and economic income distribution rights to some degree, enterprises began to change their negative attitude of “doing more or less makes no difference” in the original system and develop towards economic organizations with inherent interests. On the one hand, when no qualitative changes occurred to the external environment and the enterprise management system, the profit retention often led to the “quarrels over benchmark and proportion” between enterprises and the government, different results for different enterprises, “whipping the fast and hardworking”, or even “profits eroded by wage”. From 1979 to 1980, China moved into huge fiscal deficits for two consecutive years, totaling 34.8 billion yuan, which was 10 billion yuan more than the total deficit of 24.8 billion yuan in 29 years from 1950 to 1978. According to Wang Shaoguang, the emergence of huge fiscal deficits was the result of repaying the historical debts, such as a substantial increase in the purchase prices of agricultural and sideline products, the exemption of partial agricultural taxes, large quantities of food import, job arrangements for educated urban youth who had been to countryside or mountain areas and lived there, and raising of workers’ wages and so on. In order to eliminate the deficits without prejudice to the interests of local governments, the central government was forced to reform the fiscal and taxation system, that is, to implement the financial system of “dividing revenue and expenditure between the central and local governments and holding each responsible for balancing their budgets”, so that on the one hand local governments bore the responsibility for more financial expenditure, and on the other hand, the central government’s financial revenue would not be less than the existing level. Meanwhile, this could lay a political foundation by obtaining

41 Li

(2007a).

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local governments’ support for the reform.42 Corresponding to the financial system reform within the government, the “economic responsibility system” was promoted on the basis of the pilot reform of SOEs, namely the “making enterprises responsible for their own profits and losses” with “contract plus incentives”. The economic responsibility system had been rapidly popularized. According to statistics, at the end of August 1981, in addition to original 6000 enterprises granted with more powers, more than 30,000 SOEs at the county or higher level adopted the contract system by industry (bureau and company) or county economic commission; by the end of 1981, there were 63,000 SOEs implemented the economic responsibility system “making enterprises responsible for their own profits and losses”, and by the end of 1982, about 80% of SOEs at the county or higher level practiced the industrial economic responsibility system.43 This kind of reform of SOEs was the further projection of the intergovernmental relations at the enterprise level. Local governments handed over a certain amount or proportion of fiscal revenues to the higher level of government according to the negotiated rules.44 Accordingly, because the SOEs were the main sources of government revenues and paid their profits by the affiliation relationship, it became a common practice for local governments to actively develop enterprises for more financial revenues. In fact, the trial of the economic responsibility system by local governments was earlier than the promulgation of the unified state rules and inspired in a certain sense by the rural “household contract responsibility system”. The economic responsibility system could be a good incentive to arouse the enthusiasm of enterprises and workers, but with the enhancement of corporate interests, on condition that the economic system wasn’t fundamentally changed, the phenomenon of “more work for more profits, less work for fewer profits, and no work for no profits” occurred and affected the stability of the economic order. Compared with the traditional fiscal system, the financial responsibility system enhanced the credibility of the central government’s commitment to the local governments, from being changed every year to being fixed in five years. On the other hand, the central government decentralized its economic management powers, gave more autonomy to local governments and transitioned from the “rule-based” vertical management model to the “region-based” local independent management. Local governments could determine various economic development matters pursuant to the policies of the central government and their local financial position, so they were less restricted by the approval and arrangements of higher authorities. However, the drawbacks of this economic system were also relatively obvious. Since 42 Wang

(1997). (2010a, pp. 696–697), Wang (2001). 44 In February 1980, the State Council promulgated the Interim Provisions on the Implementation of the Financial Management System for the Division of Revenue and Expenditure and Contracting at Different Levels, which stipulated that different modes of contracting were divided according to the situation of each province: the first mode was the “division of revenue and expenditure, and fixed amount of payment or subsidy”, the second mode was the “fixed proportion of contracting”, the third mode was the “division of revenue and expenditure, and contracting at different levels”, and the fourth model was the local financial system that aimed at ethnic autonomous regions and provinces with a high proportion of ethnic groups. 43 Wu

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different provinces utilized different contract responsibility modes and had different economic bases and development potentials, “whipping the fast and hardworking” and “soft budget constraints” coexisted. In the meantime, the central government’s fiscal revenue did not grow with the reform of the new economic system, but suffered from fiscal deficits for consecutive years and serious inflation. From 1983, the central government began to introduce the reform of “replacement of profit delivery by taxes” in two steps. The first step changed the profits delivered by SOEs to competent authorities as the income tax. In other words, after enterprises paid an income tax equal to 55% of their profits, the after-tax profits would be partially delivered to the state and partially retained by enterprises. In the second step, the profit sharing between government and enterprises would no longer be implemented and after-tax profits were fully retained to enterprises. Because it was difficult for different enterprises to pay the income tax at the same rate, an “adjustment tax” was adopted by one rate for one enterprise. The positive significance of the tax reform lied in that the traditional profit delivery relationship between government and affiliated enterprises was changed to be the taxpaying obligation in the sense of modern enterprises, thus avoiding the “quarrels over benchmark and proportion”, but the adjustment tax by one rate for one enterprise resulted in “whipping the fast and hardworking” and hindered enterprises’ positivity in improving their operating efficiency.45 At the beginning of the reform, the financial and economic system of the central government underwent big changes for several times, but the proportion of fiscal revenue to GDP continued to decline. The fiscal deficits increased continuously from 1982 to 1986, and the operating conditions of most SOEs were deteriorating. Since 1987, the State Council began to promote the contract responsibility system among enterprises nationwide, so as to further reinvigorate large and medium-sized SOEs. The enterprise contract responsibility system was characterized by “fixed benchmark, guaranteed payment, retention of excess and making up insufficiency”. The relationship between enterprises and the state in responsibilities and rights was made clear through the contractual operation contracts so that enterprises could become legal entities and subjects that operated independently in the market competition, assumed full responsibility for their own profits and losses, developed on their own and became self-restraint. By the end of 1987, the contract responsibility system was implemented in 78% of industrial enterprises covered by the state budget, including 82% of large and medium enterprises. The output value of industrial enterprises covered by the state budget increased by 11.3% over the previous year, the total labor productivity increased by 7.6%, the sales revenue increased by 17%, the profits increased by 9.9%, and the delivered profits and paid taxes increased by 6.7%.46 At that time, the contract system was the main relationship between the government and enterprises, but there were still leasing and shareholding systems. However, due to the difficulty of determining lease fees and the short-term leasing behaviors, the leasing system was mainly practiced in small enterprises. The required economic and market environment and economic awareness were not satisfied, so the share45 Zhou 46 Wu

(2008, pp. 267–268). (2010a, p. 781).

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holding system only stayed in the pilot phase. For example, in 1984, Shanghai Feilo Acoustics Co., Ltd. was the first company which issued stocks openly to the public. The contract responsibility system for SOEs, in comparison with previous institutions, was a big step forward in separating ownership and management rights, giving enterprises more autonomy and making enterprises independent business entities to take operational risks. But it was found by some researchers that the reform of “decentralization of power and transfer of profits” had little effect on the improvement of overall operation of SOEs. The reason was the decline of comparative advantages of SOEs under the non-market conditions due to the emergence of non-public enterprises. Giving more autonomy in operation to enterprises meant that enterprises strengthened their pursuit of maximized comprehensive benefits, which led to the involution of development functions and staff. A “vicious circle” appeared, that is, on the one hand, the expansion of corporate autonomy greatly increased the wage and benefits of employees and the per capita investment rate, but on the other hand, per capita profits and fiscal revenue handed over to the state did not increase accordingly.47 Even as pointed out by related studies, from the late 1980s to the early 1990s, SOEs were divided into three portions: one third suffered from explicit losses, one third suffered from implicit losses and only one third made profits.48 Economic centralization and changes of SOEs after deploying the tax sharing system. The convening of the 3rd Plenary Session of the 14th CPC Central Committee in 1993 clarified the goals of establishing the socialist market economy, changed SOEs from the reform of “decentralization of power and transfer of profits” to the transformation of the enterprise management mechanism and the establishment of modern enterprise system, and required them to be constructed as modern enterprises with “clearly established ownership, well defined rights and responsibility, separation of enterprises from administration, and scientific management”, so that enterprises became the economic and market entities that operated independently and assumed full responsibility for their own profits and losses. At the same time, it is worth noting that in that year, “state-run enterprises” was renamed as “state-owned enterprises” and this was written into the Constitution. In 1994, the State Council selected 100 SOEs for piloting the modern enterprise system. The main contents included improving the enterprise legal person system, clarifying the investment entity status of stateowned assets in pilot enterprises, establishing the governance structure of modern enterprises, setting up the shareholders’ meeting, the board of directors and the board of supervisors, and perfecting the cadre and employment rules. But the most of pilot enterprises did not realize the equity diversification reform in a real sense. They were solely state-owned and far from the modern enterprise structure. Until the 4th Plenary Session of the 15th CPC Central Committee further clarified the goals and requirements of the corporate restructuring, the corporatization reform of SOEs entered the stage of establishing modern companies in accordance with the international prevailing standards.49 47 Li

and Zhang (2007, pp. 57–59). (2008, p. 269). 49 Wu (2003). 48 Zhou

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The most notable institutional reform in 1994 was the “tax-sharing” reform of the fiscal system,50 which fundamentally changed the tax distribution mode between the central and local governments, simplified the taxation structure and unified the 50 According to statistics, in 2011, the national fiscal revenue was 10,387.443 billion yuan, including

5132.732 billion yuan for the central government, accounting for 49.4%, and 5254.711 billion yuan for local governments, accounting for 50.6%. In the framework of the existing tax sharing system, the fiscal system between central and local governments (provincial governments) follows the principle of “unified leadership and hierarchical management”. The central government only divides and transfers payments with provincial governments. The provincial governments implement their respective fiscal system under the guidance of the central government, with consideration to their local reality. Please read the table below for the expenditure responsibility and revenue division between the central and local governments (Ministry of Finance of the People’s Republic of China 2012). Fiscal expenditures of central government

Fiscal expenditures of local governments

Expenditures for national defense and armed police force, diplomatic expenditure, administrative expenditure of the central government, basic construction investment under the unified management of the central government, expenditures for technological transformation and new product trial manufacturing of central enterprises, geological exploration expenditure, agricultural expenditure arranged centrally, repayment of principal and interests of domestic and foreign debts, as well as expenditures for the public security, discipline inspection and legal institutions and for culture, education, health and science etc. Local administrative expenditure, expenditures for the public security, discipline inspection and legal institutions, militia expenditure, basic construction investment arranged by local governments, expenditures for technological transformation and new product trial manufacturing of local enterprises, agricultural expenditure arranged locally, city maintenance and construction expenditure, local culture, education and health and other expenditures

Fixed revenue of Tariffs, customs levied consumption tax and value-added tax, consumption central tax, revenue paid by railways, bank headquarters and insurance firm government headquarters (incl. business tax, profits and city maintenance and construction tax), income tax of central enterprises not included in the scope of the tax sharing and profits delivered by central enterprises etc. Shared revenue of central and local governments

Value added tax, assigned 75% to the central government and 25% to local governments; enterprise and individual income taxes within the scope of sharing, 60% to the central government and 40% to local governments; resource taxes divided by different resource varieties, the offshore oil resource tax assigned to the central government, and all other resource taxes to local governments; the stamp tax for securities transactions assigned 97% to the central government and 3% to local governments

Fixed revenue of Business tax (excl. those paid by railways, bank headquarters and insurance local firm headquarters), profits handed over by local enterprises, urban land use governments tax, city maintenance and construction tax (excl. those paid by railways, bank headquarters and insurance firm headquarters), real estate tax, vehicle and vessel tax, stamp tax (excl. those levied on securities transactions), farmland occupation tax, deed tax, tobacco tax, land value-added tax and revenue from use of state-owned land etc.

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tax rate. The main goal of the new fiscal system was to reverse the situations of low fiscal revenue of the central government and too decentralized economic powers (even some scholars argued that the decentralization reached the bottom limit). The previous fiscal system based on bargaining was replaced by the new tax sharing system with unified rules in each province. The fiscal system after the tax sharing had a significant impact on the operation and development of SOEs and the governmententerprise relations. First, the main source of tax revenue for local governments, namely the value-added tax (VAT) from enterprises, was shared mostly to the central government (25% assigned to local governments and 75% to the central government). Because the VAT was a turnover tax that was levied according to invoices, regardless of whether enterprises made profits or not, this led to difficulties in the business operation of enterprises earning small profits and having high operating costs. Moreover, local governments became less enthusiastic about supporting the development of enterprises due to less revenue and higher risk. Second, the tax sharing system had a “herd effect” on local governments. The “pressurized” system for the vertical handover of fiscal revenue whipped local governments to seek the transfer of fiscal revenue from budget to extra-budget, from extra-budget to non-budget, thus increasing arbitrary quotas and unjustifiable charges on enterprises. Next, the vertical tax collection by the state taxation administration system rendered various preferential policies of local governments for enterprises ineffective.51 The tax-sharing reform was also one of the structural mechanisms for us to understand local governments’ conversion of public enterprises into private ones and “selling them all” in the middle and late 1990s. After the sharing of the VAT was reduced and the income tax became the main source of the government’s tax revenue from enterprises, their operating efficiency played a decisive role and further accelerated the transformation of the operating mechanism and the reform of the ownership institution of SOEs. Privatizing enterprises suffering poor efficiency and serious losses was surely a more rational choice for the behavioral model. After the reform, with the continuous development of non-state-owned sectors, SOEs were confronted with increasing market competitions, and inefficiency and heavy social burden turned out to be their most important features in this period. The proportion of the gross industrial output of SOEs in the national industrial output was declining all the way since the reform, from 77.6% in 1978 to 26.5% in 1997, about 3.2% lower on average each year. According to the estimate of Justin Yifu Lin et al., by 1996, SOEs owned 57% of urban workers and accounted for 52% of the industrial fixed investment, but over 40% of them ran at a loss. To improve the economic efficiency of SOEs was very important for maintaining the social stability and sustainable growth. The key to the successful reform of SOEs was removing the policy burden and creating a domain that could offer sufficient information for the market competition.52 In the face of the above problems, since the middle and late 1990s, the central government put forward the reform guideline of “invigorating large enterprises while relaxing control over small ones” and “strategic reorganization of 51 Zhou 52 Lin

(2006), Rong et al. (1998), Zhang (2006). et al. (1998).

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state-owned enterprises”, which fundamentally changed operating mechanism and governance structure of SOEs. The Decision on Major Issues Concerning the Reform and Development of StateOwned Enterprises adopted on the 4th Plenary Session of the 15th Central Committee of CPC in 1999 strategically adjusted the layout of the public sector of the economy, pushed forward the strategic restructuring of SOEs, established and perfected the modern enterprise system, enhanced enterprise management, improved the assets and liabilities structure of SOEs, reduced their social burden, did well in increasing efficiency by downsizing staff, reemployment and social security, and sped up the technological advancement and industrial upgrading of SOEs, thereby creating a good external environment for their reform and development. Subsequently the important reforms included the establishment of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) in 2003 to separate the functions of the government as owners and regulators; diversion of laid-off workers and removal of heavy social burdens from SOEs, in order to be as close as possible to independent economic organizations on the market and improve their economic efficiency and competitiveness; the shareholding transformation, reorganization and listing were conducted to some large SOEs; and different investment entities were introduced to perfect corporate governance structure. According to statistics, in 2007, the accumulated sales revenues of SOEs all over China were 18 trillion yuan, witnessing a year-over-year (YoY) increase of 20.1%; their profits reached 1.62 trillion yuan, with a YoY increase of 31.6%; and their taxpaying amounted to 1.57 trillion yuan, increasing by 21.8%. From 2002 to 2007, the number of SOEs decreased by nearly 10,000 per year, but they had an annual average increase of sales revenues by 1.9 trillion yuan, profits by 250 billion yuan and taxpaying by 180 billion yuan, about 16.1%, 33.7% and 18.2%, respectively.53 From 2003 to 2011, the operating income of nationwide SOEs grew from 10.73 trillion yuan to 39.25 trillion yuan, their taxpaying increased from 836.16 billion yuan to 3.45 trillion yuan, their net profits increased from 320.23 billion yuan to 1.94 trillion yuan, and the annual average growth rate reached 25.2%. Although the current economic performance of SOEs is absolutely incomparable with what it was in the worst historical period, we should realize that the reform of SOEs went along with heavy economic and social costs, such as the closure, termination, merger or assignment of large quantities of SOEs, which resulted in not only layoffs of numerous workers, but also loss of partial state-owned assets. Meanwhile, existing SOEs are mostly concentrated in the traditional monopolized industries, especially the distribution of central enterprises in key economic sectors such as traffic, energy, electricity, telecommunications and finance. Their goods economic efficiency is realized in a non-competitive environment excluding other enterprises (in 2012, nine enterprises of mainland China were listed among the global top 500, and all of them are stateowned enterprises). Overall, as pointed out by Wang Yong, the Director of SASAC, the most of SOEs are still distributed in traditional industries and very few in strategic 53 March 8, 2008, “Li Rongrong talks about achievements for the reform and development of stateowned enterprises in five years”, People’s Daily.

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emerging industries. For some industries, the degree of industrial concentration is low, the efficiency of resource allocation is not high, the core competitiveness is not strong, and the repetitive construction, vicious competition, waste of resources, environmental pollution and other issues have not been well resolved.54 The above descriptions and discussions provide a preliminary framework and a general understanding for us to make clear the evolution path of state-owned enterprises. Before 1993, the enterprises owned by the whole people or the state have been known as “state enterprises”, and later called “state-owned enterprises” in the revised Constitution. It can be said that the concept and connotation of state-owned enterprises are consistent at the current historical stage, but there are some differences with the continuous reform of the enterprise system, for example, state-owned enterprises comprised not just enterprises totally invested and owned by the state, but also those controlled and partially invested by the state.

3.2 Government and SOEs from the Perspective of “Work Unit System” The research on Chinese work units (danwei) is undoubtedly a highly insightful theoretical proposition when researchers are studying the relations between state and society, state and market, and government and enterprises after reform, and it had influenced related studies on Chinese organizations in a long period of time thereafter. The study of the work unit system makes it possible to profoundly understand and identify the overall structural relationships of Chinese society in particular historical periods, and therefore the structural elements in the social and economic fields can be combined for discovering internal rules for the full operation of the society.55 Actually, related work has proposed these concepts, such as “unit”, “unit organization”, “unit system” and “unit phenomenon” from the theoretical perspectives of different researchers and their cognition of social phenomena, but there is no consensus on the definition of “work unit”. In general, the existing research can be divided into two kinds of orientations referring to a kind of organization form or institutional structure, or studying the macro system structure, the internal mechanism of the unit and the action structure. For the formation and the historical development process of the work unit system, researchers have put forward various explanatory perspectives, such as the political/relational model and path dependency, the organizational means for goal achieving, insufficient total social resources, institutional structure, ideology and traditional social family system.56 Since our research focuses on the government-enterprise relations, we pay more attention to the connotation at the institution level in related studies of the extensive unit issue. Enterprises are regarded as an 54 October

25, 2012, “Four difficulties remained for the state-owned enterprise reform, according to Xinhua News Agency”, China Business News Daily. 55 Qu (2012). 56 Li (2002).

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institutionalized organizational form from the perspectives of institutional structure and institutional changes. In other words, under the institutional structure then, the organization of enterprises is separated from the technical environment, but isomorphic with the institutional environment. This is significantly manifested in the heavy dependence of higher government authorities by enterprise units and the similarities between enterprises units and government units.57 The work unit is regarded as a kind of institution because it is a special form of organization and structure that is built on the basis of the mainstream ideologies and values. In China’s work units, politics is integrated into the unit in an organizational form and turns out to be a part of the unit structure; and the ideology is also given special meaning in Chinese work units. A social man, as long as entering the work units, will be inevitably socialized as a unit man, who plays a particular social role and internalizes code of conduct in the unit form to be their own behavioral norms and orientation. In this sense, the work unit as a system becomes an institutional form that defines and regulates people’s behaviors. Also, another reason why the work unit is seen as a kind of institution is that it is a relatively stable social and organizational form and the product by combining the traditional culture and the modern ideology. Some traditions are ideologized and some ideologies are structured; those structured cannot disappear in an instant, nor be changed frequently. The inertia of people’s behaviors is fused into the institutionalized unit structure. The individual behaviors and the work unit system blend together, deepen the inertia of people’s behaviors and solidify the institutional structure of work units. This cycle builds up the resistance of the work unit system against changes in its deep structure.58 As pointed out by the argument of William F. Ogburn about social changes, institutionalized units are bound to lag behind the adjustment of micro-operation mode and technological improvements of work units in the course of social changes and this is obviously reflected by their path dependency of resistance against changes and the continuity of the unit system after reform. It is worth noting that the publication of the book “Communist NeoTraditionalism: Work and Authority in Chinese Industry” by Andrew Walder opens up a new way for the research of China’s urban work unit system. The most controversial concept in the book is “neo-traditionalism”, which is a type concept used by the author for reflecting the features of Chinese society. Walder emphasizes differences of the concept from the totalitarian model and the theory of pluralistic group and that the neo-traditionalism is an analytical concept rather than a historical concept. The concept refers to two institutional characteristics, “institutional dependence” and “institutional culture”. This institutional dependence is embodied by the workers’ social and economic dependence on the enterprise, political dependence on management, personal dependence on superiors; and the institutional culture of authority is embodied in the party-clientelism, a split between the party’s loyal client and the rank and file directly caused by vertical loyalties, and network of instrumental-personal ties.59 57 Meyer

and Rowan (1977), Li et al. (1996), Li and Li (1999). (2004, p. 8). 59 Walder (1996). 58 Li

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Richard Madsen has categorized Walder’s research into the third generation studies on the state-society relationship of China by American sociologists, and indicated that his description of the urban work unit system reveals the self-regeneration of traditional culture and society in the structural partially established on the patron-client relationship and that this state structure is not dependent on the general administrative hierarchy.60 The academic world has expressed different opinions on some of the important views in this book,61 but from the long-term debates and its extensive involvement in related research, it is of great academic value for promoting studies on the statesociety relations, power structure and social order of China. Since the 1990s, Chinese scholars begin to carry out “all-around” research on the work units, many of which are insightful. Next, we will center on the government-enterprise relations with an introduction to related studies.

3.2.1 Structural Environment: Constraints on the Unitized SOEs We have pointed out in the studies of some important issues on the Chinese work unit society that, “Whatever institution must be embedded in a specific social structure and culture. If a good institution cannot be successfully embedded in the structural environment of a society, or the institutional innovation has a strong ‘rejection’ effect on the existing social structure in the medium and long term, it is impossible for the institutional innovation and change to ultimately bring us benefit or social development and stability.”62 It is in this sense that during our research on the work unit phenomenon or the institutionalizing process of SOEs, the external structural environment for their survival and realization must be deeply reconsidered. This “embeddedness” is powerfully driven by the government to achieve the overall control of cities and adapt to the domestic socio-economic environment and the international political environment. Its embodiments are giving priority to the development of heavy industry and “concentrating resources to accomplish large undertakings”. Under the external pressures that the international market blockaded and monopolized by the Western world led by the United States of America and the breakup with the Soviet Union, through the rigorous planning system, China works hard and relies on its own efforts to stand proudly in the family of nations. The unitary enterprises become a reflection for China’s advancing of the socialist industrialization in the conditions of underdeveloped economic production at the microscopic level.63 At 60 Madsen

(1999). research of Li Lulu et al. has conducted a detailed review on the “neo-traditionalism” and historical association and on the pros and cons of the applicability of this concept (see Li et al. 2009). 62 Li (2004, p. 110). 63 Lu (1989). 61 The

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the same time, given the impossibility of developing their businesses through market, SOEs themselves are embedded in various institutional environments set by the government and depend on the government to obtain resources and maximize their own interests (according to the research and analysis of Zhang Yuyan et al., when it is difficult to change the rigid boundary, enterprises are often internally marketized through adjusting their internal boundary, for improving their efficiency to a certain extent).64 In earlier studies on the integration mechanism and the unit phenomenon of urban communities in China, we pointed out that the path dependency of government behaviors and the international and domestic environment faced by the New China were the important influencing factors for the formation of the work unit system. First of all, the “centralized party” leadership and the military communism model formed in the wars were naturally transplanted into the highly centralized and unified system due to their adaptability and inertia of institutional dependence. Secondly, after the founding of new China, in the face of severe domestic social, economic and political situations and to cope with and adapt to the prevailing international environment, the government must be powerfully capable of mobilization and allocation of resources. The best ways for the government to achieve these goals included comprehensive possession and control of various resources, all-around regulation and intervention of social production and life, and full accountability for the life of every member of society. The industrialization strategy with high accumulation and low consumption could only be achieved in a stable social environment.65 SOEs in such an institutional environment were seldom independent in their business operations.66 “Managers of general state-run factories had the right to financially approve low-value consumables at the unit price of only 200–500 yuan. Manager of large enterprises, such as 64 Zhang

and He (1996). (1993). 66 As a matter of fact, concerning the independence of enterprises, Mao Zedong clearly indicated in his article On the Ten Major Relationships, “For instance, we are now having a meeting, which is centralization; after the meeting, some of us will go for a walk, some will read books, some will go to eat, which is independence. If we don’t adjourn the meeting and give everyone some independence but let it go on and on, wouldn’t it be the death of us all? This is true of individuals, and no less true of factories and other units of production. Every unit of production must enjoy independence as the correlative of centralization if it is to develop more vigorously” (see Mao 1956, pp. 8–9). The statements made by Mao Zeodong on the independence of government and enterprises demonstrated, on the one hand, that central leaders and decision makers were already aware of how to fire the enthusiasm of enterprises for production by giving them some independence under the unified plans of the central government (unified revenue and expenditure, without links between revenue and expenditure), and meanwhile began to reconsider and amend the economic management model built by copying the Soviet Union model. On the other hand, because the Chinese Communist Party lacked sufficient experience in the management and development of the economy then, and the market had been abandoned ideologically, the independence of this kind still followed the planned economic model and the work unit management mode, and it was difficult to fundamentally overcome difficulties in the development of factories and enterprises. Of course, more importantly, as stated at the beginning of On the Ten Major Relationships, the government’s primary goal was mobilizing all positive factors, internal and external, to serve the cause of socialism. 65 Li

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Shougang, Ansteel and WISCO, could only approve products valued no more than 800 yuan. In the 1960s, the central government directly managed about 60–70% of industrial and agricultural products, and 70% of the total social retail goods.”67 Enterprises’ lack of independence in business operations was a kind of institutional arrangement adopted by the government in the specific historical environment for realizing the effective control of resources and the overall state goal, that is, the socialist construction. As far as the industrial construction was concerned, this relative abstract concept was embodied as the priority to the development of heavy industry and achieving the goal of overtaking modernization. According to the analysis of Justin Yifu Lin et al., the determination of this goal and the adoption of various institutional actions resulted in the inevitability of the follow-up planned economic system and a series of economic management modes. The SOEs aiming at the completion of the planned tasks were one of the resource allocation and production organization modes that enforced administrative orders. Later the decentralization reform and the redefinition of ownership of SOEs, because of no big changes occurring to the traditional planned system, could not improve the efficiency of SOEs, but led to the loss of state-owned assets.68 Therefore, SOEs (community units) in the work unit system were neither spontaneous nor operation and production units on the market, but “made” by the state which gave priority and invested various resources to the development of industries and cities. The enterprise units were required to assume the responsibility for the planned tasks of industrial development, and meet the economic and life needs of their employees. They ran both the industries and the “whole society”.69 In considering the unitization process of SOEs, besides the behavioral motivation for the government to achieve specific goals, we should also notice that various institutional arrangements of the government were also facing restrictions from the external structured environment. In other words, for either the urban unit system as a whole or the institutionalized state-owned enterprises as part of it, the choice of such an institutional model was a form of realization under a variety of evolution possibilities, rather than an inevitable choice.70 Firstly, there could be several realization paths for the overtaking strategy as described above, but ultimately the establishment of a system of centralized and unified management, possession and distribution of various resources by the state was inextricably linked with the backwardness in technologies, deficiency in resources, severe international situation as well as the institutional inertia of the revolutionary and historical tradition. These factors constituted a structured environment restrictive to the independence of government actions. Secondly, the comprehensive and in-depth social control not only required a lot of government resources and energy, but also was always confronted with the bottom-up resistance and opposition. The localized work unit management and the hierarchical political control by the organization of party branch on a com67 Lu

(1992). et al. (2012). 69 Liu (1995). 70 Li (2002). 68 Lin

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pany basis could resolve conflicts at lower levels and would not had greater impact on the rigid social structure. Thirdly, the socialist transformation of bureaucratic capitalism and the full establishment of the public sector of the economy in cities were the requirements of the ideology of the communist party. As a political party of the working class, it must eradicate the bourgeoisie, guarantee the welfare of workers and protect them from unemployment. This ideological pressure could only be achieved through the holistic enterprise units, even if the enterprises had very serious involution (staff redundancy and inefficiency). Another point was that the central leadership represented by Mao Zedong, after the victory of the revolution, was still full of enthusiasm and impetus for full transformation of the society. The work units in cities undoubtedly had a variety of advantages in social mobilization. Based on the work unit organization and institution, the government could break the boundaries of institutions and professions from time to time and powerfully mobilize all social resources needed by the state. As a result, the establishment of work units in cities could be seen as a long-term state mobilization system and a process of social movements.71

3.2.2 Integration and Control: A Path for Unitized SOEs72 The “unit organization” in the Chinese society has been far beyond the meaning of the general social organization. In essence, it is not only a domination and a form of domination, but also an important mechanism for the state to integrate society, and more importantly, an institution, a special form of organization deeply influenced by the institutional environment and “embedded” in a particular institutional structure. Before the reform and opening up, the work unit was a highly integrated and less differentiated basic form of organization in the Chinese society.73 China at that moment was a society composed of a unique bipolar structure: one pole was the 71 Feng

(2011). (2007b). 73 According to Sun Liping’s definition, the totalitarian society is a society with a very low degree of structural differentiation. In this society, the state fully monopolizes the economy and various social resources, the three centers highly overlap, namely politics, economy and ideology, and the state power takes full control of the society. The formation of the totalitarian society is realized through work units as an organizational intermediary. To be specific, first of all, with the strict organizational system of work units, the state has very powerful mobilization ability so that it can mobilize all manpower and material resources to achieve the economic construction and state development goals. Secondly, the highly organized work unit system changed the three-tier structure of “stateelite-people” in the past to be the two-tier structure of “state-people”. The state directly faces the people so that various information can be directly transmitted to the people, but the people cannot effectively achieve the bottom-up communication, and the social order is entirely dependent on the degree of state control. Thirdly, the work units start the politicized and administrative trend for the social life and all subsystems of the society are lack of conditions for independent operations. The totalitarian society composed of work units overcome the overall crisis of “a terrible mess” in the old China (see Sun et al. 1998; Sun 1993). 72 Li

74

3 The Government and State-Owned Enterprises (SOEs)

state and government with highly centralized powers and the other pole was a large number of relatively disperse and closed unit organizations. In cities, employees were always affiliated with specific enterprise units. In the unit, people were familiar with each other and met no strangers—this was a “familiar society”, a “society without strangers”. In this society, people understood each other, and even went together with mutual influence and dependence in their daily lives. At the same time, the relationship between individuals and work units became very close because resources were mainly distributed by the work units. From cradle to cemetery, the life and death of people were inseparable from their work units. Here, their life in the work unit society got into routines of their social life and behaviors. On the one hand, it was institutionally not allowed to cut the link with work units, because without work units, people would lose their social identity and status, and the state and the government would lose their usual control of people. On the other hand, the loss of contact with the work unit society was not easy for individuals in that social environment. This would lead to people being at a loss and confused and gradual loss of the foundation or their social existence. All these constituted important political, economic and social prerequisites and conditions for the work unit system. In fact, for a long period of time, the relations between state and units and between units and individuals were always in such a situation: the state took full possession and control of various social resources, was in an absolutely dominant position and further had absolute leadership and domination over work units; and the work units took full possession and control of development opportunities of all members as well as the essential resources in their social, political, economic and cultural life, was in an absolute dominant position and further had absolute leadership and domination over individuals (see Fig. 3.4). At that time, because of the so-called enterprises running the society, a direct and prominent social consequence of the diversified functions of work units was to an extreme extent; strengthen all-around dependence of individuals on their work units. If the state and the government carried out the integration and control in accordance with the code of conduct and value orientation advocated by the state, it was unnecessary and impossible to directly impact on members of the society, but achieve their behavior goals only through controlling those affiliated work units. In other words, the state and government realized their social control mainly through work units, which imposed the state will of integration and control by virtue of all-around dependence of individuals on work units and in the process of enterprises running the society and diversifying their own functions. In any dependent social context, people could only exchange their “obedience” for resources and therefore have access to social identity, freedom and power.74 From the perspective of control, it is found that the state and the government have comprehensive and in-depth control of enterprise organizations in the following areas: legal control, ethical control, political control and resource control.75 The legal control mainly refers to the social process of coercively integrating people’s social behaviors and maintaining the established social order through institutional74 Simmel

(1968). (1970), Zucker (1987).

75 Schelsky

3.2 Government and SOEs from the Perspective of “Work Unit System”

75

Fig. 3.4 Dual role of the work unit organization (Li 1993)

ized social norms. Laws, including a series of policies and regulations, act as an institutionalized code of conduct, which, on the one hand, gives actors mandatory social constraints that tell people how to do and what to do when they behave, and on the other hand, establish a behavioral order for people’s behaviors so that rules and directions can guide people’s behaviors and encourage them to consciously prevent “violations”. The modernization process of a society is, from one facet, a social process for continuous improvement of institutionalized behavioral norms and “internalizing” them into members of the society, who consciously put their behaviors under the scope allowable by these norms. The ethical control mainly refers to the social process of the creation of an invisible social pressure through a number of non-institutionalized social norms, including traditions, customs and habits, which non-mandatorily force people to obey the established social order and thus integrating social behaviors. Ethics is contained in the culture and the ethical spirit reflects the cultural tradition. Ethics and morality are closely related. “Morality can be regarded as the individuality and personalization of social ethics and ethics can be regarded as the socialization and consensus of individual morality. Only in social practice, individual ethics can become social ethics; through personal cultivation, social ethics can become individual morality … (ethics and morality) are the hub to maintain inner order and sound development of the society.”76 In essence, the ethical control is the control of cultural atmosphere, which uses the power of customary forces and the considerable pressure from social public opinion and customs, to force people not to conduct any transgressions and violations. The political control mainly refers to the social process that the party, the state and the government utilize various institutionalized power, administrative means and public opinion, enforce their will 76 Cheng

(1992).

76

3 The Government and State-Owned Enterprises (SOEs)

and ideology among members of the society and mandatorily require their behaviors subject to the political norms. Here, according to ideological requirements, the politics restricts people’s economic and social activities by institutionalized power and administrative means to reflect the economy and regulate social behaviors. This is the main feature of political control. There is a vertical superior and subordinate affiliation and dependence relationship between the controlling organizations and the controlled individuals, which is a prerequisite for the implementation of political control. The resource control mainly refers to the social process that specific social organizations and individuals create a dependent social environment by means of the possession and distribution of various political, economic, cultural and social resources as well as interests and opportunities in short supply, force members of the society to exchange obedience for these resources, opportunities and interests and achieve the goals of restricting people’s social behaviors and integrating the society. In such a social process, the higher the degree of possession and domination of these resources, interests and opportunities, the greater the deterrence of resource control, and the higher the efficiency of the control.

3.2.3 Institutional Changes: The Continuance of Unitized SOEs? Based on the structural environment for the formation of the work unit system, the top-down integration and control of enterprise organization by the government have been analyzed above. Then, as the structural environment and institution change, whether the work unit system of state-owned enterprises has undergone historical changes or continues in different forms or to a certain degree? Attention must be paid to this issue. According to historical facts, the state-led market-oriented reform is in parallel with the state control of SOEs. In this sense, the two most basic cores of the socialist market economic system remain consistent before and after the reform—adhering to the leadership of the Communist Party of China and the domination of the public ownership. The basic characteristics of the traditional system (state ownership, appointment of leaders by superiors, and building party branch at the company level) still exist in SOEs. Therefore, the debate over the continuance of the work unit system in SOEs should be more practically shift to the analysis of the specific process, that is, in what aspects and to which extent the characteristics of the work unit system are continued or changed, and what are the trends and influence of those changes? According to the research of Justin Yifu Lin et al., the reform after 1978 began to really touch on the essence of China’s planned economic system, and the previous reforms were mainly the adjustment of administrative authority and the change of the status of enterprises, which were manifested in the overcoming of the drawback in the over-centralization of the central government as well as the drawback in the inter-regional and inter-sectoral disparities of benefit distribution. The reform in constructing a new economic system was mainly due to four reasons. Firstly, the devi-

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77

ation between the long-term implementation of heavy industry priority development strategy and the actual results not only failed to achieve economic development and led to shortage and long-term poverty in the economic life of people, but also resulted in the fact that China’s society and economy were brought to the brink of collapse by the ten-year “Cultural Revolution”. These problems became huge propulsions of the economic system reform. Secondly, the rapid economic growth of neighboring countries and regions placed external pressure on the economic system reform of China. Thirdly, new leaders intended to acquire immense political prestige and legitimacy of the state by reforming the economic system to improve people’s economic life. As pointed out by some researchers, after reform, the legitimacy basis of the Chinese government shifted from ideology to economic performance. Thereafter, the Chinese government shouldered the burden to sustain the economic growth, which is also one of the reasons why now the Chinese government at all levels put emphasis on the priority of GDP.77 Finally, the gradual exposure of a series of problems and drawbacks caused by the planned economic system and the long-term stagnation of people’s living standards reduced the opportunity cost for reforming this system and to a certain extent, accelerated the pace of economic reform.78 The comprehensive reform launched in 1978 was a positive exploration and hard efforts under both internal and external pressures and reflecting a “passive initiative”. The 3rd Plenary Session of the 11th CPC Central Committee clearly pointed out that a major flaw in China’s economic management system was too centralized government power granting no autonomy of enterprises in business operation and management. The follow-up reform ideas emphasized the creation of a new socialist political and economic system by mobilizing and stimulating the grassroots vitality and enthusiasm and the quest for breakthroughs from a point to a plane and finally overall breakthrough by gradual reform and constant marginal adjustment. The dual track system in the 1980s was also the progressive realization of a comprehensive market under the logic of stable stock and incremental breakthrough.79 However, we should clearly see that the coexistence of the work unit system and the market system had been maintained, but with the deepening of reform and the comprehensive advancing of the market, the coverage and form of the work unit system underwent changes. From the perspective of path dependency, it could be found that on the one hand, the government could not choose large-scale and rapid “shock therapy” for the sake of social and political stability; on the other hand, the “habits” of stateowned enterprises in the overall structure would also make them dependent on the government for a longer period. As indicated in our previous studies, from the initial conditions and processes of the state system and the organizational changes, China’s 77 Zhao

(2001). et al. (2012, pp. 138–141). 79 According to Justin Yifu Lin, the states adopting the dual-track economic system, which is the worst in the eyes of most people, can attain stable and rapid growth, and on the contrary, those states wishing implementing the market-oriented reform just in one step become generally stagnant or even collapsed. He found that the transitional countries with rapid economic development, such as Mauritius in the 1970s, China in the 1980s, Vietnam, and later Cambodia and Laos, adopted the dual-track economy (see Lin 2012). 78 Lin

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3 The Government and State-Owned Enterprises (SOEs)

institutional reform had been paying more attention to relying on the existing economic and social organizations for the marginal institutional innovation. Unlike the reform pattern and logic of many other countries and regions for their economic transition, China did not simply liberalize the market and let various entities compete freely and various elements free to flow for developing and perfecting the market, but steadily promoted the organizational and institutional changes and innovations under the government intervention with steps and control, taking full advantage of economic, political and social organizations in the existing planned system, dependent on the long-term accumulation of organizational and institutional resources, and through orderly marginal organizational innovations.80 1. Continuity of the work unit system During his research on the factory institution under China’s planned system (1984), Andrew Walder also realized the path dependency of the work unit system and the continuity of its model after reform. Due to a series of changes caused by the reform, China’s power pattern and dependent institutional culture had significant changes compared with those in the past. In his words, these important changes were mainly reflected in state-owned factories that the political organizations and political mobilization played a gradually declining role in mobilizing the enthusiasm of employees; the political performance of activists was no longer the sole criterion for factory incentives; and the role and status of party organizations and the control and demands of workers by the party also changed. Even so, Walder was still convinced that the theoretical model of “neo-traditionalism” proposed by him was generally applicable and that the changes occurred only within a framework of strong institutional continuity and continued key characteristics of the old institution (“As I describe the changes of recent years—some of which are striking departures from past decades—I portray them as the latest Chinese redefinition of the generic ‘neo-traditional’ pattern, not as a departure from it.”). For example, the pattern of organized dependence that characterized employment, the party organization and its intolerance of independent political action, and the ties and leaders and activists were still intact and effective.81 On the premise that the macroscopic policy environment underwent no significant changes and the policy burden of SOEs remained, the “decentralization of power and transfer of profits” and “profit retention” of enterprises in the micro-mechanism in 1980s as well as the step-by-step introduction of the market for resource allocation were unable to fundamentally change the relationship between SOEs and the government. In 1987, we conducted a questionnaire survey on Chinese urban residents and collected 2350 valid sample data, including interviews of 936 employees from stateowned enterprises. A number of special questions were arranged in the questionnaire to investigate the economic and social situations and attitude of urban residents during this period. A descriptive statistical analysis was given below on the behavior 80 Li

(2004, pp. 116–117). (1996, pp. 250–251).

81 Walder

3.2 Government and SOEs from the Perspective of “Work Unit System” Table 3.7 Description of basic characteristics of surveyed samples Variable name Variable attribute Sample size Gender Age

Marital status

Political status

Education

79

Percentage (%)

Male Female Under 20

552 384 52

59 41 5.6

21–30 31–40 41–50 51–60 Above 60 Unmarried Married Divorced Widowed League member

264 238 180 138 56 175 732 9 13 246

28.4 25.6 19.4 14.9 6.0 18.8 78.8 1.0 1.4 26.9

CPC member Member of democratic parties

173 13

18.9 1.4

Common people

484

52.8

College or higher

157

17.0

Senior high school and secondary vocational school Junior high school

303

32.8

339

36.7

Primary school

90

9.7

Illiterate or almost illiterate

35

3.8

orientation and subjective attitude of these employees, so as to show some characteristics of SOEs in the work unit system (Compared with the situations before reform, with the continuous marketization, the general work unit system in cities ceased to exist, but in some key sectors, state-owned enterprises and institutions still maintained key characteristics of the work unit system. By virtue of the reform of “decentralization of power and transfer of profits” and the path selection of the “dualtrack” economy, “on the one hand, the activities of enterprises focus on the core business operation and the management and labor incentives are achieved to some extent through appropriate income adjustment; on the other hand, the reform does not change the work unit-based administrative framework of state-owned enterprises, but they are intervened by power because there are a certain degree of autonomy and profit margins.”82 ) (Table 3.7).

82 Qu

et al. (2009).

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3 The Government and State-Owned Enterprises (SOEs)

Fig. 3.5 Monthly wage and bonus of employees from SOEs

The social and economic status of employees from state-owned enterprises. From the economic income of the respondents, most of the employees from SOEs earned a monthly income from 50 to 150 yuan (about 86.5% of respondents); bonuses accounted for only a small proportion of their total income, and the monthly bonus income of most of the employees was less than 50 yuan (about 89% of respondents, even 27% of respondents had no bonus). From the subjective perception of their social status, a higher proportion of respondents thought that they were in the lower echelons of society (see Figs. 3.5 and 3.6). But this situation had been greatly improved compared to that before the reform. According to Andrew Walder, the most striking change was in wage policy of state factories. From 1977 to 1984, nominal wages were raised for almost one-half the workforce on three separate occasions.83 With the advance of the reform and the continuous expansion of the market, changes occurred to the income distribution of “getting an equal share regardless of the work done” and egalitarianism and the income disparity between people suggested an increasing trend. In responding to the question item “income disparity of different occupations”, about 78% of employees from state-owned enterprises agreed that the income disparity was large. Their sense of return showed a high degree of inconsistency. In terms of the economic income, about 68% of SOE employees believed that their return was lower than their contribution (with a consistent ratio of 29%); regarding the social status, about 51% of respondents thought that their return was below their contribution (with a consistent ratio of 46%); as to the living conditions, about 72% of respondents felt that their return was lower than their con83 From 1977 to 1984, nominal wages in state industry increased by 37%, real wages by 18%. By 1982 state sector workers received an annual average of 160 yuan in bonus pay, an amount equal to more than two months’ average salary. Increased inflation has eaten into these advanced, but real wage levels have nonetheless quickly returned almost to the previous high watermark of 1956 (Walder 1996, p. 252).

3.2 Government and SOEs from the Perspective of “Work Unit System”

81

Fig. 3.6 Subjective social status of employees from SOEs

tribution (with a consistent ratio of 26%). Looking back into history, it could be found that the tension between institutional stock and market increment had been widened. During the period from 1984 when Deng Xiaoping made a tour to south China until 1988 when Hainan became an independent province, “risking fortune in the business world” became a choice for people who jumped out of the “work unit system”. What attracted them were tremendous opportunities and economic benefits much higher than their wage at the early stage of the market. For those who still worked and lived in the work unit system, breakaway from the customary unit community and seeking for opportunities from the uncertain market were a “fearful but desired” torture. “Researchers on atomic bombs are worse off than peddlers who sell eggs” or “doctors who repair the brain are worse off than barbers who cut hair” gave a realistic portrait of the inconsistency of people’s social status in this period. According to a survey made by the newspaper China Youth Daily, the three most popular occupations in those years were taxi drivers, self-employed businesses and chefs, but the three most unpopular occupations were scientists, doctors and teachers.84 The employee turnover of state-owned enterprises. Under the planned economic system, employees were bounded by the units they belonged to and horizontal mobility was rarely allowed. After the reform, this situation underwent a certain degree of change. In our survey, about 50% of respondents were willing to change their jobs, and the actual situation of job transfer was: 48% of respondents experienced job transfer, comprising about 25% of cross-industry transfer, 15% of job transfer due to the ownership change of their work units, 24% of career change and 21% of living city change (see Fig. 3.7).

84 April 25, 2012, “Plight of China’s Individual Industrial and Commercial Households: Killed by Administrative Approval”, China Youth Daily, http://news.xinhuanet.com/politics/2012-04/25/c_ 111836462_2.html, last visited on November 26, 2012.

82

3 The Government and State-Owned Enterprises (SOEs)

Fig. 3.7 Employee turnover of state-owned enterprises

The job transfer was not easy at that time, but required the approval of the organizations they were subordinate to and the transfer of personnel relations and archival materials through organizations. In our survey, the major obstacle encountered in the transfer of work included disapproval by unit leaders (about 30%). The ways to surmount the obstacle were consultation with leaders (19%), sending gifts (14%), negotiation between new and old units (13%) and asking favors of relatives and friends (12%). In fact, the social mobility among organizations could, to a certain extent, reflect the degree of openness and freedom of a society. The market theories indicated that the labor force, like other factors of production, could flow freely among organizations with the change of supply and demand. Certainly, under the planned economy, the goal of social control was far greater than the demand for increased social vitality.

3.2 Government and SOEs from the Perspective of “Work Unit System”

83

In this case, the division of urban and rural areas and the localized management by work units constitute the basic framework of social control. “Employees in work units will not be out of employ, but cannot flow freely. People’s social activities cannot be separated from their work units. Marriage registration, hotel accommodation or buying air tickets require job certificate or reference letter of work units.”85 Our survey results revealed that this rigorous social control had been changed, but free mobility was still subject to restrictions. Employee participation in state-owned enterprises. Employee participation within the enterprise is generally considered to be a way to enhance employee’s sense of belonging, satisfaction and self-realization. In modern enterprise theories, sufficient employee participation is also considered an effective means to enhance the competitiveness of enterprises. However, during the dual-track period, employees of state-owned enterprises were still in the care of the work units, their basic income was distributed pursuant to uniform standards by taking into account different industries, different types of work and different job titles, and their welfare was burdened by state enterprises via “enterprises running the society”86 (This was referred to as “collective consumption” by Andrew Walder, which meant that enterprises used their profits or state budget funds to handle various services and purchase a series of necessities for their internal employees, such as houses, dormitories, hospitals, schools, kindergartens, recreational facilities and canteens, etc.).87 In enterprises, workers doing more or less work made no difference, but later the bonus distribution reflected some difference. Slack-off in work and violations of discipline were very common in enterprises; the employee representatives’ conference became merely a formality. Evaluation and promotion of workers were arranged according to administrative means. Because the power of appointment and removal were under the control of higher authorities, there were different factions in enterprises. Although the limited expansion of autonomy in business operation gave renewed vitality to enterprises to some extent, generally it did not establish state-owned enterprises as the subject for operation. In a state when the relationships of rights, responsibilities and interests between the state and enterprises and between enterprises and workers, a large number of business executives began to seek interests for themselves. After the baptism of the “Cultural Revolution”, the majority of workers had a weak sense of responsibility and seldom actively participated in business activities of enterprises.88 In our survey, employees had a very low degree of decision-making participation. About 27% of respondents were interested in various types of elections organized by their work units, but only 30% of respondents considered voting as decisive. In the case of consultative participation, a very small proportion of employees gave suggestions and advice to leaders (12%) and even a lower proportion of suggestions and advice could be valued (9%). A related study conducted by Li Meng et al. pointed out that an important feature of China’s work unit system was ceremonial. This was 85 Lu

(1989). (2004). 87 Walder (1999). 88 Li Hanlin et al., China’s Employee Participation, unpublished. 86 Li

84

3 The Government and State-Owned Enterprises (SOEs)

Fig. 3.8 Decision-making participation of employees from SOEs

Fig. 3.9 Consultative participation of employees from SOEs

reflected not only in meetings, competitions, votes, and other activities, but also in practice, such as organizational means for employee participation, namely trade union, employee representatives’ conference and party congress, which only played a formality role in expressing demands of employees and were lack of the practical significance for the bottom-up expression and realization of interests. Behind these surficial formalities, individuals often solved their problems through under-the-table personal conversations or report to organizations89 (see Figs. 3.8 and 3.9).

89 Li

et al. (1996).

3.2 Government and SOEs from the Perspective of “Work Unit System”

85

It can be seen that, after the reform, at least during the “dual-track economy”, compared with the traditional planned system, no material changes have occurred to state-owned enterprises in some fundamental aspects. From the view of ownership, they are still owned by the state and their leaders are simply managers of state-owned assets, instead of owners. Despite the reform of SOEs with the main objectives of “decentralization of power and transfer of profits” and “separation of ownership and control”, a problem has not been satisfactorily resolved, that is, unclear ownership. Any local government at each level can represent the state, but they don’t have the legal personality. Specific to every member of the enterprise, no one can tell which things and which parts are shares and properties belonging to them. This means “to see is not to reach”. The properties of the state are only vain, and the fundament problems “whom they belong to and who are responsible for” are not completely resolved. Another problem is the ambiguity of rights, responsibilities and obligations. On the one hand, leaders and members of every organization are required to be responsible, “homing in on factories” and “being masters of factories”, but in the specific course of action, particularly significant decisions of some organizations, they are shackled by some delicate administrative affiliation relationship. Even though they can rule the roost on some issues, they do this not for themselves, but for the unclear state ownership. People cannot be responsible for others as much as for themselves. As a result, the phenomenon that “public property is easily damaged” often takes place, or no one cares and it is inevitable to be generous with properties of the state. Owned by the state for the purpose of regulating the management, SOEs are naturally incorporated into the orthodox administrative hierarchy, which confers SOEs with different administrative levels, either high or low. The reform has several changes and innovations on the organization’s administrative level. For example, some cities determine administrative levels and political treatment of enterprises based on the size of fixed assets, production and annual profits and taxes, thus changing the determination of administrative levels totally in accordance with the administrative affiliation relationship in the past. But this still does not jump out of the traditional idea of managing state or collectively owned social organizations by the orthodox administrative hierarchy. Because the administrative level of an enterprise is directly related to the scale and quantity of resources, benefits and opportunities available to them, the most of leaders of SOEs have the strongest internal impulse and behavioral motives for raising their levels and avoiding lower levels, for the good of not just the enterprise, but also their own status and interests. The inclusion of state-owned enterprises into the orthodox administrative hierarchy with administrative levels also means that they must be affiliated to and accept the leadership of “superior units”. On the one hand, leaders of state-owned enterprises are subject to appointment and removal and control of “superior units”. The appointment from higher authorities remains the major form of legalization. On the other hand, although some material resources, interests and opportunities are gradually liberalized, and the state retains less and less control after the reform and opening up, some scarce non-material resources, interests and opportunities are still partially or mostly in the hands of “superior units”, such as joining the party and becoming cadres, job promotion, study abroad and further study, as well as resources, inter-

86

3 The Government and State-Owned Enterprises (SOEs)

ests and opportunities in politics and social honors. These monopolistic or semimonopolistic resources, interests and opportunities can be exchanged at the cost of obedience. This is true of leaders of state-owned enterprises to their “superior units”, and also true of members of work units to their leaders. If the above situation has not been fundamentally changed, SOEs are difficult to become completely independent. 2. Changes to the work unit system After the reform and opening up, we can deeply feel some fundamental changes in the work unit system of China. The situation of functional diversification is substantially changed. Many social functions that should not be burdened by the work units are gradually separated off and fulfilled by the society through the market operation. Even now, some work units still carry out some social functions (As reported by Wang Yong, the Director of SASAC, central enterprises have over 8000 organizations with social functions, such as hospitals, schools and administrated communities, which are subsidized with the fund of tens of billions of yuan). However, in general, they are no longer “diversification of organizational functions of work units” in a typical sense, but provide a variety of services as incentives to employees, a kind of social welfare in special work units (On the one hand, the “publicly criticized” in-house welfare of state-owned enterprises indeed reflects partially the work unit characteristics; on the other hand, after the tax reform, the state-owned enterprises never deliver their profits but pay taxes to the state. As the economic efficiency continues improving, the capital gains are increasing, the after-tax dividends are being enriched and the unit benefits and wages as incentives to employees are steadily rising. After 2007, the state begins to change from levying taxes to collecting profits at different proportions. In 2010, due to the policy adjustment, the proportions of profit delivery are further increased and to a certain extent, achieve the goal of synchronizing profit making of state-owned enterprises and their economic contribution). The systematic pattern of centralized management, possession and distribution of various resources by the state has been broken, gradually loose and disintegrated after the reform and the dependence of work units on the state and superior units is being weakened. Meanwhile, with the development of social services and increasingly diversified approaches and means for people to meet and realize their interests, the individuals and unit members’ dependence on the unit organizations is also being weakened. The mobilization of unit members by the state and the control and integration of units by the state and of individuals by units are also being impaired as units become less dependent on the state. The trends of weakening, decentralization and marketization of resource distribution formed during the reform and development have a very profound influence on behaviors of organizations and members of the work units. There are bigger and bigger differences between the organization of different units and members in different unit organizations in their access to resources, interests and social status. This shows that the interests, resources and status of the units and their members are not just the result of distribution by the state and the government, but also the result of market transactions and the result of the mutual exchange of ability and demand on the market.

3.2 Government and SOEs from the Perspective of “Work Unit System”

87

After the reform, the unit members no longer regard their work units as “a living community”, but more of an occupation and workplace. In such organizations, employees’ participation is no longer based on full dependence, but a kind of interestdriven actions, and on this basis, they maintain their identity in the organization. If, before the reform, different conflicts of interests must and can only be expressed, integrated and realized through work units and the state’s coordination and integration of conflicts of interest are conducted within the framework of the work unit system, then after the reform, the expression and integration in such framework have largely been weakened due to radical changes to the foundation they depend on. The realization of interests is not just the resolutions and opinions of the organization and leaders but also reflected by consultation with leaders in the informal interaction process and the resolutions formed on this basis through the institutionalized approach. According to the above analysis, we can easily conclude that, despite the deepening of reform and opening up, the dependence of state-owned enterprises on the state, and of employees on state-owned enterprises will gradually weaken, and the basic structure of Chinese society formed by the state and the work unit as two poles is loosening and gradually disappearing. However, this basic structure dominated by the work unit organization will not be completely changed in the short term and the coexistence, mutual effect, mutual influence and mutual restrictions of the unit and non-unit organizations and two types of social organizational behavior norms will remain for a long period. It is not quite ready to thoroughly reorganize the integration and control mechanism of Chinese urban communities based on this basic structural pattern (Table 3.8). With the continuous advancement of reform, the proportions of social organizations owned by the state or the whole people in the Chinese society are declining rapidly. In some economic sectors and industries, economic organizations owned by the state or the whole people account for a very small proportion and are replaced by private, joint venture or joint-stock economic organizations. But even in such circumstance, the customary practice accumulated in the long period and the “path dependency” in the process of organizational and institutional changes make it impossible that the values and behavioral norms in the Chinese unit organizations instantly vanish into thin air. They are still reflected in a variety of ways in the course of people’s behaviors. Another basic fact is that some of the large enterprises that control the national economic lifeline are owned by the state, the power control structure of “party branch organized on the company basis” continues to exist and the party still plays an important role in these organizations. At present, China’s state-owned enterprises, in addition to the same general characteristics of the public sector of the economy possessed by Western countries, also have the unique institutional characteristics of China, that is, the political functions of China’s state-owned economic system. In China’s state-owned economic system, the party organization exists in all work units. Therefore, the work units are not sheer economic organizations, but also embody a kind of domination, or to be exact, an institutionalized form of domination. Here, the state and the government are faced with a dilemma: on the one hand, to sustain the leadership and rule of the Chinese Communist Party, the party organi-

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Table 3.8 Comparison of unit and non-unit organizations before and after the reform Unit organization before Unit organization after reform Non-unit organization after reform reform Structural characteristics Functional diversification (well-developed units, relatively shrinking society), party branch organized on a company basis Functions Social mobilization Social control Social integration Resource allocation

Party branch organized on a company basis, “functional diversification” as motivation

Formal organizations

Social mobilization Social control Job and workplace Resource allocation

Motivation Mobilization Work efficiency control Management

Active/passive participation Interest driven Participation as organizational culture Participation as organizational identification Ideology

Interest driven Corporate culture driven Efficiency driven Participation as organizational identification

Characteristics of participation Active/passive participation Living community Full dependence based Participation as organizational culture Participation as organizational identification Ideology

Expression and integration of interests Individual behaviors Through organization Criticism and self-criticism Enhancing expression and integration within the framework of work units Realization of interests

Resort to law Through organization Enhancing expression and integration within the framework of work units

Resort to law Informal pressure group Trade union Enhancing expression and integration within the framework of work units

Resolutions of party organization and unit leaders Organizational opinion Interest realization within the institutional framework

Compromise under pressure Resolution of unit leaders in informal interactions by the institutionalized means Interest realization within the institutional framework

Compromise, consultation and negotiation with the pressure group

zation cannot and should not be withdrawn from the grassroots units in the public sector of the economy; on the other hand, the market economy generally requires that economic organizations must be purely economic in terms of ownership, so fundamentally the public sector of the economy should not assume social function other than economic functions.90 In this sense, how to organically integrate the state ownership with the free market economy is an important issue for China’s current institutional innovations, changes and development. 90 Li

(2004, pp. 1–2).

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3.3 State Marketism: Revisiting the Relations Between Government and SOEs No country can grow economically forever. Since modern times, no other country can keep growing fast for more than 30 years like China. After the mid-1990s, the Chinese economy has not only effectively avoided the impact of the Asian financial crisis, but also to a large extent reduced the risk in the global recession since 2008. How can China make the economic achievements and effectively respond to economic risks? Among a wide range of factors, to our mind, one key factor and the core reason for China’s economic miracle is the role of the Chinese government. It is precisely a series of structural changes triggered by the behavioral pattern and goal orientation of Chinese government that impact on the Chinse economy and achieve the sustained fast growth. The structural factors comprise all political, economic and social facets and are combined in a seemingly “contradictory” way. This is manifested politically as the centralized decentralism,91 economically as the combination of public and non-public ownership, and socially as segregated institutional and non-institutional existence. For either the overall socialist market economic system or the political, economic and social structures, how to effectively bind the seemingly contradictory “dualistic” forms together and act on the goal of economic growth? This problem actually returns to the key issue that we have raised in the previous section, namely, how to effectively integrate the state-owned system with the market economy, and more precisely, how to combine the socialism and the market economy that are incompatible as argued by some “classical statements”? At the 14th National People’s Congress in 1992, China has made clear the goals and tasks of establishing a socialist market economic system. “The socialist market economic system we will establish is allowing the market to play the basic role in allocating resources under state macro control and ensuring that economic activities follow the requirements of the law of value and adapt to the changes in supply and demand; allocating resources to the nodes having better efficiency through the functions of price leverage and competition mechanism and bringing pressure and impetus to enterprises to achieve survival of the fittest; and promoting the prompt coordination of production and demand by taking advantage of sensitivity of market to various economic signals.” Since then, the role of the market in the Chinese economy has become increasingly prominent, not only abandoning the bias that the socialism cannot have a market at the ideological level, but also rejudging and restating the relations between market and plan, capitalism and socialism through establishing the market economy. “A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too. Planning and market forces are both means of controlling economic activity. The proportion of planning to market forces is not the essential difference 91 Huang

(2010).

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between socialism and capitalism.”92 In this sense, both market and planning forces are economic means, of which the goals, ways and scope are decided by the nature of the state. The markets of different states have different characteristics owing to their varied nature of the state. Therefore, our in-depth understanding of this issue, only transcending the boundaries and pan-ideological debate of some classical statements, can gain insight at the practical level into the behavioral pattern of the Chinese government and its role in China’s economic and social development.93

3.3.1 State Marketism The sustained economic growth of China since the reform was generally known as “Chinese path” or “China’s miracle”. The emergence of this miracle was simultaneous with the continuous marketization, so people were firmly convinced that the wealth could be created to stimulate the economic development only as long as the factors required by the production and trade were put into the invisible domain of “market”. However, it was obvious that compared with more market-oriented states in the same period, China even avoided the cyclical economic shocks. When other states got caught in the midst of the 1998 financial crisis and the global recession of 2008, the Chinese economy could remain “intact”. People began to be fascinated by the economic development model of China and “bring the state back in” became a theme for the theoretical rethinking. The confrontation and incompatibility between the socialism and the market economy was a normative boundary that had been repeatedly demonstrated and emphasized by some classical doctrines. Ever since the Soviet Union established the socialist public ownership and the planned economy model in the 1920s and 1930s, the assertion was made constantly that the socialism could not achieve a reasonable economic calculation. Brutzkus, Mises and Hayek had put forward similar arguments or held a firm theoretical prejudgment. German sociologist Max Weber indicated in his Wirtschaft und Gesellschaft that it was difficult to make accurate economic calculations under the planned economy.94 The criticism of the socialism 92 Deng

(1993a). fact, since reform, China has been adhering to the ideological guideline of “truth-seeking”, which was described by Deng Xiaoping as “white or black, so long as the cat can catch mice, it is good cat.” In the analysis of reasons for the success of China’s economic reform, some researchers proposed that the primary reason can be attributed to the pragmatic attitude of Chinese leaders, that is, anything favorable for developing China’s economy can be used to facilitate socialism (Chow 2005). In 1985 when answering some questions of the delegation of American senior entrepreneurs organized by Time Inc., Deng Xiaoping pointed out that “There is no fundamental contradiction between socialism and the market economy. The problem is how to develop productive forces more effectively. We used to have a planned economy, but our experience over the years has proved that having a totally planned economy hampers the development of productive forces to a certain extent. If we combine a planned economy with a market economy, we shall be in a better position to liberate our productive forces and speed up economic growth” (Deng 1993b). 94 Wang (2008). 93 In

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seemed to become a “stereotype” of the Austrian School represented by Mises and Hayek because they opined that the socialism was far from economic calculations that can be made rationally, or even the planned economic system was incompatible with the reasonable allocation of resources. Non-calculable socialism and calculable marketism could not coexist. Karl Marx’s three prerequisites for socialism, namely highly developed productive forces, elimination of division of labor and happiness of work, was considered by Mises and other scholars as difficult to be realized or even “missions impossible”. Of course, in the eyes of the extreme liberals, not only Marxism but also all economic models intervened by the state are the objects for attack and criticism, such as Keynesianism or even Nazism. As proven by the practical significance and theoretical implications of the “Chinese path”, the assertion that socialism could not make effective economic calculations seemed to end only in the rigidly planned economy with a total monopoly of the Soviet Union. It was ineffective for the socialist market economy of China after the reform because the sustained and rapid economic growth of China after the reform was the result of not only the reflection and reconstruction of the traditional socialist planned economy, but also the importance attached to the role of the market in the resource allocation. China stressed the state’s orderly intervention of the healthy operation and coordinated development of the economy and aroused the enthusiasm for production by all concerned parties by keeping public ownership as the mainstay and allowing diverse forms of ownership to coexist. The spirits of reform that “there is planning under capitalism and there are markets under socialism”, “white or black, so long as the cat can catch mice, it is good cat” and “crossing the river by feeling for the stones” removed the ideological constraint that the market and the socialism were incompatible and cleverly integrated the autonomy of the state and the market. This was unexpected by those classical theorists and confusing the western world. When the liberalists praised the “magic” of the market and considered that the market was a spontaneous order without the need for government intervention and too much government intervention would be “the road to serfdom”,95 Karl Polanyi argued in his The Great Transformation: The Political and Economic Origins of Our Time that the spontaneous and natural market advocated by some people were utopian, and the self-regulating market without government intervention was very dangerous. “This idea of a self-adjusting market implied a stark Utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness.”96 Chinese scholar Wang Shaoguang, starting from Polanyi’s point of view, distinguished the three concepts: market, market economy and market-oriented society. This distinction made us aware of the rationality in liberals’ mind. The calculable and spontaneous market economy was very dangerous and horrible. The market existed since long ago in history, and both simple trading markets and bazaars were markets. However, the market economy converted not just the general consumer goods, but also the labor force, land and money into 95 von

Hayek (1997). (2007).

96 Polanyi

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commodities. In the market economy, people became a kind of production factor that had no difference with other commodities. What’s more important, without the government intervention, the rich could satisfy their consumption through the market, but the poor might not even get clean air or water. This was the terrible consequence of the socialized market.97 To allow the market mechanism to be sole director of the fate of human beings and their natural environment indeed, even of the amount and use of purchasing power, would result in the demolition of society…Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime, and starvation. Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed. Finally, the market administration of purchasing power would periodically liquidate business enterprise, for shortages and surfeits of money would prove as disastrous to business as floods and droughts in primitive society. Undoubtedly, labor, land, and money markets are essential to a market economy. But no society could stand the effects of such a system of crude fictions even for the shortest stretch of time unless its human and natural substance, as well as its business organization, was protected against the ravages of this satanic mill …Paradoxically enough, not human beings and natural resources only but also the organization of capitalistic production itself had to be sheltered from the devastating effects of a self-regulating market.98

It is found from the above statement that the dichotomy of state and market cannot get close to the historical reality and is also of little significance for guiding the social economy. The “Chinese path” can be seen as China’s rethinking on the assertions of those market liberals and provide the real evidence for highlighting that the socialist market economy can not only make rational calculations, but also better deal with the relationship between state and market. As pointed out by some scholars, the existence of the state and modern market is normal in any society today, and the sociological analysis of state and market should pay more attention to and highlight the overall structural relations of the society and the mutual transformation mechanism of various factors.99 In order to carry out an academic analysis of China’s political and economic relations since the establishment of the market system, we put forward the concept of “state marketism”. In a broad sense, this concept is equivalent to the “socialist market economy”, but in a narrow sense, because the historical period for our analysis is limited to the middle and late 1990s, the main emphasis is put on the significance 97 Wang Shaoguang compared the views of Hayek and Polanyi and summarized that: Hayek considered the market order spontaneous, but Polanyi thought it neither natural nor spontaneous; in the opinion of Hayek, the spontaneous and natural market order had incomparable superiority, but as pointed out by Polanyi, the market developed by its own laws had no superiority at all, except for bringing huge disasters; Hayek disapproved the government intervention on the spontaneous and natural market, otherwise it was “the road to serfdom”, but Polanyi supported the regulation of market by the state was the only means to expand and enhance freedom (the term “regulation” has been translated and explained by Wang Shaoguang) (Wang 2012, pp. 17–19, 56–57). 98 Polanyi (2007, pp. 71, 141). 99 Qu (2012).

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of the state for the market and the dominant position and role of the government in the economic and social development. Therefore, we can summarize the “state marketism” as: for political stability and economic development, in the governance system of centralization and local decentralization, local governments are encouraged to maximize their financial interests in the regional competition; moreover, based on the state control of key areas and important industries, diverse forms of ownership develop side by side through the gradual market-oriented reform, so that the dominant regulation of the state power and the autonomous allocation of resources by the market are effectively integrated to promote economic growth. First, at the political level, the state marketism emphasizes the state’s dominant control of the market space and public possession of the main factors of production. The market is not the ultimate goal, but the means and path for the effective allocation of production factors. The socialist market economic system with Chinese characteristics is not only an emphasis on the institutional mechanism, but also a display in the political sense because China’s market economy is running under the conditions of socialism and playing a political leading role. The dominant position of the public sector of the economy is manifested in the quantity of economy, but more in the requirements of quality. The absolute number of state-owned enterprises and their contribution to the economy have declined significantly compared with the planned system, but their control of key areas and important industries hasn’t been weakened. China’s practice of “state first” to guide the market and use of “market efficiency” to consolidate the political foundation is undoubtedly an important reason for its economic success, and the key for us to understand “China’s miracle” or “Chinese path”. The historical experience shows that the market-oriented reform of the Soviet Union ends in failure because of the abandonment of the state control and the government domination, and in the progressive reform, China accomplishes the continued economic growth for more than 30 years for its adherence to the dominant position of the state and the government and suppression of the continuous expansion of various powers based on the market interests. Second, at the economic level, the reform logic of “crossing the river by feeling for the stones” is built on the consideration of stability and the attitude of trial and error and focuses on maintaining the dominant position of the state in the expansion of the market. Because problems spring up like mushrooms at the initial stage of the reform, there are no ready experience and theoretical guidance on how to find a breakthrough in the economic and social development. Through the micro-level decentralization of powers and improvement of incentive mechanism, the economic efficiency is enhanced. And then on this basis, the effective allocation of resources is realized and ultimately the macro policy environment is improved to drive the steady progress of China’s economy, coordinate the state and market forces in an orderly manner and balance the power struggle between politics and economy.100 This kind of economic development strategy, which worked “China’s miracle” as indicated by Justin Yifu Lin and other scholars, avoids the social and political shock caused by the large-scale ownership reform due to the gradual reform and breakthrough from 100 Lin

et al. (2012).

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micro to macro. It keeps the reform of ownership within a secure limit, continues to try or transform the share and control of the public sector of the economy (stateowned enterprises) and includes the calculation characteristics of the economy into economic organizations of different types of ownership. Thus, it forms the national economy based on diverse forms of ownership, which is made up of the public sector of the economy that can allocate resources in the market and make rational economic calculations and the private economy that can be regulated effectively through the state power. At last the economic operation model with planning and market in parallel is realized by complex operations.101 The state guarantees the market efficiency of resource allocation through the continuous reforms of the institution in the process of introducing and expanding the market. These institutional reforms, including the material management system reform, the foreign trade management system reform and the financial system reform,102 have laid an important institutional foundation for the subsequent healthy and stable development of the Chinese economy. Enterprises running on the institutional basis can effectively allocate the production factors through the market and greatly promote engender the enthusiasm of state-owned enterprises for operation and production because the state has liberalized parts of the market. Although state-owned enterprises still undertake many policy tasks, by constantly approaching the market, they are constrained to improve the production efficiency. Third, at the social level, in a country having a population of more than 1.3 billion, the economic growth absolutely improves the quality of people’s material life and this also constitutes the social implication for the state marketism. However, on the one hand, the economic growth depends on China’s particular social base (dualistic household registration, surplus labor and regional disparity etc.), and on the other hand, the disconnecting of economic and social development brings a lot of social problems. Under the efficiency principle, the state and the government give priority to the pursuit of economic growth over a long period of time, thus an “institutional” gap is opened up in the integrated economy and society. A range of social problems, such as rising labor costs, tightened constraints of resources and environment and domestic consumption weakness restrict the economic and social sustainable development from the social perspective. In this sense, the government domination that forges China’s economic miracle distorts the fit of market and society to some extent. The costs of social factors have been kept down by the government actions, such as labor cost, land cost and environmental cost. This leads to three irreversible processes when the Chinese economy is further developed through the urbanization, that is, failure in urbanizing peasants, unsustainable land finance, and inability to abandon the privileges of cities.103 In respect of the deep correlation between economy and society, Sun Liping argued that after China enters the era of durable consumer goods, the social reconstruction is of great significance for the

101 Ren

(2009). et al. (2012, pp. 155–166). 103 Li (2013). 102 Lin

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economic development. This means the risk of the entire economic system further increases and the model is not just economic transformations, but also requires the support of social institutions and structures.104 As stated above, we have elaborated on the concept of “state marketism” and its significance in highlighting China’s economic miracle, but there are also problems and shortcomings. Next, an analysis will be given on the relations between the government and state-owned enterprises from the perspective of the state marketism.

3.3.2 State Marketism and Public Sector of the Economy The “state marketism” combines the contradictory domains of state and market and contains very rich practical meanings, particularly insightful in explaining China’s sustained high-speed economic growth and the government-enterprise relations. The economic development since the mid-1990s (especially since the 16th CPC National Congress) has been keeping public ownership as the mainstay and allowing diverse forms of ownership to develop side by side under the state domination of the market, thus achieving the continuous economic leap-forward. The state-owned enterprises become important carriers of the state marketism. In the theoretical perspective of the state marketism, the state is dominant, but the autonomy of the market is equally important. The Communiqué of the Third Plenary Session of the 18th Central Committee of the CPC clearly pointed out that the underlying issue of the economic system reform is how to strike a balance between the role of the government and that of the market, and let the market play the decisive role in allocating resources and let the government play its functions better.105 The development after the reform and opening up also clearly indicated that China’s marketization process and the reform of the government-enterprise relations were adjusted and made breakthroughs based on the relations of the government and the market. Between the government regulation and the resource allocation by the market, the state marketism found an effective path to link public and non-public sectors and to maintain the balance of state power and market interests. This path depended heavily on this path. During the large-scale property right reform of state-owned enterprises in the middle and late 1990s or in the process of “growing bigger and stronger” state-owned enterprises since the new century, we unswervingly persisted in the dominant position of the public sector and emphasized the domination of state-owned assets in important industries and key areas that are vital to national security and are the lifeblood of the economy. Encouraging, supporting and guiding the development of the non-public sector are economic adjustments on the periphery of the “concentric circle”.

104 Sun

(2009).

105 “Communiqué

of the Third Plenary Session of the 18th Central Committee of the CPC”, Xinhuanet, http://news.xinhuanet.com/house/tj/2013-11-14/c_118121513.htm.

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1. Political status and economic performance of state-owned enterprises The report to the 15th National Congress of the Communist Party of China pointed out that “on the premise that we keep public ownership in the dominant position, that the state controls the life-blood of the national economy and that the state-owned sector has stronger control power and is more competitive, even if the state-owned sector accounts for a smaller proportion of the economy, this will not affect the socialist nature of our country.” Since the large-scale ownership reform of stateowned enterprises in the middle and late 1990s, the numbers of SOEs are declining, but their profit-making percentage and total profits are on the increase (see Fig. 3.10). After having entered into the new century, the report delivered at the 16th National Congress of the Communist Party of China indicated that “it is necessary to consolidate and develop unswervingly the public sector of the economy. Expansion of the state sector and its control of the lifeline of the national economy is of crucial importance in displaying the superiority of the socialist system and reinforcing the economic strength, national defense capabilities and national cohesion …The Central Government should represent the state in performing the functions as an investor in large state-owned enterprises, infrastructure and important natural resources that have a vital bearing on the lifeline of the national economy and state security while local governments should represent the state in performing the functions as investors with regard to other state property. The Central Government and the provincial and municipal (prefectural) governments should set up state property management organizations” (see Fig. 3.11). On this basis, the state encourages SOEs to develop to be internationally competitive large companies, large enterprise groups. The report to the 18th National Congress of the Communist Party of China also stressed that “We should unwaveringly consolidate and develop the public sector of the economy; allow public ownership to take diverse forms; deepen reform of stateowned enterprises; improve the mechanisms for managing all types of state assets; and invest more of state capital in major industries and key fields that comprise the lifeline of the economy and are vital to national security. We should thus steadily enhance the vitality of the state-owned sector of the economy and its capacity to leverage and influence the economy.”106 These guiding institutional arrangements show that the state domination of economic development is built on its absolute control over state-owned assets, and only when the public sector has the power of control and influence in the national economy, the goals and will of the state can be effectively realized and implemented. In other words, the state marketism, one the one hand through the reform of ownership, expands the individual and private economic sectors while keeping public ownership as the mainstay, so as to invigorate the market; on the other hand, the state cleverly introduces the market mechanism into the public sector of the economy, and therefore the SOEs get rid of their full dependence on the 106 “Firmly

March on the Path of Socialism with Chinese Characteristics and Strive to Complete the Building of a Moderately Prosperous Society in All Aspects”, in The Collection of Documents for the Eighteenth National Congress of the Communist Party of China, 2012, Beijing: People’s Publishing House, p. 19.

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Fig. 3.10 Development indicators of SOEs (from 1998 to 2010). Source China Economic and Social Development Statistical Database

Fig. 3.11 Relationship structure of government and SOEs. Source Szamosszegi and Kyle (2011).

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Fig. 3.12 Tax contribution of large-scale industrial enterprises. Source China Statistical Yearbook (2011).

government, can compete on the domestic and international markets and gradually increase their economic efficiency. Regarding the economic performance, the number of Chinese state-owned enterprises on Fortune Global 500 companies list increased from 6 to 54 in the period from 2003 to 2011. The control and competitiveness of many SOEs directly under the central government are being continuously strengthened. From 2002 to 2011, the total assets of central enterprises increase from 7.13 to 28 trillion yuan, and their operating revenues grow from 3.36 to 20.2 trillion yuan. During the “Eleventh Five-Year Plan”, the state-owned shares in central enterprises valued 58.9 billion yuan has been transferred into the social security fund and becomes an important source of social security funds.107 On the whole, SOEs pay more taxes and value-added tax than private enterprises (see Fig. 3.12). SOEs and their subordinate holding companies account for 40% of non-farm GDP, or even higher. The key position of SOEs cannot waver: first, they play a leading role in China’s economic development; second, key areas and important industries must be controlled by the government; and third, SOEs are key channels for the government to encourage scientific and technological innovations.108 2. Debate over “the state advances, the private sector retreats” If the above-mentioned overall economic performance of state-owned enterprises is a “picture” viewed from afar, people have a different interpretation of its details, in 107 Shao

(2012).

108 Szamosszegi

and Kyle (2011).

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other words, they believe that the good economic performance of SOEs since the new century results from their institutional advantages (in policy, legal protection and market entry).109 The central and local governments provide state-owned enterprises with various favorable conditions that private enterprises do not have, such as bank loans, land transfer, industry monopolies and so on.110 A recent comparison of the economic performance of state-owned enterprises and private enterprises on the list of Top 500 Enterprises of China (see Figs. 3.13, 3.14, 3.15 and 3.16) finds that stateowned enterprises perform much better than private enterprises in quantity, operating revenue, assets and profit making, but the capital gains they deliver to the state only account for 7.4% of their total profits while their profits are increasing (with the net profit of 1111.5 billion yuan in 2011).111 This means that the contribution of stateowned enterprises to state and society cannot match their economic status. Moreover, positive views supporting the reform of state-owned enterprises also argue that the efficiency of SOEs is much lower than that of private enterprises, and the constraints on the capital cost of state-owned enterprises are very low.112 In addition to their dominant position in traditional industries, state-owned enterprises also enter into areas with large profit margins and “compete for interests from the people”, such as real estate, retail and service industries. The upstream industries of China’s major industries are largely monopolized by state-owned enterprises, so private enterprises in some industries become subordinate to state-owned capitals. Therefore, powerful voices are given for “the reform of state-owned enterprises” and breaking monopoly. Even an analysis pointed out that “growing bigger and stronger itself seems to replace the original intention and become the ultimate goal of the reform”, and large central enterprises turn out to be “monsters” that are difficult to be supervised and tamed in the mind of people.113 In other words, while achieving constant development and improved efficiency, the achievements of state-owned enterprises are more attributed to the monopoly by virtue of their institutional advantages and their squeeze of private enterprises. They are even in the plight of public opinion. Li Rongrong, the former director of SASAC said, “I don’t understand why we are scolded for either good or bad performance of state-owned enterprises?”114 In 2011, a dialogue between a CCTV host and the Director General of Zhejiang Provincial Administration for Industry and Commerce has evoked heated discussions. This local official compares the relationship between state-owned enterprises and private enterprises to be the “wine” and “water”. 109 Xu

(2013). Institute of Economics (2013). 111 This website uses the related data of Top 500 Enterprises of China published in 2012 for comparison the economic performance of state-owned enterprises and private enterprises, http://cnpolitics. org/2012/09/soe2/, last visited on December 10, 2012. 112 Han (2009), Xu (2013), Wei (2013). 113 He (2009). 114 “Li Rongrong: I don’t understand why I am scolded for either good or bad performance of stateowned enterprises”, Xinhuanet, http://news.xinhuanet.com/fortune/2009-12/12/content_12634915. htm. 110 Unirule

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Fig. 3.13 Quantity comparison of SOEs and private enterprises Fig. 3.14 Operating revenue comparison of SOEs and private enterprises

Dong Qian (CCTV host): This year, All-China Federation of Industry and Commerce has reported that the arms of 500 private enterprises are thinner than the thighs of 2 state-owned enterprises. It means the total profits of 500 private enterprises are less than the profits of China National Petroleum (Sinopec Group) plus China Mobile. What do you think of this? Zheng Yumin (Director General): The profits of two state-owned enterprises are more than those of 500 private enterprises. First of all, we should sincerely say thanks and congratulations to state-owned enterprises. State-owned enterprises are an important part of our national economy. Of course we should feel happy for their good performance. However, private enterprises have merits of their own. It is not scientific to compare two different things, especially those with different characteristics. For example, beards of all women are not longer than those of one man. Why don’t they have this function? Private enterprises do not have this function because those are monopolies. They “wear high heels” that we

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Fig. 3.15 Asset comparison of SOEs and private enterprises

Fig. 3.16 Profit comparison of SOEs and private enterprises

do not have. How can we reach their level? Different things for different functions cannot be compared. State-owned enterprises are “wine” and private enterprises are “water”. The

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alcohol content of ten thousand bottles of water is less than one bottle of wine. It sounds really sighing, but thinking seriously, wine and water have different functions. State-owned enterprises reflect the state will, but private enterprises carry out social functions … Water has its special social functions. Private enterprises account for over 92% of the 43 million enterprises in China. How many working population are there in the country? It is 779 million. Only 63 million people are working in state-owned enterprises, and 91.8% are working in private enterprises. Private enterprises cannot reap fat profits, but they are to our country is what the water is to our life. They are pure mineral water, they are Nongfu Spring, they are Wahaha, they are the water for the social harmony, people’s livelihood, and infiltrated in the in the hearts of every people’s life.115

It can be found that the local official is, on the one hand, critical of the institutional superiority of state-owned enterprises, and on the other hand, also deeply aware of the functional differences assumed by different sectors of the economy. Wu Xiaobo, a financial writer, argues that China’s economic structure reflects an obvious trend that “the state advances, the private sector retreats”, mainly reflected in the three characteristics: “resource monopoly”, “clear-cut boundary” and “glass door”.116 The results of different studies show that through an analysis of the data of industrial enterprises above designated size from 2005 to 2011, the phenomenon that “the state advances, the private sector retreats” is not obvious in industrial sectors. The private sector of the economy grows faster than the public sector in terms of quantity of enterprises, total assets and industrial output value, but the public sector has a high degree of monopoly in highly and moderately capital-intensive industries, such as tobacco manufacturing, oil and gas production and the like.117 The debate over whether “the state advances, the private sector retreats” or vice versa remains for long. “Everyone has an opinion; people cannot say whether it is right or wrong”. We cannot deny that state-owned enterprises have a lower degree of marketization than that of private enterprises and hold a monopoly position in certain industries and areas. However, it is also necessary to face up to the fact that stateowned enterprises must not only develop and increase their value, but also undertake 115 Source: an interview video on people.com.cn, http://politics.people.com.cn/GB/14562/ 13656515.html. 116 “Resource monopoly” refers to the large-scale leap forward of state-owned capitals in the field of resources and energy; “clear-cut boundary” means that state-owned enterprises cluster in a few upstream industries, and gradually form an oligopolistic status, and that their quantity is decreasing, but their profitability is increasing rapidly; and the “glass door” refers to many restricting conditions and high threshold for entry into some industries and areas despite no open restrictions (see Wu 2010b). 117 According to researchers, the reasons for the impression that “the state advances, the private sector retreats” after the outbreak of international financial crisis include: first, with the international financial crisis as a divide, private enterprises grow much faster than state-owned enterprises before 2008, but they are deeply influenced by the international financial crisis in China’s export-oriented economic development model, resulting in big difference with the development of state-owned enterprises; second, the gap between private enterprises and state-owned enterprises is widening in the average size and capital intensity; third, some industries even show a decline in the proportion of the private sector and an increase of the public sector; and fourth; state-owned enterprises keep a high degree of monopoly in a part of highly or moderately capital intensive industries (see Li and Zhang 2013).

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various policy tasks such as strengthening the state competitiveness in important industries and key areas, provision of public goods and maintaining the economic and social stability, which are difficult be completed by private enterprises. According to an analysis of the state statistics, Hu Angang has compared state-owned enterprises and private enterprises in terms of the quantity of enterprises, number of employees, output value, profits and contribution to tax and public finance. In his opinion, it is a false proposition that “the state advances, the private sector retreats”. The situations in some industries or in certain years are not sufficient to rock the foundation for the overall relationship between state-owned enterprises and private enterprises. The fact is that both of them combine together to be “two legs” for China’s economic growth.118 Therefore, in discussing the issue of advance and retreat between public and non-public sectors of the economy, it is not appropriate to simply determine that a certain sector has an advantage over the other, but a specific distinction should be drawn on what areas are suitable for different economic organizations, and between which require the state regulation and which should need resource allocation on the market. The dichotomy between “state failure” and “market failure” in related studies must be treated with caution. This means that we must give up arguments of different opinions and consider more about the practical significance from the perspective of state marketism. The mixed economy consisting of public and private sectors in bonding the state domination and the market allocation not just transcends the liberal theory, but also represents a breakthrough of the planned economy, so as to advance the sustained economic growth of China. In this sense, changes of China’s economic structure cannot be simply attributed to “the state advances, the private sector retreats” in a certain period or vice versa in certain industries, but seen as the strategic institutional choice of the state as an economic whole in a specific historical period, in different industries, under the pressure of the structural environment, for achieving the leading objectives, thus ensuring the economic development and social stability. 3. Segregated institutional and non-institutional existence Under the work unit system, state-owned enterprises not only fulfill economic functions, but also carry out political and social functions and thus being the main organizational form used by the state for integration and control of the urban society. In this sense, it is similar to the ethical economy of Polanyi, because the interests of the members of the organization are achieved through the work units. The egalitarian principle within work units and the characteristics of “iron rice bowl” (secure job) disable the role of resource allocation played by the market. The quantity of resources available to the members of the work units directly determine the degree of their dependence on and satisfaction with the work units as well as their sense relative deprivation.119 With the continuous market-oriented reform, the state-owned enterprises ever practicing the work unit system have undergone great changes. They go to the market and for increasing efficiency and their redundant employees are laid off and pushed 118 Hu 119 Li

(2012). and Li (1999).

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towards the market, leading to temporary social tension and economic disorder. In this situation, the unified egalitarianism is replaced by the social differentiation based on the market competition, which is the so-called “giving priority to efficiency with due consideration to fairness”, “some areas and some people can get rich first, lead and help other regions and people, and gradually achieve common prosperity”. How to advance the economic development through further marketization has become the primary goal of the government, and the social justice gives way to the economic efficiency. These individuals who lose their dependence on the work units can only make a living in the high-risk market. At that time when the social security system hasn’t been well established, this group of people undoubtedly becomes the victims of the social reform. It is difficult to rely on the individual himself or social organizations (not maturely developed) to resist the market, because the profit-based market is not morally concerned. Only the power of the state and the government can change this situation. The tax preferences, credit preferences, training for reemployment and other institutional arrangements for the laid-off unemployed groups can help them tide over difficulties in the transformation from the planned economy to the market economy. Since entering the new century, as the operating efficiency of state-owned enterprises is being improved and their profitability is being enhanced, the state-owned enterprises ever subject to the “salvation” become “new favorites” for job seekers. From the changes in the job application intents of college students, it can be found that today the stability is valued more than high salaries, and the welfare of state-owned enterprises becomes the main considerations of job applicants.120 This mentality of “seeking for stability” reflects the uncertainty of the market, and the perfect welfare treatment embodies the differentiation between the work unit system and the market. As a Chinese saying goes, “it’s unfortunate for a man to choose an unsuitable job”. Once being absorbed into a good industry or a good work unit, you can get more opportunities and benefits than other work units and industries. The result of a survey made by us in 2012 regarding the “social attitude and social development status” shows that the satisfaction of employees in state-owned enterprises and their trust in the government are significantly higher, and their sense of relative deprivation is significantly lower than those of employees in other types of enterprises. As regards the subjective perceptions of employees in different types of enterprises, those working in the state-owned enterprises are more satisfied with

120 Liu Ping et al. have interviewed employees of a large state-owned enterprise. The results indicate

that “stability” and “good welfare” are the more attractive aspects relative to other types of enterprises. “The biggest benefit of our industry is the relative stability and high sense of occupational security. Only a few of our employees resign and our overall income has been steadily increased in recent years. We have considerable advantages and competitiveness over the locality, the industry and other industries. This may be the main reason for the low employee turnover rate.” The good welfare is not just enjoyed by the management in large state-owned enterprises, but also good for workers. “We have the home leave or the holiday for traveling, usually 15 days, but the office staff can take a longer holiday than us, about 20 days, once every year. However, we are too busy to go on a holiday, so the factory gives us an allowance of about 3000 yuan” (Cited from Liu et al. 2008).

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Table 3.9 A comparison of the social and economic status of employees in different types of enterprises State-owned Collective Private Foreign or other enterprises enterprises enterprises enterprises Monthly wage (yuan)

3430

2343

2613

3273

House (satisfaction %)

40.1

20.7

26.5

24.2

Job (satisfaction %)

28.6

12.1

26.5

17

Life pressure (dissatisfaction %)

33

45.6

41.7

43.5

Social status (satisfaction %)

24.1

24.4

19.9

17

Development opportunity (satisfaction %)

35.3

16.9

25.1

20.4

their house, job and development opportunities and less dissatisfied with their life pressure (Table 3.9). From the “iron rice bowl” of employees of state-owned enterprises under the planned system to “risking fortune in the business world” due to the difference in the economic income internal and external to the work unit system after the reform, from a large number of redundant workers being pushed out to the market in the middle and late 1990s to people seeking for jobs in the “work unit system” after state-owned enterprises achieve better benefit and welfare in the new century, these changes show that state-owned enterprises, as a kind of social organizations, are subject to the intervention of the dual forces of the state and the market. In the meantime, the behavioral selection and the difference in the subjective perception of members in social organizations within or outside the work unit system reflect the tension between the plan and the market. If the state-owned enterprises under the planned economic system are regarded as an extreme that will lead to low efficiency and lack of social activity of the market, then large-scale restructuring and layoff of works of state-owned enterprises can be considered as the collapse of social organizations resulting from the invasion of market forces. In this case, if the state is regarded as a “Leviathan”, the market is also a “monster” without humanistic care. For both the state and the market, their tentacles can reach into the social space people live in. While the “small government, big society” is increasingly advocated, we must reconsider what specific issues the small or big government is concerned with, and too broad statements seem to be of little significance. In the context of global marketization, it may be more meaningful to reasonably guide and control the market by the state, so as to avoid harms to the society. When employees of state-owned enterprises working and living in the “work unit system” sit by and do

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nothing when the market changes, more labor force make a living through the highly risky market mechanism. This phenomenon is totally unexpected to people who just smilingly talk about the “iron rice bowl” while bathing in the spring breeze of the market not long since the reform. In this sense, the progress of marketization and the state control of market are reflected in the increase or decrease of the economic efficiency, and more importantly, the subsequent market reform should be vigilant about whether the organizations as the foundation of the society and their internal members can withstand and perceive the gains and losses brought the market or the merits and demerits of the state control. For example, these problems cannot be solved by the market, such as education, employment, social security, healthcare, housing, ecological environment, food and drug safety, production safety, social order, moral anomie and lack of integrity, which are important to the social development and can only be solved through the government’s guidance and control of the market. A related study on the restricted incorporation of large state-owned enterprises indicates that the traditional economic system has experienced changes from the work unit system to the “new unit system”, which are embodied by the situations from the state’s external control to internal control of state-owned enterprises, from the socialized occupancy to the unit-based occupancy of state resources, and from the dependence of the work units on the state to employees’ dependence on the work units. This analysis discusses the differentiation logic from the changes of the work unit system and thinks that the social differentiation based on the market logic and the differentiation within the work unit system are the consequences of the dualistic social structure in which the market system and the traditional system coexist.121 The study points out the differentiation within the work unit system and what’s more, distinguishes the differences of the operation logic between the two domains within or outside the work unit system. This is very important for us to understand the relationship between the government and state-owned enterprises. In fact, work organizations have always been a key factor in the study of social stratification. The urban work organizations of China, either in the acquisition of material resources or for the changes of social status, constitute the structural factors other than individual attributes. During the period of the work unit system, employees of different categories have significant and stable differences in salaries and wages, welfare and working environment. From government agencies, public institutions, state enterprises, collective enterprises to private enterprises, the increased features of the work unit system and the higher administration levels can access to obviously enhanced resources and redistributable resources. After a study of the equal relationship between different categories of organizations after the marketization, researchers have found that this category-based inequality still exists.122 While state-owned enterprises are growing bigger and stronger in key areas of the national 121 The

restricted incorporation of large state-owned enterprises in the eyes of the author mainly refers to large state-owned enterprises invested and established by the state in important industries and key areas in order to achieve certain objectives. According to the nature of resources enterprises rely on, the author divides these state-owned enterprises into two types: one type includes enterprises occupying natural resources and the other type occupying “institutional” resources (Liu et al. 2008). 122 Zhou (2009), Li and Li (1999).

3.3 State Marketism: Revisiting the Relations Between Government and SOEs

107

economy, better income and social welfare are given to their employees. In order to obtain the identity of employees of state-owned enterprises even the phenomenon by the back door or paying an “entry fee” emerged.123 In other words, there is still an institutional segregation between state-owned enterprises and a large number of the informal labor force in the new historical period. This segregation is on the surface the differences in wages and benefits, but in depth a possibility of hindering the social mobility and the integration of class in the form of divided dualistic labor force. For this reason, state-owned enterprises are still burdened heavily with social costs124 and even display a tendency of “involution” benefits,125 resulting in obstructing the improvement of their economic efficiency and the realization of social fairness and justice.

3.4 Brief Conclusions In discussing the relationship between the government and enterprises, compared with other types of enterprises, the relationship between the government and stateowned enterprises is no doubt more special. Because on the one hand the state ownership provides them with more institutional advantages, and on the other hand, the market operation logic makes it necessary to face the constant market competitions. Therefore, on the historical premises that state-owned enterprises have improved their economic efficiency and made a significant contribution to China’s economic growth, a question worthy of discussion is whether the improvement of the economic performance of state-owned enterprises is benefited from the political mechanism, the market competition, or both? As a matter of fact, the relations between the government and state-owned enterprises are closely linked to the macroeconomic system. In the planned economy, state-owned enterprises are the main form of economic organizations. The stateowned enterprises under the work unit system become the major means for the state to gain the political, economic and social control of cities. In other words, state-owned enterprises are not simply the economic carrier, but also carry out the political and social functions. In a sense, they have the characteristics of quasi-government organizations, such as administrative levels, the appointment of unit leadership by higher authorities, building party branch at the company level. More specially, leaders of state-owned enterprises can exchange between “officialdom” and “business world”. State-owned enterprises under the market system, on the one hand, inherit certain characteristics from the work unit period, and on the other hand, develop new characteristics; they obtain resources from the institution, but seek opportunities on the market; and they actively pursue economic efficiency to maximize their interests, 123 Unirule

Institute of Economics (2011, pp. 23–26).

124 October 25, 2012, “Tens of billions used by the “small society” of central enterprises: over 8,000

institutions established for social functions, heavy social burdens”, Beijing Times. and Zhang (2007).

125 Li

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but are controlled by the government to serve some policy functions to realize the state will. If the state-owned enterprises in the planned system are running under the unitary logic, they in the market system have the characteristics of “dualistic logic”. Exploring the relationship between the government and state-owned enterprises cannot be divorced from the dualistic logic of planned economy and market system. In previous studies, we emphasize the unity of political, economic and social functions of unit organizations. Before the reform and opening up, virtually all of the various types of social organizations in the Chinese society belong to unit organizations of this type, which structurally integrate political with professional organizations and behaviorally blend professionalism and ideology. Moreover, the relationship between the individual and the unit becomes very close due to the mechanism of monopolistic distribution of resources by the work units. The functional diversification is a significant social characteristic of this kind of unit organizations. After the reform and opening up, especially during today’s rapid development of the Chinese economy and society, the proportion of state or publicly owned social organizations in the whole Chinese society is declining rapidly. The state or publicly owned economic organizations take a very small share in some economic areas and industries because they are replaced by private, joint venture or joint-stock economic organizations. But even in such circumstances, due to the behavioral inertia formed in the long-term accumulation and the “path dependency” in the process of organizational and institutional changes, the values and code of conducts of Chinese unit organizations cannot vanish abruptly, but constantly reflected by the people’s behaviors in a variety of ways. Another basic fact is that some of the large enterprises that control the national economic lifeline are still owned by the state, the power control structure of “building party branch at the company level” still exists, and the party still plays an important role in these organizations. At present, China’s state-owned enterprises, in addition to the same general characteristics with the public sector of the economy of Western countries, have the unique institutional characteristics of China, that is, the political function of China’s state-owned economic system. In China’s state-owned economic system, there is a party organization in any unit. Such units are not just simply a kind of economic organizations, but also embody the rule, or more precisely, an institutional form of the rule. Here, the state and the government are in a dilemma: on the one hand, to maintain the leadership and rule of the Chinese Communist Party, the party organization cannot and should not be withdrawn from the grassroots units in the public sector of the economy; on the other hand, the general requirements of the market economy emphasize that economic organizations must be purely economic in ownership, and thus fundamentally requiring that state-owned enterprises should not assume other social functions except economic functions. In view of this point, how to organically integrate all institutions of the state with the free market economy is important in China’s current institutional innovation, change, and development. The concept of “state marketism” has been defined to have a profound understanding of the relationship between the Chinese political and economic model since the establishment of the market economy and the relationship between the government and state-owned enterprises in such structural environment. In a broad sense,

3.4 Brief Conclusions

109

this concept is equivalent to the “socialist market economy”, but in a narrow sense, because the historical period for our analysis is limited to the middle and late 1990s and afterwards, the main emphasis is put on the significance of the state for the market and the dominant position and role of the government in the economic and social development. Therefore, we can summarize the “state marketism” as: for political stability and economic development, in the governance system of centralization and local decentralization, local governments are encouraged to maximize their financial interests in the regional competition; moreover, based on the state control of key areas and important industries, diverse forms of ownership develop side by side through the gradual market-oriented reform, so that the dominant regulation of the state power and the autonomous allocation of resources by the market are effectively integrated to promote economic growth. In the domain of state marketism, state-owned enterprises closely connect the government with the market, the planned system and the market system, the state intervention and the market regulation, and provide pure samples for our research on the Chinese government and enterprises after the marketization. Although township and village enterprises originate from the planned economic system and flourish after the reform, they step off the stage of history after the full marketization in the 1990s; private enterprises become increasingly flourishing in the growing market, but they cannot be linked with the planned economy. In contrast, the state-owned enterprises after the transformation are not only “connected” with the government, but also amicable to the market; the economic efficiency of SOEs are not only improved, but also some large state-owned enterprises show a significant tendency of the unitary possession of resources; they not only inherit the characteristics during the work unit period, but also the differentiation between different types of state-owned enterprises is very obvious. All these constitute the realistic context for our reconsideration and interpretation of the relationship between the government and state-owned enterprises. The “state marketism” effectively combines the opposite concepts of the state and the market in historical practice. It is in this sense that the market as a means is the same as the planning as a means and the nature of the state determines the goals, methods and scope of these economic means. Accordingly, our cognition of the socialist market economic system and the relationship between the government and the state-owned enterprises, only transcending the boundary of some classical statements and the pan-ideological debates, can gain insight into the behavioral pattern of the Chinese government and its role in the economic and social development of China. In our opinion, the economic development since the mid-1990s (especially since the 16th CPC National Congress) achieves the continuous economic leapforward under the state domination of the market and the state-owned enterprises become important carriers of the state marketism. In the theoretical perspective of the state marketism, the state is dominant, but the autonomy of the market is equally important. Between the government regulation and the resource allocation by the market, the state marketism finds an effective path to build the public and non-public sectors and to maintain the balance of state power and market interests. The stateowned enterprises are important for this path. For either the large-scale ownership

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reform of SOEs in the middle and late 1990s or “growing bigger and stronger” SOEs since the new century, we unswervingly persist in the dominant position of the public sector and emphasize the domination of state-owned assets in important industries and key areas that are vital to national security and are the lifeblood of the economy. Encouraging, supporting and guiding the development of the non-public sector is an economic adjustment on the periphery of the center.

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Chapter 4

The Government and Rural Collective Enterprises

In the history of China’s economic and rural development, the rise and fall of the collective township and village enterprises are extremely perplexing. This type of enterprises have experienced the staggeringly rapid changes: from 1984 when the “commune and brigade enterprises” were renamed as the “township and village 1 2 enterprises” (TVEs) until 1994 when the TVEs were transformed ; from accounting 3 for 22% of the gross industrial output of China in 1978 to 38% in 1993, and by the 4 end of 2000, 95% of TVEs completed the transformation. They are quick to rise and quick to fall. As described literarily by some researchers: the township and village enterprises ever emerge as a new force to be reckoned with when towns and villages

1 On March 1, 1984, the CPC Central Committee and the State Council of China agreed and distributed the Report of How to Create New Situations of Commune and Brigade Enterprises delivered by the Ministry of Agriculture and decided to rename the “commune and brigade enterprises” as the “township and village enterprises”. See Wu (2010, p. 1621). 2 On March 31, 1994, the Ministry of Agriculture of China promulgated the Opinion on the Reform of Property Rights of Township and Village Enterprises (1995, Yearbook of China’s Township and Village Enterprises (1995), Beijing: China Agriculture Press, pp. 65–67.). 3 China Statistical Yearbook (1994), Beijing: China Statistics Press, 1994, pp. 373–375. 4 Yearbook of China’s Township and Village Enterprises (2001), Beijing: China Agriculture Press, 2001, p. 6.

Township and village enterprises mainly comprise township (town) collective enterprises, village collective enterprises and private enterprises (simplified as “TVPS” in the academic world, which is the abbreviation of “township, village and private enterprises”). Some researchers indicate that the Chinese TVPSs have the following characteristics: dynamism, competitiveness, small scale, diversity, outward orientation, community orientation and factor immobility (Byrd and Lin 1990). In the analysis of this chapter, we will confine the township and village enterprises within the collective domain, so as to distinguish them from private enterprises. If not specifically pointed out, in the subsequent analysis, the township and village enterprises are equivalent to the collective enterprises based in townships and villages.

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are in the depth of misery, bringing us great hope, but collapsing in the peak period, then buried in memory,5 scattered ashes and dispersed smoke. A large number of studies working on the rise and fall of collective TVEs could be divided into three categories: studies of the rise of collective township and village enterprises, studies of the reasons for their transformation, and holistic interpretations of the rise and fall process. Fei Xiaotong explored the development issue of small cities and towns. Taking into account the regional history and traditions and the specific social conditions, he stated the following important reasons for the development of commune and brigade enterprises (the predecessors of TVEs): “having no other choice” under the pressure of rural surplus labor; “benefit from the disaster”, which meant the unexpected space for the industrial development in rural areas owing to the collapse of the urban economic order during the “Cultural Revolution” and the transfer of resources through the retired workers or cadres and educated urban youth going to the countryside as intermediaries; and “the convenience of traffic”, which was reflected in the fact that the regions with well-developed rural collective enterprises were mainly concentrated along the traffic lines and within the radiation circles of big cities (such as the prevailing “South Jiangsu model”) and that small cities and towns became the most appropriate and convenient geographical locations for connecting rural workers.6 In his monograph concerning peasants and the market, Pan Wei opposed against viewing the development of commune and brigade enterprises as the result of a series of accidental factors, but from the angle of politics, argued that the emergence of these enterprises was on account of the influence by the radical wing within the Communist Party of China. A strong rural socialist tradition was shaped and certain fundamental characteristics were rooted in the transition from commune enterprises, brigade enterprises to township and village enterprises. The growth of TVEs after the reform largely benefited from the intermediary role of the grassroots regime and was related to the degree of the socialist tradition and the timing of return to the family farming.7 Jean C. Oi used the concept of “local state corporatism” to analyze the development of rural economy and proposed that based on the well-preserved network of local party and government organizations, decollectivization and fiscal reform, the two really important institutional reforms made local governments the entities for the corporatism and committed to the industrial development in rural areas.8 Under the stimulation of these two structural motivations, local governments took advantage of their official status and power of resource allocation to develop the local economy, and resultantly rural industrial and collective enterprise mushroomed.9 In the above analysis, Pan Wei stressed the importance of collectivism in the industrial development of rural areas, but Jean C. Oi saw the decollectivization of agricultural production caused by the disintegration of the people’s communes and the house5 Xiong

(2010). (2000). 7 Pan (2003a, pp. 72, 75, 376). 8 Oi (1995). 9 Zhao (2012). 6 Fei

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hold contract responsibility system as the main reasons for the change of the income pattern of local governments and thus providing the impetus for their development of industries in rural areas. According to Pan Wei, it was difficult to clearly define the concept proposed by Jean C. Oi, which could not distinguish between local governments and the state, because the local governments were entirely different from the state or the central government, and the rural grassroots regime was not just the government, but also parts of the “society”.10 Similar to the viewpoint of Jean C. Oi, Andrew Walder put forward the idea of “local state as industrial firms”, which argued that local governments played a role resembling corporate headquarters and positively participated in and led the operation and development of local enterprises that seemed to be their subsidiaries.11 This meant that for local governments as positive stakeholders and actors, the lower their administrative level, the more consistent their goals and interests with local enterprise. Under the economic environment then, local governments enjoyed a monopoly, so they could provide a number of advantages and conditions to promote the development of local enterprises. Unlike most researchers who focused only on rural collective enterprises, some researchers held the opinion that too much emphasis on the analysis of collective enterprises would misinterpret the relations between rural organizations and the development of TVEs and the fact was that private enterprises had been coexisting with and growing at a faster speed than these collective enterprises. The concepts of power capital and human capital were utilized for analysis. The TVEs were believed to operate in an environment of imperfect political and market institutions. Rural organizations had the power capital and entrepreneurs had the human capital. The combination of them will form collectively owned or private enterprises. The two preconditions for the emergence of collectively owned TVEs were the highly flexible supply and high productivity of the power capital. Therefore, collectively owned enterprises are more likely to appear in regions at a higher economic development level, with more investments from the state and highly developed state-owned economy and in capital-intensive and statecontrolled industries.12 After comparing TVEs and state-owned enterprises (SOEs), Cai Fang attributed to the successful rise of TVEs to the following reasons: first, their primitive accumulation enjoyed the cheap supply of production factors; second, TVEs started with ample market opportunities; and third, they were confronted with market competitions from the very outset.13 In contrast to the rise and development of TVEs, their rapid decline also drew special attention of researchers. It was noteworthy why they are like the lush growth of trees withering away in an instant. Since the transformation of collective TVEs began in the transition period of the market economy, the goal orientation of the 10 According to Pan Wei, if a county government is regarded as a “local state”, there are about 2000 local states in China; if a township is regarded as a “local state”, there are nearly 50,000 local states; if a village is regarded as a “local state”, there are over 800,000 local states. Compared with the county government, townships and villages are independent community entities. The county government acts often as protector and predator of township enterprises (Wei 2003a, p. 16). 11 Walder (1995). 12 Tan (2003). 13 Cai (1995).

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government was which forms of collectively owned TVEs could improve efficiency and be consistent with the logic of the economic reform. Researchers tended to be concerned more about whether the transformation was reasonable and why it was unreasonable. The analytical studies applying the property right theory was insightful and extensive and could be approximately divided into the economic paradigm of property rights and the sociological perspective of property rights. Researchers holding the view of “clear property rights” were mainly based on the theories of neoclassical economics and emphasized the residual rights of control and claim of enterprise owners. They considered that the clear property rights could effectively stimulate these owners and that the unclear property rights of collective township and village enterprises were the fundamental reason for their low efficiency and lack of momentum. According to Zhou Qiren, the public sector of economy (state and collectively owned enterprises) was mainly characterized by non-market contract, thus eliminating a guarantee mechanism of enterprise efficiency, which was the trial and error on the market.14 In fact, the transition to rural collective enterprises, which began in the middle and late 1990s, moved towards clear property rights. The corporate control and residual rights of control were partially or fully delivered to the individual business operators with a view of improving business efficiency and profitability. In analyzing the corporate governance structure, Wang Hongling indicated that the clear property rights of China’s TVEs could not be formed under the “governmentized” entruster (owner) and that the transformation was a process transitioning to increasingly clearer property rights.15 The property rights of rural collective enterprises were described as “ambiguous” by scholars, but this ambiguity was a choice adapting to too many administrative interventions and imperfect legal mechanism of China.16 Consequently, the transformation and restructuring of enterprises was necessary for the turn from unclear property rights and integration of government administration with enterprise operations to clearly defined property rights and separation of enterprises and administration. Victor Nee regarded collective enterprises as a hybrid marketized sector. In his point of view, the process of transition from the state socialism to the market economy was not in a single mode, but had multiple paths constrained by the previous institutional form and market politics. The hybrid sector could regulate the interactions between the weakened redistributive sector and the growing private sector.17 The mixed form of property rights was only a transitional form of enterprises and an institutional arrangement to overcome problems in the context of weak market structures and incomplete market transformation. It ultimately would be transformed into clear property rights.18 The theory of property rights in economics is premised on the market economy, regards property right as a kind of rights and emphasizes the exclusivity and indepen14 Zhou

(2000). (2000). 16 Li (1995). 17 Nee (1992). 18 Zhou (2005). 15 Wang

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dence of property rights and the clear separation boundary between corresponding organizations.19 This economic paradigm of property rights uses the private ownership as the final reference for clear property rights and thus deduces that “only clearly defined property rights can be efficiency”. However, the theory of pure property rights and the reality are often contradictory and faced with the paradox between the defining of property rights and the establishing of market.20 Different from the theory of property rights in economics, Chinese sociologists recently developed a “social perspective of property rights” on the basis of practical observation, which was reflected in two research directions. One direction refined the concept of property rights differing from that in the economic sense and established the general analysis methods and theoretical hypotheses and the other direction examined the defining process of property rights and grasped the motivations and values of actors, so as to analyze how the property rights were constructed through interactions among actors.21 Some of these studies aimed at the analysis of TVEs. The “relational concept of property rights” proposed by Zhou Xueguang pointed out that the transformation of TVEs was the result of the interaction between the government and enterprises. On the one hand, the market development of the resource allocation mechanism in the enterprise environment led to the weakening of their dependence on the government; on the other hand, the government’s interest needs and ways of satisfying them underwent changes, so that enterprises and local governments adjusted the property rights accordingly with changes in the structural environment and their respective interests.22 The “social contract of property rights” stated by Zhe Xiaoye and Chen Yingying indicated that when the market contract was incomplete, the key for the survival and sustenance of collective TVEs was that the social contract could well deal with and solve the problems of internal cooperation and property right conflicts and play the role of maintaining the bottom line of collective property rights and the order of property rights. If the transformation promoted by employing the administrative power did not take full account of the logic and significance of the existence of such informal property rights, it not only couldn’t achieve the objectives to be achieved, but also led to serious adverse consequences to the sustainable development of the community.23 The fact was that the “across-the-board” way of transformation neglected the specific institutions and historical conditions and even the actual state of property rights of “one system for one village” could avoid the failure of many enterprises after the transformation. The shift towards the “clear property rights” was not as effective as anticipated, and the most of enterprise restructuring was inevitably faced with the

19 Zhou 20 Zhe

and Chen (2005). (2013). 22 Zhou (2005). 23 Zhe and Chen (2005). 21 Cao

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problems of corruptions and loss of collective assets as well as the social sustainable development of town communities after the reform.24 Although the property rights-based analysis was also aware of the objective institutional environment, yet not in depth. In the process of transformation and restructuring of TVEs, the indirect effects of the fiscal system were generally ignored. That is to say, besides the difficulties in the development of collective TVEs, the local governments’ consideration of their own financial revenue was one of the main drivers. After implementing the tax sharing system, the tax distribution between the central and local governments would not consider the affiliation relationship of enterprises. Local governments got fewer revenues but were subject to bigger risks, so their enthusiasm for establishing industrial enterprises was dampened.25 For the grassroots government, TVEs were no longer reliable source of revenues. TVEs carried the onerous burden of increasing bad debts owed to banks as a result of their inefficient operation.26 Apart from the impact of the fiscal system, researchers also recognized that the relationship changes of TVEs and other types of enterprises were important influencing factors accelerating their decline. An explanation was that the losses of state-owned enterprises led to the dilemma of a “chain of debts” for TVEs which had a large number of business and capital transactions with state-owned enterprises. The more sluggish the state-owned enterprises were, the higher the debts they owed to TVEs, and the less financially liquid TVEs were; and the decline of state-owned enterprises also slowed the product sales of TVEs.27 Another explanation was that the transformation and restructuring of TVEs were closely related to the government support in China’s market-oriented reform. In particular, after analysis of the logic behind the government behaviors of “excellent enterprises restructured first”, it was deduced that the transformation and restructuring of TVEs were the result of the struggle for the government resources between private and collective enterprises. “Following less economic benefit from the collective economic sector, the government turns to support the development of the private economic sector and withdraw resources from the former. When this trend develops to a certain extent, the government will completely exit from the collective economic sector, large quantities of TVEs are sold and the restructuring occurs.”28 The third research orientation was the holistic interpretation of the rise and fall of township and village enterprises, which was the work we try to accomplish in this book. Compared with the above-mentioned two types of studies, the holistic inter24 Zhang and Feng (2000), Zhe and Chen (2000); Qin Hui, 1997, 1998, “Township and Village Enter-

prises at the Turn—A Survey Report of Tsinghua University on the Transformation of Township and Village Enterprises” (Part 1 and Part 2), Reform, No. 6 and No. 1; Zheng et al. (2012). 25 Zhou (2006). 26 Qu et al. (2009). 27 According to Panwei, the occupancy of the working capital of township and village enterprises by state-owned enterprises emerged in the late 1980s, especially at the time of macroeconomic depression. Since 1994, their payment in arrears kept at a higher level. The account receivables were virtually about half of TVEs’ working capital. The closer connections they had with stateowned enterprises, the situations were more serious (Pan 2003a, pp. 329–330). 28 Zhi (2001).

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pretation was more historical with a broader theoretical framework and involved relatively complex relations. From the perspective of cost-benefit and activity interactions, Xia Yongxiang et al. proposed that the rise and fall of TVEs were the response of stakeholders of TVEs to the degree of marketization, including the township government, the higher level government, TVEs, managers and employees. When the degree of marketization was established, the parties would make decisions based on their own cost-benefit analysis and these interactions led to balancing of the ownership of township and village enterprises; when the degree of marketization changed, the cost-benefit of all parties would vary accordingly and thus changing the ownership of TVEs.29 Qiu Zeqi made an analysis of the ups and downs of TVEs from the changes in the institutional environment and held an opinion that the early development of TVEs was mainly benefited from the collective ownership, the management tradition of the people’s commune, the planned economic system, the vacuum of the consumer goods market, and the most importantly the substitution of market by the government power. As the economic reform was fully advanced, the vulnerabilities of TVEs were fully revealed in the market competition. After a series of property rights system reform, the township government gradually exited from the operation of local enterprises and their withdrawal meant the failure of the collective ownership.30 Xiong Wansheng utilized the concept of “autonomy” and pointed out that in the centralized system of China, the government at all levels strove to expand their autonomy. The rise of collective enterprises was because the grassroots regime at the most fundamental level of the centralized system expanded and maintained their autonomy, but the fall of collective enterprises could be seen as the failure of the grassroots regime to expand their autonomy.31 In his research, there were two historical stages according to the combination of the changes of the grassroots autonomy and the ups and downs of TVEs, namely from 1958 to 1984 and from 1984 to the middle and late 1990s. At each stage, the autonomy at the grassroots level was faced with the process from construction to frustration, but the rise and fall of rural collective enterprises were only one of the manifestations of the failure of the grassroots regime. The related studies mentioned above give various theoretical explanations for the rise and fall of rural collective enterprises and constitute the theoretical basis for our research on the relations between the government and rural collective enterprises. Unlike the studies with the “teleological” color, in our opinion, the rise and fall of rural collective enterprises were unintended consequences of the institutional arrangements made by the government. From the “ex-post” point of view, the “shortlived” prosperity of rural collective enterprises foreruns a premature decline, because they are “not perfectly legitimate” (at the grassroots level, after several times of rename), “unclear in property rights” (neither state-owned nor private), “fickle” (in a dramatically changing structural environment) and “without an effective communication channel” (no influence on the government’s decision making). In this chapter, 29 Xia

and Wang (2005). (1999). 31 Xiong (2010). 30 Qiu

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we attempt to give a unified interpretation framework for the rise and fall of rural collective enterprises, at the core of which is the government and its various institutional arrangements.

4.1 Unintended Consequences of the Institution A purposeful action can lead to social consequences unforeseeable by the actor, which is called “the unanticipated consequences of purposive social action” or “unintended consequences”. Merton has discussed systematically this topic as a specific social issue. From the functional perspective, he argues that the unintended consequences of social actions had very close relations with the “latent function”. There are three types of unintended consequences of social actions: (1) the ones having a positive latent function towards the designated system; (2) the ones having a negative latent function towards the designated system; and (3) non-functional consequence irrelevant with the system.32 The main obstacle to restricting the correct anticipation of the consequences of actions is the existing state of knowledge.33 Therefore, the unintended consequences of social actions are not only difficult to avoid but will produce “unexpected” consequences, such as “self-fulfilling prophecy” and “selfdefeating prophecy”. If “we reap what we sow” is a completely predictable natural causal relationship, then social facts are much more complex, such as Max Weber’s study on the Protestant ethic and the spirit of capitalism and Merton’s study on the rewards system of science and the academic corruptions. Anthony Giddens disapproved of Merton’s connecting unintended consequences with functional analysis and pointed out that Merton saw the analysis of unintended consequences as seemingly irrational forms or patterns of social conduct and contrasted intentional activity (manifest functions) with its unintended consequences (latent functions). He investigated an example of a ceremonial provided by Merton: Thus a ceremonial, for example, ‘may fulfill the latent function of reinforcing the group identity by providing a periodic occasion on which the scattered member of a group assembles to engage in a common activity’. But to suppose that such a demonstration of a functional relation provides a reason for the existence of a practice is mistaken. What is being more or less surreptitiously smuggled in here is a conception of ‘society’s reasons’ on the basis of imputed social needs. Thus if we understand that the group ‘needs’ the ceremonial to enable it to survive, we see its continuation as no longer irrational… In the individual, wants that are constitutive of the motivational impulses of the actor generate a dynamic relation between motivation and intentionality. This is not the case with social systems, except where actors behave in cognizance of what they take to be social needs.34

Of course, Giddens agreed with Merton’s emphasis on the significance of connecting unintended consequences of action with institutionalized practices. In his 32 Merton

(1968, pp. 130–131). (1936, p. 130). 34 Giddens (1998, pp. 73–74). 33 Merton

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opinion, the influence of unintended consequences could be analyzed in three main research contexts, of which the institutionalized practices are the most important. One was the cumulation of events deriving from an initiating circumstance without which that cumulation would not have been found, such as the “butterfly effect”, which meant a very small deviation from the initial conditions could make all the difference in the consequences. The second type of circumstance was the “perverse effects” from the actors resulting from a complex of individual activities. For example, a “free ride” was rational for each individual actor, but the final consequences would result in the lack of public goods, which was irrational for the group or the organization. The third type of circumstance was that the unintended consequences of activities constituted an unrecognized condition for the actor’s future activities by a non-reflexive feedback cycle (causal loops), the loops were repeated and allowed for the completion of reproduction of social characteristics over a long period of time.35 In fact, the difference between Giddens and Merton in perceptions of social actions and their unanticipated consequences are largely due to the different methodologies. The “structure theory” of Giddens naturally differs from the “functional analysis” of Merton. Giddens emphasizes the purpose of social actions and that only purposive actions can lead to unanticipated consequences. By clearly indicating some key factors that limit the activities and analyzing the motives of actors, researchers can reveal how unanticipated consequences arise from purposive activities and thus avoiding the functionalist neglect of the actor’s purpose.36 Merton only analyzes the objective unanticipated consequences of the actor, but the non-objective consequences (potential or possible) haven’t been discussed. This is of course related to Merton’s definition of function, which lays stress on the distinction between the subjective intention and objective effects and insists that “the function is an observable objective consequence that contributes to the adaptation of a certain system”.37 Unlike Merton and Giddens who pay more attention to unanticipated consequences of social actions, Michael Mann, from the perspective of institutional “interstice” and in the analysis of the evolution of human history, emphasizes the role and significance of “unintended consequences”. Actually, people will make plans and arrangements before making a decision and completing a task, but because the unintended factors in the plan can lead to a failure or accident, the network of social power is more complex and the social laws become more “chaotic”. The potential influence of accidental factors on the historical development can be found in the example given by Mann on changes in the technology of military power relations leading to changes in political and economic power relations: Important social changes were precipitated by military events just after A.D.1300 in Europe. In a series of battles, the old feudal levy, whose core was semi-independent groups of armored mounted knights surrounded by their retainers, was defeated by armies (mainly Swiss and Flemish) that placed greater reliance on dense masses of infantry pikemen. This sudden 35 Giddens

(1998, pp. 74–75). and Yang (2008). 37 Merton (1968, p. 130). 36 Liu

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shift in the fortunes of war led to important changes in social power. But in the long run it strengthened the power of centralized states. It is sometimes argued that the first victory was accidental. At the battle of Courtrai, the Flemish burghers were penned against the river by the French knights. They were unable to engage in their usual tactic against charging knights - flight! No desirous of being slaughtered, they dug their pikes into the ground, gritted their teeth, and unhorsed the first knightly rank.38

Mann termed these accidental factors relative to the institutionalization “interstitial emergence”. The driving force of human society is not institutionalization, but various networks of power relations that have been generated or are being generated. These networks may be developed and outrun the existing level of institutionalization. This may happen as a direct challenge to existing institutions, or it may happen unintentionally and “interstitially”—between their interstices and around their edges—creating new relations and institutions that have unanticipated consequences for the old. After the accidental victory of the European pike phalanx against the groups of armored mounted knights, besides the simple causal pattern—changes in the technology of military power relations lead to changes in political and economic power relations, its intrinsic significance lies in that “Among social networks that were not at the core of feudalism were towns and free peasant communities. Their further development was relatively interstitial to feudalism. And in a crucial respect two of them, in Flanders and Switzerland, found that their social organization contributed a particularly effective form of ‘concentrated coercion’.”39 According to Mann, Marx’s statement that the bourgeoisie rose “interstitially” and emerged between the “pores” of feudal society is a typical example of interstitial emergence. It is in this sense that the historical development of human beings is not linear, but full of uncertainties. As mentioned above, the social actions of human beings inevitably have unintended consequences, then unintended consequences of the institution also exist and create new relations and institutions between their interstices and around their edges.40 When studying China’s work unit system, Li Meng et al. indicated that the high degree of institutionalization could not guarantee the obedience of the intention of the superior level in the hierarchy and the achievement of the goals from top to bottom, but a variety of mechanisms which the superior level utilized to control the lower level often had unintended consequences different from the control goals, that is, the deviation of actions in work units and the technical goals. Such unintended consequences were embodied prominently by “the striking ceremonial characteristics of various activities in work units”.41 Coincidentally, Xiong Wansheng, in his study of rural cooperatives, used the construct strategy of the work unit image similar to Li Meng et al. and understood the cooperative economic organizations of peasants as unintended consequences of institutionalizing process, a phenomenon

38 Mann

(2007, pp. 24–25). (2007, pp. 19–25). 40 Mann (1986). 41 Li et al. (1996). 39 Mann

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widely existing in these economic organizations that “the name does not reflect the reality”.42 This institutional analysis of Chinese work unit system and rural cooperatives stressed the forming mechanism and manifestation of unintended consequences. Its difference from previous studies lied in greater emphasis on the influence of the institutional environment on the internal operating mechanism of such organizations. They were distinctly different from the organizational study of the ideal type and closer to the reality. The importance attached to the institutional environment of organizations first benefited from the contribution of the new institutionalism. In his research on the organizational convergence, Meyer proposed that the studies of organizations must consider the specific environments, including technical environments and institutional environments. Organizations are not just the product of the technical needs for the pursuit of efficiency, but also the product of the institutional environment (legal system, cultural concepts and social expectations etc.). The degree of institutionalization of an organization could affect its degree of “legitimacy” and adaptability.43 Actually, the idea that the rise and fall of TVEs were seen as unintended or “accidental” consequences of institutional arrangements had been implied in many studies. From the characteristics of the administrative structure, Yingyi Qian indicated that the M-form hierarchy at multiple levels and in many regions had a very substantial impact on the rapid economic development since reform. In particular, the entry and expansion of the non-state sector was not the intention of the central government, but because of the enthusiasm of local governments, which benefited from the administrative decentralization after the reform and further enhanced this multi-level and multi-region organizational form.44 In a subsequent article, he discussed in detail the relationship between decentralization and China’s economic development and the so-called “market-preserving federalism” played a key role. Any change in each of the five conditions forming this institution could change its form and content. It was a “coupling” or more precisely a “coincidence” that this institution took shape in China and played a positive role, because it was extremely difficult to form a lasting and credible decentralization relationship between the central and local governments and it was not easy to ensure that such decentralization could promote rather than hinder economic development. The key problem was that how this institutionalized relationship is formed, but the author did not give a sufficient answer. Pros and cons of the decentralization and centralization always accompanied each other. There was no permanent decentralization, nor was the centralization. The institutional arrangement of market-preserving federalism and the reliability and durability of such power distribution were only the characteristics for the time being and closely linked to the structural environment at that time. On the basis of criticizing Yingyi Qian, from 42 Xiong

(2009). and Rowan (1977). 44 Qian, Yingyi and Chenggang Xu, “Why China’s economic reforms differ: the M-form hierarchy and entry/expansion of the non-state sector”, in Zhang Jun and Zhou Li’an (eds.), 2008, Compete for Growth, Shanghai: Shanghai People’s Publishing House. 43 Meyer

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the perspective of construct and failure of the “autonomy” at the grassroots level, Xiong Wansheng made an analysis of the ups and downs of rural collective enterprises and suggested that their development was only an accidental product of the peasant economy and the accidental coordination of the people, cadres and grassroots organizations and the government at the higher level in the construct of their respective autonomy. When such coordination failed, the rural collective enterprises were subjected to the restructuring.45 We also regard the rise and fall of China’s rural collective enterprises as unintended consequences of institutional arrangements of the government, which are reflected in distinct historical stages. They can be roughly divided into three stages according to the structural environment and institutional arrangements: from 1958 to 1978, the germination stage of rural collective enterprises (known as “commune enterprises” or “brigade enterprises”); from 1978 to 1993, the prosperity stage (renamed as “township and village enterprises”); and after 1994, the property right reform and gradual disappearance. As shown in Fig. 4.1, the number of rural collective enterprises reached the highest peak in 1984, about 1.863 million, but decreases linearly since 1994. By 2008, there are only 140,000 enterprises of this kind, with an average annual decrease of 107,000 and an average annual decrease rate of 15.5%. The output value of rural collective enterprises shows an inverted U-shaped trend, reaching the highest peak in 1997, about 4384.414 billion yuan. From 1978 to 1997, it sees an average annual increase of about 270.94 billion yuan and an average annual growth rate of 33.3%, but from 1997 to 2008, it witnesses an annual decrease of about 302.5 billion yuan and an average annual decrease rate of 10.7% (see Fig. 4.3). In the following sections, we will expatiate on the external manifestations (various institutional arrangements) of this mechanism as well as the resulting relationship changes between the government and rural collective enterprises from the three historical stages (Fig. 4.1–4.4). Before 1996, the rural collective enterprises in the Yearbook of China’s Township and Village Enterprises are divided into township villages and village enterprises, and after 1997, they are uniformly called rural collective enterprises. In the Yearbook, the types of TVEs include domestic enterprises, enterprises with investment from Hong Kong, Macao and Taiwan and foreign investment enterprises, among which the domestic enterprises comprise collective enterprises, shareholding cooperative enterprises, joint ventures, limited liability companies, joint stock limited companies, private enterprises and individual enterprises. Only the number of collective enterprises, private enterprises and individual enterprises are recorded before 2001 and more enterprise types are included after 2002.

45 Xiong

(2010).

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Fig. 4.1 Changes in the number of rural collective enterprises (1978–2008). Data source: Yearbook of China’s Township and Village Enterprises (data of 1979 not available)

Fig. 4.2 Proportion of rural collective enterprises in TVEs (1984–2008)

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Fig. 4.3 Changes in the rural collective enterprises (1978–2008). Data source: Yearbook of China’s Township and Village Enterprises (data of 1979, 1995 and 1996 not available)

Fig. 4.4 Proportion of total output value of rural collective enterprises in TVEs (1984–2008). Data source: Yearbook of China’s Township and Village Enterprises (data of 1995 and 1996 not available)

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4.2 Supplement to Rural Collectivity: Germination and Initiation of Rural Collective Enterprises (from 1958 to 1978) Rural collective enterprises were not the main path to achieve industrialization in the country, but initially served as a supplementary form of the collective agricultural production, that is, the so-called “nurturing agriculture by industry”. The commune and brigade enterprises were only one of the organizational forms for the people’s communes complete the diversified functions of “farming, forestry, animal husbandry, sideline production and fishery, workers, peasants, merchants, students and soldiers”. As pointed out by Mao Zedong, “there are not many things directly owned by the people’s commune, such as commune enterprises, public institutions, provident fund and public welfare fund. Nevertheless, our great bright and brilliant hope is here.” The subsequent development of commune and brigade enterprises broke through the original design of the leaders because they became important means for peasants to increase income and played an important role in the community construction, government taxation and attraction of surplus labor force. In the study of the small towns, Fei Xiaotong visited a large number of towns in southern Jiangsu and found that the role and significance of commune and brigade enterprises were far beyond the expectations of many people: Before 1975, the agricultural economic path of Shenta Commune became increasingly narrower. The agriculture was planting grain crops, the sideline was only raising pigs and the peasants’ average income was per capital 150 yuan… Since 1975, the town changed dramatically. On the 18 m-wide new street, there stood a lot of new factories, houses of residents and workers, as well as a cinema that could accommodate over 1000 audiences. The total investment of this infrastructure amounted to 3.568 million yuan, including the profit of 2.581 million yuan handed by 13 factories over to the commune, which accounted for over 72% of the total investment … If all of the brigade enterprises of the commune were included, 57 commune and brigade enterprises were established with the employment of 2,098 workers and staff, about 17% of the labor force of the commune. The annual output value was 10.26 million yuan, the profit was 660,000 yuan and the income tax paid to the state was 120,000 yuan. Calculated by the wages of workers and the year-end distribution of profit, the per capita industrial income of 20,000 people of the commune was 49 yuan, about 15% of the total per capita income. From the output value structure and the distribution structure of the agriculture, sideline and industry, the total output value of Shenta Commune consisted of 33% of agriculture, 13% of sideline and 54% of industry. The per capita income of the commune members was 327 yuan, including the agricultural income of 190 yuan, the industrial income of 49 yuan and the family sideline income of 88 yuan.46

Until 1978, 1.52 million enterprises had been set up at the commune and brigade levels, employed the agricultural surplus labor force of 28.26 million people and achieved an output value of 49.1 billion yuan.47 At this point, rural enterprises completed the historical “transformation” and became active suddenly on the stage of Chinese economic history. However, their growth process was accompanied with 46 Fei

(2000/1984). (1990, p. 22).

47 Zhang

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changes in the external structural environment and the government-led goals, as well as various institutional arrangements arising therefrom, thus enhancing the ups and downs of rural enterprises in the history of new China.

4.2.1 The “Great Leap Forward” Movement and Establishment of the “People’s Commune” The “Great Leap Forward” movement and the establishment of the “People’s Commune” system constructed an agricultural social economic structure and an organizational form different from those in the past historical period and profoundly influenced the development mode of rural enterprises later. Rural brigade enterprises rose in such a historical structural environment, developed into the mainstream of the rural industrial economy in the form of “a small sparkle initiating a large flame” and became the major channel for peasants to “make a living”. As stated by Fei Xiaotong, “They are seeking for the way to wealth by every possible means and call it ‘finding means of subsistence’. Peasants in different regions can find different means of subsistence and shape various development models for the rural economy.”48 It could be said that the soil for the growth of commune and brigade enterprises was not “fertile”. The survival of such enterprises in a tight corner was a portrait of the peasants’ life at that time, and their prosperity and growth were inseparable from the structural environment and the institutional arrangements under the double constraints of the government-led goals. It was these institutional arrangements that led to different forms of relationship models between the government and rural collective enterprises (such as “South Jiangsu model”, “Wenzhou model” and “Pearl River model”). 1. Structural Environment In 1957, after the “First Five-Year Plan” was accomplished, China formed a centralized model similar to that of the Soviet Union.49 At that time, the number of state-owned enterprises affiliated to the central government increased from 2800 in 1953 to 9300 in 1957, and the number of materials allocated to the central gov-

48 Fei

(2000/1984, pp. 365–366).

49 The “First Five-Year Plan” (1953–1957) was formulated based on the general line and overall task

of the Party during the transitional period with the aid of the Soviet Union experts (concentrating efforts on the development of the heavy industry by 694 large and medium-sized industrial projects, including 156 core projects, so as to lay solid foundations for the preliminary industrialization and subsequent industrial development), and thus inevitably sharing similarities with the social and economic system of Soviet Union. Its planned goal was mainly to achieve the socialist industrialization, and the strategic steps had been put forward, comprising the progressive realization of the country’s industrialization, as well as the socialist transformation of the agriculture, handicraft industries and capitalist industries and commerce.

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ernment increased from 55 types in 1952 to 213 types in 1957.50 Meanwhile, the national economy revived and developed, especially the great improvement in the level of industrialization. The gross domestic product increased from 67.9 billion yuan in 1952 to 106.8 billion yuan, with an annual increase of 9.2%; and the gross domestic product increased from 11.98 billion yuan in 1952 to 27.1 billion yuan in 1957, with an average annual increase of 18.2%, much higher than the growth rate of the gross domestic product. On the basis of the good achievements and industrial development of the “First Five-Year Plan”, the central government began to carry out the transformation and reconstruction of the rural production mode and organization form in a realistic, large-scale and highly mobilized manner, in other words, “Great Leap Forward” and “People’s Commune” movements. The “Great Leap Forward” movement began in rural areas and agriculture. It was indivisible from the political ideology of criticizing the “rightist conservatism” and “anti-reckless advance”, was closely related to the leaders’ consideration of China’s international prestige, and reflected more of the urge of the Party and the government to change the poverty and underdevelopment status of China. On September 24, 1957, the Decision on the Large-scale Development of Farmland and Water Conservancy Projects and the Store Compost Campaign in the Winter and the Next Spring kicked off the “Great Leap Forward” movement, “the labor force used for the water conservancy construction was about 20 or 30 million in October, 60 and 70 million in November, 80 million in December and 100 million in January 1958”. Later, in terms of the food production, the top-down “blowing wind” type of promotion and the local false reports together brought the agricultural “Great Leap Forward” to a climax. Even the People’s Daily published an article titled “Man can make the land produce as much as he likes, so long as he is bold enough”, which claimed that “as long as we need, we can produce as much food as we like”.51 On the basis of the illusion about the agricultural growth, the “Great Leap Forward” was further launched. The whole country initiated a “nationwide iron and steel production campaign” aiming at “surpassing the UK and US”. “Before August, the country established a lot of small backyard steel furnaces with the production capacity of fewer than 100,000 tons. After September, some more hundred thousand furnaces were newly constructed … For prospecting, numerous local party secretaries led the masses up the mountains, inclusive of students from primary and secondary schools and old people aged seventy or eighty. The coal authorities required ‘soldiers for soldiers, generals for generals, scattered small coal mines for small furnaces’ and ‘where there are thousands of tons of iron, there will be tens of thousands of tons of coals’”.52 Motivated and led by leaders and cadres at various levels, “by the end of August, millions of labor forces were used for steel production, which soared to 50 million by the end of September, 60 million at the end of October and over 50 Qian, Yingyi and Barry R. Weingast, “Beyond Decentralization: Market-Preserving Federalism with Chinese Characteristics”, in Zhang Jun and Zhou Li’an (eds.), 2008, Compete for Growth, Shanghai: Truth & Wisdom Press, p. 25. 51 Bo (2008, pp. 478–486). 52 Ibid., p. 498.

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90 million in the end of the year. The manpower directly or indirectly participating the steel production campaign accounted for about one-sixth of the total population … Small furnaces and ironworks were established everywhere, not only in factories and communes, but also in organs, schools and armies, and even some central organs constructed small furnaces in their backyards … There were no high-grade ores, the low-grade ores were used instead. If there were no ores, the iron pans and other ironware for domestic use were smashed and used as raw materials for iron making”.53 Advanced by the “Great Leap Forward” movement, Mao Zedong and other central leaders came up with the idea of changing the rural grassroots organizations. In the period of agricultural cooperatives, Mao Zedong pointed out that, “Now half-socialist cooperatives are mostly small communes with only twenty or thirty households for the easier establishment and quick acquisition of experience by cadres and the masses. However, small communes have too few land and capitals to carry out large-scale operations and use machines. These small communes restrict the development of productive forces and cannot be kept for long, but be gradually merged. In some places, one township may have a commune, and of course, one township may also have several communes. Not just the plains can have big communes; mountainous areas can also have big communes.”54 Subsequently, the practice of merging communes and renaming (such as Chayashan Satellite People’s Commune) and the “boast” of some cadres catered for the will of the highest leaders (“the people’s communes are good”) and resulted in the institutionalization of “people’s commune” (Decision on Establishing the People’s Commune System in Rural Areas) and the rapid expansion all over the country. According to a report on the 4th People’s Commune Movement Bulletin by the Central Rural Work Department: By the end of September, the country has basically constructed the people’s commune system, only one month before and after the climax. 100% of peasants in 12 of 27 provinces, municipalities and autonomous regions of China, and 85% of peasants in 10 provinces and regions have joined the people’s communes. The four provinces and regions, Zhejiang, Guizhou, Ningxia and Xinjiang, will virtually achieve the people’s communes before the National Day. Only Yunnan Province is scheduled to be completed by the end of October. As at September 29, a total of 23,384 people’s communes have been built up with more than 110 million agricultural households, accounting for 90.4% of the total. There are averagely 4,797 households in each commune (according to the statistics of 7,589 communes in 11 provinces, municipalities and regions, there are 5287 communes having less than 5000 households, 1718 communes having 5000 to 10,000 households, 533 communes having 10,000 to 20,000 households and 51 communes having more than 20,000 households). 94 counties in Henan, Jilin and other 11 provinces have established the people’s communes or associated communes at the county level.

53 Party History Research Center of the CPC Central Committee, 2011, History of the Communist Party of China (1949–1978) (Volume II), Beijing: The Chinese Communist Party History Publishing House, p. 490. 54 Bo (2008, pp. 511–512).

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2. Unintended Consequences of Institutional Arrangements The negative influence of the “Great Leap Forward” and “People’s Commune” movements was unquestionable, but it should be noted that to a large extent, they promoted the rise and development of commune and brigade enterprises, especially some local small industries and enterprises related to the agricultural production and peasants’ life services, although at high costs. “According to the incomplete statistics of 17 provinces in the country, a total of more than 60,000 iron and steelmaking furnaces, 59,000 coal kilns, 9000 cement plants, 4000 small power stations and over 80,000 farm tool manufacturing and repair plants have been constructed; moreover, there are also a great number of fertilizer plants, grain processing plants, oil mills, sugar mills and sewing factories. By the end of 1958, 2.6 million commune enterprises have the output value of 6.25 billion yuan.”55 The development of these enterprises was on the one hand due to the government’s primary goals. In order to cater for the agricultural “Great Leap Forward” movement, various types of local enterprises must be set up to achieve the tasks and goals assigned by the higher-level authorities. On the other hand, the “large and public” people’s communes ensured the “institutional” viability for the rapid rise and widespread establishment of commune enterprises because the capital, labor or factory buildings and land could be obtained by administrative means.56 According to Zhang Yi, the funds for commune enterprises were mainly acquired from the following four sources: first, free requisition of enterprises of agricultural cooperatives; second, financing from commune members; third, transformation of more than 30,000 industrial cooperatives (groups) to be commune enterprises; and fourth, allocation of some enterprises owned by the whole people to people’s communes.57 Due to the lack of complete statistical data, it was unable to know the costs of setting up commune enterprises in that historical period, 55 Zhang

(1990, p. 13–14). “large and public” people’s communes were characterized by “free requisition” and “shared properties” either. “When necessary, a people’s commune could requisition any piece of land within its administrative region, without any specified formality or even formally recorded documents … In December 1958, since the inception of the commune, several hectares of land were appropriated from L Production Brigade to construct a so-called “Qiantang River University”. In October 1959, the commune allocated tens of hectares of land for setting up Qiantang River Commune Silkworm Breeding Plant … The animal farm, steel mill, ramie factory, grass woven factory, farm tool factory, brick and tile factory and salt fertilizer factory established by the commune also occupied a lot of land.” “Properties of peasants within the commune were requisitioned by a variety of means. Of course, the civilized collection was the most high-sounding. In 1959, the commune obtained the public welfare fund of 9,742 yuan from L Production Brigade, which plus the agricultural tax of 13,162.43 yuan was equal to 22,904.43 yuan, accounting for 13% of its total income and 26% of net income. But this was only part of shared properties. The commune also required the brigade to deliver 20,000 kg feed grains to meet the need of the animal farm. The brigade was unbearable and finally delivered only 14,000 kg. Besides the aforesaid money and grains, the commune could requisition the properties of peasants or brigade from time to time or took away cheap materials allocated by the state to peasants, for the need that they needed them … Another important aspect of the commune power was that it could use the labor force of natural villages at any time or even free of charge.” (Zhang 2005, pp. 57–59). 57 Zhang (1990. p. 14). 56 The

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but we could get a glimpse of some local records that the most of the funds were raised from commune members. From 1958 to 1959, Hubin Commune in Wujiang County, Jiangsu Province invested 29,000 yuan for developing industrial products, consisting of 16,000 yuan from donations of commune members, 6000 yuan from the collective accumulation and 7000 yuan provided by the financial institution under the management of the commune.58 This way of fundraising was surprisingly fast and funds were raised from all kinds of sources. Various types of materials collected by “Weixing Commune” in Suiping County, Henan Province from peasants for establishing collective enterprises included 135 houses, 150 handcarts, 425 kg bamboos, 15 tons of iron scraps, 18 gold rings, 1 gold bracelet, 240 kg silver, 698 silver coins and cash of 5891, all of which were collected only in two days.59 Enterprises sprang up like mushrooms in this manner and at such remarkable speed. According to statistics, until the end of 1958, there were 6.02 million industrial enterprises run by communes with the total output value of 6.25 billion yuan, accounting for about 5.8% of the country’s total industrial output value.60 Different from the rational design and natural growth process, the rapid development of commune enterprises to a large extent largely “benefited” from the decentralization by the central government.61 One important work of the later rectification and reform was the re-centralization. This decentralization was tantamount to a “tonic” to centralized local governments, but their impulse to develop commune enterprises was not based on economic benefits and community benefits, but the irrational political movements under the high degree of ideology. Then the key questions were why the central government and the leaders launched these movements, how the will of the central government could be effectively implemented and how the people could be convinced. Viewed from the nature of the state and the regime, these questions could have relatively reasonable answers. After the founding of new China, a highly centralized political and economic system of one-party rule was established, in which the central government had absolute administrative and economic management power. Some scholars called the political system “revolutionary education regime”,62 which revealed the key point. The main feature of the revolutionary education regime was its legitimacy based on a high degree of “ideology” and the personal charm of the leaders, which was the “Charismatic authority” proposed by Max Weber. The fierce social transformation and the high degree of social mobilization resulted from the internalities of the “revolutionary education regime” because the state could only keep its revolutionary nature in order to consolidate its legitimacy based on ideology. The establishment of the new 58 Ma

et al. (1991, p. 37). et al. (1988). 60 Zhang and Zhang (2001). 61 On January 3, 1961, one of the four drawbacks mentioned by Li Fuchun in the report was too much decentralization of power (Bo 2008, p. 627). 62 “Revolutionary education regime” means the state has a strong sense of mission to the social transformation and sees the extraordinary endowment of the state conforming to the social transformation needs as the basis for the legitimacy of the regime (Feng 2011). 59 Wang

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regime and the victory of the revolution were not “once and for all”. At that time, China’s economic and social situation was poverty-stricken and weak. The promotion of “catch-up modernization” was the unanimous consensus of the party and the leaders. Only in this way could China break the international structure controlled by the western countries and the passive situation of “being under the direction” of the Soviet Union. It was in this sense that the “Great Leap Forward” and “People’s Commune” movements were only a positive attempt by the state to carry out the economic and social transformation. The second question above is how the institutional arrangements made by the central government for transforming the economy and society can be effectively implemented by the subordinate government. This involves another important dimension of government action—effectiveness. Effectiveness mainly refers to the resource accession and allocation capacity of the state to guarantee the realization of the primary objectives as well as the resistance and costs against the formulation and execution of policies. The state and society relationship before reform was called the “totalitarian social structure” by scholars since the state monopolized all the important resources and maintained strict control over virtually all the social life.63 Similarly, the central government had absolute leadership and control over local governments at the grassroots level because the central government controlled all powers in planning decisions, resource allocation, finance and taxation and personnel management, which could guarantee to a large extent that the will and decisions of the central government could be effectively implemented by subordinates. For this reason, China was able to effectively launch national political mobilization and social movements. Thus, it was not difficult for us to understand the regime basis for the “mighty” movements in those years. “Legitimacy” and “effectiveness” constituted dual conditions restricting government actions, but it was precisely in the structural environment that they could “seamlessly” fit for each other and be prerequisites for the occurrence and development of movements. First, the regime based on the legitimacy of the ideology gave the extraordinary authority to the leaders, so that they could launch large-scale intense economic and social transformations by breaking the routines. These transformations were usually based on grand ideas, such as “communism” and “surpassing the UK and US” and put into all kinds of practices for achieving these ideals. The common people had great trust in the government, which derived not only from their widespread support due to great achievements in the establishment of the new regime and the victory of the revolution, but also from the consistent mass line and the good image of “serving the people” of the Communist Party of China, as well as the bright prospects of the ideology and the publicity and education. Second, the decentralization movement in 1958 gave local authorities greater autonomy, which produced the stimulating effects. The decentralized powers of the central government included the planning and decision-making power, the approval power of basic construction projects, the material distribution power, the financial and tax power, the labor and personnel management power, and the credit management

63 Sun

(1994).

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power.64 Next, the initiative and diversified means of the government at the grassroots level ensured the realization of the movement goals. In discussing the agricultural cooperation in rural areas of northern Zhejiang Province, Zhang Letian pointed out that the creation of cultural atmosphere, the induction of economic interests and the restriction of government power were the main mechanisms to promote and realize the cooperation.65 It could be imagined that during the “Great Leap Forward” and “People’s Commune” movements, the grassroots governments also resorted to all means to advance the movement and accomplish the indicators.

4.2.2 Advancing in Twists and Turns: The Commune and Brigade Enterprises from 1961 to 1978 The “Great Leap Forward” and “People’s Commune” movements had a tremendous impact on people’s economic life and the ensuing “Three Years of Great Chinese Famine” made the situation even worse.66 Under such circumstances, the central government began to reflect on the shortcomings of previous work and the serious impact and put forward the eight-character principle of “adjustment, consolidation, enrichment and improvement”. The subsequent Work Regulations for Rural People’s Communes (or the “Sixty Articles for Agriculture” for short) had adjusted and amended the rural social and economic planning, broke through the original pattern of the people’s commune system and established the three-level collective ownership of “three level ownership based on brigades”, which stipulated that the production brigades were the basic units. Later, the Revised Draft clearly stated that: “The production brigade is the basic unit of the people’s commune. It conducts business accounting independently, assumes sole responsibility for its own profits or losses, directly organizes production and distributes the organizational revenues”. The formally concentrated powers (including the ownership, labor management, production management, financial management, and distribution powers of brigade enterprises) were devolved to the production brigades, thus overcoming the contradiction of incompatible production and distribution existing for long in the collective economic sector and greatly improving the production efficiency and

64 Except some major and special and “experimental field” enterprises being still under the central management, other enterprises were in principle decentralized to local governments. 885 in 1165 enterprises directly managed by the central government were decentralized (Zhou 2008, p. 282). 65 Zhang (2005, pp. 50–51). 66 According to the study of Justin Yifu Lin, during the “Three Years of Great Chinese Famine”, the estimated number of famine victims reached 30 million. Through constructing a game model, he demonstrated that the repeated game relying on individual self-restraints for which the rural collectivization became successful was replaced by the one-shot game, thus the self-compliant contract form underwent changes, such as demotivation of commune members. It was difficult to sustain the agricultural collective production pattern and eventually a large-scale collapse of grain production occurred (Lin 1990).

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people’s enthusiasm for work.67 These regulations also had a great influence on the production organization model of commune and brigade enterprises. Particularly, the adjustment of commune enterprises reduced their quantity from 6.02 million by the end of 1958 to 45,000 in 1961, and the output value of commune enterprises sharply declined from 10 billion yuan in 1958 to 1.98 billion yuan in 196168 (Fig. 4.5). Subsequently, the central government introduced a series of measures requiring people’s communes and production brigades not to start new enterprises in the future several years. The existing enterprises must be suspended, transferred to production brigades or transformed to be individual handicrafts and family sideline, as the case may be. If the business operation was successful, a few regions with communes or production brigades as the basic units could be operated continuously by them. These measures suppressed the communes and brigades’ impulse and attempt to do business and closed commune enterprises nationwide. While correcting the mistakes, they overcorrected and pushed the rural collective economic sector back to the status and scope affiliated to agricultural cooperatives.69 According to statistics, the output value of commune enterprises decreased from 1.98 billion yuan in 1961–0.53 billion yuan in 1965 (Fig. 4.5). The adjustment and suspension of commune enterprises, on the one hand, were a kind of institutional arrangements made by the central government to correct mistakes in the “Great Leap Forward” and “People’s Commune” movements; on the other hand, it also reflected that the “grassroots” rural enterprises were not favored by highest leaders. The subsequent development of commune and brigade enterprises was only considered as appropriate concessions of the state policy in the planned economy and a tolerated compromise between the urban and rural areas. The limited power was conferred to peasants’ industrial operations in exchange for their continued supply of agricultural products to cities at low prices. Peasants were allowed to own a few industrial assets independent of the industry controlled by the state, to make up for their loss of the land ownership.70 Researchers considered that the establishment of the industry in rural areas and allowing rural areas and peasants to enter the industrial sector was the state intention because the profits from the 67 Bo

(2008, pp. 661–662).

68 Adjustment of commune enterprises comprise the following measures: first, to confirm that com-

mune enterprises are the hope of achieving the agricultural mechanization; second, the State Council set up the People’s Commune Industry Administration to strengthen the leadership of commune enterprises; third, to invest 1 billion yuan each year in support of commune enterprises; fourth, to determine that providing services for the agriculture, industry, life and exports is the guideline for the development of commune enterprises; fifth, to specify the business scope of commune run industrial sector; sixth, to weigh their own abilities and act accordingly; seventh, commune enterprises must streamline the workforce and adhere to the principles of joint running of industry and agriculture, being more in the slack season of farming, less in the busy season and stopped during very busy days, farming in the busy season and work in the leisure season; eighth, to refund and eradicate the free requisition; ninth, to perfect the management system of commune enterprises; tenth, to emphasize the liquidation of “old accounts”; and eleventh, to focus on the economic accounting of commune enterprises (Zhang 1990, pp. 14–15). 69 Zhang (1990, pp. 16–17). 70 Luo (1990).

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Fig. 4.5 Changes in the output value of commune enterprises (1958–1965). Data source Zhang (1990)

industry developed by rural areas could “nurture” the agriculture, thus reducing their dependence on the state investment. The role defined by the state to commune and brigade enterprises was only confined to “nurturing agriculture by industry”.71 In fact, besides to the state will and the institutional arrangements, an often neglected aspect was the “rural socialist education movement”. The Decision of the Central Committee of the Communist Party of China on Some Issues concerning Rural Areas (Draft) (“First Ten Articles” for short) stressed the “class struggle”, anti-capitalism, anti-revisionism and the “Four Cleanups Movement” (to cleanse account, warehouse, finance, and work points), which dampened the enthusiasm of grassroots cadres for the development of rural economy. Even the normal sideline of the production brigade was afraid to be mistaken for “taking the capitalist road” and thus being suspended or closed. The following statement was an expression of a grassroots cadre: Villagers from the same village meet every day and know each other very well. Honestly, we are the most active in working, thanksgiving and obedient to the Communist Party. If we are attacked, then who they can rely on in the future? Those who are malignant, sloppy or full of hate to the Party? It is meaningless for us to be a cadre. Even working hard, you still end up nowhere. We had better eat much, do less and be common people in a peaceful life.72

Under such circumstances, the output value of rural sideline production decreased from 6.6 billion yuan in 1963 to 5.6 billion yuan in 1965, and the production of 71 Zhou

(2008, pp. 279–280). (2005, p. 127).

72 Zhang

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handicrafts fell from 3.6 billion yuan to 2.4 billion yuan.73 As a result, the originally fragile rural economy lost vitality, peasants’ income was decreased and the rural market declined. Of course, it could not be denied that some cadres used their powers to seek personal gains or do evil things, but the national campaign was bound to bring disaster to many cadres who worked hard and actively for the development of the brigades and production groups. The later facts also proved that these grassroots cadres or “local capable persons” played an important role in promoting the development of rural enterprises. Even the nationwide rural collective enterprises began the transformation, actually benefited commune members still spoke highly of those village leaders. The party members in our village, like the old party secretary, endure the hardship together with our villagers, so we never lose confidence in the party leadership. I’ve heard that Chairman Mao likes eating fat meat, but in those years (author’s note: the Great Leap Forward and the “Three Years of Great Chinese Famine”), he (author’s note: old party secretary), just as Premier Zhou did, did not eat meat.74

Although the radical changes in commune and brigade enterprise could be depicted as “no eggs can remain unbroken when the nest is upset”, it was undeniable that the “after effect” of the institutions and policies aiming at other problems also inevitably affected rural enterprises and made them in an awkward predicament. The hindrance to the development of rural enterprises accumulated more “internal energy” for the follow-up recovery and leap. The willingness of grassroots peasants to seek for economic development and improve prospects, but the essence would not change but become more intense. Once the policy unleashed and the environment changed, it was bound to once again create brilliant rural enterprises. Statistics show that from 1970 to 1978, the output value of rural collective enterprises rose year after year to reach 49.1 billion yuan in 1978, and in comparison, the output value of commune and brigade enterprises was only 2.93 billion yuan in 1965 and 6.76 billion yuan in 1970 (Fig. 4.6). 1. Structural Environment Generally speaking the “Cultural Revolution”, which lasted for ten years from 1966 to 1976, resulted in near collapse of China’s economy. The protracted political movements brought great disaster to the Chinese economy and society. Since nothing could counterbalance the policy blunders and the personal power of the leaders, the topdown “leftist” movement became the “last historical masterpiece” of revolutionary radicals represented by Mao Zedong. It was difficult to have a comprehensive and fair argument for the reasons of the “Cultural Revolution”, but the “class struggle” was undoubtedly one of the main strategies and a powerful tool for eliminating the danger of “capitalist restoration” of the “malignant demon”.75 As a great leader and 73 Zhang

(1990, pp. 18). (2003a, p. 308). 75 In 1961, Mao Zedong wrote the poem Reply to Comrade Guo Moruo, in which the two sentences are “The deluded monk was not beyond the light, but the malignant demon must wreak havoc.”. 74 Pan

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Fig. 4.6 Changes in the output value of commune and brigade enterprises. Data source Zhang (1990); the output value from 1970 to 1975 is the industrial output value and that from 1976 to 1978 is the total input value

political thinker, Mao Zedong launched the “Cultural Revolution” with good intentions which should be known to future generations, although the results were not satisfactory. “That is to say, the obstacles in the way must be swept away by means of the political revolution, thus achieving the forced transformation of the production relations, promoting the great revolution in economic construction and changed the ‘poverty-stricken’ state of China as soon as possible”.76 As far as the international environment was concerned, China was excluded by the First World led by the United States of America, and the relationship between China and Soviet Union was worsening. China was disappointed at the economic and technical support from Soviet Union and turned to the domestic construction for pursuing development and enhancing the state capacity by “working hard and self-reliance”. In case of the state structure, the success of the land revolution and the economic recovery and the victory of the Korean War won the popular support and legitimacy for the Communist Party of China. The overwhelming majority of the Chinese people had indisputable loyalty to Mao Zedong and the Communist Party, thus “granting” the power for large-scale social and economic transformation, such as the “Great Leap Forward” and the “Cultural Revolution”. The ideology played an important role in China’s enhancement of state capacity and economic efficiency. Guided by the “utopianism” with fantasy, the leaders adopted the radical economic 76 Wu

(2010, p. 519).

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development strategies and brought great disaster to the common people. This statedominated political and social economic movement reached the peak in the “Cultural Revolution”.77 However, in such a structural environment, local industrial enterprises developed rapidly, especially the local “five small industrial sectors”. Statistics revealed that by the end of 1975, the annual production of steel, coal, cement and fertilizer by the local “five small industrial sectors” accounted for 6.8, 37.1, 58.8 and 69% of the total in the country. Over 1300 small chemical fertilizer plants were established, the output of synthetic ammonia was 18 times more than that in 1964, and the fertilizer application amount in agriculture increased by 4 times; the total power of agricultural machinery in China was over 100 million horsepower, which was nearly 10 times more than that in 1964; and the electric rice mills, ginning machines and oil presses saw an increase of 10.4 times, 1.8 times and 11.8 times respectively, as compared with those in 1964.78 Since it was unable to know exactly the share of these “five small industrial sectors” in rural enterprises, we could not give a historical comparison. But the changes in the output value of commune and brigade enterprises demonstrated that the development of rural collective enterprises must be synchronized with the process of achieving agricultural mechanization. According to statistics, until 1978, the output value of manufacturing accounted for 82.5% of the total output value of commune enterprises and the machinery manufacturing reached 33.5% of the output value of manufacturing.79 This mainly benefited from the historical turn of the policies framed by the central government and the importance attached to the rural economic development. In 1970, the “North China Agriculture Meeting” proposed to accelerate the agricultural mechanization and pointed out that without agricultural mechanization, solely by manual labor, it was impossible to quickly improve the efficiency of agricultural production, to solve the food shortage of 600 million peasants and to free more labor for speeding up the industrial construction. Later, the Agricultural Mechanization Meeting held by the State Council put forward that the level of mechanization of agriculture, forestry, animal husbandry, sideline and fishery in China must reach over 70% in 1980, and the average fertilizer application must be about 40 kg/µ of farmland.80

77 Zhao

and Hall (1994). (2010, p. 534). 79 Pan (2003a, p. 80.). 80 In order to implement the goal of agricultural mechanization, the central government proposed the following measures: first, good management of gradually increasing large and small enterprises of communes and brigades can play a greater role in the socialist construction; second, the repair network should be built at the three levels, county, township and brigade, so as to achieve the goal of heavy repair at the county level, medium repair at the commune level and minor repair at the brigade level; third, to develop the local “five small industrial sectors” with iron and steel as raw materials; and fourthly, each year the state will subsidize people’s communes with the fund of about 1 billion yuan for agricultural mechanization. 78 Wu

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2. Unintended Consequences of Institutional Arrangements The reinvigoration of rural collective enterprises resulted from the less restrictive policies and the changes in the rural development goals formulated by the central government. The unintended consequence of a series of institutional arrangements of other issues also took a role of “booster”. This, to some extent, could be regarded as the historical contingency. First of all, it must be noted that the “second round of decentralization” by the central government provided effective stimulation to local governments for developing township and village enterprises.81 The decentralization are embodied in many aspects, of which the decentralization of financial, infrastructure investment, material allocation and planning management powers aroused the enthusiasm of local governments for developing industrial enterprises. The financial policy of “verifying the total financial revenues and expenditures and balancing of revenues and expenditures” was adopted. Every year the central government allocated a special fund of 8 billion yuan for developing the local “five small industrial sectors”. The off-budget investments by the central government also increased significantly from 1 million yuan in 1970 to 148 million yuan in 1973; and in terms of the material allocation, the varieties of materials under the uniform distribution of the state and administration of ministries reduced from 579 in 1966 to 217 in after 1972.82 In addition to the impact of the above decentralization, the pressure of rural surplus labor, the technical workers streamlined from urban industrial sectors to rural areas, the gap in the market due to the “Cultural Revolution Decade” and the cadres, scientific researchers and educated urban youth working in the countryside and mountainous areas also created unexpected conditions for the development of rural collective enterprises.83 A large number of rural surplus labor was a historical issue of our country. More people and less land were the objective condition that could not be changed. To solve the food shortage of this part of population, the development of commune and brigade enterprises became a viable choice; and the agricultural mechanization dramatically increased the machines owned in rural areas. The governments at all levels could no longer use the rural labor shortage as an excuse to suppress rural industrial development.84 Meanwhile, many scholars held the opinion that due to the “Cultural Revolution”, the country’s planned economy fell into 81 Compared

with that in 1958, the decentralization in the 1970s is regarded as the “second round” by the central government. 82 Zhou (2008, pp. 126–127), Wu (2010, p. 534). 83 Fei (2000), Pan (2003a, p. 79), Zhang (1990, p. 19), Ma et al. (1991, p. 46). 84 Here, the contradiction between the rural labor surplus and the shortage of labor in the opinion of the government is an emphasis on the different aspects of the same problem. The labor surplus refers to the relationship between the labor force and the grain output. When the grain production and the required labor are established, the surplus population becomes surplus labor force. But the labor shortage observed by the government is mainly related to the low working efficiency and demotivation of people. As pointed out by Perkins and Yusuf, inefficient rural construction projects can always absorb more labor force, weeds in the cropland can always be pulled and pulled, and there is always a need for more people to carry water to irrigate the land (cited from Pan 2003a, p. 79).

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a state of collapse. In particular, the urban markets were short of commodities and some state-run enterprises could not attain the planned targets of the government, thus turning to commune and brigade enterprise for help and providing necessary equipment and technologies to rural enterprises, which could give assistance to their completion of production tasks. These created favorable conditions for the rise of rural enterprises. From 1962 to 1977, about 20 million educated youth were sent down to “working in the countryside and mountainous areas”, coupled with some cadres and researchers, who provided technologies, paths and connections for the development of rural enterprises. Researchers also pointed out that from 1961 to 1963; over 10 million technical workers were streamlined from urban industrial sectors to rural areas and offered technical strength for the recovery and growth of commune and brigade enterprises. This was vividly called resource advantages + labor force + technical strength + market needs.

4.3 Unanticipated: The Development and Prosperity of TVEs (from 1978 to 1993) If the word “unanticipated” is used to describe the growth and prosperity of rural collective enterprises, no one will doubt over this, including the leadership. As stated by Deng Xiaoping: In the rural reform our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously. These small enterprises engage in the most diverse endeavours, including both manufacturing and trade. The Central Committee takes no credit for this. Their annual output value has been increasing by more than 20 percent a year for the last several years. This increase in village and township enterprises, particularly industrial enterprises, has provided jobs for 50 percent of the surplus labor in the countryside. Instead of flocking into the cities, the peasants have been building villages and townships of a new type. If the Central Committee made any contribution in this respect, it was only by laying down the correct policy of invigorating the domestic economy. The fact that this policy has had such a favourable result shows that we made a good decision. But this result was not anything that I or any of the other comrades had foreseen; it just came out of the blue.85

According to statistics, from 1978 to 1993, the proportion of township and village enterprises (TVEs) in the national industrial output value increased from 9 to 36%, known as “one-third of the world”. These development effects and results were the unintended consequences of the institutional arrangements made by the government. Compared with the strict planning control, the looser institutional environment provided opportunities for the rapid growth of TVEs. Of course, the expansion of the grassroots government’s autonomy was only the result of decentralization, and China’s grassroots government and peasants were never lack of creativity and enthusiasm for development. 85 Deng

(1987/1987).

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The real changes have taken place in rural areas, and some of them have exceeded our expectations. We had not found a good solution to the problem of surplus labor created by the implementation of the contracted responsibility system. For a long time, 70 to 80 percent of the rural workforce was tied to the land, with an average of only about 0.1 hectares per person, and most peasants did not even have adequate food and clothing. Once we instituted the reform and the open policy and introduced the responsibility system, the number of people engaged in agriculture shrank. What about those who were made redundant? Ten years of experience have shown that we can solve this problem by encouraging villages and townships and individual peasants to develop a diversified economy and establish new types of enterprises. Rural industries have absorbed 50 percent of the surplus workforce. The idea of starting such industries was not put forward by the leaders of this country but by the villages and townships and the peasants themselves. Devolving authority to the localities and the people, which in the countryside means the peasants, is the height of democracy. This is an important component of the socialist democracy we talk about.86

Whether the above statement on TVEs was consistent with the actual situations of rural collective enterprises would be questioned. The facts were that prior to 1984, enterprises run by townships and villages were the mainstay of rural enterprises, and the joint ventures and individual enterprises were very few and even not included in the scope of the Yearbook of China’s Township and Village Enterprises; before 1998, the output value of rural collective enterprises still accounted for more than half of the total output value of TVEs; in terms of absorbing rural surplus labor force, in 1984 collective enterprises at the township and village levels absorbed 39.82 million labor force, about 76.5% of all TVEs, and until 1989, the number of workers in rural collective enterprises was still more than half of the workers of TVEs and employed about 11.3% of rural labor force. This meant that in a long period of time, collective enterprises occupy the dominant position of rural enterprises (or TVEs). It should be noted that the relations between the government and rural collective enterprises during this period were quite different from that before the reform. This difference lies in the following aspects: Firstly, the reform and opening up established a new economic pace and development model and progressively introduced the market for the allocation of commodity and factor markets. The strict planning and control gradually declined and make a concession to the dual economic regulation mechanism of planning and market. In such an institutional environment, rural collective enterprises changed their way of acquiring resources and commodity circulation channels in the past, made a breakthrough in the “three-local” model, and gradually relied on the market to strive for sales, resources and capital. The role of rural enterprises as a supplement to rural collective organizations and agricultural production could not match their size, function and status in the national economy, thus the state promulgated a series of policies and regulations to guide their development. Secondly, rural enterprises were significant for the grassroots government than before the reform. If there were political risks in running commune and brigade enterprises in a certain period prior to the reform because they were “remnants of capitalism”, then after the reform the grassroots government and the cadres were immensely enthusiastic for the establishment of collective enterprises. First of all, 86 Deng

(1987/1993).

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the financial system of “dividing revenue and expenditure between the central and local governments and holding each responsible for balancing their budgets” in the early 1980s were huge financial incentives to local and grassroots government. The tax system centered on the taxation of products could collect tax with the output value or added value as the benchmark, regardless of their profitability. The key was that enterprises must be large.87 Some researchers pointed out that rural enterprises were the main source of the three kinds of revenues for the township government: the first part was the tax shared with the higher level government; the second part was the profits paid by enterprises (those run by townships paid to township government, those run by villages paid to village government); the third part was the management fee.88 This increase in financial resources not only enhanced the autonomy and authority of the grassroots government and met their expanding spending needs, but also served as one of the sources of off-the-books income for some cadres. Second, while meeting the needs of tax revenues, establishing enterprises and running projects were also one approach for grassroots cadres to achieve political performance and gain promotion. Thirdly, before the reform, rural enterprises in different regions were similar and homogeneous, integrating “government administration with enterprise management” and based on the collective ownership. After the reform, TVEs developed different models, such as “South Jiangsu model”, “Wenzhou model”, “Pearl River model” and “Gengche model”. Besides historical traditions, natural endowments, economic base, regional characteristics and other factors, local governments played different roles in the development of rural enterprises. Some “gave a hand”, some directly acted as owners and operators; some were “strong government” where authority elites and economic elites controlled the operation and development of enterprises; some were “weak government” where the common people could participate in the public affairs of the region or even influenced the transformation of collective enterprises.89 After the reform, with the increase of local autonomy, the local government’s power relations and goal orientation would undoubtedly have a great influence on the development and pattern formation of rural enterprises. The development of TVEs has opened up the road of rural economic development with Chinese characteristics. In fact, the “economic miracle” or the development model of Chinese TVEs which are concerned by scholars at home and abroad mainly refers to the achievements made in the over ten years after the reform and opening up. Numerous studies have been done on this issue in academia, and the discussion of various reasons need not be repeated. Here, we only make an analysis of the relations between the government and rural collective enterprises, which are the mainstay of TVEs. We follow the historical development track and elaborate under the logic of structure-mechanism consistent with what mentioned above, so the analysis is still divided into two parts: the structural environment and the unintended consequences of institutional arrangements. 87 Qu

et al. (2009). (2008, p. 281). 89 Chen (1989), Zhou (2008, p. 288), Zhang (2005). 88 Zhou

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The successful convocation of the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China was hailed as the arrival of the “spring” of rural enterprises. It would be insufficient to talk about the great historical significance of the reform and opening up in only a few words, but it contributed greatly to the development of rural enterprises. After the 3rd Plenary Session of the 11th Central Committee, the whole Party united the thought and understanding, shifted the focus of work to the socialist modernization construction and adjustment and the development of the national economy, and put forward new guiding ideas and policy deployment for the development of rural areas and agriculture, although without clear instructions on the issue of commune and brigade enterprises. Later, the Decision of the Central Committee of the Communist Party of China on Some Issues concerning Accelerating Agricultural Development pointed out that: “Commune and brigade enterprises must have a rapid development and increase their proportion in the three-level economic income of communes step by step. Agricultural and sideline products in line with the economic rationalization and suitable for processing in rural areas must be gradually processed by commune and brigade enterprises. Factories in the urban area should transfer some products or parts that can be processed in rural areas to commune and brigade enterprises, and provide equipment and technical consultancy. Their production, supply and marketing must be connected with the national economic plans at all levels, so as to ensure unimpeded supply and marketing channels. The state implemented the low tax or tax exemption policy in different cases.” The historical turn of the institution removed worries of grassroots cadres and the masses about the development of rural enterprises, fully mobilized their enthusiasm for economic production and bring rural enterprises to a “climax”. According to statistics, from 1978 to 1983, the output value of commune and brigade enterprises increased year by year, from about 49.3 billion yuan in 1978 to about 101.7 billion yuan in 1983, witnessing an average annual increase of about 15.6%; in contrast, the number of enterprises decreased from about 1.52 million in 1978 to about 1.35 million in 1983, seeing an annual decrease of about 2.4%. This also showed that the efficiency of rural enterprises had been improved (Fig. 4.7). In 1984, with the collapse of the people’s commune system, the former commune and village (brigade) system was replaced by the township (town) and village system.90 In the meantime, with the changes of China’s economic policies and institutional environment, peasants broke through the business model of commune and brigade enterprises and began to raise funds for running individual enterprises and joint ventures. In order to actively guide the development of rural enterprises, effectively cope with new situations and be consistent with the administrative division and region of the township, the central government decided to rename “commune and brigade enterprise” as “township and village enterprises” (TVEs). The scope of TVEs 90 In October 1983, the CPC Central Committee and the State Council issued the Notice on the Establishment of Township Government by Separating Government and Commune. At the end of October 1983, 9028 people’s communes in 902 counties (cities and districts) in the whole country had separated the government from the commune. In total 12,786 township people’s government was constructed, including all over 176 counties (cities or districts) (Zhao 2010, pp. 24–25).

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Fig. 4.7 The development trend of rural collective enterprises (1978–1983). Data source: Yearbook of China’s Township and Village Enterprises

also expanded from the enterprises run by townships and villages to the joint ventures and individual enterprises. By the end of 1984, there were 6.06 million TVEs with a total output value of 171 billion yuan, made up of 46% of township enterprises, 37% of village-run enterprises, 5% of joint ventures, 3% in other forms of cooperative enterprises and 9% of individual enterprises. The new development pattern of TVEs was shaped and known as “five wheels running together and industry, commerce, traffic, construction and service jointly developing”. However, it should be noted that as of the end of 1993, there were 1.685 million enterprises at the township and village levels, absorbing the labor force of 57.677 million, with the output value of 2036.03 billion yuan, which accounted for 64.6% of the total output value of all TVEs. Even in 1998, their output value still occupied more than half of the total output value of TVEs.91 It could be said that during this period, the backbone of TVEs was still collective enterprises. Without the preliminary historical accumulation and the outstanding achievements of rural collective enterprises after the reform, the so-called miracle of “township and village enterprises” would never emerge.

4.3.1 Structural Environment The convening of the 3rd Plenary Session of the 11th Central Committee was a great turning point in the history of the new China. It broke through the “class struggle as the guiding principle” and the criteria of “Two Whatevers” and established the guidelines of emancipating mind, seeking truth from facts and uniting as one to look to the future. Since then, China started new political, economic and social development patterns. Numerous studies on “China model” used this event as a dividing point. 91 Please refer to the statistics of data in relevant years in the Yearbook of China’s Township and Village Enterprises.

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Besides various policies on commune and brigade enterprises,92 the establishment and promotion of the “household contract responsibility system” has a deep and far-reaching influence on rural enterprises. From 1982 to 1985, the central government issued four No. 1 Central Documents and established the two-tier operations system that “combined unified operations with independent operations on the basis of household contract operations”. By the end of 1984, more than 99% of rural production brigades realized the household-based production (work) contract system.93 The popularization of the household contract responsibility system thorough abandoned the collective rural organization pattern and agricultural production mode and greatly fired the enthusiasm of peasants for production. After peasants returned to the household production mode, from 1978 to 1984, the total grain output increased from 305 million tons to 407 million tons, the actual income of peasants increased by 15.1%, and the income gap between urban and rural residents narrowed from 3.2 to 1.85.94 In contrast with the above institutional policies, the reform of the financial system by the central government and local governments constituted an important structural environment that affected the government-enterprise relations. In 1980, the State Council promulgated the Interim Provisions on Implementing the Financial System of Dividing Revenue and Expenditure between the Central and Local governments and Holding Each Responsible for Balancing Their Budgets, which undertook a major reform on the financial relationship between the central and local governments. The original financial system of “eating from the same big pot” gave way to “serving meals to different diners from different pots”. An important consequence of this financial system was a substantial increase in the off-budget revenues of local governments and their motivation for “running enterprises”. This system lasted for more than a decade until the “tax sharing reform” in 1994. Despite micro-regulations, 92 The

most critical policies was the Regulations on Several Issues concerning the Development of Commune and Brigade Enterprises promulgated by the State Council on July 3, 1979, the Several Regulations of the State Council on Implementing the National Economic Adjustment Guidelines by Commune and Brigade Enterprises promulgated on May 4, 1981, the Survey Report on Implementing the Operation Contract Responsibility System by Commune and Brigade Enterprises of the Commune and Brigade Administration distributed by the Ministry of Agriculture, Animal Husbandry and Fishery in May 1982, and the Report on Adjustment and Reform, Improving Efficiency and Creating New Development Pattern of Commune and Brigade Enterprises of Ministry of Agriculture, Animal Husbandry and Fishery distributed by the Central Committee of CPC and the State Council and so on. 93 It is generally believed that the agricultural production management mode of the “production contract to household” recognized by the institution began in Xiaogang Village, Fengyang County, Anhui Province. In fact, the attempt of peasants to resist cooperatives had never stopped. “In over 20 years of cooperatives, resistance occurred against the operation modes created by peasants, including production contract to villager’s groups or to household and work contract to household. There were three times in large scale, before the anti-rightist movement in 1957, before the struggle against right deviations in 1959 and before the 10th Plenary Session of the 8th Central Committee, all of which were suppressed by political movements” (Party History Research Center of the CPC Central Committee, 2011, History of the Communist Party of China (1949–1978) (Volume II), Beijing: The Chinese Communist Party History Publishing House, p. 1036.). 94 Gao (2009).

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the basic framework underwent no changes. A very interesting phenomenon was that in 1994, the property right reform of rural collective enterprises was synchronized and deepened with the reform of the financial system, which will be analyzed later. The reform broke the shackles of the planned economic system. The “dual-track system” in the early ten years laid the foundation for their smooth transition to the market system in the latter period. Any interpretation of the relationship between the government and rural enterprises could be separated from the operational logic of the dual track system. When the dominant position of the planned economy had not yet been shaken, the dual-track system established a split economic structure. On the one hand, the state protected the stock and, on the other hand, nurtured and developed increments. In particular, newly grown non-state economic sectors, under the administration of local governments, began to follow the market rules from the aspects of production, sales and pricing and gradually promoted the marketoriented reform.95 With regard to either power structure, social basis or market operation, TVEs “moved” between the dual-track system, built bridges by various means between the dual tracks, thus seeking continuous development.

4.3.2 Unintended Consequences of Institutional Arrangements The core for understanding the relations between the government and rural collective enterprises within this period was the local grassroots government. An academically accepted view was that the initiative taken by local governments in “running enterprises” led to the “emergence” of the township and village enterprises. It was clear from the above analysis that the impetus and enthusiasm of local governments to develop rural enterprises were not consistent when the central government’s policy orientation on rural enterprises “turned left or right” and took conservative or even restrictive attitude. This difference could profoundly reveal that the development of rural enterprises was beyond the government’s ideal design, rational arrangements and long-term goals. In this sense, they were more embodied as unintended consequences of various institutional arrangements. The local government’s enterprise operation mode of “releasing more water to nourish the fish in the pond” was unintended acts caused by a higher level of institutional arrangements. To understand the internal mechanism of such unintended consequences, the “dual-track” operation mechanism lasting for tens of years, the intragovernmental centralization and decentralization of powers and the reform of land property rights were the key points. The path dependency for the formation of the commune and brigade enterprise system before the reform also constituted the structural condition for the subsequent development and operation of rural collective enterprises. It was generally believed that the reform in the late 1970s originated in rural areas, and the starting point of the rural reform was the changes in the land prop95 Zhang

(2006), Qu et al. (2009).

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erty rights. Chinese peasants dared to take the lead in the household contract of land, which was accepted by the uppermost leaders and institutionalized across the country. The idea of “contract system” was spread to various sectors, including the economic production in rural areas and the intragovernmental division of responsibilities. If the land contract system generated by the fingerprints of 18 villagers found a new way to redeem China’s rural economy, then the return to the traditional way of family operation could not only arouse the enthusiasm of peasants, but also resulted in numerous surplus labor force. Given that the grain production underwent no big changes, in order to feed these people, the grassroots government and the common people must seek for other employment methods. “No commerce, no vigor; no industry, no wealth” became a tenet for developing enterprises. As pointed out by Deng Xiaoping, “For a long time 70–80% of the rural workforce was tied to the land, with an average of only about 0.1 hectares per person, and most peasants did not even have adequate food and clothing. Once we instituted the reform and the open policy and introduced the responsibility system, the number of people engaged in agriculture shrank. What about those who were made redundant? Ten years of experience have shown that we can solve this problem by encouraging villages and townships and individual peasants to develop a diversified economy and establish new types of enterprises.” Therefore, the land contract system released the surplus labor force previously tied to small pieces of land and saved countless labor costs for the development of township and village enterprises. This was one reason for their strong competitiveness. At the same time, we should also clearly recognize that the rural surplus labor was only one of the necessary conditions for the development of township and village enterprises, which was also supported by the government at the grassroots level, the accumulation of funds and regional historical traditions. The later development of Xiaogang Village proved that the simple return of agricultural production to the household operation brought about only small changes in people’s lives. The collapse of the collective system led to difficulties in rural public affairs and the collapse of traditional village communities would never again organize scattered farmers together. A few years ago, the Consulate General of Japan in Shanghai signed a contract with Fengyang County Agriculture Bureau. The Japanese provided 10 million yen (equivalent to 670,000 yuan) for developing agriculture and animal husbandry in Xiaogang Village. At the beginning, the peasants raised ducks. How to raise them? Because it was contracting, your family raised a dozen and his family raised a score. Finally, the ducks died and lost, and no benefit had been reaped. Even the cost could not be recovered. Looking around, we did not find roads in the field. We felt very surprised and asked: “No tractor road, how can you use machines?” Gu Naifang gave a wry smile with a look of embarrassment: “You know what? After cutting the paddy rice, we carry them to the village one bundle after another. Doing everything in the unit of the family, who is willing to build the road? But we cannot use machines if there isn’t a tractor road.” In his eyes, the “contract system” is unable to improve productivity. The household operation on small pieces of fragmented lands makes it impossible to use big machines and not conducive to large-scale operation and division of labor. It is a waste of labor force. The redundant labor force in the village cannot be reasonably used and peas-

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ants have to go out to find jobs. However, it is difficult to find jobs these years, so they are wandering around.96

Since few records can be found on the relations between the grassroots government and villagers, we can not speculate on what role the government plays in the development of Xiaogang Village, but it is clear from the conversations with the above-mentioned interviewees that villagers are frustrated by the lack of “collectivity” when needed. If the large-scale agricultural production requires the collective collaboration and coordination, the rural collective resources and the grassroots government’s support and guidance are essential for the development of rural collective enterprises. The reform of the land property right system is regarded as one of the necessary conditions for their emergence and development. Only by combining with the local government’s enthusiasm for running enterprises can we provide a more reasonable explanation. As mentioned above, the driving force for local governments’ operation of enterprises is derived from the decentralization of powers by the central government. The devolving of financial powers is the key point, because China’s government finance system is the “one-level-below responsibility” mode. Under the pressurized system, the financial contract system between the central and provincial governments will be duplicated between province and city, city and county, county and town, or even “enhanced at each level”, so the grassroots governments have strong motivations for the pursuit of economic benefits under the increased pressure.97 After the reform, the financial system of “dividing revenue and expenditure between the central and local governments and holding each responsible for balancing their budgets” was an embodiment of the decentralization of powers by the central government. On the one hand, due to the heavy financial burden in history, the central government hoped to reduce the financial pressure by the financial system reform; on the other hand, the decentralization could mobilize the enthusiasm for local economic development, but would not greatly damage the interests of local governments, confronted with small political resistance. Researchers also indicated that in order to obtain broad acclamation and local governments’ support for the reform and opening up, the central government allocated part of financial revenues to local governments, thus laying a political foundation for further deepening the reform.98 Indeed, the decentralization of powers allowed local governments to become the definite stakeholders. They could freely control financial revenues, so that their off-budget revenues increased year by year, but the central government’s financial revenue decreased. This was the reason for the tax sharing reform in the middle 1990s. However, the economic system reform of the central government with a view of financial taxation unanticipatedly provided localities with strong incentives to run enterprises. The relationship between local governments and enterprises was designated by the concepts of “local governments as industrial firms”, “local state 96 Pan

(2003b). (2006), Rong et al. (1998). 98 Wang Shaoguang (1997), Zhou (2008, p. 171). 97 Zhang

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corporatism” or “official corporatist”. In regions where the TVEs were well developed, the income of township governments was largely dependent on the taxation, profit and retention from them. Except for the taxation that needed to be shared with higher levels of governments, the profits and retention paid by enterprises and various forms of administrative expenses were under the full control of township governments. Consequently, as long as the conditions permitted, township governments would spare no efforts in carrying out projects and enterprises. It could be appropriately described as “why not go ahead with it”. For the mutual benefit and coexistence relations between local governments and enterprises, Jean C. Oi provided an in-depth description by “local state corporatism” and indicated that the interest community of the government and enterprises aimed at maximizing their interests. Local governments operated like enterprises and combined with rural collective enterprises. Local officials performed the role of decision makers of collective enterprises. The grassroots government could intervene and guide the development of TVEs by the following means: (1) through the effective control by power, the government could decide the management, production and profit allocation of enterprises and restricted or stimulated their executives; (2) in the acquisition of various resources, township governments could provide support for enterprises from the aspects of land use, loan guarantees, financial support, risk sharing and ideological protection, and “wearing red hats” was a means used by private enterprises to obtain their institutional legitimacy; (3) by offering assistance in obtaining business license, product conformity certificate and tax relief, local governments provided a variety of administrative services to their selected township and village enterprises.99 The above reasons are undoubtedly convincing in explaining why local governments are keen to set up enterprises, but it is difficult to know why TVEs in this period can have higher economic efficiency than state-owned enterprises (SOEs) since they can be operated under the same logic. Besides different binding effects of the budget, a credible explanation has also been given that for either SOEs or TVEs, the affiliation relations between government and enterprises show systematic differences at different administrative levels, which lead to varied capabilities of the governments at different levels in their supervision and management of enterprises. In comparison with the number of enterprises under the jurisdiction of the provinces, cities and counties, the number of enterprises affiliated to the township governments are definitely much less (Andrew G. Walder took “Tianjin” and “Jiangsu” as an example and found that 3251 SOEs were affiliated to Tianjin, averagely 89 enterprises affiliated to counties, 10 affiliated to townships and 2 affiliated to villages; and in Jiangsu, 433 SOEs affiliated to SOEs, averagely 172 enterprises affiliated to counties, 23 affiliated to towns and 3 and 4 affiliated to townships and villages, respectively), so the township governments can more effectively supervise and manage enterprises. Plus harder budget constraints of TVEs, they must continuously improve efficiency to avoid losses and bankruptcy.100 99 Oi

(1992, 1995), Zhao (2012). (1995).

100 Walder

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In fact, we always stressed the rapid growth of TVEs and ignored that the “path” was not smooth but experienced setbacks and failures. Zhang Yi et al. called the development of TVEs in this period “four waves of ups and downs”.101 According to Zhou Li’an, TVEs were often blamed for economic overheating when the central government tightened the macroeconomic control. For example, “minor enterprises squeeze out major ones” and “scrambling for energy, market, capital and raw materials with state-owned enterprises” were “labels” put on township and village enterprises at some stages of their growth. He divided the rise and fall of TVEs due to the restrictions of the central government’s policies into three periods, namely from 1980 to 1981, from 1985 to 1986 and from 1989 to 1990. In the last period, the Chinese economy was confronted with serious difficulties and thus TVEs once again became suppressed. There was even a slogan requiring for “resolutely restraining township enterprises for protecting state-owned enterprises”.102 It was not difficult to understand the differential treatment by the central government. If the government and SOEs were compared to “father and children”, then TVEs could only be counted as “adopted children”. The key problem was how to coordinate and resolve the contradiction when the central government’s policy over TVEs conflicted with the enthusiasm of local governments for encouraging enterprises. Based on expanding the theory of “local governments as industrial firms” proposed by Andrew G. Walder, from the cost-benefit perspective in economics, Zhou Li’an pointed out that the development of TVEs had much smaller “negative” effects on local governments than on SOEs. The central government needed to fully internalize negative the spillover effects of TVEs, but local governments only needed partially internalizing them at a smaller cost; meanwhile, the central government viewed the relations between TVEs and SOEs from a nationwide angle, so it could not transfer any negative effects unless all TVEs could be export-oriented, but within a local administrative region, TVEs could partially compete with other regions or foreign markets for product sales and production factors. As stated above, the following conclusions were reached: (1) the lower the level of local governments, the higher incentives they had to develop township enterprises because this could benefit them without any negative effects; (2) in regions with well-developed SOEs, TVEs were more probably suppressed; (3) local governments hoped to form a complementary relationship between TVEs and SOEs in their administrative regions.103 The above analysis understood the relations of government and TVEs primarily from the financial taxation incentives to local governments due to the decentralization of powers by the central government and revealed the implied internal mechanism for governance and economic incentives within the government, but paid no attention from the social perspective. Qu Jingdong et al. made an analysis by including rural collective enterprises into the social domain and suggested that the collective ownership after the reform could be considered to a certain extent, the emergence of social forces different from the state organization and individual peasants. The rise 101 Zhang

and Zhang (2001). (2008, pp. 284–285). 103 Ibid., pp. 284–287. 102 Zhou

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of rural collective enterprises as social forces was built on the collective land ownership, thus being a kind of social contract rights structure, and compound property rights blending social, economic, political and even ethical relations at the grassroots level. In the dual-track system at that time, the government power could mobilize capitals, technologies, talents and other production factors essential for the growth of TVEs, and build a variety of tacit trading and protective relations to reduce their costs. Local governments and collective enterprises in the dual-track system were characterized more by local social relations with the nature of local protectionism.104 In other words, due to the operation of the dual-track system, the institutional design of promoting the marketization by the development increments did not necessarily lead to the rise and development of rural collective enterprises, but the combination of land adjustment, surplus labor, fiscal decentralization, government power and social relations constituted the necessary conditions for their prosperity. Such combination could be achieved by the subjective will of some people or a rational institutional design. This further demonstrated that the unexpected rapid growth of TVEs after the reform was an unintended consequence. Justin Yifu Lin et al. also held the opinion that the development of TVEs was the result attained under the economic logic of “wading across the stream by feeling the way”. The conditions for their rapid growth comprised cheap supply of production factors, relatively ample market opportunities, increasingly perfected market and fierce market competitions, which, along with the progressive reform measures by the government, were not predetermined or preset, but furthered and advanced on the basis of previous reform and solving of new problems. Therefore, we prove that the rapid development of TVEs in the 1980s was an unintended consequence of the government’s institutional arrangements.105

4.4 The Ending: Privatization of Rural Collective Enterprises (1994 and After) On March 31, 1994, the Ministry of Agriculture issued the Notice on Printing and Distributing the Opinions on the Reform of Property Rights System of Township and Village Enterprises, which marked the establishment of the transformation of rural collective enterprises at the government level. The central government began to implement this policy from top to bottom. The file clearly pointed out that, “the goal of the property right reform of township and village enterprises is through reform, allowing for reasonable flow and optimized combination of all kinds of production factors in different regions, different industries, different enterprises and different ownership types, so that the joint stock cooperative, shareholding, contract, lease, mergers, joint ventures and other modes of operation can be improved and developed, and enterprises truly become legal persons and market competition entities that operate independently, assume sole responsibility for their profits and losses and seek 104 Qu 105 Lin

et al. (2009). et al. (2012).

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self-development and self-reliance. Ultimately, the modern enterprise system can be established by clearly defining property rights, specifying rights and responsibilities, separating enterprises from administration and adopting scientific management, and adapt to the objective requirements of the socialist market economy and the largescale socialized production.” The main contents of the property right reform includes: (1) the definition and clarification of property rights; (2) the valid circulation of property rights; (3) the final realization of property rights; and (4) the management and supervision of property rights.106 It can be clearly seen from the contents of the file that one primary reason for the transformation of collective enterprises in townships is expressed as “unclear property rights”, which is the “ambiguous property rights” as defined by some scholars. In their opinion, the major problem of collective enterprises is the property ownership. The actual power of enterprises is jointly controlled by managers of enterprises and local governments. The “collective” property rights in the real sense haven’t been fulfilled or finally recognized, or the “collectivity” is only on the surface, because they are internally controlled by only some people or the government.107 Indeed, from the very outset, the property rights of collectively owned enterprises are not as clear as private enterprises. Some people even claim that “collective ownership actually equals to collective non-ownership”. We cannot judge of which type of ownership is more reasonable, since rural enterprises are neither the rational institutional design by the government from top to down, nor based on market contracts with clear rights and responsibilities between individuals, but the product of benefit coordination and social practice among multiple entities in the specific historical structural conditions. In this sense, even though rural collective enterprises do not have the legitimacy of property rights, they have legitimate social attributes. An investigation is made first into the development status and economic performance of rural collective enterprises in this period. First of all, in terms of the output value of rural collective enterprises, from 1991 to 1994, their output value increases year by year and accounted for 65% of the total output value of township and village enterprises (Fig. 4.8). This period is also the peak for the development of township and village enterprises, known as “onethird of the world”. No doubt, rural collective enterprises occupy one-third of the national economy and perform well in absorbing rural labor force. From 1991 to 1994, collective enterprises are still half of township and village enterprises and show an increasing trend year by year (Fig. 4.9). From 1991 to 1997, the net profits of rural collective enterprises continue to grow. It is noted that the profit growth after 1994 occurs concurrently with the transformation. In the meantime, the tax contribution of collective enterprises is equally strong, from 24.43 billion yuan (53.7% of township and village enterprises) in 1991 to 143.9 billion yuan (60.8% of township and village enterprises) in 1996, seeing an average annual increase of about 60% (Fig. 4.10).

106 1995, “Opinions on the Reform of Property Rights System of Township and Village Enterprises”

in Yearbook of China’s Township and Village Enterprises (1995), Beijing: China Agricultural Press, pp. 65–67. 107 Li (1995).

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Fig. 4.8 The changing trend of the output value of rural collective enterprises from 1991 to 1994. Data source: Yearbook of China’s Township and Village Enterprises

Fig. 4.9 The absorption of labor force by rural collective enterprises from 1991 to 1994. Data source: Yearbook of China’s Township and Village Enterprises

On the surface, no matter to what degree the property rights are ambiguous and whether the rights and responsibilities are clearly defined, are there any other reasons for the good growth and development trend of rural collective enterprises? Besides the property rights, whether the transformation launched the government for other causes, such as the onerous burden falling on townships and government due to their serious losses? As revealed by the study of Pan Wei, the above accusations

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Fig. 4.10 Taxpaying and profits of rural collective enterprises (1991–1997). Data source: Yearbook of China’s Township and Village Enterprises (data of 1994 unavailable)

are not consistent with the facts.108 In the degree of profit and loss, rural collective enterprises are subject to increasing losses from 1992 to 1999. The losses are the smallest in 1992, being 2.4%, and the highest losses are seen in 1999, being 6.82%. (According to Pan Wei, the losses are insignificant compared with enterprises in other countries of the world). This, on the one hand, reflects the actual business operations of enterprises, and on the other hand is related to the decreased number of collective enterprises after transformation and restructuring. It is difficult for us to obtain data regarding the degree of losses of private enterprises (joint ventures or individual enterprises) before 1995, but after 1996, the profit and loss status of township and village enterprises is represented by the “profit-making percentage”. Through comparing two types of enterprises from 1996 to 2001, the results show that their losses are not quite different from each other. In some years, collective enterprises are more profitable, but in some years, the situation reverses, so we can hardly determine that the losses of collective enterprises are higher than those of private enterprises (Fig. 4.11). Another viewpoint is that the transformation policy of rural collective enterprises was introduced because they competed for resources, capitals and markets with 108 Based

on the statistics of the Yearbook of China’s Township and Village Enterprises, Pan Wei indicated that the degree of losses of rural collective enterprises was not higher than that of private enterprises. Using the year 1995 as the observation point, 980,000 township and village enterprises suffered from losses, 900,000 of which were private enterprises. The total losses were 47.8 billion yuan, including 16.8 billion yuan suffered by collective enterprises and 31.0 billion yuan suffered by private enterprises. The added value of collective enterprises was twice that of private enterprises, but their losses were only half of private enterprises. Since 1996, the Yearbook of China’s Township and Village Enterprises uses the number of profitable enterprises and the profit-making percentage to replace the number of enterprises suffering losses and the loss-making percentage, respectively. From 1996 to 2001, the profit-making percentage of collective enterprises is more than 90% (Pan 2003a, pp. 336–339).

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Fig. 4.11 Profit-making comparison of township and village enterprises (1996–2001). Data source: Yearbook of China’s Township and Village Enterprises

state-owned enterprises and threatened their development (An intuitive feeling is that since the reform, the economic performance of state-owned enterprises was steadily deteriorating. As pointed out by some scholars, the proportion of state-owned enterprises in the national industrial output decreased from 77.6% in 1978 to 28.8% in 1996; as at 1996, 57.4% of urban workers worked in state-owned enterprises. They used 52.2% of the investment in fixed assets by state-owned industrial sectors, but more than 40% suffered from losses109 ). Therefore, the economic order became chaotic and rural collective enterprises needed to be suppressed. This logic partially told the truth, but hardly convincing. First of all, the development of township and village enterprises competed with state-owned enterprises in some production and sales fields. The central government was inclined to protect the interests of stateowned enterprises more than those of township and village enterprises, so the former had more say than the latter.110 Meanwhile, it was also found that in the early stages of the development of township and village enterprises, they were in an upstream and downstream relationship or cooperated with state-owned enterprises. If they were restricted owing to the plight of state-owned enterprises, it was “decreasing the number of wolves because lions make a prey of nothing”, and bound to result in an imbalance of the market environment and non-economic development of enterprises. The key lied in the improvement of competitiveness and efficiency of state-owned enterprises, rather than artificially creating a non-market environment. This was equivalent to degenerate into the planned economic way of thinking. Second, the rectifications of township and village enterprises were mainly reflected by various restrictive measures and the change of property rights of collective enterprises. The transformed and restructured private enterprises would certainly compete with the 109 Lin

et al. (1998). at a meeting hosted by leaders of the former Economic and Trade Commission of the PRC with the attendees being executives of super large state-owned enterprises, a considerable number of attendees imputed the plight of state-owned enterprises to competitions from township and village enterprises and accused that the previous reform “shackled tigers but released monkeys” (Zhou 2008, p. 286).

110 “Once

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state-owned enterprises for resources and markets, and the change occurred only to the property rights. The third point of view returns to the transformation of property rights and insists that it is difficult for enterprises with unclear property rights to adapt to the laws of the market economy and carry out effective regulation and that it is not conducive to the effective allocation of resources and improvement of economic efficiency. In fact, the viewpoint of “pan-marketization” cannot gain a firm foothold in reality, because no country’s economy is purely market-oriented, just as no one is completely rational. Researchers or policymakers who hold this view ignore the diversity of property rights of rural collective enterprises characterized by “one village, one system” and their social significance at the rural community level,111 for example, their contributions to providing employment for rural areas, increasing peasants’ income, improving public construction and so on. As pointed out by other researchers, the collective property rights of the community are not a kind of market contractual property rights, but a kind of social contractual property rights, which have the functions of defining and maintaining the community property right order in the case of incomplete market contract and reflect a harmonious social order. The transformation implemented through administrative means only replaces informal social contract rules by institutional designs, without full consideration to the continuation or replacement issue of the latter, thus leading to serious adverse consequences to the sustainable development of the community.112 It is not difficult to obtain the key mechanism of the institutional change process if we put the privatization of rural collective enterprises under the macro-structural environment and take full account of the impact of rapid changes in the institutional environment at that time. Although the central government has made formal institutional arrangements, there are different regions and various forms and the grassroots government, business owners and community residents take varied attitudes towards the transformation. This task cannot be “accomplished at one stroke” and a considerable number of enterprises end in failure after the transformation. Consequently, the policy file of the central government is undoubtedly not convincing for explaining the “sudden” withdrawal of large groups of rural collective enterprises from the economic and social stage of China in history.

4.4.1 Structural Environment In 1992, Deng Xiaoping’s Speech in South China and the convening of the 14th National Congress of the CPC eliminated the controversy over the goals and directions of economic reform inside and outside the Party and made clear that the target of China’s economic reforms was to establish a socialist market economy. The criteria for the reform was not capitalism or socialism, but “three favorables” (whether 111 Zhe 112 Zhe

(2000). and Chen (2005).

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it promotes the growth of the productive forces in a socialist society, increases the overall strength of the socialist state and raises the people’s living standards). The Decision of the CPC Central Committee Regarding a Number of Issues Concerning the Establishment of a Socialist Market Economy (hereinafter “Decision”), which was adopted by the Central Committee in 1993, further established the reform target for the establishment of a socialist market economic system. This also meant an end to the operating mechanism of the “dual-track system”. China’s economic and social development must take a turn through major adjustments to the original institutional structure. The Decision pointed out that the reform must focus on the central task of economic construction and integrate with the overall advancing and major breakthroughs. The basic economic system to keep public ownership in a dominant position and have diverse forms of ownership develop side by side must be followed. The operating mechanism of state-owned enterprises should be further transformed to establish the modern corporate system adapting to the requirements of the market economy and in line with the principles of clarifying ownership, rights and responsibilities, separating government administration from the management of enterprises, and implementing scientific management. A unified and open national market system must be set up to achieve close combination of urban and rural markets and convergence of domestic market and international market and promote the optimal allocation of resources. This decision has important significance and a great influence on the development of China’s economy in the following period, which are reflected in the transformation of property rights of state-owned enterprises and collective enterprises and the rapid rise of private enterprises under the conditions of marketization. The Decision provided guidance on the transformation of the operating mechanism of state-owned enterprises in a chapter and adopted different reform strategies for large and medium-sized and small state-owned enterprises. To large and medium-sized state-owned enterprises, the modern corporate system and strategic restructuring were introduced, especially in pillar enterprises, with a view to improving their efficiency and competitiveness; but small state-owned enterprises were generally allowed to transform by means of contract, lease, shareholding and selling. The above strategy attained the overall business performance and economies of scale of state-owned enterprises through “developing large ones and giving up smaller ones” and selective structural adjustment, so as to ensure the dominant position and core competitiveness of the public sector in the market economy. When the township and village enterprises were mentioned, a fact was often overlooked that the transformation of state-owned enterprises also had a profound impact on the restructuring of township and village enterprises, and more precisely, accelerated the decline of rural collective enterprises. This will be expatiated in the following sections. At the expedited economic turn and social transition through the major reform and adjustment, the power relations between the central government and local governments underwent profound changes, the most critical of which was the tax sharing reform. The financial strength of the government had a direct bearing on the success of many things. The central government desired to increase revenue to strengthen its control, deployment and local governments’ dependence on the central government;

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similarly, local governments tried every means to increase their revenues, develop local interests and reduce dependence on the central government authority. This kind of mutual gaming or even “eccentric” trend formed the long-term competitions for interests and constant bargaining between the central and local governments. In the 1980s, the “decentralization of power and transfer of profits” and the financial contract system of “dividing revenue and expenditure between the central and local governments and holding each responsible for balancing their budgets” had a significant impact on stimulating local governments’ enthusiasm for economic development and increasing the government’s financial revenues, but also brought about the problems of overheating of local economy, too much emphasis on GDP and local protectionism. More importantly, the proportion of central financial revenues to total financial revenues and the proportion of financial revenue to GDP declined rapidly during the financial contract period. With the rapid increase in extra-budgetary revenues and retention money by local governments, the proportion of central financial revenues to total financial revenues dropped from 44% in 1984 to 22% in 1993; meanwhile, revenues from a large number of local enterprises were treated as the operating revenue of local governments or as profits, so the proportion of financial revenue to GDP fell from 22.8% in 1984 to 12.3% in 1993.113 In contrast to the weakening financial strength of the central government, extra-budgetary revenues of local governments increased from 61% of budgetary revenues in 1982 to the historical high of 92% in 1988, remained above 80% in 1992, and decreased year by year only after the tax sharing reform. (Figure 4.12) Such financial situation, as described by some scholars, had reached the “bottom line of decentralization” and if not adjusted, was bound to form “fragmentation” that threatened the state capacity building.114 Under this background, the central government tried to adopt the “tax sharing system” for remedying shortcomings of the financial contract system, especially its financial predicament. It changed the division of tax types and sharing proportion; in the meantime, to ensure that local governments’ positivity was not subdued by the tax sharing system, the tax rebates and transfer payments were implemented; the system of state and local taxation administrations changed the tax collection mechanism in the past. The tax sharing system was the centralization of economic powers again. The effects were very obvious and reflected in increasing central financial revenues with the development of the national economy. The proportion of financial revenue to GDP increased from 10.8% in 1994 to 20.9% in 2010, seeing an average annual growth rate of 15.2%; the proportion of central financial revenues to total financial revenues increased from 22% in 1993 to 55.7% in 1994 and then stabilized around 50%; and the ratio of central and local financial revenues rose from 0.28 in 1993 to 1.26 in 1994 and then remained above 1 (Fig. 4.13). The growth of central financial resources strengthened the state capacities in nationwide macroeconomic regulation 113 Qu

et al. (2009); the calculation results of the two proportions by Zhou Feizhou in another article are slightly different from the values above, one proportion is 31.6% in 1993 and the other proportion is 12.6% in 1993 (Zhou 2006); our calculation results are 22% for the first proportion in 1993 and 12.3% for the other proportion. 114 Wang (1997), Wang and Hu (1994).

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Fig. 4.12 The changing trend of local extra-budgetary revenue from 1982 to 2005. Data source Zhou (2008, pp. 180–181). Note According to Zhou Li’an, the declining proportion of extrabudgetary revenues of local governments in 1993 was partly because since 1993 extra-budgetary funds of state-owned enterprises were no longer included in the scope of local extra-budgetary revenues; and the other reason was that at the beginning of the tax sharing system, local governments increased their budgetary revenues to increase future tax rebate base. Fig. 4.13 The changing trend of central financial revenues. Data source Chinese Economic and Social Development Statistics Database

and control, provision of public goods, social welfare and security, and maintenance of public order, thus providing a relatively fair tax environment for all localities and changing the phenomenon of “whipping the fast and hardworking” in the past. However, new problems still arose, such as relations between the government and enterprises, regional differences, income distribution and relations between local governments. The influence on the government-enterprise relations was obviously manifested in the declining enthusiasm of local governments for running enterprises. The rapid privatization of township and village enterprises, in particular, collective enterprises, was also the result of the tax sharing system, which can be considered as another institutional factor speeding up the withdrawal of rural collective enterprises from the stage of history.

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4.4.2 Unintended Consequences of Institutional Arrangements The influence of the transformation and restructuring of state-owned enterprises on the privatization of rural collective enterprises is mainly embodied in two aspects, namely, political influence and economic influence. On condition that “keeping public ownership as the mainstay and allowing diverse forms of ownership to develop side by side” became a basic economic system, the “clearly established ownership, well defined rights and responsibility, separation of enterprises from administration, and scientific management” turned out to be the primary goals for the reform of state-owned enterprises. State-owned enterprises were not only required to attain the political target of keeping public ownership as the mainstay, but also changed their “soft budget constraints” towards the operation under the market logic so as to continuously enhance their competitiveness on the market. Some poorly performed ones having low efficiency were closed down, suspended operation, merged with others or shifted to different lines of production. In order to reduce their burdensome social costs, the state carried out the reposition of laid-off workers and increase of efficiency by downsizing staff, which largely changed the model of “enterprises burdened with social responsibilities” during the “work unit” period. The transformation and restructuring of state-owned enterprises showed the government’s reform efforts to create a market environment for fair competitions and a policy environment with equal treatments of all types of enterprises. In such a political environment, their transformation and restructuring set a reform and political example for the privatization of rural collective enterprises. The convening of the 15th National Congress of the CPC Central Committee made clear the guidelines for the property right reform of state-owned and collective enterprises. State-owned enterprises must be reformed, not to mention private enterprises. When the ideology was that the reform went with the historical tide and resistance against reform is the political “leftism”, local governments got rid of the debates and doubts over the reform and how to reform, began to respond to the central policy and vigorously advanced the restructuring of rural collective enterprises. By the end of 2000, about 95% of rural collective enterprises completed the property rights reform. The economic influence of the transformation and restructuring of state-owned enterprises on the privatization of rural collective enterprises was obviously manifested by the working capital owed by them to township and village enterprises. Since a considerable part of township and village enterprises were in the upstream and downstream relation with state-owned enterprises, especially in the early stage when they processed with raw materials and equipment for state-owned enterprises and formed a market-based partnership or contractual relationship, a substantial portion of their funds was sourced from loans. During the economic downturn, the “triangle debt” became common in township and village enterprises. According to statistics, as at 1989, at least 87.036 billion yuan was in arrears by large industrial, state-owned commercial, foreign trade enterprises. 74% of the borrowed funds were occupied free of charge so that the operating funds of township and village enterprises

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could not function properly.115 “At the end of 1993, the payables owed to township and village enterprises increased to 180.865 billion yuan, accounting for 27.9% of their working capital, and 75% of which was owed by state-owned enterprises… In 1994, the account receivables of township and village enterprises increased drastically to 44.2% of their total working capital … In 1995, the proportion of working capitals owed and occupied by other work units (mainly state-owned enterprises) increased to 89.31% … The closer relations they had with state-owned enterprises in production and sale, the more they were encumbered.”116 If the policy arrangement was the direct cause for the privatization of rural collective enterprises, then, because the working capital in arrears, especially the closing, suspension of operation, merge with others, shift to different lines of production or selling of state-owned enterprises that had direct economic relations with them, directly led to their bad and doubtful debts, reduced their revenues, shrank their production and forced them to carry out property rights reform and even become bankrupt. Compared with the above influence of the transformation and restructuring of state-owned enterprises on rural collective enterprises, the tax sharing system had a more powerful influence on accelerating the property right reform of rural collective enterprises. Indeed, the tax sharing system only stipulates the division of financial and taxation revenues between the central government and provincial governments. Because of the “hierarchical levels” of China’s financial system, the tax sharing effects will pass from upper to lower levels, thus forming the “pressurized regime” and resulting in the financial “pyramid” structure. As the saying goes, “the central finance is beaming, the local finance is barely enough, the county level finance robs Peter to pay Paul and the township level finance cried for help”.117 Some researchers found that under the pressurized regime, the township level governments were forced to use irregular means to accomplish the financial tasks allocated by the county governments, such as accounting schemes, buying taxes and tax compensation.118 With limited financial resources, why did township governments lose interest in running collective enterprises since enterprises were one of the financial sources? As a matter of fact, the change and formation of the behavioral patterns between the central, local and grassroots governments by the tax sharing system lied not just in the changes of government revenue. The reform of the taxation means and taxation administrations led to few benefits from government running enterprises, or even “threw good money after bad”. Collective enterprises were one of the main financial sources of township governments, but under the tax-sharing system, the cost-benefit for running enterprises by grassroots governments underwent changes. In the past, the value-added tax from enterprises was shared between the central and local governments, 75% to the central government and 25% to local governments. While the revenue was 115 1990, Yearbook of China’s Township and Village Enterprises (1990), Beijing: China Agriculture Press, pp. 201–202. 116 Pan (2003a, pp. 329–330). 117 Chen (2002). 118 Zhao (2010, pp. 108–110).

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reduced, the risks and costs for the business operation were entirely assumed by the government at the grassroots level. Moreover, regardless of profit-making or not, if only enterprises had input and output, they must pay value-added tax to the state taxation administration, so various preferential policies practiced by local governments to protect local enterprises became ineffective.119 Therefore, under the tax sharing system, the marginal revenue of government-run enterprises was decreasing while the marginal cost was rising. Township governments could get only a small share of the profits but take the full losses. This was bound to result in the property right reform or direct closure of collective enterprises with the direct participation of township governments. After the privatization of enterprises, local governments could avoid risks (political and economic risks; the political risk refers to the conflict with the political guideline by continuing support and development of collective enterprises after the central policy is very clear; and the economic rise refers to the debts owed to banks by local governments operating enterprises), and also continued to obtain part of revenue through tax levying and fee charging, despite of greatly reduced flexibility and initiative compared with that before the tax sharing reform.

4.5 Brief Conclusions Centering on the relations between the rise and fall of rural collective enterprises and institutional arrangements of the government, this chapter analyzes the historical development of rural collective enterprises from two perspectives: the structural environment and unintended consequences of institutional arrangements. We see the rise and fall of China’s rural collective enterprises as unintended consequences of the government’s institutional arrangements, which are divided into three stages according to the structural environment and institutional arrangements: from 1958 to 1978, the germination stage of rural collective enterprises; from 1978 to 1993, the prosperity stage; and after 1994, the property right reform and gradual disappearance. The germination and development of rural enterprises are neither the rational design of the upper institution, nor the rational economic expression at the lower levels, but unintended consequences of various institutional arrangements in a specific historical social structure. These unintended consequences always accompany the rise and fall of the rural enterprises. Several key mechanisms causing these unintended consequences must be addressed and valued. First, the relations between the government and rural collective enterprises are faced with different structural environments and pressures in different historical stages. On the one hand, the government has made various institutional arrangements due to its own targets and the pressure of structural environment; on the other hand, enterprises need to cope with and overcome changes in the institutional environment, and thus bringing about various unintended consequences.

119 Zhou

(2006).

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Second, the “centralization and decentralization” between the central and local governments comprised administrative powers and economic powers. Several big changes in the ups and downs of rural enterprises are closely connected with this change of power relations; even there is an odd cycle of “loosening, disorder, controlling and inactivity”. Third, the dynamic mechanism for local governments to actively set up enterprises is derived from the decentralization of powers by the central government. The devolving of financial powers is the key point because China’s government finance system is the “one-level-below responsibility” mode. Under the pressurized system, the financial contract system between the central and provincial governments will be duplicated between province and city, city and county, county and town, or even “enhanced at each level”, so the grassroots governments have strong motivations for the pursuit of economic benefits under the increased pressure. Fourth, the change and formation of the behavioral patterns between the central, local and grassroots governments by the tax sharing system lie not just in the changes of government revenue. The reform of the taxation means and administrations leads to few benefits from government running enterprises, or even “throws good money after bad”. Collective enterprises are one of the main financial sources of township governments, but under the tax-sharing system, the cost-benefit for running enterprises by grassroots governments undergoes changes. The emergence, development and decline of any kind of thing have its own natural historical process. It is unfair to consider the decline of township collective enterprises entirely due to institutional arrangements made by the government. We often say “the hero of the times”. If Chinese rural collective enterprises are regarded as an “economic and social miracle” in the social and historical environment, as the time goes by, the hero naturally comes to an end. The development of history is unidirectionally linear. Just because of a variety of unintended consequences in the history of mankind, we are obsessed with historical facts that have occurred. The importance of history lies in not whether this event has occurred, but its influence on the subsequent history, which is called by us as “structural environment” and “path dependency”.

References Bo, Yibo. 2008. Review of Several Important Decisions and Events. Beijing: Chinese Communist Party History Publishing House. Cai, Fang. 1995. Logic of Property Right Reform of Township Enterprises and Success Conditions. Economic Research Journal (10). Cao, Zhenghan. 2013. Nation and Governance—Government Monopoly on the Market in China’s History and its Political Cause. Journal of Foshan University (Social Science Edition) (1). Chen, Jiyuan. 1989. Research on the Township and Village Enterprise Model. Beijing: China Social Sciences Press. Chen, Xiwen. 2002. Research on China’s County and Township Finance and Peasants’ Income Growth, 17. Taiyuan: Shanxi Economic Publishing House.

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Deng, Xiaoping. 1987/1993. In everything we do we must proceed from the realities of the primary stage of socialism. In Selected Works of Deng Xiaoping, vol. 3, 251. Beijing: People’s Publishing House. Deng, Xiaoping. 1987/1993. We shall speed up reform. In Selected Works of Deng Xiaoping, vol. 3, 238. Beijing: People’s Publishing House. Fei, Xiaotong. 2000. Small towns, big problem. In Fei Xiaotong’s thinking on the construction of small towns. Beijing: Qunyan Press. Fei, Xiaotong. 2000/1984. Small towns, big problem. In Fei Xiaotong’s thinking on the construction of small towns. Beijing: Qunyan Press. Feng, Shizheng. 2011. The formation and variation Chinese national movement: Holistic regime based explanation. Open Times (1). Gao, Liang. 2009. The path of China’s economic development and changes of the economic system. In China model: A new developmental model from the sixty years of the People’s Republic ed. Pan, Wei, 101. Beijing: Central Compilation & Translation Press. Giddens, Anthony. 1998. The Constitution of Society, trans. Kang Li and Li, Meng. Beijing: SDX Joint Publishing Company. Li, David Daokui. 1995. A theory of ambiguous property rights in transition economies. Economic Research Journal (4). Li, David D. 1995. A theory of ambiguous property rights in transition economies: The case of the Chinese non-state sector. Economic Research Journal (4). Li Meng, Feizhou, Zhou and Li, Kang. 1996. Work units: The internal mechanism of institutionalized organizations. Chinese Social Sciences Quarterly (16). Lin, J. Y. 1990. Collectivization and China’s agricultural crisis in 1959–1961. Journal of Political Economy 98 (6). Lin, Justin Yifu, Fang Cai and Zhou Li. 1998. Competition, policy burdens, and state-owned enterprise reform. The American Economic Review, 88 (2). Lin, Justin Yifu, Fang Cai, and Zhou Li. 2012. The China miracle: Development strategy and economic reform, 173–175. Shanghai: Truth and Wisdom Press. Liu, Yuneng and Weiling, Yang. 2008. The unanticipated consequences of social action: A brief theoretical history. Journal of Zhejiang University (Humanities and Social Sciences) (3). Luo, Xiaopeng. 1990. Ownership and status stratification. In China’s rural industry: Structure, development and reform, ed. Byrd, William A and Qinsong Lin. Oxford University Press. Ma, Jiesan, et al. (eds.). 1991. Township enterprises in contemporary China. Beijing: Contemporary China Publishing House. Mann, M. 1986. The Sources of Social Power: A history of power from the beginning to A.D.1760, Cambridge University Press. Mann, Michael. 2007. The sources of social power, trans. Liu, Beicheng and Shaojun, Li. Shanghai: Shanghai Century Publishing (Group) Co., Ltd. Merton, Robert K. 1936. The unanticipated consequences of purposive social action. American Sociological Review 1 (6). Merton, Robert K. 1968. Social theory and social structure, trans. Tang Shaojie trans. 2008. Nanjing: Yilin Press. Meyer, John W and Rowan, Brian. 1977. Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology 83 (2). Nee, Victor. 1992. Organizational dynamics of market transition: Hybrid forms, property rights, and mixed economy in China. Administrative Science Quarterly 37 (1). Oi, Jean C. 1992. Fiscal reform and the economic foundations of local corporation in China. World Politics, 45. Oi, Jean C. 1995. The role of the local state in China’s transitional economy. The China Quarterly (144) (Special Issue). Pan, Wei. 2003a. Peasants and market: China’s grassroots regime and township enterprises. Beijing: The Commercial Press.

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Pan, Wei. 2003b. Interview of peasants in Xiaogang. In Peasants and market: China’s grassroots regime and township enterprises. Beijing: The Commercial Press. Qiu, Zeqi. 1999. Transformation of township and village enterprises and end of local authoritarianism. Sociological Study (3). Qu, Jingdong, Feizhou Zhou and Ying Xing. 2009. From macromanagement to micromanagement—Reflections on thirty year of reform from the sociological perspective. Social Sciences in China (6). Rong, Jingben et al. 1998. Transformation from the pressurized system to the democratic system of cooperative. Beiing: Central Compilation & Translation Press. Sun, Liping. 1994. Changes in China’s social structure since reform. Social Sciences in China (2). Tan, Qiucheng. 2003. Behavior of rural organizations and development of township and village enterprises during the transitional period. Social Sciences in China (2). Walder, Andrew G. 1995. Local governments as industrial firms: An organizational analysis of China’s transitional economy. The American Journal of Sociology 101 (2). Wang, Shaoguang. 1997. The bottom line of decentralization. Beijing: China Planning Press. Wang, Hongling. 2000. The effect of Entruster’s “Governmentalization and Nongovernmentalization” on corporate governance. Economic Research Journal (7). Wang, Shaoguang, and Angang Hu. 1994. A study of China’s state capacity. Hong Kong: Oxford University Press. Wang, Wenbin, et al. (eds.). 1988. China’s township enterprises, 42. Shanghai: Shanghai Academy of Social Sciences Press. William, A. Byrd and Qinsong Lin. 1990. China’s rural industry: Structure, development, and reform. Oxford University Press. Wu, Li (ed.). 2010. Economic history of the People’s Republic of China, vol. 2. Beijing: China Modern Economic Publishing House. Xia, Yongxiang and Changxiong Wang. 2005. Market-oriented improvement, government activity and ownership revolution: An application to the rise and fall of township village enterprise. Research of Institutional Economics (2). Xiong, Wansheng. 2009. China’s cooperative: As unintended consequences of institutionalizing process. Sociological Studies (5). Xiong, Wansheng. 2010. Strive for autonomy: An institutionalism analytic framework about the rise and fall of rural collective enterprises. Sociological Studies (3). Zhang, Yi. 1990. Township enterprises in China: An arduous journey. Beijing: Law Press China. Zhang, Yi and Songsong Zhang. 2001. A brief history of China’s township enterprises, 5–6. Beijing: China Agriculture Press. Zhang, Letian. 2005a. Farewell to ideal: Study on People’s commune, 57–59. Shanghai: Shanghai People’s Publishing House. Zhang, Jianjun. 2005b. State power, elite relations and the politic of privatization in Chinese rural industry. Sociological Study (5). Zhang, Jun. 2006a. Dual track economics: China’s economic reform (1978–1992). Shanghai: SDX Joint Publishing Company. Zhang, Yanlong. 2006b. Fiscal decentralization and the evolution of sub-provincial intergovernmental relations: A case study. Sociological Studies (3). Zhang, Jun and Qu Feng. 2000. An analytical framework of restructure of collective township enterprises. Economic Research Journal (8). Zhao, Shukai. 2010. Township governance and institutionalization of government. Beijing: The Commercial Press. Zhao, Shukai. 2012. Corporatism of local governments: Institutional advantage or disadvantage? http://www.snzg.cn/article/2012/0429/article_28459.html. Zhao, Ding Xin and John A. Hall. 1994. State power and patterns of late development: Resolving the crisis of the sociology of development. Sociology 28 (1). Zhe, Xiaoye. 2000. Practice of community development of “Supervillage”. Hangzhou: Zhejiang People’s Publishing House.

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Zhe, Xiaoye and Yingying Chen. 2005. Defining the property rights in the context of township and village collective enterprises. Sociological Studies (4). Zheng, Fengtian et al. 2012. The evolution of relationship between village and enterprise: From “the company of village” to the “village of company”. Sociological Study (1). Zhi, Zhaohua. 2001. Another explanation to the transformation of township and village enterprises. Economic Research Journal (3). Zhou, Li’an. 2008. Local governments in transition: Official motivation and governance, 282. Shanghai: Truth & Wisdom Press/Shanghai People’s Publishing House. Zhou, Qiren. 2000. The nature of publicly-owned enterprise. Economic Research Journal (11). Zhou, Xueguang. 2005. Property rights as a relational concept: A sociological approach. Sociological Studies (2). Zhou, Feizhou. 2006. A decade of tax-sharing: The system and its evolution. Social Sciences in China (6).

Chapter 5

The Government and Private Enterprises

There is no enterprise operating solely based on market rules, just as there is no completely free market. The institutional constraints the market is subject to are also the institutional environment enterprises must face. This is not only true for Western capitalist countries, but also holds true for enterprises under the Chinese market economy system. Compared with state-owned enterprises and collectively-owned enterprises, private enterprises are more market-oriented, but it does not mean that private enterprises can operate spontaneously in the market without being subject to government intervention and regulation. Private enterprises nearly “disappeared” after the founding of new China and re-appeared and flourished after reform and opening up, from which we see the developmental trajectory of private enterprises in the market and observe changes in the relations between the government and private enterprises in different historical periods. As a matter of fact, the development of private enterprises is a process of constantly overcoming and responding to the institutional environment, the market environment and the technological environment. In other words, on the one hand, private enterprises should establish the “legitimacy” of their status; on the other hand, they should seek economic “efficiency”. Data shows that the number of private enterprises has increased at an average annual rate of 24.4% since 1988 when the constitution acknowledged the legitimacy of the private sector and reached 10.86 million by 2012, accounting for 79.4% of the total number of enterprises in the country1 (see Fig. 5.1). The total profits of private industrial 1 According to the Provisional Regulations of the People’s Republic of China on Private Enterprises

(1988), “private enterprises refer to for-profit economic organizations whose assets are privately owned and which employ more than eight people. Private enterprises can be divided into sole proprietorships, partnerships and limited liability companies”. The Regulations on the Classification of Enterprise Registration Types (2011) issued by the National Bureau of Statistics and the State Administration for Industry and Commerce defines private enterprises as “wage labor-based for-profit economic organizations established or controlled by natural persons, including privately owned and operated limited liability companies, privately owned and operated companies limited by shares, privately owned and operated partnerships and privately owned and operated sole proprietorships registered under the Company Law, the Partnership Enterprise Law and the Provisional Regulations on Private Enterprises”. © China Social Sciences Press 2019 Q. Wei and H. Li, Entities and Structures in the Embedding Process, Social Development Experiences in China, https://doi.org/10.1007/978-981-13-2390-4_5

171

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5 The Government and Private Enterprises

Fig. 5.1 Changes in the number of private enterprises (1989–2012). Data source Statistics of the General Administration of Industry and Commerce of the PRC, China Statistical Yearbooks, http:// www.saic.gov.cn/zwgk/tjzl/index_1.html

enterprises grew from 6.725 billion yuan in 1998 to 1.51025 trillion yuan in 2010, representing an average annual increase of about 58%. The number of private sector employees grew from 1.64 million in 1989 to 78.23 million in 2009, representing an average annual increase of about 23%. If we look at the development of private enterprises from the perspective of corporate history, we will find that this seemingly smooth growth curve is divided into distinct historical stages (Fig. 5.1). In his analysis of the growth path and the evolution of the organizational structure of private enterprises in Wenzhou, Cao Zhenghan divided the development of private enterprises into the following three stages from the perspective of the institutional environment for enterprises: 1978–1988, the stage during which the legitimacy of private enterprises’ operations was acquired and recognized; 1989–1997, the stage during which the political status of private enterprises was acquired; 1998–2004, their political bargaining power increased.2 Zhang Jun et al. divided the development of private enterprises into the 1978–1987 stage of allowing the development of the private sector, the 1987–1992 stage of encouraging the development of the private sector and the 1992–2006 stage of institutional building.3 Of course, these two division methods have their own rationality. The former, proceeding from the legitimacy of enterprises, emphasizes the importance of the institutional environment for the development of enterprises;

2 Cao

(2006). et al. (2006, pp. 403–395).

3 Zhang

5 The Government and Private Enterprises

173

the latter, proceeding from the historical evolution of national policy, emphasizes the government’s top-down reforms. Next, we will briefly describe the development of private enterprises and institutional evolution to facilitate the subsequent analysis.

5.1 Institutional Evolution and the Development of Private Enterprises Since the beginning of reform, with the constant changes of national policy and the continuous improvement of the market economic system, private enterprises have gradually emerged as important entities of China’s economic and social development. From the perspective of China’s progressive reform and changes in the social structure, private enterprises are an embodiment of the market “increments”. The continuous reform and improvement of the market economy have provided space, resources and opportunities for the significant development of private enterprises. The private sector has become a socially legitimate organic part of the whole society.4 The economic aggregate and capacity to absorb labor force of private enterprises have surpassed those of other types of economic organizations; private entrepreneurs have seen dramatic changes in their social and political status as compared to that before reform and have become a dominant part of the new social strata. Some researchers see the emergence and growth of private enterprises and entrepreneurs as a process of structural change, and the driving force behind this change is the coexistence, infiltration and change of the traditional planned economic system and the market economy.5 There is no doubt that progressive reform by the Chinese government provides a feasible institutional environment for such infiltration and change.

5.1.1 The “Pre-institution” Stage of the Private Sector of Economy At the beginning of the reform and opening up, in talking with the representatives of former industrial and commercial circles, Deng Xiaoping pointed out that “At present, it is necessary to develop the economy in many ways. For example, we can utilize foreign funds and technology, and overseas Chinese and foreign citizens of Chinese origin should be allowed to establish factories in China. In order to absorb foreign capital, we may either use compensatory trade or establish Sino-foreign joint ventures, beginning with enterprises where the turnover of capital is quick”, “We should allow former capitalist industrialists and businessmen to play a role, using those who are well-trained and appointing capable individuals as cadres”, “We should implement our policies concerning the above-mentioned industrialists and 4 Li

(1997).

5 Ibid.

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5 The Government and Private Enterprises

businessmen and their descendants. These people stopped receiving a fixed rate of interest long ago. If they no longer exploit others, we have no reason to continue to label them ‘capitalists’”, “They should be allowed to set up factories or invest in tourism to earn foreign capital. It is better for them to use their money to do something rather than keeping it idle”, “In short, both industrialists and businessmen and their money should be utilized”.6 Deng Xiaoping’s speech showed that the high level of the central government had begun to loosen the grip on the use of relevant capital and human resources at home and abroad for the construction and development of the socialist economy, especially the development of the private sector. But the speech didn’t form a formal policy system. In fact, around 1980 waves upon waves of educated youth returning to cities exacerbated the already grim urban employment situation. It is estimated that during this period more than 30 million educated urban youth working in the countryside returned to cities. The work unit system simply couldn’t accommodate so many people seeking employment. It was under this kind of pressure that in 1981 the State Council promulgated Several Policy Stipulations Concerning the Urban NonAgricultural Individual Economy to institutionally recognize self-employment. The document stipulates that, if necessary, upon approval by the administrative department for Industry and commerce, those who have special skills can take on no more than five apprentices, thereby recognizing the existence of hiring by self-employed households and people at a certain level. At the time self-employment was a booming phenomenon in cities and towns, with people selling big bowls of tea and tea eggs, transporting coal briquettes, running small restaurants, repairing shoes, repairing bikes and doing everything else from which they could make a living. Although this kind of individual- or family-run operations provided a means for many people to put food on the table, at a time when the policy system was still very unclear, self-employed people would take every possible opportunity to make their way into in-system units, as many people held the traditional view that self-employment is not a serious occupation, and self-employed people were even regarded as “idle people in society”, despite the fact that some self-employed households had become “10,000-yuan households”. Soon afterward, in 1982, the Constitution of the People’s Republic of China adopted on the Fifth National People’s Congress stipulated that “The individual economy of urban and rural working people, operating within the limits prescribed by law, is a complement to the socialist public economy. The state protects the lawful rights and interests of the individual economy.” This undoubtedly emboldened the individual economy. In 1983, the central government pointed out in the document Several Issues Concerning the Current Rural Economic Policy that “Several Policy Stipulations Concerning the Urban Non-Agricultural Individual Economy promulgated by the State Council may apply, mutatis mutandis, to the issue of rural self-employed households and people and competent planters and breeders hiring helpers and taking on apprentices. For those who hire more helpers than prescribed above, we should not advocate or publicize their practice, nor should we rush to ban their practice, instead 6 Deng

(1979–1994).

5.1 Institutional Evolution and the Development of Private Enterprises

175

we should make the best of the situation by making it develop in the direction of different forms of the cooperative economy”. During this period, the private sector didn’t acquire lawful status policy-wise and only exists in the name of big industrial and commercial units.7 But the acquiescence of the government and the development of the individual and collective economies had laid the foundation for and played a great role in promoting the development of the private sector. As a saying goes, “everything is ready except the east wind”.

5.1.2 The Institutionalization Stage of the Private Sector of Economy With the continuous development of individual economy, some “self-employed households and people” had accumulated considerable wealth. The scale of their operations and the number of people they hired far exceeded the prescribed limits. They adhered only nominally avoided breaking the rule. At that time, there was a dispute going on over whether the limit on the number of hires should be set at seven or eight. The government didn’t make a clear decision but took a “not advocating or publicizing, nor rushing to ban” attitude. In 1987, the Decision on Deepening Rural Reform pointed out that “for privately owned businesses …, the policy of allowing their existence, strengthening management, promoting good elements while suppressing bad elements and gradually guiding should also be adopted”. Although the document made no specific mention of private enterprises, it represented the first time since the beginning of reform that the existence of privately owned businesses was allowed in a central government document and also laid the institutional foundation for the later introduction of relevant policies. In the same year, the report to the 13th Party Congress gave more clear instructions on the development of the private sector: “A certain degree of development of the private sector is conducive to promoting production, stimulating markets and expanding employment and better meeting people’s needs in various aspects of life. It is a necessary and useful supplement to the public sector of the economy. Policies and laws on the private sector must be formulated as soon as possible to protect their legitimate interests and strengthen the guidance, supervision and management of them”. Meanwhile, the report defined in an institutional sense the relationship between economies in different forms of ownership: “At present, the development of other economic components than ownership by the whole people is not excessive, but rather inadequate. We must continue to encourage the development of the urban and rural cooperative economy, the individual economy and the private sector”, “policies and laws on the private sector must be formulated as soon as possible to protect their legitimate interests and strengthen the guidance, supervision and management of them”. The report to the 13th Party Congress can be considered as a major turning point in the development of the private sector, with 7 Zhang

et al. (2006, p. 398).

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the central government’s stance on the development of the private sector changing from acquiescence to explicit encouragement and guidance. In 1988, the constitutional amendment adopted by the National People’s Congress stipulated that “the state allows the private sector to exist and develop within the limits prescribed by the law … The state protects the legitimate rights and interests of the private sector and guides, supervises and manages the private sector”. The legal status of the private sector was recognized by law and private enterprises became a necessary supplement to socialist public ownership and an integral part of the socialist market economy. In June the same year, the Provisional Regulations of the People’s Republic of China on Private Enterprises were promulgated, which brought an end to the state of lawlessness private enterprises had been in, clarified the legal and economic status of the private sector of economy and provided a legal guarantee for the development of the private sector, whereupon private enterprises began to register at the administration for industry and commerce. From 1989 onwards, the situation at home and abroad underwent tremendous changes. A series of events such as the “1989 disturbance”, the collapse of the Berlin Wall and the disintegration of the Soviet Union led people to question “reform”. Some people even believed that reform and opening up would drive China to capitalism and economic reform would lead to a peaceful evolution. On February 22, 1990, People’s Daily published a long article entitled “On the Struggle against Bourgeois Liberalization”, which raised the question “should we pursue capitalist reforms or socialist reforms”, giving rise to the dispute over “belonging to socialism or capitalism”. On June 11 the same year, People’s Daily published “Comments on the Pluralistic View of Bourgeoisie Liberalization”, arguing that people who “engage in liberalization” expect political pluralism and power pluralism to grow naturally out of economic pluralism and that “the private sector and the individual economy …, if left unchecked, will impact the socialist economy “. In such an environment and atmosphere of public opinion, although the law on the private sector had not changed, the private sector had become an imaginary enemy in the class struggle, leaving private enterprises floundering.8 At the end of 1990, Comrade Deng Xiaoping suggested that “we should seize every opportunity to develop the economy” and stressed that “We must understand theoretically that the difference between capitalism and socialism is not a market economy as opposed to a planned economy. Socialism has regulation by market forces, and capitalism has control through planning”, “You must not think that if we have some market economy we shall be taking the capitalist road. That’s simply not true. Both a planned economy and a market economy are necessary. If we did not have a market economy, we would have no access to information from other countries and would have to reconcile ourselves to lagging behind”.9 Later, during the Spring Festival in 1991, Deng Xiaoping stressed again during his visit to Shanghai that “Don’t think that any planned economy is socialist and any market economy is capitalist. That’s not the way things are. In fact, planning and regulation by the 8 Wan

(2006). (1991–1993a).

9 Deng

5.1 Institutional Evolution and the Development of Private Enterprises

177

market are both means of controlling economic activities, and the market can also serve socialism”.10 In 1992, Deng Xiaoping’s southern tour speech solved ideological issues related to the reform and the development of the market economy that had long puzzled people. He stressed that “Planning and market forces are both means of controlling economic activity. The proportion of planning to market forces is not the essential difference between socialism and capitalism”, “The chief criterion for making that judgment should be whether it promotes the growth of the productive forces in a socialist society, increases the overall strength of the socialist state and raises living standards”, liberating people’s minds from the shackles of the dispute over “belonging to socialism or capitalism” and establishing the direction of China’s economic development.11 In the same year, the 14th National Congress was held. The meeting further clarified the economic status of the private sector. The meeting pointed out that “in the ownership structure, the public sector of the economy consisting of the economy under ownership by the whole people and the collectively owned economy is dominant, supplemented by the individual economy, the private sector and the foreign capital economy. Different sectors of the economy will develop side by side for a long time to come. Different sectors of the economy may carry out various forms of joint operation on a voluntary basis. State-owned enterprises, collectively-owned enterprises and other enterprises all enter the market to give play to the leading role of state-owned enterprises through fair competition”. In 1993, the Decision of the CPC Central Committee on Several Issues Concerning the Establishment of the Socialist market Economic System further clarified the guideline of “keeping public ownership as the mainstay of the economy and allowing diverse forms of ownership to develop side by side”: “The state protects all the lawful income and property of legal persons and residents in accordance with the law, encourages urban and rural residents to save and invest, and allows personal capital and other factors of production to participate in income distribution”. The “Zhucheng incident” which caused a sensation at that time also received the approbation of the central leadership12 and was promoted as experience. The Decision pointed out that “some of the small state-owned enterprises of a general nature can be contracted out or leased; some can be reorganized into joint-stock cooperative enterprises or sold to collectives and individuals”.

10 Deng

(1991–1993b). (1991–1993c). 12 The “Zhucheng incident” refers to the then party secretary of Zhucheng city, Shandong province Chen Guang restructuring 95% of the state-owned and collectively-owned enterprises of Zhucheng city through the joint-stock system, the joint-stock cooperative system, the free transfer of property rights, bankruptcy, mergers, leases, etc., hence the incident was called “sell-out by Chen”. The incident set off a debate over whether the practice was “privatization”. 11 Deng

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5.1.3 The Institutional Construction Stage of the Private Sector of Economy In 1993, the “Chinese Private Enterprise Research Task Force” organized by the United Front Work Department of CPC Central Committee, the All-China Federation of Industry and Commerce, the State Administration for Industry and Commerce, the Chinese Academy of Social Sciences and the China Private Economy Research Society conducted a sample survey of private enterprises across the country. It was the first time in China that a sample survey of private enterprises was organized since the beginning of reform. Subsequently, the task force conducted seven national sample surveys of private enterprises in 1995, 1997, 2000, 2002, 2004, 2006 and 2008 respectively to collect more comprehensive data. This section provides a descriptive analysis of the historical development of private enterprises around these survey data. 1. Rapid Development of the Private Sector of Economy (1992–1997) The survey data of 1993 show that since 1989, the number of private enterprises and the number of people they hired had increased to varying degrees. “The speed of growth is much faster than in previous years, marking a new high in the development of private enterprises”.13 If 1992 is seen as an important historical turning point in the development of private enterprises, then the convening of the 14th National Congress means that the status and role of the private sector have been further clarified and the private sector has become an important part of China’s market economy. “The nonpublic sectors of the economy are an important component of China’s socialist market economy. We should continue to encourage and guide the individual economy, the private sector and other non-public sectors of the economy, so that they can develop in a healthy way.” First, in terms of the overall scale of development, by the end of 1996, the number of registered private enterprises across the country had reached 961,000, an increase of 466% over the same period in 1992; the number of employees had reached 11.451 million, an increase of 490%; total sales had reached 309.67 billion yuan and retail sales 185.47 billion yuan (see Table 5.1). In terms of the allocation of enterprises’ profits (1997 survey), about two-thirds of the profits for expanded reproduction and the remaining profits were used for entertainment, socializing, apportions, donations, dividends for investors, etc. In terms of the external social environment for the development of enterprises, “power-for-money deals” and the “deterioration of public security” became the most serious social issues affecting the development of enterprises in the eyes of enterprises surveyed (Fig. 5.2). In respect of power-for-money deals, in the process of economic and social transformation, as relevant systems were still not perfect, some stateowned sectors and government officials took advantage of their special powers and monopoly position to commercialize power into money and put power above the market, thus disrupting the market order, which became a major obstacle to free 13 All-China

Federation of Industry and Commerce (2007, p. 3).

5.1 Institutional Evolution and the Development of Private Enterprises Table 5.1 The development status of China’s private enterprises 1992 1995

179

1997

Number of enterprises (10,000)

20.6

43.2

96.1

Number of employees (10,000)

233.1

559.5

1145.1

Total sales (100 million yuan)

–

758.5

3096.7

Retail sales (100 million yuan)

–

512.6

1854.7

Data source Statistical Compilation for Industrial and Commercial Administration (for years)

Fig. 5.2 Social issues influencing the development of private enterprises Data source 2007, LargeScale Survey of Chinese Private Enterprises (1993–2006), Beijing: China Industry & Commerce Associated Press, p. 93

competition among market players. Regarding the public security environment, on the one hand, enterprises in the market cannot exist independently of the social environment and a stable social environment can promote the stable development of enterprises; private entrepreneurs were then people who “got rich first” and a deteriorating public security environment often threatened the personal safety of entrepreneurs, bringing a sense of insecurity to this group. Among the factors influencing the economic activities of private enterprises, government regulation and relevant policies were topmost in the minds of entrepreneurs. As can be seen from the survey data (Fig. 5.3), in the 1995 survey, enterprises surveyed thought that credit policies, tax policies and macro-control policies were the most important factors influencing the economic activities of enterprises; in the 1997 survey, enterprises surveyed thought that industrial and commercial administration, credit policies and macro-control policies were the most important factors influenc-

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Fig. 5.3 Most important influencing factors on the economic activities of private enterprises. Data source 2007, Large-Scale Survey of Chinese Private Enterprises (1993–2006), Beijing: China Industry & Commerce Associated Press, p. 94

ing the economic activities of enterprises. This speaks volumes about the critical role of government policy interventions in the development of private enterprises. Some researchers believe that since the state gives legitimacy to the existence of private enterprises, the state’s administrative power necessarily exerts a variety of influences on the development of private enterprises, and the operation, access to resources, industry, scale and even structural changes of private enterprises as a whole depend on the country’s institutional change and national policy changes.14 Meanwhile, we also found that enterprise’s property rights were not taken seriously by respondents, with only about 5% of the private entrepreneurs considering property rights as an important factor influencing the economic activities of enterprises. As regards the “predecessors” of private entrepreneurs, self-employed people accounted for the highest proportion (38.2% of respondents), followed by cadres of enterprises and institutions (23.5% of respondents) (Fig. 5.4). From the institutional evolution described above, we learn that when private enterprises were not yet institutionally recognized, the majority of private enterprises existed in the form of “big hiring households”; after the policy was relaxed, these self-employed households naturally transformed into private enterprises. Private entrepreneurs who were formerly cadres of enterprises and institutions were mainly in-system personnel who “jumped into the sea” in the late 1980s and early 1990s. Pushed and pulled by the original system and the reform environment, a considerable proportion of the professional and technical personnel and cadres of the party and government organs and the managers 14 Li

(1996).

5.1 Institutional Evolution and the Development of Private Enterprises

181

Fig. 5.4 Occupations of surveyed entrepreneurs before starting a business. Source 2007, LargeScale Survey of Chinese Private Enterprises (1993–2006), Beijing: China Industry & Commerce Associated Press, p. 97

of state-owned and collectively-owned enterprises and institutions chose to enter the market, a “vast ocean”, to set up their own businesses. They accounted for nearly one-third of private entrepreneurs surveyed.15 It is noteworthy that some of these private enterprises used to exist in the form of “red hat enterprises” affiliated to stateowned enterprises and institutions or urban and rural collectively-owned enterprises and institutions. In the absence of clarity over enterprises’ property rights, “red hat enterprise” had caused a lot of disputes and even tragedies. The “Lucheng Transport Red Hat” incident in 1995 was a property rights dispute arising from the affiliation of a private enterprise.16 There were many similar cases. According to survey data, companies wearing the state-owned enterprise “hat” accounted for 5.2%, urban 15 All-China

Federation of Industry and Commerce (2007, p. 97).

16 Lucheng Transport Corporation was established on February 19, 1993. Zhang Chaorong invested

about 3.61 million yuan, accounting for 62% of the company’s total capital stock, and was the company’s largest shareholder. On March 17, 1995, the Public Transport Commission of Lucheng District to which the company was affiliated dismissed Zhao Chaorong from his posts as the company’s legal representative and general manager over unwarranted charges and put into use a new set of corporate seals of questionable origin. Less than one week later, it replaced the Business License for an Enterprise as a Legal Person and the Tax Registration Certificate. Zhang Chaorong’s investment of 3.61 million yuan in the company was taken over by the competent authority. China Business Times reported on this phenomenon. Through public opinion supervision and litigation

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collectively-owned enterprises 31.3%, rural collectively-owned enterprises 18.0%, associated enterprises 4.5%, joint-stock enterprises 7.9%, three kinds of enterprises with foreign investment 1.0% and self-employed households 31.3%. The main reasons for “unhatting” were “operational autonomy can be easily guaranteed” (27.9%), “clarify property rights to avoid disputes” (23.3%) and “social status has improved” (19.7%).17 2. Further Development of the Private Sector of Economy (1997–2002) After the 15th National People’s Congress, the private sector was elevated from the “supplementary status” to “an important component” of the socialist economy. The Amendment to the Constitution of the People’s Republic of China adopted at the Second Session of the Ninth NPC wrote “the individual economy, the private sector and other non-public sectors of the economy are an important component of the socialist market economy” into the Constitution. In 2001, in the Speech at the Meeting Celebrating the 80th Anniversary of the Founding of the Communist Party of China, Comrade Jiang Zemin pointed out that “Since China adopted the policy of reform and opening up, the composition of China’s social strata has changed to some extent. There are, among others, entrepreneurs and technical personnel employed by scientific and technical enterprises of the non-public sector, managerial and technical staff employed by foreign-funded enterprises, the self-employed, private entrepreneurs, employees in intermediaries and free-lance professionals. Moreover, many people frequently move from one ownership, sector or place to another, changing their jobs or capacity from time to time. This trend of developments will continue. Under the guidance of the Party’s line, principles and policies, most of these people in the new social strata have contributed to the development of productive forces and other undertakings in the socialist society through honest labor and work or lawful business operations. They join workers, peasants, intellectuals, cadres and PLA officers and men in an effort to build socialism with Chinese characteristics. They, too, have made contributions to this cause”. The speech further clarified the political status of private entrepreneurs, treated them as builders of the socialist cause on an equal footing with other workers and pointed out that “those who have proved to meet the requirements for Party membership through a long period of tests should be admitted into the Party”. In the second half of 1997, the “Asian financial crisis” broke out. Many Asian economies were impacted to varying degrees and experienced difficulties and setbacks. The Chinese economy was no exception, with exports thwarted and investment reduced, thus affecting the development of some export-oriented private enterprises. Nevertheless, in a favorable institutional environment at home, a series of policies greatly encouraged the development of private enterprises. From 1997 to

by Zhang Chaorong, Zhang Chaorong reclaimed the Business License for an Enterprise as a Legal Person and resumed his post as legal representative. 17 All-China Federation of Industry and Commerce (2007, p. 110).

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Table 5.2 The development of China’s private enterprises from (1997–2001) 1997 1998 1999 2000

2001

Number of enterprises (×10,000)

96.1

120.1

150.9

176.2

202.9

Number of employees (×10,000)

1145.1

1445.3

1699.2

2011.2

2253.0

Total sales (100 million yuan)

3096.7

5232.7

7149.4

9884.1

11484.2

Retail sales (100 million 1854.7 yuan)

3059.3

4191.4

5813.5

6245.0

Data source Statistical Compilation for Industrial and Commercial Administration (for years) Table 5.3 Size and operating conditions of private enterprises (1997–2001) Number of Amount of Sales (10,000 employees capital owned yuan) (10,000 yuan) End of 1996 End of 1999 End of 2001

50 55 60

115.3 150 250

355 400 580

Amount of tax paid (10,000 yuan) 12.8 14 22

Data source 2007, Large-Scale Survey of Chinese Private Enterprises (1993–2006), Beijing: China Industry & Commerce Associated Press, p. 132

2001, China’s private enterprises withstood a series of tests and challenges including the “financial crisis” and the accession to the WTO and showed steady growth (see Table 5.2). A comparison of the results of surveys conducted over the years shows that from 1997 to 2001, both the average size and operating conditions of private enterprises developed a great deal (see Table 5.3). The number of employees grew by an average of 10%, the amount of capital owned grew by an average of 48%, sales grew by an average of 29% and the amount of tax paid grew by an average of 33%. The average lifespan of enterprises was extended and their vitality kept growing. As enterprises expanded and their operational efficiency improved every year, although major investors to a large extent still served in the capacity of managers, the governing bodies of private enterprises had been improving and the status and role of boards of directors and corporate managers in decision-making had been gradually increasing. Of enterprises surveyed in 2002, 33.9% had general meetings of shareholders, 47.5% had boards of directors and 26.6% had boards of supervisors. The proportion of major operational decisions made by major investors decreased from 64% in 1993 to nearly 40% in 2002 and the proportion of decisions made by boards of directors increased from 15% in 1993 to 30% in 2002; the proportion of general management decisions made by major investors decreased from 69% in 1993 to 35% in 2002 and the proportion of those made by boards of directors increased from 5% in 1993 to 26% in 2002 (Figs. 5.5 and 5.6).

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Fig. 5.5 Changes in the governance structure of enterprises (1993–2002) Data source 2007, LargeScale Survey of Chinese Private Enterprises (1993–2006), Beijing: China Industry & Commerce Associated Press, p. 136

Fig. 5.6 Changes in the decision-makers of enterprises (1993–2002). Data source 2007, LargeScale Survey of Chinese Private Enterprises (1993–2006), Beijing: China Industry & Commerce Associated Press, p. 136

In terms of the political identities of private entrepreneurs, the results of the 2002 survey showed that about 30% of private entrepreneurs were party members, a significant increase compared to the 13% in 1993, the 17% in 1995, the 17% in 1997

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and the 20% in 1999. The diversity of organizations private entrepreneurs participated in increased. 79% of private entrepreneurs were members of federations of industry and commerce, 35% were CPPCC members, 17% were deputies to people’s congresses and 6% were members of democratic parties.18 On the one hand, this change reflected a steady rise in the political status of private entrepreneurs. On the other hand, it also reflected private entrepreneurs’ attempt to boost the legitimacy of enterprises through their political identities and thus promote the further development of enterprises. Many private entrepreneurs participated in politics through the acquisition of the political identity “CPPCC member” or “deputy to the people’s congress” to increase their political capital. Interview data included in a researcher’s analysis of private entrepreneurs’ participation in politics clearly show that it would be a great advantage to the development of a private entrepreneur and his enterprise if he had a “political aura”. I didn’t expect this when I started the business. The only thing I was thinking about was developing the enterprise. The enterprise flourished with the help of my friends. As the head of a big private enterprise in the district, I was often invited to some events by the federation of industry and commerce and private enterprises’ association of the district. Naturally, I became acquainted with some important figures and was recommended as a CPPCC member, a member of a committee of the All-China Federation of Industry and Commerce. Moreover, these titles can play a special role at critical junctures. They enabled me to meet many important figures and solve some thorny issues. Now is the era of competition. We must fend for ourselves. I do not believe in politics, but there is no need to oppose them. We live in a hierarchical society where party votes, official positions, and connections are three important treasures. I am a member of the CDNCA. If the Communist Party wants me, I will join it. Although these titles are nominal, not everyone can get them. If I do not fight for them, others will fight for them, and then I will have no chance. Now that my enterprise has grown so big, these things are indispensable.19

3. Steady and Rapid Development of the Private Sector of Economy (2002–Present) After the post-institutionalization phases of rapid and further development, the private sector entered a phase of steady development. If the phase of rapid development of the private sector is considered as an “early childhood” and the phase of further development as “adolescence”, then after the 16th National People’s Congress, private enterprises entered strong and robust “adulthood”. In 2002, the report to the 16th Party Congress put the non-public sectors of the economy on an equal footing with the public sector of the economy and further clarified the government’s stance and determination to encourage, guide and develop the private sector. The report pointed out that “the individual economy, the private sector and other non-public sectors of the economy are an important component of the socialist market economy”. The public sector of the economy and the non-public sectors of the economy promote each other and develop together. Of course, enterprises with different forms of ownership, of different sizes and in different industries and fields inevitably find themselves in unequal positions, but institutional guarantees can reduce unfair competition to 18 All-China 19 Li

Federation of Industry and Commerce (2007, p. 155). (2001b).

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the greatest extent possible. The important position of private enterprises in China’s economy and society is unquestionable. How to make this huge group of economic organizations run well and develop in coordination with other types of enterprises has become one of the key factors that have a bearing on whether China’s economy and society can develop harmoniously and healthily. The results of the survey conducted by the Chinese Private Enterprise Research Task Force in 2004 showed that since 2002, China’s private sector had been developing steadily, rapidly and healthily; not only had the number of private enterprises increased significantly, but they had been expanding; their sales had been growing and their economic strength had increased markedly; their main business had been diversifying; the number of export-oriented enterprises had increased; more enterprises have begun to focus on technology development. By the end of 2003, the number of private enterprises had reached 3.006 million, their registered capital 3.5305 trillion yuan, the number of their employees 42.99 million, their output 2.0083 trillion yuan and their total sales 1.8652 trillion yuan. Enterprises with more than 10 million yuan in owner’s equity accounted for 26%, enterprises with more than 50 million yuan in owner’s equity accounted for 6.9% and enterprises with more than 100 million yuan in owner’s equity accounted for 3.5%.20 In 2005, the Several Opinions of the State Council on Encouraging, Supporting and Guiding the Individual Economy, the Private Economy and Other Non-public Sectors of the Economy were published. The opinions formally proposed implementing the principle of equal access and fair treatment by broadening market access, increasing taxation and financial support, improving social services, safeguarding the legitimate rights and interests of enterprises and workers, guide enterprises towards improving their own quality, improving government regulation and strengthening development guidance and policy coordination to create a favorable institutional environment for the non-public sectors of the economy. In 2007, the Property Law was promulgated to provide equal legal protection to the property rights of the state, collectives and individuals and safeguard the equal economic status of all market players. The private sector is an important component of the socialist market economy and enjoys the same political status, legal status and economic status as other types of economic entities within the framework of the economic system dominated by the public ownership. The report to the 17th Party Congress further reiterated the status of the nonpublic sectors of the economy, “we should adhere to and improve the basic economic system in which public ownership is the mainstay of the economy and economic entities of diverse ownership develop together, unwaveringly consolidate and develop the public sector of the economy and unswervingly encourage, support and guide the development of the non-public sectors of the economy”. The private sector has become a market player with important economic status, clear political status and equal legal status.21 As of 2008, there were 6.239 million private enterprises, employing 77 million people, with a total registered capital of 10.8 trillion yuan. Limited liability compa20 All-China 21 All-China

Federation of Industry and Commerce (2007, pp. 162–167). Federation of Industry and Commerce (2008, p. 6).

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Fig. 5.7 External influencing factors for the development of private enterprises from 1995 to 1997. Source 2008, Yearbook of Chinese Private Enterprises (2008), Beijing: China Industry & Commerce Associated Press, p. 26

nies accounted for the largest proportion (72%); one-person companies the smallest proportion (3%). Enterprises in the secondary sector accounted for the largest proportion (53%); enterprises in the primary sector the smallest proportion (7%). Wages varied greatly from industry to industry. The real estate industry had the highest annual average wage at more than 40,000 yuan; the public administration and utility industries had the lowest annual average wage at more than 10,000 yuan. In terms of the external environment affecting the development of enterprises, the 2008 survey data of the Chinese Private Enterprise Research Task Force showed that rising labor costs and rising raw material prices and energy prices were the factors having the biggest impact on the development of enterprises (Fig. 5.7). On the one hand, this situation shows that China’s private enterprises were mainly concentrated in labor-intensive and energy- and material-dependent industries and therefore susceptible to the influence of the external environment; on the other hand, we can see that sensitivity to the external environment varied from enterprise to enterprise, depending on their regions, industries and sizes, indicating that China’s private enterprises had become more and more diversified and differentiated. Private enterprises were “small boats which can easily turn around”, but generally speaking, private enterprises needed to step up their investment in technological R&D to enter high value-added, low-cost industries. Private enterprises are an important part of China’s economic development, and also one of the important sources of tax revenue for local grass-roots governments. In addition to regular taxes and fees, private enterprises also need to bear the burdens of apportions, donations and public relations and entertainment expenses. Survey data over the years show that although the country’s macro system has been improving,

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Table 5.4 Percentage of burdens of private enterprises in the sales (2002–2008) Taxes Charges Fundraising Donations Public relations quotas and entertainment 2002 2004 2006 2008

5.45 5.96 5.77 6.48

1.83 2.31 2.07 2.34

0.58 0.89 0.64 0.79

0.67 0.86 0.56 0.69

1.53 1.93 1.30 1.64

Data source 2008, Yearbook of Chinese Private Enterprises (2008), Beijing: China Industry & Commerce Associated Press, p. 32

these burdens haven’t fundamentally changed and even seriously affect the development of enterprises (Table 5.4). In addition to the burden of various taxes and fees, some local governments, caring greatly about GDP, awarded officials titles in return for investment and tax payment to encourage private enterprises and attract investment. Many private entrepreneurs became veritable “red-hat” businessmen. For example, the 2005 investment promotion policy of Zhengning County, Gansu stipulated that entrepreneurs who invested more than two million yuan and paid more than 150,000 yuan in taxes annually were entitled to deputy section head-level treatment; those who invested more than three million yuan and paid more than 200,000 yuan in taxes annually were entitled to section head-level treatment; those who invested more than five million yuan and paid more than 400,000 yuan in taxes annually could receive an equivalent of the basic wage for deputy department heads; those who invested more than 10 million yuan and paid more than 800,000 yuan in taxes annually could be hired as an economic adviser to the county government and receive an equivalent of the basic wage for department heads. Qiqihar City, Heilongjiang Province stipulated in 2003 that the legal representatives of enterprises which paid more than 30 million yuan, more than 50 million yuan, more than 100 million yuan and more than 200 million yuan annually for three consecutive years were entitled to deputy county head-level, county head-level, deputy mayor-level and mayor-level treatment respectively; the legal representatives of enterprises which paid more than 200 million yuan annually for three consecutive years and had made particularly significant contributions would also be given a special contribution award of five million yuan by the municipal government.22

“Labor relations” are always a major topic in the development of enterprises. The State protects the legitimate rights and interests of workers through legislation. The new Labor Contract Law was promulgated in 2008, greatly affecting enterprises’ employment practices. The cost of labor increased subsequently. Survey data showed that 44% of respondents believed that the new law was conducive to the establishment of harmonious labor relations; 31% of respondents believed that the new law encouraged enterprises to improve operational efficiency; 29% of respondents believed that the new law was conducive to fostering cohesion within enterprises. Naturally, private entrepreneurs believed that the new law had many adverse effects on the development of enterprises. For example, 67% of entrepreneurs believed that the new law increased enterprises’ cost of labor; 45% of entrepreneurs believed that 22 Chen

(2007).

5.1 Institutional Evolution and the Development of Private Enterprises

189

the new law increased enterprises’ employment risk; 24% of entrepreneurs believed that the new law restricted enterprises’ power to make employment decisions.23 Since the beginning of the new century, private entrepreneurs have become the focus of people’s attention because of their growing wealth and attention-grabbing behaviors. “Problematic rich people” hit the front pages of newspapers from time to time, making people doubt the source of wealth of private entrepreneurs and believe that they “got rich overnight” mostly by taking advantage of loopholes in the system or through improper conduct. The behavior and lifestyle of this group became the object of criticism. They “drove luxury cars”, “lived in villas” and “spent money like water”, but had a weak sense of social responsibility. In fact, it is difficult for us to generalize about this group. According to the survey, there was a great income disparity among private entrepreneurs, just as there was a great disparity among enterprises in terms of size and profitability. Those with an annual income below 100,000 yuan accounted for 62.5%; those with an annual income between 110,000–500,000 yuan accounted for 30.9%; those with an annual income between 510,000–990,000 yuan accounted for 2%; those with an annual income above one million yuan accounted for 4.6%. In terms of their self-perceived socioeconomic status, the vast majority of entrepreneurs classified themselves as middle class, with 59% of entrepreneurs surveyed believing they were economically in the middle class, 48% believing they were politically in the middle class and 59% believing they were socially in the middle class (Fig. 5.8). If donations are viewed as an indicator of entrepreneurs’ contributions to society, then 87% of entrepreneurs surveyed had made donations. The amount of donations was positively correlated with the size of enterprises. 75% of the owners of enterprises with an asset size below one million yuan had made donations, with the median donation being 10,000 yuan; 90% of the owners of enterprises with an asset size between 1 and 5 million yuan had made donations, with the median donation being 50,000 yuan; 97% of the owners of enterprises with an asset size above five million yuan had made donations, with the median donation being 200,000 yuan.24 The private sector has become an indispensable part of China’s economic and social development. If the development of the private sector cannot be separated from a perfect market economy system, then the government’s institutional policies will ensure that the market can play a positive role. The report to the 18th Party Congress once again stressed that “The underlying issue we face in economic structural reform is how to strike a balance between the role of the government and that of the market, and we should follow more closely the rules of the market and better play the role of the government”, “we must unswervingly encourage, support and guide the development of the non-public sector, and ensure that economic entities under all forms of ownership have equal access to factors of production in accordance with the law, compete on a level playing field and are protected by the law as equals.” The development of the private sector cannot be separated from the market. The further development of private enterprises cannot be separated from the government. Only through the constant coordination and proper handling of the relationship between 23 All-China 24 All-China

Federation of Industry and Commerce (2008, p. 24). Federation of Industry and Commerce (2008, pp. 35–37).

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Fig. 5.8 Self-perceived social, political and economic status of private entrepreneurs. Source 2008, Yearbook of Chinese Private Enterprises (2008), Beijing: China Industry & Commerce Associated Press, p. 38

the government, the market and enterprises can both the public and non-public sectors of the economy develop continually, healthily and steadily. From the above data we can see that the number of private enterprises, the number of their employees and their total sales have been rising year after year, but in the context of economic globalization, only by further stepping up the structural adjustment of private enterprises to improve their overall quality and enhance their competitiveness can we keep moving forward. The Central Economic Work Conference 2013 stressed that at present in China, “there is a growing conflict between downward pressure on economic growth and excess production capacity, enterprises’ operating costs are increasing and their capacity for innovation is inadequate, there are potential risks in the financial sector and the conflict between economic development and resource conservation and environmental protection remains prominent”. Private enterprises are large in number but generally small in size, are found in a wide range of industries but hold no significant advantages, possess strong production capacity but lack capacity for innovation. The frequent occurrence of “Wenzhou escape” incidents in 2011 reflected one of the predicaments of private enterprisesfinancial dependence and excessive indebtedness.25 As the global economy remains 25 According to the survey results of the Chinese Private Enterprise Research Task Force, the average

loan balance of sample enterprises was 2.734 million yuan in 2001, 6.655 million yuan in 2003, 6.088 million yuan in 2005 and 7.229 million yuan in 2007. In terms of access to loans, large and medium-sized enterprises rely more on state-owned banks; small enterprises reply more on urban commercial banks, credit cooperatives, individuals and nongovernmental financial institutions (AllChina Federation of Industry and Commerce 2008, p. 30).

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in the doldrums, only by trudging forward can private enterprises have a place of their own. Compared with public-owned enterprises, private enterprises are more marketoriented. As the market mechanism improves, private enterprises have increasingly come to regulate production and trade through the market, but we cannot thereby conclude that private enterprises are not subject to government regulation. As mentioned earlier, the development of private enterprises is a process of constantly responding to and overcoming the institutional environment and the technological environment. Next, we will elaborate on the relationship between the government and private enterprises from two perspectives: institutional environment and private enterprises, political connections and private enterprises.

5.2 Private Enterprises and the Structural Environment In the development process, enterprises in the market need to face and solve two kinds of problems. One kind of problems are “technical problems”, namely problems in enterprises’ production, management, etc. brought about by changes in enterprises’ production scale and factors such as production technology; the other kind of problems are “institutional environment problems”, mainly referring to opportunities or obstacles for the development of enterprises brought about by changes in the external institutional environment of enterprises. These problems entail enterprises to change their organizational structures or behaviors to adapt to changes in the institutional environment.26 Technical problems are mainly concerned with the efficiency of enterprises, while institutional environment problems are mainly related to the “legitimacy” of enterprises. However, the technological environment and the institutional environment are often at odds with each other when it comes to requirements for enterprises. To meet these conflicting environmental requirements, enterprises often build different organizational structures.27 In the development process of private enterprises, we often see the following phenomena: affiliation, the establishment of party organizations and formation of trade unions. Especially some large private enterprises look almost the same as state-owned enterprises in terms of organizational structure and rules and regulations. A lot of system construction is unnecessary, from an efficiency point of view, but not from a “legitimacy” of point of view. An enterprise needs to first address common issues recognized by society (legal system, cultural concepts, social expectations, etc.) before seeking efficiency and making progress. An enterprise which is more in line with social expectations in terms of organizational structure and organizational behavior is more likely to gain a foothold in the market. This is the reason why a “bogus company” must label itself as a limited liability company and print business cards.

26 Cao

(2006). (2003, p. 77).

27 Zhou

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5 The Government and Private Enterprises

For private enterprises, issues and phenomena such as “hatting”, the establishment of party organizations and becoming isomorphic with state-owned enterprises in organizational form can be analyzed from the perspective of the relationship between the organization and the institutional environment. These issues cannot be reasonably explained within the enterprise and market-related theoretical framework of neoclassical economics, because these practices of enterprises and governments have little to do with the efficiency of enterprises and even to some extent contradicts the efficiency mechanism, while the study of the new institutional economics provides a more mature theoretical framework for explaining this. In the study of new institutionalism, an institutional environment based on the legitimacy mechanism plays a role at the two levels of “strong sense” and “weak sense”.28 In a strong sense, the institutional environment exerts a strong constraint on enterprises, leaving enterprises with little choice. For example, in the early stages of reform when private enterprises were not allowed by the government and couldn’t be registered with industrial and commercial administrative departments, entrepreneurs could only choose a form of operation by other means. For enterprises, just as social and cultural values influence individuals, such an institutional environment compelled organizations or individuals to (or made organizations or individuals involuntarily) choose patterns of behavior that were approved by and known to everyone. In a weak sense, institutions influence the behavior of enterprises by influencing the allocation of resources or incentives. The institutional environment is not coercive for enterprises, but the compliance of the organizational behavior of an enterprise with the requirements of the institutional environment will make it easier for the enterprise to improve its visibility, receive government protection and intercourse with other enterprises. The institutional environment has an inductive or incentive effect on enterprises. For example, phenomena such as the bureaucratic structure of private enterprises and the establishment of party organizations, in fact, have little to do with the operational efficiency of enterprises, but an enterprise with a perfect organizational structure is more likely to gain the trust of other enterprises and an enterprise which implements the government’s institutional arrangements is more likely to receive policy support from the government. New institutionalism’s emphasis on institutional environments begins with isomorphism. Meyer was the first one to contribute. In his famous work Institutionalized Organizations: Formal Structure as Myth and Ceremony, he argued that “Many formal organizational structures arise as reflections of rationalized institutional rules. Institutional rules function as myths which organizations incorporate, gaining legitimacy, resources, stability, and enhanced survival prospects. Organizations whose structures become isomorphic with the myths of the institutional environment in contrast with those primarily structured by the demands of technical production and exchange-decrease internal coordination and control to maintain legitimacy”. Like rationalized myths, institutional environments cause enterprises to be structurally isomorphic.29 According to Meyer, institutional environment become rational myths 28 Zhou

(2003). and Rowan (1977).

29 Meyer

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193

mainly due to: the concentration of social relations is increasing, a specific logic gradually evolves into a universal logic, once the legitimacy of an organizational structure is recognized in society, it will be imitated by other organizations; as the complexity of organizational environments and organizational levels deepens, the structure of an organization will spread to its sub-organizations, leading to structural isomorphism. Structural isomorphism mainly solves the issue of legitimacy and enhances an organization’s Survivability. It is difficult to envisage how a flat organization could communicate and interact with other organizations in an organizational environment where bureaucratic structures prevail. In the real world, the organizational structure adopted by an enterprise is not necessarily what it really needs. In case of a conflict with the efficiency of the enterprise, a flexible approach is to put up a facade. At present, many private enterprises in China have boards of directors, boards of supervisors, shareholders’ meetings, party committees, trade unions and congresses of workers and staff and their corporate governance structures are perfect, but entrepreneurs have the final say on major decisions and daily management. Meyer also believed that in case of a conflict between the legitimacy and efficiency of the organization, the usual solution was to separate the organization’s structure from its actual operation. The structure of an organization is like a shell. Rules and regulations and departments used to deal with the organization’s institutional environment are often “laid aside and neglected”. Based on Meyer’s studies, DiMaggio and Powell further studied the phenomenon of organizational isomorphism. They referred to this phenomenon as collective rationality, arguing that structural and behavioral isomorphism was mainly caused by the following mechanisms: The first mechanism is the coercive mechanism. Organizations must fulfill the government’s institutional arrangements, such as laws and regulations. If organizations do not accept these norms, they will be punished. The second mechanism is the mimetic mechanism. When the organizational environment is uncertain, other organizations will imitate the practices and behavior of successful organizations. The third mechanism is the normative mechanism. Groups ranging in size from societies to organizations all have their shared cultural values and ways of thinking. In a certain organizational environment, organizations will be constrained by social norms that already exist and are known to everyone.30 What are the differences and similarities between Meyer and DiMaggio and Powell’s explanations of the phenomenon of organizational isomorphism? According to Zhou Xueguang, Meyer stressed the importance of a large institutional environment, the behavior of organizations is influenced by the institutional environment and the institutionalization of organizations is more of a top-down process; DiMaggio and Powell’s analysis was more specific, they explored the legitimacy of organizations at the level of organizational fields and placed greater emphasis on the relationship and interdependence between organizations and even the internal operating mechanisms of organizations.31

30 DiMaggio 31 Zhou

and Powell (2000). (2003, p. 91).

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Based on these studies, we will analyze some of the organization and behavior of private enterprises through the theoretical framework of new institutionalism.

5.2.1 “Hatting” and “Unhatting” of Private Enterprises In the early stages of reform when private enterprises had not yet obtained institutional legitimacy, many private enterprises were affiliated to state-owned enterprises or government bodies. This phenomenon was called affiliation or “wearing a red hat”.32 These “pseudo-enterprises” engaged in production and trade in the name of units to which they were affiliated, which provided relevant services for these enterprises. In Wenzhou, these “red hat” enterprises developed through affiliation. Units to which self-employed households and people were affiliated issued invoices, set up accounts, paid taxes and paid collective accumulations on behalf of self-employed households and people and lent their letters of introduction, blank contracts and bank accounts to self-employed households and people.33 “Affiliation” was an action taken by private enterprises in order to solve the dilemma of institutional legitimacy. After putting on hats, affiliated enterprises could trade lawfully on the market and get all kinds of concessions and protection from the government and were more likely to gain the trust of other enterprises and society. The existence of “hatted enterprises” was a special phenomenon in the special stage of China’s economic development, but this phenomenon was very universal. According to relevant surveys, private entrepreneurs surveyed in 1993 believed that “red hat” enterprise accounted for 50–80% of collectively-owned enterprises; 50% of private entrepreneurs surveyed in 1994 believed that “red hat” enterprise accounted for 30–50% of collectively-owned enterprises. A sample survey conducted by the SAIC in 1994 showed that 83% of township enterprises were actually private enterprises.34 When studying the issue of private enterprises in Wenzhou “borrowing hats”, Cao Zhenghan found that the “wearing red hats” behavior in Wenzhou was not as common as elsewhere and was shortly replaced by another kind of hat-wearing behavior, namely affiliation. The advantage of this approach was that it was suitable for family workshop-style operation in Wenzhou and did not require enterprises to be legally registered under the name of government bodies or public-owned enterprises. This 32 According to some researchers, “red hat” enterprises can be divided into three categories, namely affiliation-type enterprises, which were affiliated to certain enterprises or units in order to receive a business license for collectively-owned enterprise; business license licensing or transfer-type enterprises, which were issued or leased a collectively-owned enterprises by or from the competent unit; “pseudo-cooperation”-type enterprises, which, urged by the government or the relevant department, received a business license for collectively-owned enterprise in the name of “cooperation”(Dai 2004). Some researchers have found that in addition to “red hats”, some private enterprises also wore “foreign hats” and “little hats” (registered as self-employed) (Dai 2001). 33 Cao (2006). 34 Dai (2004).

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kind of hat-borrowing behavior not only solved the legitimacy issue, but also allowed enterprises to produce and exchange at lower costs. He divided the affiliating behavior of Wenzhou enterprises into three phases: The first phase was called “covert affiliation”. Two approaches were taken. The first approach was to go from running pseudo-collectively-owned enterprises to affiliating underground factories to township enterprises; the second approach was to turn collectively-owned enterprises into shell companies providing affiliation services for self-employed households and people. The second phase was called “open affiliation”. First, the affiliation of supply and marketing clerks became ubiquitous and known to the public, and then two modes of affiliation appeared, namely affiliation to companies in the field of circulation and affiliation to factories in the field of industrial production. The third phase was the legalization of affiliation.35 From the theoretical perspective of new institutionalism, “hatting” solved the legitimacy issue of private enterprises in a specific institutional environment in both a “strong sense” and a “weak sense”. In a strong sense, “hatting” was a method adopted by many “illegal enterprises” at that time and a method enterprises had to adopt for their survival and development in circumstances their existence was institutionally prohibited and there was still institutional discrimination in terms of loans, taxes, purchases and sales, etc. In a weak sense, any institution is not only a norm, but also provided a certain inducement and incentive. From a rational point of view, by choosing this kind of behavior, enterprises could not only avoid political and economic risks, but also boost their survivability and operational efficiency. In retrospect, enterprises surviving under these hats had planted the “seeds” for the later development of the Chinese economy. These enterprises would “take off their hats and take on a new look” as soon as the institutional environment changed. The surge in the number of private enterprises in the 1990s was to a great extent attributed to “unhatted” enterprises. Some studies have even suggested that the number of private enterprises hidden under all kinds of hats was no less than the number of private enterprises officially registered with industrial and commercial administrative departments.36 Although many disputes arose in the unhatting process due to hatted enterprises’ problems in property rights, management, etc., unhatting was a rational behavior performed in time by enterprises as the institutional environment was changing. As the macro-institutional environment improved, a large number of enterprises began to remove their hats. According to a survey, the proportion of unhatted private enterprises was 12.3% between 1989 and 1991, 48.1% between 1992 and 1996 and 39.6% after 1997. Private enterprises removed their hats one after another mainly because their operational autonomy could be easily guaranteed, their property rights needed to be clarified to avoid disputes, their social status had been improved and

35 Cao

(2006). Federation of Industry and Commerce (2007, p. 110).

36 All-China

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they were subject to fewer restrictions in business activities (see Fig. 5.9). Overall, in the unhatting process, the composition of the assets of private enterprises changed little, primarily because when private enterprises wore hats, their assets were mainly owned by investors and the investments of government departments and township collectives were minimal. For this reason, instead of causing the loss of state-owned and collective assets, the “hatting” process to a certain extent laid a good foundation for the later development of private enterprises.37

5.2.2 Establishment of Party Organizations by Private Enterprises Under the planned economic system, the economic structure of public ownership as the mainstay and the social governance structure with “unit” as the organizational form made it possible for party organizations to permeate. “Building party branch at the company level” could realize leadership by the party and effectively achieve the social control. The continuous development of the private sector of economy changed the original economic structure and created new challenges for the party’s social control and governance. Although every step of the development of private enterprises 37 Many “hatted” private enterprises later developed into famous private enterprises. For example, Far East Holding Group Co., Ltd. was formerly a hatted enterprise. Chairman, president and party secretary Jiang Xipei was elected as a deputy to the 16th National People’s Congress. The enterprise currently has more than 20 billion yuan in assets and over 8500 employees and is involved in many fields such as wires and cables, pharmaceuticals, real estate, biochemistry and investment.” In 1991, Jiang Xipei started a factory in his hometown. Due to lack of funds, he applied for 200,000 yuan in loans, but was repeatedly “cold-shouldered” by banks. Jiang Xipei hit upon the idea of applying to the local township government for restructuring his enterprise into a township-run enterprise. This ‘little read hat’ brought enormous benefits to Jiang Xipei. Thanks to substantial funding and policy support, Far East Group saw its sales exceed 100 million yuan for the first time in 1994 to become the largest enterprise in Yixing, Jiangsu. But before long, the problem of ambiguity over property rights was exposed and the local government offered to withdraw. Thus, in the three months following the issuance of government documents, Far East Group quickly completed asset evaluation. The enterprise implemented joint-stock reform at the end of the year to become the first to take off the ‘red hat’ in Yixing. Far East Group experienced explosive growth in productivity in 1995 and 1996, with its profits rising 182.8 and 126.5% respectively. In 1996, by pure chance, Jiang Xipei put on put on the ‘red hat’ again. After 16 rounds of negotiations over the span of nearly one year, Huaneng, Huadian, State Grid, Jiangsu Electric Power Company and other large state-owned enterprises decided to invest 102 million yuan along with Far East Group to establish a mixed ownership enterprise—New Far East Cable Co., Ltd. The move was then regarded by the government as a breakthrough in mixed ownership reform. With the help of investments from the four state-owned enterprises, Far East Group quickly became the number one in the industry. In 2001, in the “state-owned capital advances while private capital retreats” wave, Far East Group successfully removed the second ‘red hat’. Far East Group signed an agreement with Huaneng and other state-owned and collectively-owned shareholders to repurchase 68% of state-owned shares and 7% of collectively-owned shares. Far East Group was once again privatized” (Zhang Xiaoping, “Private Enterprises’ “Hat Trickery””, http://www.chinavalue.net/Management/Article/2007-7-9/ 72186.html, last visited on January 8, 2013).

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Fig. 5.9 Main reasons for the unhatting of private enterprises. Source 2007, Large-Scale Survey of Chinese Private Enterprises (1993–2006), Beijing: China Industry & Commerce Associated Press, p. 110

cannot do without the party’s institutional arrangements and policy adjustments, it is difficult for this economic sector to be led directly by the party like stateowned enterprises and collectively-owned enterprises. For this reason, the direction of operation and political nature of private enterprises and the political loyalty of private entrepreneurs have been the focus of attention and have become an important issue facing the development of private enterprises. According to the Constitution of the Communist Party of China, “enterprises, primary party organizations should be set up in enterprises, rural areas, government organs, schools, research institutes, subdistrict communities, social organizations, companies of the People’s Liberation Army and other basic units where there are three or more full party members.” According to this provision, private enterprises shall set up primary party organizations so long as they have three or more full party members. In non-public-owned economic organizations, the main task of primary party organizations is to “carry out the party’s principles and policies, guide and supervise enterprises in relation to compliance with national laws and regulations, lead trade unions, Communist Youth League organizations and other mass organizations, foster unity and solidarity among workers and staff members, safeguard the legitimate rights and interests of all parties and promote the healthy development of enterprises”. The Opinions on Strengthening the Party’s Construction Work in NonPublic-Owned Economic Organizations such as Self -employed Households and Private Enterprises (for Trial Implementation) issued by the CPC Central Committee’s

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Organization Department in 2010 stipulates that “all non-public economic-owned organizations with three or more full party members shall set up primary party organizations; those with more than three but less than 50 party members shall set up party branches; those with less than three party members may set up joint party branches with party members in other nearby organizations; those whose number of party members exceeds or approaches 50 and 100 may set up committees of general party branches or party branches and primary party committees respectively. If the number of Party members is small and the conditions for establishing party organizations are absent, trade unions and the Communist Youth League organizations should be established first, so as to create conditions for the establishment of party organizations. Party organizations may be established in or near places where self-employed party members are relatively concentrated.” In non-public-owned economic organizations, the main tasks of party organizations include the following: (1) publicize and implement the guidelines and policies of the party and the state and guide and supervise enterprises in relation to complying with national laws and regulations, operating according to law and paying tax according to regulations. (2) Take care of major issues relating to enterprises’ production and operation, give advice and make suggestions and support and promote the development of enterprises. (3) Strengthen the education and management of party members, recruit new party members and give play to the vanguard and exemplary role of party members. (4) Do the ideological and political work well, unite and rely on workers and staff members and care for and safeguard the legitimate rights and interests of workers. (5) Strengthen the construction of socialist spiritual civilization and build a contingent of workers with ideals, morality, culture and discipline. (6) Coordinate internal relations, adhere to principles, resolve conflicts and maintain the stability of enterprises and society. (7) Lead trade unions, Communist Youth League organizations and other mass organizations and support them in working independently in accordance with the law and their respective charters. (8) Complete tasks assigned by higher party organizations. These provisions require that party organizations set up by private enterprises not only meet certain conditions, but also undertake responsibilities and tasks. But as these provisions are not mandatory, in reality the proportion of private enterprises which have set up party organizations is still low and there has been a lack of initiative. According to a survey by the “Chinese Private Enterprise Research Group”, in 2008, the proportion of private enterprises surveyed which had set up party committees, general party branches, party branches and other primary party organizations was 30.6%, less than thirty percent. Meanwhile, the number of party members was positively correlated with the establishment of primary party organizations. 26.6% of the enterprises with more than three but less than 50 party members hadn’t set up party organizations; 1.6% of the enterprises with more than 50 but less than 100 party members hadn’t set up party organizations; all the enterprises with more than 100 party members had set up party organizations (see Table 5.5). A researcher questioned the reliability of the findings. According to the proportion of private enterprises which had set up primary party organizations, he reckoned that the main reason why the figures from this national survey were inflated lied in the fact that all previous surveys conducted by the Chinese Private Enterprise Research Group

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Table 5.5 Percentages of enterprises with different number of party members which establish party organizations Number of Having a Having a Having a Having a No party party party party branch party party group organization members committee subbranch 3 (incl.) to 50

2.6

4.6

58.1

8.1

26.6

50 (incl.) to 100 100 or more

50

17.7

30.6

0

1.6

75

13.6

11.4

0

0

Data source 2008, Yearbook of Chinese Private Enterprises (2008), Beijing: China Industry & Commerce Associated Press, p. 39

were led by the All-China Federation of Industry and Commerce; consequently most of the enterprises surveyed were large enterprises with considerable strength which maintained close relations with the Federation and were more politically conscious and more willing to support the establishment of party organizations.38 There may be some discrepancies regarding the proportion of private enterprises which have established party organizations, but we can see that the bigger enterprises are and the more party members they have, the more likely they will set up party organizations. In other words, they bigger enterprises are, the greater the pressure they are under to become isomorphic with the institutional environment. This phenomenon is similar to the definition of institutionalization by Selznick, that is, the establishment of party organizations by private enterprises is “the process of infusing with value beyond the technical requirements of the task at hand”. As enterprises grow in size and influence, they need to address issues relating to the technological environment in the process of their development and also issues relating to the institutional environment on an ongoing basis. Founded in 1986, Transfar Group is mainly engaged in chemical engineering, logistics, agriculture and investment and is one of “China’s top 500 enterprises”, “China’s top 500 private enterprises” and “China’s 500 Most Valuable Brands”. It set up a party branch in 1995 and was one of the first non-public-owned enterprises in Zhejiang Province to set up a party branch. It set up a party committee in 1998 and was one of the first non-public-owned enterprises in Zhejiang Province to set up a grass-roots party committee. At present, there are three general party branches, 20 party branches, one mobile party member management station, 48 party groups and more than 500 party members under the group’s party committee. In 2001, its party committee was awarded the title “national advanced primary party organizations”.39 Founded in 1991, Far East Group is involved in areas such as wires and cables, pharmaceuticals, real estate, biochemicals and investment and set up a party branch in 1992, a party committee in 1996 and a party school in 2002. To facilitate the work of party organizations, it set up a Youth League committee, a trade union, a militia battalion and other organizations in 1995. In the words of Jiang Xipei: “The Communist Party of China is the core of 38 Chen

(2007, p. 103). Party Building”, http://www.etransfar.com/about/transfar_party.html, last visited on January 20, 2013. 39 “Transfer

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leadership for the people of all ethnic groups throughout the country and therefore should also be the core of leadership for private enterprises”, “The party building work of Far East Group is very characteristic of the group. Instead of simply assigning people to party building work, we organize party building closely around the enterprise’s economic work according to our own characteristics to coordinate party building work with economic work. We have a streamlined administrative structure, with the CEO serving concurrently as secretary of the party committee and members of the party committee concurrently holding other positions, thereby improving efficiency and eliminating the wasteful expenditure of resources caused by internal disunity and disharmony.”40 Founded in 1991, JuneYao Group is mainly engaged in air transport and marketing services and is involved in areas such as real estate and investment. In 2004, it set up the first private enterprise party committee directly under the CPC Shanghai Municipal Committee on Social Work, known as the “highest-level” private enterprise party committee in China. At present, the party committee of JuneYao Group has 15 (general) branches and 150 party members directly under its management and guides the work of 16 (general) branches and 450 party members. At the inaugural meeting of the party committee, JuneYao Group Chairman Wang Junyao presented a gold rudder to the party committee. “It symbolizes the inclusion of the development of Chinese private enterprises into the route laid down by the party,” said Wang Junyao.41

The above cases show that the development of a private enterprise does not consist in its expansion and rising influence only, but also in its political maturity. Economic behavior and political behavior are interwoven and mutually promoted. Economic behavior and political behavior are intertwined and mutually reinforcing. The Communist Party of China is the largest party in the world and has more than 82 million party members.42 The continuous growth of the number of party members, on the one hand, shows that the Chinese Communist Party is growing steadily, but on the other hand also makes it harder to handle issues such as the party’s management, education and unity. The Communist Party of China, which has been in power for more than 60 years, is faced with the task of governing the country and also the issue of governing a super-large party.43 The party building work of private enterprises can be seen as a two-way process, both “top-down” and “bottom-up”. “Top-down” mainly means that with the development of private enterprises and the emergence of new economic elites, the economic influence of this economic sector and this group is growing and their influence on national and local economic and social development is growing. How to unite and guide this group, co-opt them into the party’s organizational system and make them voluntarily accept the party’s leadership has become a major task. A series of policies of the party and the state on the formation of primary 40 Ding

(2003). 1, 2004, “A Chinese Private Enterprises Sets Up the Highest-Level Party Committee”, people.cn, http://www.people.cc/GBjingji/1037/2538139.html, last visited on January 20, 2013. 42 According to the latest party statistics released by the Organization Department of the CPC Central Committee, as of the end of 2011, there were a total of 82.602 million CPC members, an increase of 2.333 million or 2.9% over the previous year; there were a total of 4.027 million primary party organizations, an increase of 135,000 or 3.5% over the previous year (July 1, 2012, “Total Number of Party Members Nationwide Stands at 82.602 million”, people.cn, http://cpc.People.com.cn/n/ 2012/0701/c64387-18417738.html, last visited on January 21, 2013). 43 Jiang (2008). 41 June

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party organizations in non-public-owned enterprises and the admission of private entrepreneurs to the party are precisely aimed at addressing this issue to consolidate the party’s ruling foundation and strengthen the party’s ranks. “Bottom-up” means that to overcome issues relating to the institutional environment during their development, private enterprises take the more rational approach of building primary party organizations according to relevant regulations. As some researchers put it: “Being rational businessmen, private entrepreneurs are motivated by interest. Their calculating and utilitarian nature is reflected in their economic and political behaviors. The political behaviors of most entrepreneurs are an extension of their economic behaviors. They pursue profits through the operation and expansion of enterprises, and seek greater economic benefits by participating in politics if necessary”.44 1. “Top-Down” Process Reform and opening up have brought in the market. In the market, private enterprises have been growing and developing and have become an important force in China’s economic growth and the organizational foundation for social development. In discussing industrial enterprises and their power structures under the traditional planned economy system, Walder argued that the most prominent feature of stateowned factories in communist society was the attachment of workers to enterprise organizations and enterprise leaders, and the communist party could achieve Vertical leadership through organizational building at the enterprise level. “The communist state has been among the most stable, the most thoroughly organized, the most autonomous from organized interests, and the most complete in its reform of prior political and economic arrangements. These party-states have proven adept at implementing a variety of social and economic programs, extracting and mobilizing resources for rapid industrial growth, providing extensive social welfare at an early stage of development…”45 While the traditional planned economy system and unit system are considered advantageous to the party in terms of organization and administration, the continuous development of private enterprises are posing new challenges for the construction of the ruling party. First, a growing private sector is diminishing the importance of the state-owned and collective economies, gradually eroding the economic foundation of the ruling party and weakening the party’s influence on the private sector of the economy. Second, the growing ranks of private entrepreneurs are also constantly impacting the ruling party’s class base. Compared with the traditional working class who are both producers and owners, the many workers employed by private enterprises are not only economically employed, but also politically vulnerable.46 Some researchers even think that the Chinese Communist Party is in a governance dilemma, that is, on the one hand, On the one hand, along with reform and opening up and economic privatization, the rule of the communist party is faced with the crisis of 44 Chen

(2007, p. 124). (1996). 46 Chen (2007, pp. 97–100). 45 Walder

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popularization and legitimacy; on the other hand, the Leninist nature of the political system calls for the strengthening of one-party rule to rein in privatization in markets.47 It was under this environmental pressure that the ruling party strengthened its efforts to build primary party organizations in private enterprises. The Decision of the Central Committee of the Communist Party of China on Several Important Issues Relating to Strengthening Party Building adopted at the fourth plenary session of the 14th CPC Central Committee in 1994 required that “the work of the party should be strengthened in other enterprises with various forms of ownership; enterprises without party organizations should actively create conditions for the establishment of party organizations and carry out party activities by such means and in such manner as will suit their respective characteristics”. The establishment of party organizations in private enterprises can not only “ensure the supervision of the implementation of the party and the state’s policies, laws and regulations”, but also “strengthen the party’s links with the workers of non-public-owned enterprises and consolidate and expand the party’s mass base.” In 2001, Jiang Zemin’s “July 1 Speech” eliminated the institutional and ideological obstacles to private entrepreneurs joining the Communist Party of China, greatly boosting the number of private entrepreneurs joining the party. Dickson argued that an organization generally adapts to changes in the environment through two strategies. One strategy is to co-opt new members. This strategy can better integrate an organization with the environment and inform it about internal changes. Co-option enables an organization to acquire new technology, experience and resources to improve its performance and enhance its viability. The other strategy is to create links with external organizations. Such links allow information to be communicated between organizations, gain the support of elites for the organization and enhance the legitimacy of the organization. In the face of a new economic and social environment, the Communist Party of China is recruiting entrepreneurs and skilled expertise into the party through co-optation. In addition, local party and government officials are developing corporatist arrangements to promote economic change.48 According to the latest statistics of the CPC Central Committee’s Organization Department, by the end of 2011, 983,000 non-public-owned enterprises had established party organizations, accounting for 99.91% of all nonpublic-owned enterprises which met the requirements for the establishment of party organizations.49 2. “Bottom-Up” Process The rapid development of private enterprises has become the structural environment for the building of the ruling party’s organizations, and the institutional arrangements and objectives and strategies of the ruling party constitute the institutional environment for the building of primary party organizations in private enterprises. 47 Dickson

(2004). (2000–2001). 49 July 1, 2012, “Total Number of Party Members Nationwide Stands at 82.602 Million”, people.cn, http://cpc.people.com.cn/n/2012/0701/c64387-18417738.html, last visited on January 21, 2013. 48 Dickson

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On the one hand, some private entrepreneurs think that whether or not enterprises set up party organizations has little bearing on their economic development goals and therefore harbor feelings of “helplessness” and “resentment”; on the other hand, some entrepreneurs see the establishment of party organizations as a political investment which enhances the political capital of enterprises and therefore are conducive to the future development of enterprises.50 Respondents to a survey on the role of the establishment of party organizations in private enterprises conducted in 2006 by the “Chinese Private Enterprise Research Group” were generally of the opinion that primary party organizations played a role in ideology, politics and corporate culture (such as “helping operators grasp the guidelines and policies of the party and the government and laws and regulations”, “educating staff ideologically and politically and guiding the construction of corporate culture”, etc.), but were neutral when it comes to enterprises’ production, operational and managerial decision-making. Private entrepreneurs care most about “doing business and running a successful business” and are not so eager to “join the Communist Party of China” or “become deputies to people’s congresses or CPPCC members”. In this sense, a considerable proportion of private entrepreneurs are not very enthusiastic about the establishment of party organizations. The reason is that the scale of enterprises and the degree to which they relate to the government are a key factor in deciding whether private enterprises are willing to establish party organizations. Enterprises which operate on a large scale and wield great influence must deal with governments and higher authorities on a regular basis and need governments’ policy support and resource assistance. Through the establishment of Party organizations, they can set up a typical example in politics to win the “love” of governments and relevant authorities. By comparison, like “clay Buddhas fording rivers”, small private enterprises are only concerned about current economic gains and production and operation, have neither the energy nor the time to care about their political status and therefore often adopt a passive strategy. Meanwhile, some entrepreneurs believe that the establishment of party organizations will threaten their position. According to existing research, many entrepreneurs believe that “after the formation of party organizations, enterprises are subject to supervision and their profit-seeking goals are affected; party organizations interfere with enterprises’ decision-making by taking 50 In his analysis of the establishment of party committees by private enterprises in Wenzhou, Cao Zhenghan argued that the motive behind private enterprises’ move to establish party organizations was to solve the issue of political legitimacy and the motive behind their move to upgrade party organizations was to boost their political bargaining power. From this perspective, enterprises are undoubtedly rational. Both political legitimacy and political bargaining power have a bearing on the development of enterprises. Even though it costs money to establish party organizations, the economic gain far outweighs the political expenditure. Zhu Kangdui argued that the establishment of political organizations by private enterprises in Wenzhou was not an autonomous and rational process but a top-down process reflecting the assertiveness of the ruling party. Unlike the establishment and upgrading of party organizations by private enterprises, the establishment and upgrading of party organizations by state-owned enterprises are not intended to avoid political risks or better control enterprises, but are more intended to reflect their administrative achievements and have neither significant nor clear implications for political legitimacy and boosting political bargaining power (Cao 2006; Zhu 2006).

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advantage of their political superiority, resulting in ‘the loss of power, the separation of powers and a struggle for power’”.51 Of course, all enterprises grow by constantly solving problems arising during their development. While small private enterprises are most concerned about their survival, many large private enterprises are more concerned about their relationships with the government and how to get political protection. Economic investment and political investment to a certain extent are mutually reinforcing. Private enterprises do not belong to governments at any level or the state in terms of property rights, so the establishment of party organizations has become a shortcut to striking up a relationship with the government. The establishment of Party organizations can not only take institutional pressure off enterprises, but also bring a lot of benefits to enterprises, and therefore has become an active choice for rational entrepreneurs. First, private entrepreneurs can gain political capital. Many entrepreneurs themselves serve as leaders of party organizations. Through the establishment of party organizations or upgrading to party committees, entrepreneurs constantly improve their political status to seek political support and protection. Second, as we have pointed out when discussing issues relating to the institutional environment, in dealing with other organizations, private enterprises will find that the regularization of an enterprise has a lot to do with its organizational structure. Through the establishment of party organizations, private enterprises can improve their image and boost the trust the outside world has in them. Third, certain conditions must be met for private enterprises to set up party organizations. The ability to establish a party branch or party committee itself reflects an enterprise’s attainment in terms of scale, number of party members and credibility. In addition, the establishment of party organizations in private enterprises to a certain extent enables entrepreneurs to participate in politics and articulate their demands and is also a reflection of the political progressiveness of entrepreneurs. “In order to promote party building in non-public-owned enterprises, the organization departments and united front work departments of many local party committees explicitly make party building one of the criteria for checking the political quality of private entrepreneurs, make whether they support the party building work and how they perform in party building one of the criteria for assessing their qualifications to represent the non-public sector of the economy and link their support for and performance in party building to political arrangements.”52

5.3 Political Connections of Private Enterprises No enterprise can survive independently. Like individuals in society, enterprises will form a network of relationships of a certain size in the process of their production and operation. These relationships can be broadly classified into three categories: relationships between enterprises, relationships between enterprises and governments 51 Xue

(2002). (2007, p. 126).

52 Chen

5.3 Political Connections of Private Enterprises

205

and relationships within enterprises. In today’s marketized world, a private enterprise’s relationship with the government still has very significant implications for its growth.53 This has a lot to do with the government’s role in the economy. In a transition economy, the role of the government is all-encompassing and “the hands of the government” are on everything, including resource allocation, product pricing, industry regulation, energy control, etc.54 The government grants a certain amount of activity space and some of its own mobile resources while still retaining its absolute dominance in some important areas.55 As a result, as their economic strength grows, private entrepreneurs are bound to seek political backing to protect and strengthen their economic gains. Of the many relationships between governments and enterprises, one dimension has been constantly refined by researchers, and specific operational variables have been introduced into it to form a new research direction, which is called political connection. In a certain sense, China’s state-owned enterprises are essentially politically connected. Not only are they subordinate to government departments at a certain level, but also leaders of state-owned enterprises are assigned to corresponding administrative ranks. Leaders of state-owned enterprises and government officials can swap their roles under certain circumstances. On the one hand, state-owned enterprises produce and operate under the market mechanism; on the one hand, they gain access to resources through the government. Thus, for the subject of marketization—the private sector, the theoretical and practical significance of political connection is even more prominent. There has been no consensus in academic circles regarding the political collection, but many empirical studies show that firms around the world are politically connected to a certain degree. Political connection is even thought to have become an alternative mechanism to the market and the legal system to play an increasingly important role in social and economic activities.56 So, what is the political connection? We will take a brief look at the main definitions in academic circles. Roberts’ definition of political connection: if there is an interest-based relationship between a firm and a senator, then the firm is politically connected.57 This definition is undoubtedly based on the western political system. Peng and Luo were of the view that firms are politically connected as long as there is a certain relationship between their executives and government officials. Similar definitions can be found in the study of Malaysian firms by Johnson et al. and the study of German firms by Ferguson et al.58 Compared with the above definitions, Faccio’s definition is more refined. He argued that political connection mainly refers to a situation where there is a certain connection between a firm and a holder of a high government position and if a government official or his or her relative or a member of Congress is a large shareholder or top officer of a firm, the firm is also politically connected. Fan 53 Qian

et al. (2009). (2007). 55 Li (1995). 56 Zhang et al. (2011). 57 Roberts (1990). 58 Peng and Luo (2000), Johnson and Mitton (2003), Ferguson and Voth (2008). 54 Shi

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et al. were of the view that a firm is politically connected if its CEO serves or has served in the central government, the local government or the army.59 The gist of the above definitions is that a firm in the market is politically connected as long as there is an interest-based relationship between it and government power. Researchers have summarized the characteristics of this relationship into four aspects: first, the political connection is a relationship between government and business; second, it is a network of political relations; third, it is a kind of political resources; finally, it is also an alternative mechanism to the market and the legal system.60 Different from the above general definitions, Xu and Zhou divided political connection into two categories, namely explicit political connection and implicit political connection. The explicit political connection is based on the legal system and is established through public-owned property rights, as in the case of state-owned enterprises; the implicit political connection is not expressly provided for by the legal system and is established between firms and former or incumbent government officials through certain interests.61 At present, studies at home explore political connection mostly in the latter sense. For example, Wu Wenfeng et al. argued that political connection is implicit political relations between firms and individuals who possess political power, including relationships obtained by virtue of top officers of firms having served or serving in government departments and through elections and donations and excluding relationships formed by government shareholding.62 On the basis of China’s institutional environment and by synthesizing previous studies, Zhao Feng and Ma Guangming defined political connection as an implicit political relation between firms and individuals with political influence. If the chairman, the general manager, a director or a top officer of a firm serves or has served in the central government, the local government or the army, or as a deputy to the people’s congress or CPPCC member, then the firm is politically connected.63

5.3.1 Economic Manifestations of the Political Connections of Enterprises The results of political connection are manifested not only on the economic level, but also on the political and social levels and not only affect firms, but also have various implications for entrepreneurs. We choose economic manifestations, firstly because economic manifestations are easy to navigate and observe, and secondly because most of the existing studies on the political connection are related to economic manifestations. By reviewing previous studies, we find that the economic manifestations of political connection have both positive and negative effects. 59 Zhao

and Ma (2011). et al. (2011). 61 Xu and Jian (2008). 62 Wu et al. (2008). 63 Zhao and Ma (2011). 60 Zhang

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Many studies have found that political connection can effectively improve the performance of firms, mainly because the political connection can provide firms with financing facilities, tax incentives, government orders, government assistance and industry access permits. This is more common in emerging markets and developing countries because in these countries, the market system is imperfect, the legal system needs to be improved, industry barriers are high and there are more space and opportunities for politically connected firms.64 This theory has been confirmed by a number of studies conducted by scholars at home. Studies have found that politically connected firms face fewer financing constraints and have easier access to bank loans, and loans available to them are larger in amount and longer in duration. This situation is more pronounced in areas where financial development is lagging behind, the rule of law is weak and government plundering is serious.65 In terms of reducing industry barriers, the role of political connection is mainly to give private entrepreneurs a political identity which serves as an assurance of the credibility and quality of firms, thereby reducing barriers to entry into government-regulated industries and fields.66 Similarly, politically connected firms can get more subsidies from local governments, and the more imperfect the institutional environment, the greater the impact of political connection.67 Contrary to the findings of studies discussed above, studies abroad have found that political connection will have a negative impact on the performance of firms and may even damage the value of firms. On the one hand, rent-seeking or corruption by government officials offsets the economic benefits brought about by the political connection. On the other hand, firms that receive government subsidies, financing and protection through political connection are more likely to face “soft budget constraints” similar to those faced by state-owned enterprises, thereby reducing operational efficiency.68 Studies by scholars at home have also found that government subsidies are significantly less effective in promoting the performance of politically connected private enterprises than in promoting the performance of politically unconnected enterprises.69 If this negative effect is amplified, then politically connected private enterprises to a certain extent distort the process of market-based allocation of resources, disrupt the normal business order, encroach on the interests of small and medium-sized enterprises, encourage corruption among government officials and create an inefficient allocation and waste of national resources.70

64 Zhang

et al. (2011). and Zhen (2008), Yu and Pan (2008). 66 Hu (2010). 67 Yu et al. (2010). 68 Zhang et al. (2011). 69 Guo and Du (2014). 70 Chen (2006). 65 Luo

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5.3.2 The Motivation Behind the Political Connections in Private Enterprises In the course of China’s economic transformation, politics and economy are deeply intertwined and difficult to separate, political capital has always maintained a strong position and political power controls important social resources.71 Without understanding the political and economic background of China, it will be difficult to make accurate judgments about the status quo and significance of political connection in private enterprises. Along with China’s political and economic reforms, private enterprises are playing an increasingly important role in China’s economy and have become an indispensable force. Their political performance has not only improved the business environment in China, but also brought profound changes to China’s political and economic environment. Private entrepreneurs participate in politics not only because the market is still not perfect (especially the credit market and market system), but also because the government intervenes too much in the market, the tax burden is heavy and the legal system is incomplete. Therefore, it is the institutional environment that shapes the motivation of private entrepreneurs to participate actively in politics.72 Strictly speaking, political connection in private enterprise, in fact, occurs in two ways: one is a top-down institutional arrangement process; the other is the process of transformation from being within the system to being in the private sector. With the development of private enterprises, private entrepreneurs are rising as new economic elites. To consolidate its power base and mass base, the ruling party has absorbed some economic elites and technical elites into the system by means of institutionalization, giving them certain political identities or honorary titles. Of course, these identities or titles as a resource are scarce. Political arrangements are mainly aimed at elites and outstanding persons in various sectors. There are a variety of criteria against which they are evaluated. They are given political honors or assigned to certain positions within the system based on their contributions, prestige, representativeness, political loyalty and other principles. While such top-down political arrangements smack of an attempt to cement the united front and appeasement, they also act as incentives. As mentioned earlier, due to historical reasons, most private entrepreneurs think that their social status and political status are not high, and some private entrepreneurs cherish opportunities to enhance their social and political prestige. The acquisition of political connection is in some way consistent with the motivation to earn money. For them, participation in political life is more about avoiding risks, gaining political capital and increasing personal gains. I always pay great attention to my personal image. It’s not easy to be a private entrepreneur. ‘People used to look down on us. Although we have money, we can only feel honored and unrestrained when we dine in restaurants. So in order to show that I am a capable person,

71 Sun 72 Li

(2002). et al. (2006).

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I not only want to build up my business, but also hope to have a high position in society. Especially I want the government to pay attention to me.73

Starting from the process of market transformation and social change in China, Victor Nee et al. argued that in the transition from the redistributive economy system to the market economy system, people’s political capital depreciated while human capital appreciated. This point of view is tenable on certain levels, but as far as private entrepreneurs’ access to resources within the system is concerned, political capital still plays an important role.74 Under the mixed economy system, although administrative power no longer has a direct impact on private enterprises, private enterprises are still linked to the internal structure of the system through various possible channels so as to facilitate their development. Individuals who used to have a dominant position and possess a lot of power in the former planned economy system and later entered the private sector can take full advantage of their relationships with the former system to gain advantages in resources, information, market exchange and business management.75 In 2008, the “Chinese Private Enterprise Research Group” conducted a survey with respect to private entrepreneurs serving as deputies to people’s congresses and CPPCC members and holding government and party positions. The results showed that many private entrepreneurs had certain political identities, many of them were NPC deputies, the CPPCC members, deputies to the National Congress of the Communist Party of China and members of provincial party committees and some of them worked in government departments (Table 5.6). Of course, this is only an explicit manifestation. There is no way to know what positions they have held or what political relations they have established with government officials, but one thing is sure—political connection in private enterprises is available through a variety of sources and takes on a variety of forms. This behavior creates favorable political and economic conditions for the survival and development of private enterprises. Of course, the political connection in private enterprises is an institutional arrangement of the government and also an effective strategy and a rational choice for self-protection under the influence of the traditional “official-merchant culture” and “relationship culture”.

5.4 Brief Conclusions Since the beginning of reform, the private sector has been developing rapidly. The mixture of and the tension between the traditional planned economy system and the market economy system as well as gradual reform in China have provided opportunities and space for it. Compared with public-owned enterprises, private enterprises are more market-oriented and farthest away from the traditional economic system. However, in the institutional environment of China, the power of the government is 73 Li

(2001a). (2002). 75 Li (1997). 74 Nee

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Table 5.6 Private entrepreneurs serving as deputies to people’s congresses and CPPCC members and holding government and party positions Number of Percentage Valid people percentage (%) Deputies to People’s Congresses

Township level

113

2.8

3.8

County (city) level

418

10.2

14.2

CPPCC members

Prefecture level Provincial level National level County (city) level

268 68 18 743

6.5 1.7 0.4 18.1

9.1 2.3 0.6 24.2

Governments (departments)

Prefecture level Provincial level National level Deputy position at the township level

401 63 8 29

9.8 1.5 0.2 0.7

13.1 2.1 0.3 35.4

Deputy position at the county level

8

0.2

9.8

Relevant departments of the county government

24

0.6

29.3

Other Township level

21 127

0.5 3.1

25.6 11.7

County (city) level

205

5.0

18.9

Prefecture level Provincial level National level Township level

35 15 7 114

0.9 0.4 0.2 2.8

3.2 1.4 0.6 11.6

County (city) level

77

1.9

7.8

Prefecture level Provincial level

10 4

0.2 0.1

1.0 0.4

Deputies to the CPC congress (as a percentage of all party members)

Party committee members (as a percentage of all party members)

Data source All-China Federation of Industry and Commerce (2008, p. 40)

deep and wide, and every step of the development of private enterprises cannot do without the party’s institutional arrangements and policy adjustments. It is in this sense that the development of private enterprises is a process of constantly overcoming and responding to the institutional environment, the market environment and the technological environment. In other words, on the one hand, private enterprises should establish the “legitimacy” of their status; on the other hand, they should seek economic “efficiency”.

5.4 Brief Conclusions

211

This chapter analyzes the relationship between private enterprises and the government along three lines. It first reviews the institutional evolution of the government and the development of private enterprises, then analyzes the organizational behavior of private enterprises from the perspective of the institutional environment and finally discusses political connection in private enterprises from the point of view of the theory of political connection. In our opinion, hatting, establishing primary party organizations and having some sort of association with the government are all microscopic embodiments of the relationship between private enterprises and the government. Unlike the government’s macroscopic institutional arrangements and policy adjustments, the specific process of interaction between enterprises and the government deeply depicts how private entrepreneurs obtain political legitimacy and government protection in the process of economic and social transformation. These behaviors appearing inconsistent with the efficiency mechanism are a process of private enterprises adapting and responding to the institutional environment, the process of private entrepreneurs making rational choices and the process of China’s market economy system improving. We divide the history of private enterprises into the “pre-institution stage”, the “institutionalization stage” and the “institutional building stage”. With the adjustment of government policies, the development of private enterprises took on different characteristics at each stage. Especially since 1992, the private sector has experienced the rapid growth stage, the further development stage and the steady and fast development stage. The private sector has become an indispensable part of China’s economic and social development. If the development of the private sector cannot be separated from a perfect market economy system, then the government’s institutional policies will ensure that the market can play a positive role. The development of the private sector cannot be separated from the market. The further development of private enterprises cannot be separated from the government. Only through the constant coordination and proper handling of the relationship between the government, the market and enterprises can both the public and non-public sectors of the economy develop continually, healthily and steadily. In terms of the microscopic relationship between the government and the private sector, we analyzed the “hatting” and “unhatting” of enterprises as well as the phenomenon of the establishment of primary party organizations in private enterprises. We believe that these issues cannot be reasonably explained within the enterprise and market-related theoretical framework of neoclassical economics, because these practices of enterprises and governments has little to do with the efficiency of enterprises and even to some extent contradicts the efficiency mechanism, while the study of the new institutional economics provides us with a more mature theoretical framework for explaining this phenomenon. “Hatting” solved the legitimacy issue of private enterprises in a specific institutional environment in both a “strong sense” and a “weak sense”. In a strong sense, “hatting” was a method adopted by many “illegal enterprises” at that time and a method enterprises had to adopt for their survival and development in circumstances their existence was institutionally prohibited and there was still institutional discrimination in terms of loans, taxes, purchases and sales, etc. In a weak sense, any institution is not only a norm, but also provided a

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certain inducement and incentive. From a rational point of view, by choosing this kind of behavior, enterprises could not only avoid political and economic risks, but also boost their survivability and operational efficiency. Similarly, hatted enterprises will “take off their hats and take on a new look” when the institutional environment they face changes. Overall, in the unhatting process, the composition of the assets of private enterprises changed little, primarily because when private enterprises wore hats, their assets were mainly owned by investors and the investments of government departments and township collectives were minimal. For this reason, instead of causing the loss of state-owned and collective assets, the “hatting” process to a certain extent laid a good foundation for the later development of private enterprises. We also analyze the issue of the establishment of party organizations in private enterprises. Under the planned economic system, the economic structure with public ownership as the mainstay and the social governance structure with “unit” as the organizational form made it possible for party organizations to permeate. “Building party branch at the company level” could not only realize leadership by the party, but also effectively realize social control. The continuous development of the private sector has not only changed the original economic structure, but also created new challenges for the party’s social control and governance. Party organizations set up by private enterprises are institutionally required to not only meet certain conditions, but also undertake responsibilities and tasks. But as these requirements are not mandatory, the proportion of private enterprises which have set up party organizations is still low and there has been a lack of initiative. We believe that the party building work of private enterprises can be considered as a two-way process, both “top-down” and “bottom-up”. “Top-down” mainly means that with the development of private enterprises and the emergence of new economic elites, the economic influence of this economic sector and this group is growing and their influence on national and local economic and social development is growing. How to unite and guide this group, co-opt them into the party’s organizational system and make them voluntarily accept the party’s leadership has become a major task. A series of policies of the party and the state on the formation of primary party organizations in non-public-owned enterprises and the admission of private entrepreneurs to the party are precisely aimed at addressing this issue to consolidate the party’s ruling foundation and strengthen the party’s ranks. “Bottom-up” means that in order to overcome issues relating to the institutional environment in the course of their development, private enterprises take the more rational approach of building primary party organizations according to relevant regulations. Of the many relationships between governments and enterprises, one dimension has been constantly refined by researchers, and specific operational variables have been introduced into it to form a new research direction, which is called political connection. There has been no consensus in academic circles regarding political collection, but a large number of empirical studies show that firms around the world are politically connected to a certain degree. On the basis of reviewing the results of previous studies, we described the economic manifestations of, the motivation behind and the status quo of political connection in private enterprises. It can be said that private entrepreneurs actively see the political connection with the government not

5.4 Brief Conclusions

213

only because the market is still not perfect (especially the credit market and market system), but also because the government intervenes too much in the market, the tax burden is heavy and the legal system is incomplete. Therefore, it is the institutional environment that shapes the motivation of private entrepreneurs to actively seek political connection. Due to historical reasons, most private entrepreneurs think that their social status and political status are not high, and some private entrepreneurs cherish opportunities to enhance their social and political prestige. The acquisition of political connection is in some way consistent with the motivation to earn money. For them, participation in political life is more about avoiding risks, gaining political capital and increasing personal gains. Political connection in private enterprises is an institutional arrangement of the government and an effective strategy and a rational choice for their self-protection under the influence of the traditional “official-merchant culture” and “relationship culture” in China.

References All-China Federation of Industry and Commerce. 2007. Large-scale survey of Chinese private enterprises (1993–2006). Beijing: China Industry & Commerce Associated Press. All-China Federation of Industry and Commerce. 2008. Yearbook of Chinese private enterprises (2008). Beijing: China Industry & Commerce Associated Press. Cao, Zhenghan. 2006. From borrowing “Red Hats” to establishing party committees: The growth path and the evolution of the organizational structure of private enterprises in Wenzhou. In Case studies of institutional changes in China. Chen, Jiaxi. 2007. Political influence of Chinese private entrepreneurs during the reform period. Chongqing: Chongqing Publishing House. Chen, Minju. 2006. Game between business and government: Politicization of private enterprises. Rural Economy (6). Dai, Jianzhong. 2001. A study of Chinese private entrepreneurs at the present stage. Sociological Studies (5). Dai, Yuanchen. 2004. Twists and turns in the development of Red Hat Enterprises. Market Economy Research (5). Deng, Xiaoping. 1979–1994. We should make use of foreign funds and let former capitalist industrialists and businessmen play their role in developing the economy. In Selected works of Deng Xiaoping, vol. II, 156–157. Beijing: People’s Publishing House. Deng, Xiaoping. 1991–1993a. Seize the opportunity to develop the economy. In Selected works of Deng Xiaoping, vol. III, 363–365. Beijing: People’s Publishing House. Deng, Xiaoping. 1991–1993b. Remarks made during an inspection tour of Shanghai. In Selected works of Deng Xiaoping, vol. III, 367. Beijing: People’s Publishing House. Deng, Xiaoping. 1991–1993c. Excerpts from talks given in Wuchang, Shenzhen, Zhuhai and Shanghai. In Selected works of Deng Xiaoping, vol. III, 372–373. Beijing: People’s Publishing House. Dickson, Bruce J. 2000–2001. Cooptation and corporatism in China: The logic of party adaptation. Political Science Quarterly 115 (4). Dickson, Bruce J. 2004. Dilemmas of party adaptation: The CCP’s strategies for survival. http:// www.ou.edu/uschina/gries/courses/1.Dockson.X.pdf. Last visited on 21 Jan 2013. DiMaggio, P.J., and W. Powell. 2000. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. Advances in Strategic Management 17. Ding, Jilin. 2003. A Time will come to ride the wind and cleave the waves to cross the sea. people.cn, http://www.people.com.cn/GB/paper81/10994/997010.html. Last visited on 20 Jan 2013.

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Ferguson, T., and H.J. Voth. 2008. Betting on Hitler: The value of political connections in Nazi Germany. Quarterly Journal of Economics 123 (1). Guo, Jianhua, and Xingqiang Du. 2014. Political connection, soft budget constraints and the efficiency of the allocation of government subsidies. Journal of Financial Research (2). Hu, Xuyang. 2010. Analysis of political connection in private enterprises and its economic effects. Economic Theory and Business Management (2). Jiang, Chonghui. 2008. From traditional “party management” to modern “party governance”. Academic Exploration (1). Johnson, S., and T. Mitton. 2003. Cronyism and capital controls: Evidence from Malaysia. Journal of Financial Economics 67 (2). Li, Lulu. 1995. Social capital and private entrepreneurs—A special driver of the transformation of the Chinese social structure. Sociological Studies (6). Li, Lulu. 1996. Change of the social structure and the development of private enterprises. Management World (1). Li, Lulu. 1997. Private entrepreneur’ personal background and enterprises’ “success”. Chinese Social Sciences (2). Li, Baoliang. 2001a. From super economic compulsion to relational consensus—An analysis of private entrepreneurs’ political participation process. Sociological Studies (1). Li, Baoliang. 2001b. From extra-economic coercion to relational convenience: Analysis of political participation among private entrepreneurs. Sociological Studies (1). Li, Hongbin, Lingsheng Meng, and Junsen Zhang. 2006. Why do entrepreneurs enter politics? Evidence from China. Economic Inquiry 44 (3). Luo, Danglun, and Liming Zhen. 2008. Control of private enterprises, political relations and financing constraints for firms. Journal of Financial Research (12). Meyer, John W., and Brian Rowan. 1977. Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology 83 (2). Nee, Victor. 2002. Market transformation theory: National socialism from redistribution to the market, market transformation and social stratification. In Market Transformation and Social Stratification, ed. Yanjie Bian. Beijing: SDX Joint Publishing Company. Peng, M.W., and Y. Luo. 2000. Managerial ties and firm performance in a transition economy: The nature of a micro-macro Link. Academy of Management Journal 43 (3). Qian, Xihong, et al. 2009. A study of entrepreneurs’ three-dimensional network of relationships and enterprise growth. China Industrial Economy (1). Roberts, B. 1990. A dead senator tells no lies: Seniority and the distribution of federal benefits. American Journal of Political Science 34 (1). Shi, Junwei, et al. 2007. The functional structure of corporate social capital: An empirical study based on Chinese listed companies. China Industrial Economy (2). Sun, Liping. 2002. Practical sociology and analysis of the market transformation process. Social Sciences in China (5). Walder, Andrew G. 1996. Communist neo-traditionalism: Work and authority in Chinese industry, trans. Xiaoxia Gong, 1. Hong Kong: Oxford University Press. Wan, Zhongxing. 2006. A look back at 15 major events related to China’s private enterprises (1978–2003). http://www.ce.cn/cysc/ztpd/2006/wenzhoucaituan/dashiji/200603/28/t20060328_ 6519439.shtml. Last visited on 8 Jan 2013. Wu, Wenfeng, Chongfeng Wu, and Xiaowei Liu. 2008. The background of the executives of Chinese private listed companies and the value of companies. Economic Research Journal (7). Xu, Haoping, and Zhou Jian. 2008. The value of political connections: Chinese evidence. http:// papers.ssrn.com/sol3/paperscfm?abstract_id=1267472. Xue, Fei. 2002. Analysis of the particularity of party building in non-public-owned enterprises and institutional innovation therefor. Exploration (1). Yu, Minggui, and Hongbo Pan. 2008. Political relations, institutional environment and bank loans to private enterprises. Management World (8).

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Chapter 6

The Government-Enterprise Relations Change Model

Until this chapter, we have intensively expounded and explained the relations between the government and the three types of enterprises (state-owned enterprises, rural collective enterprises and private enterprises) and their historical evolution. As a matter of fact, the three types of enterprises are only the most important and typical forms of business organizations in the course of China’s economic and social development. However, we try to figure out the main framework and the logic mechanism behind the interactions and evolution of the Chinese government-enterprise relations with respect to these three types of enterprises. In this book, our analysis of the relations between the government and different types of enterprises and their interactions is seemingly able to support some hypotheses mentioned above. But further studies prove that we cannot make a thorough judgment only based on these hypotheses, which do not suffice for our fundamental understanding of the government-enterprise relations with Chinese characteristics and their interactions. Here, we need further efforts to unveil the basic logic following the rules of logical induction. Several basic concepts must be made clear during our summary of the evolving and developing process of China’s government-enterprise relations in the past 60 years. These concepts must be linked together to form a kind of logical thinking for summarizing and concluding. First of all, to explore the process of interactions between the government and enterprises, we should be aware that such an interaction process is embedded in China’s specific social environment, social system and social structure. Without an understanding of the structural environment, it is impossible to fundamentally comprehend the interactions of the government and enterprises on this land. Second, when we reflect on the evolution and development of the relations between the government and enterprises in China over the past 60 years and before and after the reform, we must realize the differences and connections before and after the evolution and development and grasp the inertia, path dependency and unintended consequences of institutional arrangements of the interactions and changes of the government-enterprise relations. Only in this way, we can catch the essential characteristics of such relations. Thirdly, in a general sense, Chinese © China Social Sciences Press 2019 Q. Wei and H. Li, Entities and Structures in the Embedding Process, Social Development Experiences in China, https://doi.org/10.1007/978-981-13-2390-4_6

217

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business organizations, especially state-owned enterprises, do not belong to pure economic organizations in economics, but carry out more or less political and ideological structures and functions. If this point is unclear, we cannot fundamentally get hold of business organizations in China. Finally, the government has always been in a dominant position during its interactions with enterprises. Either induced changes or forced institutional arrangements by the government have a great impact on the acts of enterprises. In this chapter, we try to theoretically present the Chinese government-enterprise relations model. One of the most important problems we encounter is that the key to our analysis is changing or not and how to change such relations. As we point out in previous studies, “change has become a societal norm in the era in which the reform becomes a social custom or habit and the reform itself is justified and rational.” It is in this rapidly changing society that “the study of any social phenomenon is bound to have insufficient explanatory power in this transition period of Chinese social structure when all kinds of complicated factors are integrated into the changes and various complex factors are constantly changing”.1 Therefore, the analysis of the relations between the government and enterprises, on the one hand, must emphasize the changes in the structural environment they survive, and on the other hand, attempt to find the key intersections that induce changes in such relations from their interactions. While describing and portraying such changes, we need to further distinguish which factors are at the core of the relational changes and which factors are at the edge. In our previous discussions on the changing process of social organizations and institutions, we refer to Imre Lakatos’ perspective of “hard core” and “protective belt” of scientific research programmes. This perspective is equally applicable to the study of the government-enterprise relations and can be used to refine the relations between entity and structure, interaction and embeddedness, and stability and changes.

6.1 Interactions Between “Hard Core” and “Protective Belt”: Internal Impetus for Changes in the Government-Enterprise Relations Imre Lakatos, a philosopher of mathematics and science, proposed the interaction of “hard core” and “protective belt” in The Methodology of Scientific Research Programmes. According to him, the essential difference of all scientific research programmes lies in their “hard core”, but the hard core alone is not enough to establish the progress of a scientific research programme, or the progressive problem shift. The “protective belt” formed around the hard core plays an important role in the stability and “irrefutability” of hard core. “When the hard core encounters anomalies or refutation, that is, there is a contradiction of scientific research programme and 1 Li

et al. (2005).

6.1 Interactions Between “Hard Core” and “Protective Belt” …

219

observation and experimental data, this protective belt of auxiliary hypotheses and theories has to be adjusted to protect the hard core from refutation”.2 Relative to the protective belt, hard core is preset and essentially prescriptive, but the protective belt is auxiliary hypotheses of hard core. “It is this protective belt of auxiliary hypotheses which has to bear the brunt of tests and get adjusted and readjusted, or even completely replaced, to defend the thus-hardened core. A research programme is successful if all this leads to a progressive problem shift; unsuccessful if it leads to a degenerating problem shift.”3 According to this logic of Lakatos, the correctness of the hard core itself isn’t determined by the adjustment of the protective belt; on the contrary, the protective belt is adjusted so that the correctness of the hard core can be further established in practice. When Newton advanced the gravitational theory, there was heated debate about the comet trajectories, but Newtonians successfully utilized the gravitational theory to predict that some comets would appear at a certain time. This means a scientific research programme can foresee the emergence of new phenomena. This fact-proven hypothesis adds yet another effective protective belt to the hard core of the Newtonian scientific research programme. Of course, Lakatos’ hard core and protective belt are based on the scientific logic. If this premise is put aside, as pointed out in its introduction part, “Even if a description seems to be very ‘rational’ and everyone believes it, it may also be pseudoscience.” The significance of the methodology of the scientific research program lies in the demarcation between science and pseudoscience. He argued that “the typical descriptive unit of great scientific achievements is not an isolated hypothesis but rather a research programme”, and “this hard core is tenaciously protected from refutation by a vast ‘protective belt’ of auxiliary hypotheses”. More importantly, the research programme also has a “heuristic” (positive heuristic and negative heuristic), which turns “anomalies” into positive evidence or put forward advice or implication on various possible “refutations”.4 In fact, Lakatos not just constructed a theory for demarcating science and pseudoscience, his theoretical logic also sought to become a hard core of scientific research programme. After a brief description of Lakatos’ “hard core” and “protective belt”, this theoretical logic will be used to analyze the relations of government and enterprises in China. In our eyes, this “change” and “invariability”, “center” and “periphery” interactions coincide well with the logic behind the changes in Chinese governmententerprise relations. However, we are neither trying to build a hard core of scientific research programme, nor intend to elevate such changes to a formal model. Moreover, we are not constructing a systematic theory, but only make a holistic analysis of these relations. For this purpose, some stable parts of the changes are regarded as the “hard core” and various institutional arrangements and adjustments that maintain these stable parts as the “protective belt”. Then what are the stability parts as the hard core? As we have already pointed out in the introduction of this book, the changes 2 Li

(2006b, p. 204). (1986, p. 67). 4 Lakatos (1986, pp. 5–6). 3 Lakatos

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of the government-enterprise relations in China are government-centered because the government is very powerful in organization, coordination and mobilization of resources. The changing process of these relations is the gradual realization of multiple goals under the leadership of the government. Government entities obviously dominate and control enterprise entities. The acquisition and maintenance of such domination and control as well as the realization of multiple goals are not prescribed by the relations of government and enterprises, but by the power of the government over enterprises. Therefore, the essence of such relations is a kind of power relations and the relations of domination and obedience, control and affiliation.5 The concept of “power” itself is perplexing. As indicated by Parsons, “unfortunately the concept of power is not a settled one in the social sciences, either in political science or in sociology”.6 When we use the concept of power or the power proposition to analyze social issues, one most frequently asked question is which “version” of power is used or which theoretical tradition of power is adhered to. Among the endless debate over the concept of power, Steven Lukes proposed a three-dimensional view of power, that is, “power as domination”, based on the view of behavior-centered power. Lukes stressed that both Dahl’s one-dimensional view of power and Bakhrach and Baratz’s two-dimensional view of power failed to provide a satisfactory analysis of power relations. The three-dimensional view of power not only focuses on decision and non-decision situations, but also emphasizes control over the political agenda; not only focuses on key issues that enter the decision-making agenda, but also emphasizes potential issues; not only focuses on observable (explicit or implicit) conflicts, but also emphasizes various underlying conflicts; and not only focuses on subjective interests but also emphasizes objective interests. Thus, we can summarize the power relations of Lukes into the following three levels. The first level is about the power of decision-making control, that is, one party occupies the dominant position in decision-making under controversial and conflicting circumstances. The second 5 On the domination issue, Charles Tilly had a classic question and answers. He proposed that if the

clear interests of subordinates are continuously infringe by the dominant, why they do not complain, sustain struggle or at least resist against this in a long term? The answers may include: first, the premise of this question is wrong because the subordinates are fighting all the time, but in a covert form; second, the subordinates get something in exchange, so they acquiesce their subordination in most of the time; third, by pursuing values such as respect and acceptance, subordinates gradually become associated with the institution depriving or repressing them; fourth, subordinates cannot recognize their true interests due to the mystery, repression or inaccessibility by the available ideological structure; fifth, subordinates are subdued by force or inertia; sixth, most subordinates lack effective means of resistance; and seventh, all of the above.” (Tilly 1991) Of course, these answers of Tilly are not mutually exclusive, but depending on the type of dominance and obedience, it may be one of the answers, a combination of several of these answers, or even all of them. As one of the most common forms of relations in human society, the power relations of domination and obedience, control and affiliation equally exist between the government and enterprises, which is considered as an essential characteristics of the government-enterprise relations. The basis of this asymmetrical power relations is the ability of owning, mobilizing and using various resources. (Zhou 2004; Peng 2011) The power does not equate to the use of power. Even not used, the power also has its dominant force. Even as Luxor puts it, “power is at its most effective when least observable” (Lukes 2008). 6 Lukes (2008, p. 1).

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221

level is about the control over the decision-making agenda, that is, one party plays a dominant role through formulating the decision-making procedure, ceremonies and values that are conducive to its own interests when controversial or conflicting decisions have occurred or may occur. The third level is about the power of ideological control, that is, in the process of making decisions, one party can avoid the occurrence of controversial or conflicting decision situations by contriving the other party’s cognition and preference and thus making them accept, believe or voluntarily obey the existing order state. Indeed the three levels of power involved are the interest preference, institutional rules and ideology. As the influence of power goes deeper and deeper, the form of power becomes increasingly covert. In our opinion, when analyzing the relations between the government and enterprises, the power relations can be divided into three areas: economic income, political control and ideology. More precisely, the hard core of the government-enterprise relations is the realization of goals in the three aspects by the government as the dominant and controller, and the institutional arrangements and adjustments for achieving these goals are the protective belt for this hard core. It is worthy to note that the three aspects are not pure and separated but intertwined. At different historical stages, the combination of the three goals and the power relations behind them are different. The achievement of a certain goal is different from other goals. For example, in the period of planned economy, the relations between the government and enterprises are mainly manifested in the form of work unit system. The government merges economic income, political control and ideology into one. After the implementation of the market economic system, not only the forms of ownership of enterprises have undergone great changes, but also the government’s dominant goals and ways of achieving them have also been different from those before the reform. If the hard core of the government-enterprise relations is the realization of the three dominant goals on the basis of the dominant power of the government, namely economic income, political control and ideology, then we need to answer what the difference and similarities are when such realization influences the relations between the government and enterprises or other entities, and if this hard core is stable and prescriptive. Actually, answering the first question involves a very wide range of issues. In China, the government (the state) is always in a dominant position in the important relational domains of the government and enterprises, the government and market, or the government and society. The differences are reflected by the entities for these relations, the relationship structure formed by them, the institutional arrangements and adjustments based on this structure, and different dominant goals of the government in difference periods when confronted with different relationship structures. Thus, if the realization of the government-dominated goals is regarded as the hard core of the government-enterprise relations, attention should be paid only to the stability and prescription of such relational domain, without expanding the meaning of this hard core or comparison with the relations of other entities. This is not the task of this study, nor can be explained at length in this book. The so-called government is de facto equivalent to the state. It is neither a specific function, nor the central or local authorities, but the government in a holistic sense. At the same time, the realization

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and transformation of the government-dominated goals emphasize the multiple goals of the government, different historical periods, different structural constraints, and the importance of and changes in the relationship structure of these goals. As is known to us, the nature of government can be divided into different categories according to different principles. However, from a functional point of view, in order to preserve the national stability, the government must achieve several major goals. These goals include safeguarding the territorial integrity, instilling ideology, political stability and economic and social development. Of course, because of the complicatedness and variability of these functions and the characteristics of their transformation with time and space and being ever-changing, it is very difficult for us to define the nature of the government from one facet, but this is not the key point of our research. On the contrary, the complexity of changes in the relations between the government and enterprises results from the complexity of realizing the government’s goals. The realization of the government-dominated goals is seen as the hard core of such relations, the relations of these dominant goals and their degree of stability need further discussions. The autonomy of government must be emphasized first. It is known to us that the government has autonomy, which depends on the amount of resources it owns and the sufficient force it uses to guarantee the realization of goals. According to Wang Shaoguang, a state can must have the following four basic state capacities to ensure its survival and operation, including extractive capacity to mobilize financial resources from the economy and society, steering capacity to steer the economic and social development, legitimation capacity to achieve consensus by using political symbols and coercive capacity to maintain its rule by force.7 These capacities allow for the realization of political, ideological, economic and social goals of the state. However, it is worthy to note that in realizing these goals, the results of institutional arrangements will vary widely. In order to achieve economic and social development, the government needs to decentralize its power (decentralization); in order to realize ideological indoctrination and political control, the government needs to centralize its power (centralization). Since these goals are not isolated, but interrelated, the realization of anticipated goals by either decentralization or centralization of power will inevitably affect the realization of other goals. The so-called cycle of “decentralization-centralization” is institutional adjustments or balance finding of the government in the process of realizing different goals.

6.1.1 Political Control The primary goal of any government is to maintain political stability and spare no efforts in strengthening political control through various means. In this sense, adjusting the relations between the government and enterprises is an approach for the government to achieve political stability. In the horizon of political science, “political 7 Wang

(1997, pp. 1–2).

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stability” is a very broad concept. Some researchers have enumerated up to twelve definitions of political stability given in our country, but the core idea is basically preserving orderliness and continuity the political system in operation.8 Actually, the analysis of political stability by Chinese researchers is mostly influenced by the western academic world, especially Huntington’s “political order model”. According to Huntington, the degree of stability of a regime depends on the relationship between political participation and political institutionalization and denote it as a progressive formula, in which political instability  political participation/political institutionalization. If the political institutionalization and organization of a society fall behind the demands of political participation of the general public, it will lead to political instability. In other words, the issue of political stability is mainly that the development of the political institutionalization lags behind the economic and social development.9 Obviously, Huntington takes the political order into consideration in the macroscopic environment of social development and emphasizes the importance of the society’s bottom-up and government’s top-down interactions to the stability of the political order. Of course, this is beyond doubt. However, under normal circumstances, the institutionalization of politics always lags behind the development of economy and society. From the experience of China, the government generally adopts three methods in adjusting its relations with enterprises. The first method is the political centralization of power. Since the government plays a dominant role relative to enterprises, it can maintain political stability by virtue of its dominating power. As indicated by some researchers, under China’s traditional centralized system, the government realizes “governing the country and ruling the people” by monopolizing the market and controlling important industries and key areas.10 The second method is that the government strives to embed politics into enterprise organizations and bring political organizations and economic and social organizations together, so as to achieve political control, such as the work unit system of “building party branch at the company level”. The third method is to reform the existing political system to some extent so as to bridge the gap between the economic and social development. For example, China’s gradual market-oriented reform and economic development logic of “keeping stock and promoting increment” can achieve the government’s transformative control of enterprises.11

8 Zheng

(2002). (1989). 10 Cao (2013). 11 Some researchers, based on refuting neo-liberalism from the western academia, point out that the logic behind China’s political and economic development and progress lies in political reform. First, China’s rapid economic development and huge economic growth are built on the transfer of a wide range of economic rights (property rights) from the state to citizen. This is the first step of the logic of political reform. Next, with economic growth and increasing income, the conflict between individuals and groups caused by the exercise of economic rights, in turn, require the government to reform the political system and further promote the political rights of citizens. This is the second step of the logic of political reform (Zhang 2013). 9 Huntington

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The above division is indeed only for analysis. Any of these methods are not pure. But we should not be confined to such analysis, which would result in the overlook of another important feature of political power and the duality of political organization. According to Mann’s definition of the sources and attributes of political power, political power is mainly restricted to “regulations and coercion centrally administered and territorially bounded—that is, to state power”, emphasizing the centralization, institutionalization and territoriality of political power. Consequently, from the state perspective, “a state is centrally administered and territorially bounded”. But in the context of its relations with other states, it involves the geopolitical dimension that the political stability of a state is not based solely on domestic relations, but also effectively cope with and handle geopolitical relations.12 That is to say, from a political stability point of view, the analysis of the relations between the government and enterprises need to consider the impact of geopolitical factors. At the very beginning of the founding of new China in 1949, in an international environment of a complete blockade and embargo imposed by western capitalist countries, the “Cold War” strategy of the United States of America has isolated China from the First World, but the Soviet Union in the socialist camp helped China to design and construct 156 basic industrial facilities, thus laying a foundation for China’s industrial development. Subsequently, the open conflict between China and the Soviet Union leads to China’s loss of technical aids from the Soviet Union and turn to seek development through self-reliance and an all-around planned economy. Under this geopolitical background, China has long been isolated from the world market. After the end of the Cold War, the economic strength of a state has once again become the dominant factor in geostrategic relations13 as the number of practitioners in the global modern economy rises sharply and the economic scale and pace have drastically changed. Or, as some studies suggest, the strategic relations of states have shifted from the political domain to the economic domain, and geopolitics gradually give way to geo-economics.14 Regardless of whether these statements are in line with historical facts, it is worth noting that with the globalization and the proliferation of economic globalization, it is imperative for a state to participate in the global economic competition if it is to achieve domestic political stability and safeguard its overall interests. As the microscopic foundation of economic development, enterprises undoubtedly become one of the organizational means for the realization of economic development and competitiveness in the wave of globalization. As we all know, China’s economy has been growing since the reform (Fig. 6.1) and now becomes the second largest economy in the world. The reform and opening up bring China into the global economic order. The accession to the World Trade Organization (WTO) in 2001 further links the Chinese economy to the world economy. Exports have become one of the “trio” driving China’s economic development. In some years, the contribution rate and proportion of exports to GDP growth even

12 Mann

(2007, pp. 34–35). (2010). 14 Zhang (2001). 13 White

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far exceed investment and domestic consumption.15 In this sense, participating in the world economy and exporting goods has become an important pole in the sustained development of China’s economy. This also shapes another important attribute of the relations between the government and enterprises: on the one hand, the government is actively using foreign investments and attracting multinational corporations to invest and produce in China; on the other hand, the government supports local enterprises to “go global” and gain a foothold in the international market.16 Once entrenched in the global market, the relations between the government and multinational corporations largely become a “triangular relationship”, in which the boundary of a state no longer acts as the “dividing line” between the government and enterprises, but become a “game” of negotiations and actions in the triangular relationship.17 Because of examining the government-enterprise relations on the basis of the global market and geopolitics, they not only include the relations between the government and enterprises, and among enterprises, but also the appeals of intergovernmental interests hidden behind these relations are increasingly apparent. Recently, the antidumping and countervailing by EU and USA against China-made PV products have gradually evolved into a trade war between different countries. EU and USA claim that the Chinese government provides various subsidies to local PV products and impose anti-dumping and countervailing duties over them. In response, China’s Ministry of Commerce has announced an anti-dumping and countervailing investigation on wines exported from the European Union.18 This phenomenon is commonplace in the international trade. The relations among enterprises and between enterprises and the government reflect the cooperation and competition of countries in political and economic interests. China has enjoyed fast economic development for over 30 years. During the past decade, we firmly seized the strategic opportunities for development, made hard and pioneering efforts, and scored new historic achievements in economic and social development. From 2002 to 2011, China’s GDP grew at an average annual rate of 10.7% and moved up from the sixth to 15 Shen

(2009). multinational corporations (MNCs) are considered as economic organizations across specific borders of countries and flowing freely on a globalized market, the opposite view holds that large-scale MNCs are backed by their home countries and even become a symbol of the global presence of national interests. MNCs in the real sense are still relatively rare. Most of them are based on their home countries and only trade in many countries. The major assets, production and sales on which they rely are still within the limits of nation-states. (Stopford and Strange 2003, p. 2; Enterprise Research Institute, Development Research Center of the State Council 2013; Hirst and Thompson 2002, p. 2) Of course, these two views are not unreasonable. The crux of the matter is that when discussing the relations between the government and MNCs, we need to specifically look into the extent to which they are “free” entities and at what interest level they are “restricted” by the government. From the perspective of national interests and geopolitics, no matter where a multinational corporation is and where its interests belong, it is affected by the political and economic conflicts between countries. 17 Stopford and Strange (2003, pp. 25–26). 18 June 5, 2013, “Ministry of Commerce Talking EU’s Minimum Import Price (MIP) on Solar Panels: China Begins to Investigate Wine Imports from European Union”, people.cn, http://finance. people.com.cn/n/2013/0605/c1004-21744046.html. 16 Although

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Fig. 6.1 The economic development level (GDP) of PRC since its founding. Data source China Economic and Social Development Statistical Database

the second place in the world. Our per capita GDP rose from 1000-plus to 5432 U.S. dollars. China’s foreign trade volume also climbed from the sixth to the second place in the world, and foreign exchange reserves exceeded three trillion U.S. dollars.19

6.1.2 Ideology Different from the political control, ideology largely influences the legitimacy of the government, which, in turn, affects the political stability of the state. Even to a certain extent, the ideology of the state influences and decides its behavioral choice. Ideology plays an imperceptible role in building the legitimacy of the government and has strong exclusivity. That is to say, the dominant ideology is often characterized by “exclusiveness” and “stability”. The exclusivity in a certain period of a state is certainly controlled by a dominant ideology, which is the mainstream beliefs and culture advocated and promoted by the interest group dominating in a society.20 The stability comes mainly from three aspects. First, when an ideology is accepted by the majority of people in the community, social behaviors in line with the ideology are often seen as rational, while those challenging the ideology are considered as irrational. Second, once some kind of ideology is accepted, the values or beliefs of individuals will not easily change. Third, as a typical public product, it is difficult for

19 “Speech

by Wen Jiabao, Premier of the State Council of the People’s Republic of China at the Summer Davos Forum 2012”. 20 Li (2006b, p. 220).

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individuals or minorities to change the mainstream ideology.21 Being a part of the political culture, the dominant ideology of the state is more inert towards changes than its political, economic and social goals.22 According to Michael Mann, the ideology is sourced from one basic need of human society: “People need to understand and explain the meaning of their own life and the world around them, and live in a system with common values, norms and rituals.”23 Specifically, it can be divided into meaning, norms and aesthetic/ritual practices. When an ideology becomes the dominant one, it has some power that is related to the dominant group (government). After monopolizing the ideology, the group will have rather extensive and in-depth power so that the ideological power attains a certain function-to gain control over the people.24 As far as the relations between the government and enterprises are concerned, the historical experience shows that the mainstream ideologies of China in different periods influence and change the pattern of the government-enterprise relations. For example, these are statements at the ideological level, namely “keeping public ownership as the mainstay of the economy and allowing diverse forms of ownership to develop side by side”, “consolidating and developing unswervingly the public sector of the economy” and the debate that “the criteria for the reform is capitalism or socialism”. In the past studies on organizational and institutional changes, we always attach importance to the role and influence of ideology and hold the opinion that the ideology plays an important role in impacting on the expression of interests and the socializing process of entities, affecting the specific process of social changes, saving the costs for their actions during interactions and influencing and changing their values and preferences. If changes in the government-enterprise relations are regarded as a social process of organizational and institutional changes, this process is mainly manifested in that new institutional arrangements gradually replace the old institutional arrangements and new behavioral rules gradually replace the old ones. In this process, ideology can provide rationality (the rationale of change), legitimacy (the order of change) and empathy (the emotional basis of change) for institutional changes and reform.25

21 Li

et al. (2005). Ogburn, an American sociologist, puts forward the concept of “cultural lag” in his book Social Change with Respect to Culture and Original Nature, which means that culture has different levels and the change of material culture is always faster than that of non-material culture. Of course, what it refers to is a kind of culture in a broad sense. Compared with material technology, ideology is a non-material culture more inert against changes. When summarizing cultural changes, some researchers emphasize that “if the entire human culture is divided into three levels of material, institution and concept, then in terms of the speed of changes, the material and technology will change at the fastest pace, followed by the institution level, and the ideology and culture see the slowest changes (Sun 1991). 23 Zhao (2006a). 24 Mann (2007, pp. 28–29). 25 Li et al. (2005). 22 William

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Some researchers analyze the privatization reform of state-owned enterprises. By constructing a balanced model between the ideological evolution of the central government and the institutional innovations of local governments, they conclude that China’s reform is benefited from two major changes in ideology, including the great discussion on the issue of truth standards and the market economy theory established in the early 1990s. The first change brings us the reform and opening up and the second change builds up the market in China.26 Of course, logically there is no unidirectional causal relationship between institutional changes and ideological evolution. The evolution of ideology may precede, influence and advance institutional changes; or institutional changes occur earlier than the ideological evolution and select and construct a new ideology. Thus, institutional changes and ideological evolution are influencing, interactive with or even premised on each other.27 Only clearly recognizing the role of ideology, we can understand profoundly the significance of ideology in shaping the actions of the government and enterprises. If the public ownership is regarded as an expression of the socialist ideology on the economic ownership, the form of public ownership before and after the reform in China and the changes in the ways of its realization become an internal logic behind the changes of the relations between the government and enterprises. Similarly, either the convening of the Third Plenary Session of the 11th CPC Central Committee, or the assertion made by Deng Xiaoping in the early 1990s that “A planned economy is not equivalent to socialism, because there is planning under capitalism too; a market economy is not capitalism, because there are markets under socialism too” has ideologically set the tone for the economic development direction and the legitimacy of non-public enterprises in China. Along with the evolution of ideology,28 China’s economic system has undergone changes from public ownership to the development of various forms of ownership-based economy, and the government-enterprise relations change from the government’s all-around and direct management to the combination of management and control.

26 Yaoyang

(2008). (2007). 28 It is noteworthy that the so-called ideology here refers to the government’s dominant ideology (more precisely, the ideology of economic development), because in the same period of one society, the ideology has different levels and inconsistent content, or even there are opposing ideologies. As a manifestation of power, the ideological power is often intertwined with the political power, making it hard for us to specify clearly whether the power that affects the transformation of the relations between the government and enterprises is political control or ideological indoctrination. But this just shows that in order to achieve its diversification goal, the government will adopt a variety of power paths. These powers, due to their different natures and functions, can form an effective “network of power” of the government only in combination. We also need to emphasize that the dominant ideology of the government is an integral part of the political culture. It has characteristics of in-depth, dispersibility and stability. Looking back changes in the dominant ideology after the founding of the People’s Republic of China, although there are only a few, their impact on China’s economy and society is far-reaching. This is exactly what Lukes emphasizes: as a hidden power, its operation is not visible, but it can work most effectively. 27 Liu

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6.1.3 Economic Income Next, we will talk about economic income, another dimension of the hard core of the relations between the government and enterprises. Compared with the political stability and ideology, the level of economic income is more explicit, but this does not mean that it is less important than the other two dimensions. As mentioned above, they have different natures and functions, with varied dominant roles in different historical periods, thus influencing the changes of the government-enterprise relations to different degrees. While analyzing the state capacities, some scholars regard the extractive capacity of financial resources as the main dimension. This is not only because “financial changes are one of the important reasons for all changes”, but also because “financial resources are the central nerve system of the state” and “the evolutionary history of a modern state is a growth history of the state finance”. And more importantly, a government’s financial strength is the basis for realizing all its will and the key to effective operation of the government.29 In our research, there are extensive social entities for political control and ideological indoctrination, and enterprises are the major entities as the sources of economic income for the government. The nationalization of bureaucratic capitals in the early days after the founding of new China, the wave of privatization of state-owned enterprises in the 1990s or the transformation of property rights of rural collective enterprises largely reflects the government’s considerations of economic income. This kind of economic income is, on the one hand, manifested in that the government controls the economic lifeline of important industries and key areas, and on the other hand, it obtains profits of enterprises through taxation. Although the two cannot be totally compared in terms of financial revenues, they are both the means by which the government achieves its goals in economic income. The government’s control over important industries and key economic areas are regarded as a means to realize economic income. The economic development since the mid-to-late 1990s (especially since the 16th CPC National Congress) achieves the continuous economic leap-forward under the state domination of the market. For either the large-scale reform of property rights carried out by state-owned enterprises in the mid-to-late 1990s or the state-owned enterprises continuously “growing bigger and stronger” in the new century, upholding the dominant position of public ownership and emphasizing the importance of state-owned capital in important industries and key areas that are related to national security and the lifeline of national economy have never been shaken. For example, encouraging, supporting and guiding the development of the non-public sector of the economy are the economic adjustments that have taken place on the periphery of the “concentric circle” under this premise. Under the reform logic of “crossing the river by feeling the stones” or the economic logic of preserving “stock” and promoting “increment”, based on the expanding market, the government has always attached importance to maintaining the dominant position of state-owned capital. This practice has avoided social and political turmoil brought by the large-scale ownership reform and maintained the reform of 29 Wang

(1997, p. 3).

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ownership system within relatively sound limits. At the same time, since the state has liberalized many market spaces, this plays a significant role in promoting the enthusiasm of state-owned enterprises for operation and production. Although state-owned enterprises are still burdened with many policy tasks, they harden their constraints by constantly approaching the market and increase their production efficiency. The state skillfully introduces the market mechanism into the state-owned sector of the economy, thereby getting rid of state-owned enterprises’ complete reliance on the government and urging them to compete in domestic and international markets and gradually increase their economic benefits. As for the importance of enterprises in the government revenue, it is self-evident. Figure 6.2 shows the percentage of corporate income tax in the government revenue from 1985 to 2011. It can be found that the percentage of corporate income tax in the government revenue shows a downward trend before 2000 (the percentage reaches more than one third in 1985, but reduces to 7.5% in 2000). However, since 2001, the percentage of corporate income tax in the government revenue has been increasing and maintaining above 15% and seeing an increase of about 21% year over year. This is in large part due to the fact that statistics before 2001 only include state-owned enterprises and collective enterprises, but the income tax of other types of enterprises is added since 2001. In addition to changes in types and numbers of enterprises, there are also the following reasons. First, with the transformation, restructuring and optimization of state-owned enterprises after the mid-1990s, their operating efficiency has been continuously raised and the tax payment is increased. Second, accompanying the continuous growth of enterprises in non-public sector, their contribution to the government revenue is increasing. With regard to the first reason, an empirical analysis has demonstrated that the state-owned enterprises indeed increase their tax payment after privatization and reorganization.30 Through analysis of statistical data over the years (Fig. 6.3), we find that after the reform of property rights (the number of enterprises reduces from 238,000 in 1998 to 136,000 in 2011, with an annual average decrease of about 3.9% year over year), the overall profitability of state-owned enterprises rises significantly (the total profit has increased from 21.37 billion yuan in 1998 to 2466.98 billion yuan in 2011, with an annual increase of about 65%). Even though a small proportion of proceeds from state-owned capital is collected,31 the total amount of tax paid by state-owned enterprises is still on 30 Han

and Oi (2008). 2007, the Interim Measures for the Administration of the Collection of Proceeds from Stateowned Capital of Central Enterprises jointly promulgated by the Ministry of Finance and the SASAC stipulates that the proceeds from state-owned capital is divided into five items: profits payable of wholly state-owned enterprises, dividends and bonuses of state shares, income from the transfer of state-owned property rights, income from the liquidation of an enterprise and other proceeds from state-owned capital. Different percentages of net profits must be paid by categories. The first category includes tobacco, petroleum and petrochemical, electric power and telecommunications enterprises, which pay 10% of net profits; the second category covers iron and steel, transportation and electronics enterprises, which pay 5% of net profits; and the third category comprises military enterprises and transformed scientific research institutes, which can suspend payment for three years or be exempted from paying. In 2010, the Notice on Improving the Central Stateowned Capital Operation Budgets has been issued by Department of Enterprises of the Ministry of

31 In

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Fig. 6.2 The percentage of corporate income tax in the government revenue from 1985 to 2011. Data source: China Statistical Yearbook 2012

the increase, about annually 20.3% from 2005 to 2011 (Fig. 6.4). In respect of the second season, with the continuous improvement of the socialist market economic system, non-public sector becomes increasingly important in the economic structure and equally the major source of the government revenue. According to a survey of large-scale private enterprises in China from 2005 to 2009, both the total tax payment and the average tax per enterprise have steadily increased.32 It is unable to accurately describe the overall contribution of enterprises in the non-public sector to the government revenue because we fail to obtain more detailed taxation data. Undoubtedly, besides the corporate income tax, the business tax, value-added tax, customs duties and non-tax revenues from paid use of state-owned resources and proceeds of state-owned capital collectively constitute the main parts of the government revenue. The above analysis shows the stability and prescriptiveness of the “hard core” of the government-enterprise relations—economic income, political control and ideology during the evolution of such relations. This stability is certainly relative. If the external adjustments through various institutional arrangements still cannot effecFinance, which stipulate that the proceeds from state-owned capital in central enterprises should be appropriately increased and different percentages should be paid separately by different categories. The percentage is 15% of after-tax profit of the first category, 10% for the second category, 5% for the third category and exempt for the fourth category. (China Grain Reserves Corp. and China National Cotton Reserves Corp.). 32 In 2005 and 2006, large scale private enterprises mean those having an annual operating income of 200 million yuan or more, and after 2006, this standard increases to 300 million yuan or more. From 2005 to 2009, the average annual taxpaying of large-scale private enterprises increases by 46.090 billion yuan, averagely about 9.5 million yuan per enterprise. (All-China Federation of Industry and Commerce, 2010, Yearbook of China’s Private Sector Economy (2008–2010), Beijing: All-China Federation of Industry and Commerce Press).

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Fig. 6.3 The changes in number state-owned enterprises and total profit from 1999 to 2011. Data source: China Financial Yearbook 2012

Fig. 6.4 The change of tax payment by centrally administered enterprises from 2005 to 2011. Data source: China Financial Yearbook 2012

tively coordinate the government and enterprise entities and deal with the pressure of the external structural environment, then the hard core itself is confronted with “legitimacy” crisis and needs to be properly adjusted and amended. The prescriptiveness of the hard core, that is, the characteristics in terms of quantity and quality, not only faces the process of gradual change, but also determines the peculiarity of China’s government-enterprise relations. In our opinion, the change of these relations in the overall sense is both driven by the internal drive for the realization of governmentdominated goals, and subject to pressure and constraints from the external structural environment. The institutional arrangements of the government become the main

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approach to coordinate their relations. Next, based on the “hard core”, we will summarize the structural environment that the evolution of the relations between the government and enterprises faces and is embedded in.

6.2 Structural Environment: The External Constraints Over the Relational Change Attention has been paid to the external structural environment and the impact of their changes. As “A Happy Excursion” of Zhuangzi says, “If there is not sufficient depth, water will not float large ships. Upset a cupful into a hole in the yard, and a mustard-seed will be your boat. Try to float the cup, and it will be grounded, due to the disproportion between water and vessel.” In effect, once the discussion on the government-enterprise relations is separated from China’s social structural environment and its historical changes, it will become “a boat in a hole in the yard”; and if we cannot profoundly understand the impact of this structural environment on such relations, all discussions will be “a frog in a well talking about the sea, an insect of the summer talking about ice or a scholar of limited view talking about the Dao”. Next, we will elaborate how the external structural environment affects and regulates the evolution of relations between the government and enterprises from three perspectives: macroscopic environment, institutional environment and relationship structure.

6.2.1 Macroscopic Environment At the macroeconomic level, the historical tradition, legitimacy level of government and international market under globalization, influence the relations between the government and enterprises. These factors exert different degrees and kinds of influence at different historical stages, either alone or in the interwoven form. The influence takes place directly or indirectly and cause changes by its latent or manifest functions. 1. Historical Tradition The impact of historical tradition on the relations between the government and enterprises is mainly manifested in three aspects: state domination of industry and economy, family in the traditional society and war communism. In traditional dynasties of China, the ruling groups regulate and control the market, runs important industries by officials (official-merchant operation, merchant run under the official supervision, and monopoly by bureaucratic capital), and restricts private industry and commerce by the gigantic bureaucratic group from top to down, so as to maintain the stability of

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their rule.33 This historical tradition or economic model deeply influences the relations between the Chinese government and enterprises in the later period. After the People’s Republic China has been founded, the planned economic model, whether influenced by the economic model of Soviet Union or for achieving the goal of leapforward industrialization, the traditional mode of political thinking of the country should not be overlooked. That is to say, the state has the comprehensive and in-depth control of the economy and society, and the social result is the “work unit system” familiar to us. Enterprises under the work unit system are neither spontaneous, nor economic organizations in the market sense. Instead, they are “created” by the state to attain economic and social control, thus in resource allocation, social regulation and organizational management, the work unit-based centralized distribution system of social resources and the highly integrated political system have been shaped.34 On the other hand, in view of the dependence of individuals on their work units and of units on higher level authorities under the work unit system, many researchers compare this organized state ruling system to families in the traditional Chinese society. The unit organizations provide members with various types of resources like families and emotional affiliation and derive their power from the centralized resource allocation and reflect the authority of the state from top to down just as families do.35 Traces of Chinese traditional families can be found in the taking of complete charge and diversified functions by work units; and similarly, individuals’ total dependence on their work units is identical to members’ reliance on the traditional family organization.36 It is from the way of obtaining the inputs needed by enterprises that Kornai refers to the relations between the government and enterprises in the socialist economy under the traditional economic management system as the “father-son relationship”.37 For either “giving in kind-passive acceptance” 33 In the history of China, the industry is mainly run by the government and gradually evolves to be private firms. There are two important reasons. Firstly, “the needs cannot be met solely by the government”. As the living standard of people improves, the demand for industrial products is gradually increasing. “The population growth is unlimited, the living standard is raised, the government cannot meet them all, the supply falls short of the demand, and so the people run private business.” Another reason is that the ever-increasing diversified needs of the people stimulate the development of non-governmental industries and working can earn more income than farming. “The government refuses to make skillful products, so the people are forced to make them on their own.” Compared with the industry, the commerce is more naturally developed. With the advent of private property, the trade between people gradually flourishes. The social division of labor further promotes the trade and commerce. “The business is developed, the division of labor is more intensive, and they benefit each other, so the commerce becomes prosperous.” However, this does not mean that non-governmental economic development is outside the control of the government. The fact is that in ancient markets, “the governance is complete and the supervision is strict”, and “the price official oversees cheating, the trade official manages the market, the security official maintains the order, the patrol official catches thief, the minor official controls the entry, the shop official supervises the display of goods and the market official takes the overall control” (Lü 2005, p. 17, 18, 23). 34 Wang (1995). 35 Li (2002). 36 Li (1993). 37 Kornai (1986).

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or “giving in kind—direct expression”, under the planned economy, the dominant government enjoys all the power to give and distribute. Compared with the impact from the above two aspects, the mobilization order system formed by the communist party in the era of revolutionary war, before the establishment of the new regime, is transplanted into the new system due to the institutional dependence. This mobilization order system, preconditioned by the leadership of the “party unification”, is based on the masses (such as the support from peasants’ associations and poor peasant groups) formed through the equalization of land in the vast revolutionary base areas, and together with moral model, persuasion and mobilization, shapes a new lower level institution,38 which guarantees the legitimacy of leadership and the supply of materials and manpower during the revolutionary war era and to large extent, ensures that the communist party can victoriously seize power. After the founding of new China, it becomes the most pressing task for leaders to mobilize all resources and build a socialist New China due to the difficulty from both the interior and exterior and many things waiting to be done. Naturally, the high efficiency of the military communist model featuring orders and obedience continues being implemented by the state. It is manifested in a highly planned economy and a comprehensive and in-depth control of the society by the government. At the enterprise level, economic, political and social functions are combined into one and the government and enterprises are integrated, in order to achieve the possession, control, mobilization and allocation of resources. 2. Legitimacy Level According to the ideal type, Max Weber distinguishes three types of authority: traditional authority based on the established tradition or order, charismatic authority resting on the appeal of leaders and legal-rational authority grounded in clearly defined laws.39 Although this kind of static division has aroused plenty of controversies, it has also become the theoretical basis for scholars to study the authority and guide people to understand and judge the legitimacy of a country. In the development history of human beings, no country’s legitimacy is based on one kind of basis, but the construction of hybridism and the domination of one source are the basis for claiming legitimacy. The “legitimacy”, no matter how complicated its meaning is, in essence, the approval and acceptance of the people and elites during the state-society interactions. A government without legitimacy or with a low degree of legitimacy finds it hard to consolidate their ruling. For this reason, once a legitimacy crisis occurs to a country, it has to rebuild legitimacy through reform or even revolution. Emperors in the history of China claiming themselves as the “Son of Heaven”, economic reform of the Pahlavi Dynasty or general elections of democratic states are efforts to legitimize their governance. However, no legitimacy basis can remain unchanged, because such state-society relations based on interactions are changing with the historical development. In a poverty-stricken society with insufficient supplies of food or clothes, dressing the people warmly and eating their fill can win 38 Huang 39 Weber

(1997b). (1978/2010).

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their support and allegiance. Once the material needs of the people are satisfied, new visions and demands on the government will be developed. In this sense, raising the level of legitimacy or dealing with the legitimacy crisis becomes a daily issue for every government in every country. When talking about the relations between government and enterprises, it can be found that comparing enterprises in the planned economy and those in the market economy, they have not only undergone great changes in ownership, but also are under obviously different ways of regulation and control by the government. Before the reform, the government attaches importance to the control, but after the reform, attention is shifted to performance; before the reform, the government mainly relies on administrative orders, but after the reform, the market regulation is adopted; before the reform, the government can mobilize all social resources, but after the reform, laws clarify the property rights. One fundamental reason is that before and after the reform, China has transformed itself from a state that claims its legitimacy based on the ideology and political discipline to be a state rests its legitimacy on economic performance, and thus enterprises also change from units for the state control and mobilization to be microscopic level organizations for the economic and social development. The founding of the People’s Republic of China can be described as “a major change that has not occurred in the past thousands of years” in the history of China. This new regime is not established spontaneously on the ruins of old China but installed by the communist party through constant revolution.40 It is not only distinguished from the Soviet Union regime, but also different from other late developing countries. In a traditionally agricultural empire over the most of the past several thousand years, confronted with invasions of powerful countries for more than one hundred years, winning national independence and liberation through the revolution not only subverts China’s survival-oriented national tradition, but also changes China’s national and social nature, reshapes the interactions between the state and society and gives the new regime a different kind of legitimacy from the past. The revolutionary achievements of the new regime established in 1949 and defeating strong domestic and foreign opponents, plus the mass backing in the revolutionary base areas, have gained popular support from the people. Both the communist party and Mao Zedong enjoy a high degree of ideological and charismatic legitimacy.41 After the founding of new China, in order to change the poverty-stricken status, the government advances the “leap-forward modernization”, begins the social transformation to change the situation of “disunity”, ensures the realization of the national goal and further consolidates the legitimacy basis of the regime. The “Great Leap Forward” is the most obvious practice for the leap-forward modernization; and the most significant result of the social transformation is the realization of collectivization in rural areas, unitization in cities and comprehensive economic planning. At the enterprise level, since the founding of new China, on the one hand, the bureaucratic capital is confiscated and on the other hand, the state capitalist economic model is adopted for 40 Feng 41 Zhao

(2011). (2001).

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private industrial enterprises. By the time when the “First Five-Year Plan” is completed, the private industrial capitalism has been basically eliminated and the work unit model of full public ownership is rapidly established. If the establishment of a work unit society reflects to a large extent the political aspiration and ideal of political elites for changing the society, all-around public ownership of the economy and the work unit system mean the total abandonment of private economy and market capitalism by the new regime.42 On the one hand, the communist regime represented by the working class and based on the alliance of workers and peasants desires to show its ideological purity and advancement, so all things related to “private interests” and “capital” are considered to be deviations from the socialism; on the other hand, to consolidate the legitimacy basis, the state should not only ensure full employment and financial revenue, but also give priority to the development of heavy industries with poorer comparative advantages so as to achieve the leap-forward strategy, thus directly organizing operation and production through the top-down enterprises as work units.43 Although state-owned enterprises in cities and rural collective enterprises have developed to some extent before the reform, their inefficiency is known to all. The leap-forward modernization is difficult to realize, and the economy of the entire country develops at a relatively low level. After the “Cultural Revolution” comes to an end, the country’s economy is on the brink of collapse, and the regime grounded on the ideological legitimacy is also facing a crisis. At this historical moment, political elites in the party break through the many obstructions and gradually make clear the economy-centered development logic of replacing the planned economy with the market economy. The reform achieves remarkable results, witnessing the continuously improving level of economic development, the rapid rise of rural collective enterprises and the emergence of enterprises of private and other types of ownership. By the 1990s, the market economy has been completely established and the party’s leaders take the moral and economic performance as the main source of the legitimacy of their administration.44 The economic growth is promoted with all efforts from top to down. Under this logic of development and the pressure of legitimacy, China sustains more than 30 years’ rapid growth and works an “economic miracle” in the history of the world. State-owned enterprises have improved their operational efficiency through restructuring and reorganization, and foreign-funded enterprises, private-owned enterprises and joint ventures are also booming. In terms of the government-enterprise relations, if the government on the basis of ideological legitimacy can achieve the top-down control and transformation by arbitrary power, the government based on the performance legitimacy needs to regulate development of enterprises through the market mechanism, thus achieving the increase of revenues and economic development.

42 Tian

and Liu (2010). and He (1996). 44 Zhao (2012). 43 Zhang

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3. International Market Because of the reform and opening up, the establishment of the market economy and accession to the WTO, China has gradually become integrated into the global market. The development of international trade, an increase of foreign investment and the internationalization of business operations45 play an important role in China’s rapid economic growth and exert tremendous influence on the relations between the government and enterprises in China. The Chinese government can no longer handle its relations with enterprises completely according to the traditional logic of governance. Instead, it constantly responds to and regulates the relations between the international market and the domestic market, international rules and domestic systems, and multinational corporations and local enterprises. Although the contribution of foreign capital and exports to China’s economic growth is outstanding, the “world’s factory” and “made-in-China” formed by the comparative advantages of cheap labor and extensive resource consumption are not sustainable.46 Therefore, since the 21st century, the government has continuously stressed the importance of strengthening the innovation capability of enterprises, promoting economic restructuring and upgrading, and encouraging enterprises to “go global”. Meanwhile, the government introduces the far-reaching reform in the corporate governance structure, social responsibility and labor rights protection. Although China participates in the global economic order and actively adjusts its own acts and the relationship model of the government and enterprises, the unequal international market not only binds the participating enterprises but also restrains the government’s acts. As Paul Hirst et al. argues, globalization has not brought about a “fair arena”. The dominance and rule-making power of developed countries and monopoly capital have made the international market extremely unbalanced. Not only transnational corporations in the real sense do not come into existence (more often than not, multinational corporations), but the most of multinational corporations are still tied to the nation-state basis.47 In the multilateral trading system of WTO, some treaties have different applicability to developed and developing countries. Under the premise of differences in economic strength and trade capacity, it is obviously unfair that developing countries must comply with the laws and rules applicable to developed countries.48 For example, Protocol on China’s Accession to the World Trade Organization (WTO) is the first WTO legal document that stipulates a set of special rules of conduct for an individual member. These additional clauses require the Chinese government to abide by the “ultra-WTO” obligations and rules, which constrains and restricts China’s economic and trade practices, and breaks the uniformity of rules of the WTO.49 Under the same logic, for trade protection, 45 In

2012, the total exports of goods and services by mainland China reach 2.2434 trillion US dollars, and the foreign direct investment (FDI) internally reaches 1.2108 trillion US dollars and externally 842.2 billion US dollars. See UNCTAD database at www.unctad.org. 46 Gao (2005). 47 Hirst and Thompson (2002, pp. 107–110). 48 Zhao (2006b). 49 Wayne (2006).

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developed countries link such principles as collective bargaining rights of workers, minimum wages and working hours with international trade rules. However, due to the differences in economic conditions and labor supply and demand in each country, the inequality of trade rules becomes even more serious. The empirical research results show that the imposition of unrealistic standards of fair labor rights is not just difficult to achieve the protection and improvement of labor rights, but leads to a large number of surplus labor force in developing countries and ultimately detrimental to workers’ actual interests.50 The global market is like a double-edged sword. On the one hand, with the flow and allocation of the factors of production in the world, proper utilization of and participating in this process can share the benefits of economic globalization and accelerate the development of the domestic economy; on the other hand, because the system of division of labor is still dominated by developed capitalist countries, China in the global market is bound to constantly confronted with the unfavorable effects of competitions for economic interests and national interests. As indicated by a research institute, China’s economic model is based on the world factories characterized by the attraction of foreign capital and the rapid expansion of international trade. There are huge risks hidden in the Chinese economy under the “dollar standard system” and structural conditions of lack of independent innovations and brands. Also, China’s political stability also faces the hidden dangers brought about by the slowdown in economic growth.51 If it can be said that before the reform and opening up, due to the top-down control of enterprises and the full planned allocation of production factors by the government, the efficiency-based development is difficult to achieve without the market and capital flow, then the establishment of the market economy and the release of global capital in the absence of endogenous competitive advantages of China, transnational capital captures excess surplus value and a large number of small and medium-sized enterprises sink into the lower end of the global division of labor. When we emphasize that the government should withdraw from the market and allow the market to regulate production voluntarily, the goals of the state and the returns of enterprises are a mutually reinforcing relationship in the global market. On the one hand, the government needs to speed up the transformation of the mode of economic development through institutional arrangements, break institutional barriers, standardize the operation of the market, improve the financial system, guide the rational flow of production factors and strengthen the supervision of enterprises; on the other hand, enterprises need to enhance independent innovation, improve the governance structure, fulfill social responsibilities and enhance competitiveness. It may be very difficult to accomplish this process. First, due to long-term inertia and institutional dependence, the government may unyoke the development of the Chinese economic model or delay the reform of the economic system to achieve economic gains and employment growth. Second, due to the obstruction of interest groups, different types of enterprises cannot yet attain fair competition in the short term. Thirdly, the profit-oriented nature of enterprise entities makes it difficult to 50 Liu

(2010) (2004).

51 Gao

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innovate while making profits under the current labor division system. Of course, the crucial point is that huge externality of the global market influences the Chinese government’s decision on whether to reform the economic system, how to reform it, and to what extent. Once the old mechanism of economic growth is broken and the new economic system fails to conform to the structural environment, this not only cannot revive the economic development of China, but also cause stagnation or even depression.

6.2.2 Institutional Environment The evolution of the relations between the government and enterprises progresses through constant institutional adjustments. Both the formal laws and regulations and the unofficial cultural conceptions have a certain goal orientation and are all based on a specific historical environment. In other words, the institution itself is not an end but a means by which the entity pursues the goal. However, due to the contradictions inherent in the institution itself, once the structural environment changes, the existing institution faces the challenge of operation. In a general sense, existing institutional rules must also be compatible with changes in the structural environment. More crucially, due to the path-dependent nature of the institution, even being adjusted or replaced, the original institutional arrangements will still affect the behavior and orientation of the entity and become a structural factor. In a broader sense, after the founding of new China, the economic systems it has implemented, namely the planned economy, the dual-track economy and the market economy, are all institutional arrangements, while reforms such as enterprise ownership, financial taxes and governance structures are all embedded within the macroscopic institution. This kind of multi-level and mutually-embedded institutional environment not only shapes the model of the relations between the government and enterprises within a specific period, but also, once an institution has changed, the coordination and conflict between new and old institutions, the adaptation and exclusion of entities to the institutional environment, and even the stability and disorder of the entire institutional system itself will lead to complex relations between the government and enterprises. The analysis of corporate behavior and structural evolution from the perspective of institutional environment breaks through the theoretical threshold of neoclassical economics and goes beyond the rational organizational framework in the sense of Weber’s ideal type. As a combination of a series of factors of production, the essence of the behaviors of an enterprise is to pursue the maximization of economic benefits. With regard to the subject of rationality, an enterprise can develop continuously only by solving uncertainties of the technical environment and achieving profit-making. The actual situation is far more complicated than that supposed by rationalists. Besides pursuing economic benefits, enterprises also assume social responsibility. It is not only difficult for an enterprise to design an effective and changing organizational model based on its own endowment and economic goals,

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but also it is common to see the identical organizational structure and behaviors. Even in some cases, enterprises have to “shut down their businesses” because resources consumed by non-technical pressure have exceeded the cost and output of realizing economic benefits. For these phenomena and problems, the explanation made by institutionalists holds that in the development process, organizations face both the pressure from the technical environment and the pressure from the institutional environment. The technical environment mainly refers to such factors as cost and benefit, supply and demand, technology and market, which are related to the efficiency of the organization. The institutional environment mainly refers to the legal system, values and cultural expectation in the specific environment where the organization is located, which is related to the legitimacy of the organization.52 In other words, apart from making profits in the market, enterprises are also subject to the norms of political and social factors, which not only fall far short of efficiency, but in some cases run counter to the principle of efficiency. However, just as there is no ideal state of any friction, there is neither a completely free-competition market nor an enterprise that only exists for economic benefits. Enterprises are both economic carriers and social micro-organizations and assume both economic responsibilities and political-social functions, thus the changes of the institutional environment and the adjustment of institutional arrangements restrict the survival and development of enterprises from the legitimacy level. To understand the impact of the institutional environment on the relations between the government and enterprises, we should first emphasize the basic and initial conditions for our country to carry out institutional changes and innovations. On these organizational and institutional foundations, China’s institutional reforms can be smoothly progressed in accordance with the established logic. The basic conditions and gradual changes also determine the relational pattern of the government and enterprises. Looking back at the vicissitudes of the government-enterprise relations and the history of reform, it can be clearly seen that most of newborn economic organizations are almost always, directly and indirectly, relying on the transformation, extension, grafting and shelling of original state-owned and rural collective enterprises, for example, the ownership transformation of public-owned enterprises and privatization of property rights of collective enterprises affiliated to state-owned enterprises. Moreover, for a long period of time, many market economic organizations that are emerging from the transition have to rely on or seek the protection of some kind of government organizations in order to obtain business licenses or once they reach a certain scale, such as the political connection of private enterprises “wearing a red hat” at the beginning of the reform.53 We should also point out that during the changes in the relations between the government and enterprises in China; there is an institutional bottom line that runs consistently. That is, the public sector of economy dominates the important industries and key areas that affect national security and the lifeline of the national economy. The government has always emphasized the strategic dominance of public-owned enterprises either in the large-scale property right 52 Meyer 53 Li

and Rowan (1977). (2006b, p. 219).

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reform in the mid-1990s or during the strategic reorganization and “growing bigger and stronger” of state-owned enterprises since the new century. Just on the basis of maintaining the control and influence of public-owned enterprises, it is possible to encourage, support and guide non-public-owned sector. Without the institutional foundation of public-owned enterprises, it is worthless to talk about the nature of socialism as well as the combination of macro-control and market allocation, state domination and market regulation. Of course, the institutional environment influences the relations between the government and enterprises by the institutional regulation of behaviors, which on the one hand is manifested as mandatory institutional arrangements and on the other hand, the allocation of resources and the motivation of entities in the weak “legitimacy” sense.54 According to our previous empirical study on the influence of different organizational institutions on people’s behaviors and behavioral orientation, different organizational institutions can provide people with stable, universally recognized and repeatable behavioral pattern on some fundamental issues, regulate behaviors through the institution, and use it to define the conditions of people’s social behaviors in a specific organizational institution. Specifically, in different organizational institutions, due to different methods of resource allocation, different internal organizational structures and different ideologies to be emphasized, people feel different degrees of satisfaction and relative deprivation.55 Both social individuals and enterprise entities are consistent in the logical sense of the institution regulated behaviors. As is known to us, under the traditional planned economy, because the resources are owned and the distribution method is stipulated by the state, the work unit system shapes the dependence structure of enterprises on their higher-level organizations and the isomorphism among enterprises.56 This dependency and isomorphism are formed by the government through top-down external institutional arrangements, thus solving the legitimacy for the existence and development of enterprises in a “strong” sense. After the reform and opening up, the gradually prominent role played by the market in the distribution of factors of production, the emergence of non-public economic organizations and the development and expansion of rural collective enterprises form a coexistence of the work unit system and non-work unit system. This dual-track economic model inherits the model of planned economy and embeds the market into the overall economic structure, thus resulting in the different behavioral logic of the government and enterprise entities and the segmented characteristics of the relations between them. State-owned enterprises considered as the “stock” and the government still maintains the characteristics of the work unit system and manages and allocates resources from top to bottom, but non-public sector regarded as “increment” obtain resources under an imperfect market mechanism for production and sales.57 After the market economy has been established in the 1990s, enterprises of different ownership types all enter the market to varying degrees. In order to reduce the burden on 54 Zhou

(2003). and Qu (2002). 56 Li and Li (1999a, b). 57 Qu et al. (2009). 55 Li

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the government, encourage enterprises and enhance economic efficiency, the government gradually liberalizes administrative control over public-owned enterprises. Through the separation of government and enterprises and making clear property rights, state-owned and rural collective enterprises conduct a wide range of property right transformation. On this basis, the SASAC (State-owned Assets Supervision and Administration Commission of the State Council) is established to supervise and manage state-owned assets and to seek the improvement of the economic benefits of state-owned enterprises by exchanging quality for quantity. From the logic of institution regulated behaviors, different from the planned economy, the process of marketization stimulates market entities in the “weak” sense by virtue of its role in the optimal allocation of resources and achieves the orderly competition of enterprises and the “market-oriented” development. On the one hand, through constant introduction of the market and ownership reform, non-public sector of the economy is expanded on the basis of public ownership so as to enhance the vitality of the market; on the other hand, the market mechanism is introduced into the state-owned sector so as to get rid of their complete dependence on the government. Meanwhile, China’s participation in the world market and the introduction of foreign-funded enterprises have also changed the way the Chinese government controls enterprises through the institutional competition. To some extent, the different ownership types of Chinese enterprises constitute different institutional environments that constrain the behaviors of enterprises. Therefore, the behaviors of public-owned enterprises, private-owned enterprises and foreign-funded enterprises have different behavioral orientations due to facing different institutional environments. In Chinese society, the government is the main supplier of the institution, so the relations between the government and enterprises show different characteristics due to differences in institutional environments. In talking about the institutional environment, in addition to the influence and restraint of a specific institution on the entity’s behaviors, the reality is that the institution usually functions in a certain combination to form a system of rules. Such system of rules is generally embodied as a hierarchical structure from general rules to specific rules at a mandatory external institutional level. For example, in a legal system, it generally consists of the top-level constitution, the middle-level written law and the underlying government regulations. The internal system of rules generally does not contain a clear hierarchy of rules and procedural rules, such as social customs and cultural values.58 The institutional environment regulates and restrains behaviors of both the government and enterprises through formal external institutional arrangements, so that when the institutional rules and regulations change at a low level, in order to maintain the continuity and coordination of the institutional system, the bottom-up adjustments are required to preserve the stability of the toplevel foundation of the institution. In this sense, according to China’s experience, both the institutional adjustment at the macroscopic level and the institution reform at the middle and micro-level follow the logical path of government domination and marginal adjustment, that is, the gradual reform relying on the original institution 58 Kasper

et al. (2000, pp. 164–166).

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and economic foundation steadily push forward changes in the entire institutional system. As pointed out by Justin Yifu Lin et al., China’s reform is a process gradually approaching from micro to macro. First, the decentralization of power and transfer of profits at the micro level gradually improve the incentive mechanism and increase operating efficiency of enterprises; then the microscopic institutional adjustments change the balance and consistency of the original institutional system, new breakthroughs are found in resource allocation and macro policy environment, and finally the traditional economic development strategy is changed.59 Although drawbacks of this reform are obvious, such as rent-seeking in the dual-track period, loss of stateowned assets and strengthening of sectoral interests, without damage to the entire economic system of China, this practice of “taking medicine before surgery” is more secure than the “shock therapy” and sees smaller political risks. Owing to the rigid characteristics of mandatory institutional arrangements, it is costly to maintain the hierarchical institutional system. To regulate the behaviors of entities, the original system must be constantly “patched up” or even an involution of the institution is formed. When internal rules and external institution cannot effectively fit with each other, the institutional norms at the low level are difficult to achieve the long-term regulating effect or lead to tension and conflict between the entity behaviors and the institution. Under the planned economy, the economic order is not spontaneous but framed through the design. The allocation of means of production and the production and circulation of products require the government orders and plans from top to down. The horizontal markets and the exchange of production among enterprises are forbidden. The government must use mandatory powers for comprehensive and in-depth control, in order to regulate and restrain the behaviors of enterprises. For the sake of comprehensive planning and control, the government designs complex rules and regulations and intervenes directly. However, the problem is that an institutional arrangement intended to promote the achievement of a goal may cause unintended consequences if other effects subsequently become the dominant factor due to the complexity and variability of the external environment.60 For instance, to realize the people’s commune movement that assumes full control over and mobilization of rural communities, it creates to a large extent the institutional possibility for the rapid rise of social enterprises. The capital, factories, labor force and land can be quickly accomplished by administrative means. If the relations between the government and enterprises under the planned economy are regarded as a rigid structure, they are more flexible in the market economy. Compared with the planned closed order, the market system is often seen as a spontaneous open order. Hayek points out that, “Human intelligence is quite insufficient to comprehend all the details of the complex human society, and it is the inadequacy of our reason to arrange such an order in detail which forces us to be content with abstract rules”.61 In other words, all attempts at total control will in the end only be counter-productive. Although we cannot agree with the laissez-faire economic view 59 Lin

et al. (2012). et al. (2000, p. 176). 61 Ibid., pp. 177–184. 60 Kasper

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advocated by Hayek, excessive government intervention and market regulation will only be overkill in the scope and extent of institutional norms. This not only loses economic efficiency but also restrains the innovative vitality of the market entity. For the economic development of China since the reform, the consensus is introducing and perfecting the market mechanism, putting the “fish” of enterprises in the “sea” of the market and allowing for spontaneous regulation of the market based on macroeconomic regulation. As emphasized earlier, the market system itself is an institutional arrangement and an integral part of the overall economic institutional system. If the “visible hand” of the government and the “invisible hand” of the market play their respective role, the government can directly intervene in economic activities in a comprehensive and in-depth manner, without tremendous cost, and incorporates enterprise behaviors and market activities in a predictable order.

6.2.3 Relationship Structure Although the analysis aims at the government-enterprise relations, it is indisputable that their relations are not only “embedded” in the relations between the state and the market, the state and the society as discussed above, but also “embedded” in the relationship network of the government and enterprises. Figure 6.5 is a governmententerprise relationship model plotted according to links between entities, which looks like a “mess”. This relationship is actually more complicated, but it is not untraceable, but the “patterned mess” as proposed by Mann, consisting of three forms of relations, namely the government and enterprises, intragovernmental and interenterprises. Since the main task of this book is to analyze the structure, characteristics and changes of the government-enterprise relations, here the relationship structure mainly refers to the intragovernmental relationship and inter-enterprise relationship. The study of the relationship network follows different orientations and can be mainly divided into two perspectives: the relationship viewed as a constructing process and the regulation of the entity by the relationship structure. Different from the transaction cost school and the institutional school in economics; the study of relationship network opposes “under-socialization” and admits the insufficiency of “over-socialization”.62 The so-called “under-socialization” mainly means that in the economic research domain, people’s behaviors are rational and motivated by interest, and any behavior and attitude of people can be answered from the logic of rational man. If both the government and enterprises are deemed as entities oriented towards the maximization of their interests, the relationship model and interactive evolution between them can be regarded as an interest-based game process. To a certain extent, this perspective views a social individual as a completely rational entity and strips off his sociality. On the contrary, the institutional school in the organizational research regards the behavior of a social individual as the result of the regulation by the social institution, and the result of claiming legitimacy of an individual for adapting to laws 62 Granovertter

(1985).

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Fig. 6.5 The government-enterprise relationship model

and regulations or social and cultural expectations. This obliterates the initiative of the individual and thus is an embodiment of “over-socialization”. Our research is not concerned with the entity constructs the relationship network, but sees the relationship network between entities as the structural factor for the change of the government-enterprise relations, and mainly analyzes how the relationship structure between the government and enterprises influences their relations. 1. Intragovernmental Relationship The core of the intragovernmental relationship is the relations between the central government and local governments. In an article titled On the Ten Major Relationships, Mao Zedong points out, “For a large country like ours and a big Party like ours the proper handling of the relationship between the central and local authorities is of vital importance.”63 This important issue exists in the history of China,64 and the “vertical management” from top to down and the horizontal “block structure”65 exist in the relationship the central and local authorities in the new era, thus facing the two 63 Mao

(1956). (2008). 65 This segmented horizontal and vertical system is called the “M-form” hierarchy by some researchers (Qian and Xu 2008). 64 Xin

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problems of information asymmetry and power asymmetry.66 In order to give play to the enthusiasm of the two aspects, the changes in the power relations or precisely the seeking of a balance between decentralization and centralization become a means of breaking the existing system. Due to the level of government and regional differences where enterprises belong to, the intragovernmental relationship structure is bound to lead to changes in the relations between the government and enterprises. In the light of the government-dominated goals mentioned above, we have analyzed the logic of power decentralization and centralization between the central and local authorities; that is to say, the decentralization is required for realizing economic benefits and the centralization of power is required for achieving political control and stability. This repeated cycle aims to find a point of balance between them. From the analysis of state-owned enterprises and rural collective enterprises, we can also clearly see that the government’s decentralizing and centralizing of power (both administrative and economic) has greatly affected the development model of enterprises. The centralization is generally pronounced under the traditional planned economy. Although this period has also experienced the decentralization movement represented by the “Great Leap Forward” in 1958 and that during the Cultural Revolution, as part of the planning, the decentralization and centralization of state-owned enterprises primarily change the management power of enterprises between the central and local authorities and do not touch on the business autonomy of enterprises. Rural collective enterprises, on the other hand, are rooted in vast rural areas and based on communes and brigades, so the twice decentralization of powers has “accidentally” promoted their development and gradually shifted from the supplement of rural collectives to an important driving force for the development of rural economy. After the reform, the largest decentralization can be regarded as the introduction of the market system, and thus a wide range of decentralization at the economic level has not only “decentralized power and shared profits” to state-owned enterprises, but also accelerated the rapid development of rural collective enterprises. The non-public sector such as private enterprises is also booming. However, with the continuous advance of decentralization, financial revenue, an important issue between the central and local governments, has undergone tremendous changes. The financial and taxation system of “dividing revenue and expenditure between the central and local governments and holding each responsible for balancing their budgets” has caused the financial revenue of the central government to reduce to the “bottom line of decentralization”.67 Thus, since 1994, the “tax sharing reform” begins being implemented, first of all, through the economic centralization. Financial resources are the basis for various arrangements by the government, so this changes the behavioral pattern of the government to a certain extent, thereby affecting the government-enterprise relationship model. Firstly, the reform of the tax system has increased risks and reduced benefits in enterprises run by local governments, so their enthusiasm for developing enterprises is greatly dampened. For example, the transformation and restructuring of state-owned enterprises and rural collective enterprises in the 1990s are largely 66 Hu

(2010). (1997).

67 Wang

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affected by the tax-sharing reform. Second, the tax-sharing system has produced a “drive-out effect” on local governments. The “pressurized” system of turning over financial revenue to the higher authorities forces local governments to seek for financial revenue from budget to extra-budget or even non-budget, and increase their arbitrary charges and fundraising.68 Of course, in addition to the vertical top-down relations at different levels of the government, the horizontal block relations also impact the formation of different relationship models of the government and enterprises. Due to the differences in resource endowments and policy environments in different regions, different forms of government-enterprise relations have been formed in the development history of township and village enterprises, such as “South Jiangsu model”, “Wenzhou model” and “Pearl River model”. After the reform, in order to make use of foreign capital and introduce advanced technologies, economic and technological development zones have been set up in batches in many cities across the country. Then, to promote the development of domestic-funded small-scale enterprises, numerous high-tech zones are set up. These “super-autonomous systems” enjoy special preferential policies and thus the target of local governments. According to statistics, from the establishment of the first batch of economic and technological development zones in 1984 to the establishment of the third batch in 2000, the number of national-level economic and technological development zones has reached 46; in 1991 and 1992, a total of 52 national-level high-tech zones are approved.69 But because of the differences in infrastructure and natural conditions, the development zones along the coast and in the eastern China generally attract more domestic and foreign capitals than the central and western regions. At the same time, local governments play a role of “developer” in attracting investments for the construction of development zones and shape the “government of manufacturers” in the new era. A government-enterprise relationship model different from the traditional system has been constructed by the domination of local governments, based on development zones and relying on different city platforms to enable the interregional flow and competition of capital. 2. Inter-enterprise Relationship In the traditional planned economy, because enterprises are affiliated to a certain level of superior organizations, the acquisition and distribution of resources rely on the top-down planning and allocation, thus cutting off the horizontal relationship among enterprises. When the marketization breaks this institutional framework, the horizontal trading of enterprises and the horizontal flow of resources become easier. However, this horizontal relationship does not follow exactly the logic of the market. The government plays a role of dominator, mediator or protector in the middle of enterprises. For example, after the reform, with the rapid development of township and village enterprises and overheating of the local economy, the central government blames township and village enterprises that “minor enterprises squeeze out major ones”, “scramble for energy, market, capital and raw materials with state-owned 68 Zhang 69 Bao

(2006); Rong et al. (1998). (2002, p. 63, 67, 68).

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enterprises” and restricts the development of state-owned enterprises. They clean up township and village enterprises for many times or even requires “resolutely suppressing township-owned enterprises for protecting state-owned enterprises”. The plight of state-owned enterprises is attributed to the competition of township and village enterprises and a voice is added that the reform of the previous period “shackles tigers but releases monkeys”. In the 1990s, the closing, suspension of operation, merge with others, shift to different lines of production or selling of state-owned enterprises and the serious “triangle debt” of township and village enterprises in the upstream and downstream with partnership with state-owned enterprises also result in failure of normal operation and emergence of bad debts and to a certain extent, lead to the bankruptcy of township and village enterprises and the property right reform. However, this is only a part of the truth. Along with the massive transformation and restructuring of state-owned enterprises in the 1990s, those continuing to “survive” attain a dual position of making profits in the market and access to resources from the government system owing to the state’s policy preferences. This “duality” of state-owned enterprises, plus “invigorating large enterprises while relaxing control over small ones” by the state, has created a number of large groups with “restricted incorporation”, which impede the horizontal flow of resources.70 Especially when the upstream and downstream of major industries are controlled by state-owned enterprises, private enterprises can only go with the government and state-owned enterprises to obtain the necessary elements for their own development, such as orders and resources, and even become affiliated to state-owned enterprises. The capital for expansion and investment must be obtained through banks, and this means they must be reined by monopolistic state-owned enterprises in the financial sector. This kind of inter-enterprise relationship shaped by the dominant goals of state policies and the policy preferences is crucial for understanding the relations of government and enterprises in the new era. Owing to their special status, state-owned enterprises have a kind of “structural autonomy” in the enterprise relationship network, which gives them more advantages than other types of enterprises in resource mobilization and information acquisition. In other words, the specific position of enterprise entities in the relationship network and the relationship structure influence the behavioral patterns of enterprises to a certain degree. Because no enterprise is homogeneous, in the process of constructing the enterprise relationship network, on the one hand, the differences in attributes attached to enterprises, such as ownership type, firm size and industry, determine the characteristics of the shaped relationship structure; on the other hand, once a certain structural relationship is formed between enterprises, such as cooperation, competition and affiliation, this will further regulate corporate behaviors. At the institutional level, the state requires to “ensure that economic entities under all forms of ownership have equal access to factors of production in accordance with the law, compete on a level playing field and are protected by the law as equals.”71 This also 70 Liu 71 Hu

et al. (2008). (2012).

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shows precisely that in the current institutional environment, enterprises of different ownership types cannot equally use the production factors, nor fairly participate in market competitions or be equally protected by laws. The enterprise relationship network formed on this basis also adversely affects the growth and development of disadvantaged enterprises. Different from the domestic market, once enterprises go into the international market, the state often plays a role of advocate or protector to help them be autonomous in the global enterprise network, so as to raise the national competitiveness.

6.3 The Intersection Model and Internal Mechanism of the Relationship Change As mentioned above, the government-enterprise relations are demonstrated and discussed at the two facets, namely internal dynamics and external structural constraints. In view of the autonomy characteristic of the government entity relative to the enterprise entity as well as the dominant and controlling position it possesses, the fulfillment of the multiple goals of the government internally drives the transformation of the relations between the government and enterprises, but this stipulates only one facet for the evolution of such relations. The structural environment, which is the other facet, becomes the external pressure for the evolution and regulates behaviors of the government and enterprises, thus becoming the key to understanding changes in the government-enterprise relations in China. In this sense, the adjustment of the “protective belt” around the “hard core”, that is, institutional arrangements of the government, is a bridge linking the government-dominated goals to the structural environmental constraints. However, the historical experience shows that changes in relations between the government and enterprises are seldom pre-determined by the regulative structural environment or the dominant government goals, but are characterized by “non-linearity” (Fig. 6.6). This not just because institutional arrangements are path-dependent, but unintended consequences of institutional arrangements also promote or hinder the development of their relations towards a given direction. The figure above indicates the change trend of the government-enterprise relations by referring to the development model of human history proposed by Ray Huang. The spiral path shows the development and changes in the relations. The solid arrows denote institutional arrangements made by the government to achieve the dominant goals (different directions of institutional arrangements have different roles, towards the desired goals, path dependent or producing unintended consequences), and the dotted arrows represent the constraints of the structural environment (different directions have different natures of constraint, hindering or promoting). The sum of these two forces, along with the passage of time (but, as stressed by Ray Huang, from the point of view of history, time is counted as a causal variable), continues to affect the changes of the relations between the government and enterprises.72 72 Huang

(1997a).

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Fig. 6.6 The development path of the government-enterprise relations

The above argument is trying to build an analysis framework for the evolution of the relations between the government and enterprises. In fact, when the government makes various institutional arrangements to achieve the dominant goals and adapt to the structural environment, the development of such relations depends on the concrete and sustained interactions between the government and enterprises. As a result, their relations are characterized by mess or form various “impossibly possible” results. From the historical experience, the interactions between the government and enterprises distinctly feature historical stages. A historical stage is called as an intersection, so changes in the government-enterprise relations can be seen as an empirical intersection model. Figure 6.7 is a model of the government-enterprise relation change plotted on the basis of several key intersections of China’s economic and social development. The abscissa axis shows the degree of government intervention in enterprises, while the ordinate axis shows the degree of marketization in China. It can be found that several key intersections are the focus of our analysis of such relations, including the traditional planned economic system, reform and opening up, establishment of the market system and integration of China into the global economic order in the new century. Between these key intersections, China has different economic systems and also differs in the government-enterprise relationship model. The relations of the government and enterprises of different ownership types and their changes between these key intersections have been expatiated in detail in above chapters. Next, based on the above analysis framework, we will summarize and demonstrate the internal mechanism of changes in the relations between the government and enterprises in China.

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Fig. 6.7 The intersection model of the government-enterprise relation change

6.3.1 Embeddedness: Structural Environment for the Relation Change In our analysis of each type of enterprises, we emphasize the structural environment in which the government-enterprise relations evolve. The “embeddedness” runs through the entire process and is embodied by the embedding of economic behaviors in the politics and society. More broadly, entities of the interaction are not only mutually embedded into each other (“mutual embeddedness”), but also deeply embedded in the structural environment. This is due to the reasons that the structural environment has external pressure on entities of action, which need to obtain the legitimacy through continuous adaptation and adaptive embedding, and that the realization of goals depends on the embedded interactions. Moreover, the embedding here has two meanings. On the one hand, the behaviors of both government and enterprises occur in a specific social and political environment. On the other hand, when the government interacts with enterprises, it attempts to use the power to influence the behaviors of enterprises in an embedded manner. The government influences and

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controls the behaviors of enterprises through a series of institutional arrangements, such as changing policies, changing behaviors and changing regulations. The government and enterprises as two different entities of interest will not change their inherent behaviors and concepts without the influence and pressure of the external environment, so they are not driven to embrace internal innovations and changes. Only when the objective environment changes, with the internal motivation, external pressure to change and mutual interest demands, the behaviors and behavioral changes of the government and enterprises can be influenced. For Chinese enterprises, the most important structural environment for their behaviors is the influence of the government behaviors. Indeed, when a system is embedded in the social structure and the social environment in which it survives, then such a system is also deeply marked by such a social environment and social structure, thus forming the interdependence and gradual mixture between each other. 1. Institutional Embeddedness of the Government into Enterprises After the founding of new China in 1949, the most serious problem is the complete blockade and isolation of the newly established republic by Western countries. In this case, the Soviet Union and some socialist countries in the Eastern Europe are the main reference groups for China in carrying out its socialist economic construction. Their institutional arrangements, behavioral orientations and even experiences and lessons learned in the economic construction all exert a tremendous influence on the economic construction behaviors of the newly formed republic. In ideology, China learns from the Soviet Union and clearly points out that the socialism means public ownership. This ideology is used for guiding and promoting the public-private partnerships across the country and carrying out the socialist transformation movement. In the meantime, using the administrative authority of the government, China centralizes resources to launch 156 major construction projects and use them as a catalyst for China’s economic construction and industrialization. During this period, in the process of behavioral interactions of the government and enterprises, the government acts predominantly. It regulates its relations with other economic organizations through a series of institutional arrangements implemented under the guidance of a specific ideology and interacts in such a manner. Here, the government has basically completed the institutional embeddedness from the four aspects, thus creating a good prerequisite for the efficient interaction between the government and enterprises. First, the economic embeddedness means that the government organizes the guides the production and business activities of enterprises through issuing mandatory plans and formulating policies. Second, the political embeddedness refers to the establishment of party organizations in any single enterprise and emphasis on the party’s overall lead over economic activities, so that the party organization in the enterprise plays a political and central role, and the politics and ideology are embedded into the economic structure of enterprises by an institutionalized way. Third, the organizational embeddedness means that the superior government maintains its dominance of the interaction by appointing the principal leaders of enterprises. Fourth, the social embeddedness mainly diversifies functions of enterprises through “burdening them with social responsibilities”. A prominent result of this is that enterprises,

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especially large state-owned enterprises, are no longer merely economic organizations, but have gradually become social communities and organizations integrating political, economic, social and educational functions. After the policy of reform and opening up is framed in 1978, the party and the government bring order out of chaos and shift the focus of their work to the socialist modernization. China’s economic construction no longer just follows the path of Soviet Union, but that of some developed capitalist countries in the West. This suddenly enriches the imitation of economic activities. In ideology, the understanding of the planned economy has gradually begun to change. In 1982, at the 12th National Congress of the Communist Party of China, it proposes “keeping the planned economy as the mainstay and supplemented by the market regulation”; in 1984, at the Third Plenary Session of the 12th CPC Central Committee, the idea is accepted that “the socialist economy is the planned commodity economy on the basis of public ownership”; and in 1987, at the 13th National Congress of the Communist Party of China, it further proposes that “the socialist planned commodity economy should be a system with internal unity of planning and market”. The process reveals that, with the continuously improved understanding of “how to carry out the socialist economic construction”, reflections on the government-enterprise relations also make progress. What can be clearly observed is that in the 1980s and 1990s, starting with “expanding the autonomy of enterprises”, a series of institutional arrangements are made, such as “replacement of profit delivery by tax payment”, “economic responsibility”, “leasehold”, “shareholding” and “tax sharing reform”, for the sake of rediscovering, defining and regulating the government-enterprise relations and regulating economic behaviors of enterprises. During this period, the government’s institutional embeddedness into enterprises shows different characteristics. In terms of economic embeddedness, the government has come to realize that it is necessary to provide macro supervision so that the government can mainly regulate the market and let the market guide enterprises. In this case, the government gradually turns from direct economic intervention to indirect means. As for the social embeddedness, due to the emphasis on the dominant position of enterprises as economic organizations, the diversification of enterprise functions is greatly released. Enterprises are mainly committed to their economic functions and fulfillment of corporate social responsibility. With regards to the political and organizational embeddedness, importance is attached to the party leadership and the factory manager responsibility system under the party committee in state-owned enterprises. Principal leaders of large state-owned enterprises are appointed by the superiors. The government is still in a dominant position in its interaction with enterprises. After entering the 21st century, our understanding of the market economy is further deepened. The goal of establishing a socialist market economic system has been further clarified and calls for the establishment of a modern enterprise system characterized by clear property rights, clear powers and responsibilities, separation of government from enterprises and scientific management in accordance with the laws of the market economy. In this period, keeping public ownership as the mainstay and allowing diverse forms of ownership to develop side by side has also been clearly

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Table 6.1 The characteristics and changes of the government’s institutional embeddedness into enterprises Types of Before 1978 1980s–1990s After 2000 “embeddedness” Economic Planned economy Dual-track economy Market economy embeddedness Political Party leadership by Factory manager Factory manager embeddedness establishing the party responsibility under responsibility under organization the party leadership the party leadership by establishing the by establishing the party organization in party organization in publicly owned publicly owned enterprises enterprises; party organization in non-public enterprises and including and allowing for political participation of entrepreneurs Organizational embeddedness

Appointment of enterprise leaders by superiors

Appointment of leaders in publicly owned enterprises by superiors

Appointment of leaders in publicly owned enterprises by superiors

Social embeddedness

Enterprise burdened with social responsibilities, diversified functions

Focus on economic functions and weakening diversified functions

Emphasis on autonomy in economic activities of enterprises

defined as a basic economic system at the initial stage of our country’s socialism. Under such a macro environment, the relations between the government and enterprises during this period and its interaction tend to be more rational and reasonable. However, since the level of economic development in a region is closely linked with the performance of local government officials, local governments, without exception, extremely enthusiastically participate in and pay attention to the development of the economy. This shows some different characteristics in the government’s institutional embeddedness into enterprises. For economic embeddedness, the government behaviors are involuntarily transformed into economic activities that are enthusiastically participate in and help enterprises. The concrete manifestation is that the government guarantees for enterprises, raises funds for the development of enterprises and provides preferential policies; the government invites investment for enterprises and strives for projects; and the government directly participates in the economic and trade negotiation meetings and so on. In short, during this period, the behavioral characteristics of protection and dependence are manifested very clearly in the process of government-enterprise interactions (Table 6.1). The institutional embeddedness of the government into enterprises is analyzed above. With the deepening of the analysis, these observations should also take account

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of the ownership environment of different enterprises. In other words, there are also significant differences in the ways in which the government interacts with enterprises of different ownership types. 2. Mutual Behavioral Embeddedness of the Government and Enterprises The interactions of the government with state-owned enterprises have different characteristics at different stages. From the reform and opening up to the 1990s, their interactions are achieved through the decentralization of powers and transfer of profits, implementing the contractual management responsibility system and initially separating the ownership and operation powers. Before and after 2000, the expansion of the autonomy of enterprises is mainly manifested in the withdrawal of many government departments in charge of state-owned enterprises, the attempt to use the association to manage industries instead of direct management and the replacement of the previous micro-management with macro-control. In 2003, the state sets up the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), so that the contributors of state-owned assets are initially in place, attempt to separate the government from enterprises and capitals, and spare no efforts in managing state-owned assets by the market-oriented means. Here, the government realizes the management and control of enterprises through a double agency approach. First, the state and the government, through the agency by the SASAC, as the contributor of state-owned assets, manage them by caring for and evaluating the return on investment and taking market-oriented measures. Second, through appointment of chief executives of state-owned enterprises, on the one hand, they manage enterprises on behalf of the state and the government; on the other hand, the state and the government control and urge their efforts in improving the enterprise efficiency by appointment and evaluation, so that state-owned assets can maintain and increase their value at a high level. Moreover, another way of influencing the interactions between the government and enterprises deserves our attention in the study. That is to say, the social roles and identities of the government and corporate leaders exchange and transform through the institutionalized and organized means of appointment. According to the statistics of a related study, among 183 officials at the deputy ministerial level and above in 19 ministries and commissions, 56 have the working experience in state-owned enterprises, accounting for 30.6% of the total. Based on the statistics of the executives of 123 central enterprises, 115 executives in 47 enterprises of information disclosure have worked in the government, averagely 2.45 per enterprise. Thus, there is an exchange of identity between executives of state-owned enterprise and government officials. That study also argues that executives get access to policies and resources through entering the government, and government officials can convert economic benefits after joining enterprises.73 Indeed, the exchange and transformation of government officials and enterprise executives through this institutionalized and organized means have a far-reaching influence on the relations between the government 73 Unirule

Institute of Economics (2011).

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and enterprises and their interaction. Through the exchange of social roles and identities, the two sides of the interaction can better understand each other’s behavior and orientation and grasp each other’s expectations, core concerns and interests. These are fundamentally conducive to improving the interactional efficiency of the government and enterprises. On the other hand, because both sides have a better grasp and understanding of their behaviors and orientations, which to some extent strengthen the behavioral orientations and mutual embedding of the government and state-owned enterprises. The situations are different for collective enterprises and non-public-owned enterprises in the process of their development because they interact more with the government at the grassroots level. Over a considerable long period of time, the level of local economic development is directly linked to the performance of local government officials. This institutional arrangement motivates and regulates the enthusiasm of local officials for participating in economic activities of enterprises. It leads to an economic phenomenon with Chinese characteristics, namely, the local government and its officials have the double roles and codes of conducts. On the one hand, they are the government or represent the government, thus having the ability to allocate and mobilize all political, economic and social resources in China and organize the socio-economic and political life of a region according to the requirements for the social role of the government. On the other hand, they serve as leaders of enterprises, manage all aspects of business development, and can perceive the government behaviors and their enthusiastic participation or even direct decisions on financing, investment, attraction of investors, product sales, land acquisition and employment. The government gradually evolves into a corporative government in a certain sense, thus gaining a development experience with Chinese characteristics: different local governments not only need to regulate the market but also act as special enterprises or as a corporative government participating in the market economy. Different local governments and enterprises are gradually becoming the main competitors against each other and promoting the development of China’s economy. The interaction of the government and enterprises is achieved in this development process. At the same time, private enterprises interact with the government through political connections and are embedded into the institutional environment built by the government. This is mainly manifested in that large-scale private enterprises seek the political legitimacy through the establishment of party organizations, and seek political resources and policy protection through entrepreneurs being elected as members of people’s congress, CPPCC members and leaders of industrial associations. Through the above analysis, it can be clearly seen that at the different development stages and in different historical periods, the government have different degrees, methods and features of embeddedness in its interaction with different types of enterprises. Obviously, with the continuous promotion of reform and opening up and the deepening of understanding of the socialist market economy, the people have a new understanding of how to handle the relations between the government and enterprises, especially the recognition and definition of their respective social roles in the socialist market economy. All these are driving the constant changes in behaviors of the government and enterprises during the reform and opening up.

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6.3.2 Path Dependency: Institutional Arrangements and Inertia of Change When analyzing the behaviors of Chinese government and enterprises and their relations during different periods, we find that the government is always in a dominant and powerful position in this interaction process. The behaviors of enterprises in many cases are not “market-oriented”, but often “government-oriented”. The “aggressive force” of the government and the “submissive weakness” of enterprises leave a strong impression to us. Then, the first problem is why they have such behavioral rules, patterns and orientations. In a general sense, it is difficult to understand the behavioral pattern and orientation. However, if the behaviors of the government and enterprises and their interactions are put into a specific structural environment, understood with the reference groups, and considered with the imitation mechanism of behaviors, we can rationally comprehend changes in the government-enterprise relations. Therefore, the path dependency may be an important theoretical entry point for us to understand such change. The path dependency theory is first proposed by the institutional economics North. This theory primarily explains the process and mechanism of how the past institution influences the current and future institution and how the past behaviors of people influence their future behaviors. It reveals that an existing institution and people’s social behaviors have a kind of “inertia” similar to that in physics. When an institution has been adopted, some kind of social behaviors are implemented, or a specific path is utilized, this institution or behavior possibly produces an inertia and depends on the past choice and path. According to North, the past choices may largely determine the choices now and in the future. History does play a very important role. All our decisions or choices today are in fact influenced by historical factors.74 From the perspective of social behaviors, when a person makes a choice, he is likely to follow the path of his choice all along and cannot help but act on his chosen course of behaviors. After a person makes a choice, there will inevitably be the inertia of a behavior, which continues to be self-enforced in the subsequent course of behaviors. If at this time another behavioral pattern is chosen, it is likely to need to pay a lot of costs. The more deeply a person’s behavior is affected by his socialization, the deeper and deeper he will be influenced and restricted by the behavior in his future course of behaviors, the more possible he is impacted and restrained by such behavior. Human behaviors are path dependent, so is the behavior of an organization and institution. When an institution and organization is embedded in the social environment, there are many choices and problems. The most important of them is the path dependency and self-enforcement. This means that in the social process of institutional and organizational changes, after the organization and institution have chosen a path under the self-enhancement mechanism, he probably follows the path, and the established direction of the organization and institution may be enhanced in the future 74 North

(1981); Kasper et al. (2000).

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development. In other words, the initial choice of an institution and organization has a very strong influence and binding force on the trajectory and future directions of such institutional and organizational change. Once the choice has been made and established, the institution and organization will be dependent on such choice. The path dependency is compared to the inertia in physics. If a path is entered, it may be depended on. The established direction of a path will be self-enhanced in the future development. On the one hand, the path may produce so-called flywheel effect through inertia and momentum and promote the evolvement and development of an institution and organization towards the direction of a virtuous circle. On the other hand, the path may have a negative feedback through inertia and momentum, thereby this institution and organization sinks into or is locked in a doom loop, eventually leading to inefficiency and stagnation.75 When analyzing the relations between the government and enterprises, the theoretical thinking path dependency is helpful to deepen our understanding of the changes in such relations. As we know, after the founding of new China in 1949, the first problem is the complete blockade and isolation of the newly established republic by Western countries. In this case, the Soviet Union and some socialist countries in the Eastern Europe are the main reference groups for China in carrying out its socialist economic construction. Their institutional arrangements, behavioral orientations and even experiences and lessons learned in the economic construction all exert a tremendous influence on the economic construction behaviors of the newly formed republic. These have a tremendous impact on our handling of the government-enterprise relations. After the reform and opening up in 1978, we have systematically borrowed the theories and experiences of economic development from the western capitalist countries, which play a good exemplary role in building our socialist market economy. However, because of the long-term influence of the Soviet Union and socialist countries in the Eastern Europe on our original behaviors and ideology, there is a behavioral inertia towards the planned economy and an impulse to deal with the government-enterprise relations according to the mode of the planned economy. Despite the demonstration effect of the market economy after the reform and opening up, for either the government or enterprises, the path dependency of behaviors and ideas before the reform and opening up still persistently affect the behaviors of the government and enterprises and their interactions. In fact, from the initial conditions and process of the institutional and organizational changes of China, the reform and changes focus on the marginal institutional innovation by relying on the existing economic and social organizations. Unlike many other countries or regions with economies in transition, which are subject to changes and reforms, China does not simply liberalize its market and allow for free competitions of social and economic organizations to promote the development of the market system, nor abandons the existing organizational structure and starts a new organization to force changes and undertake reform. What’s more, China makes full use of the existing economic, political and social organizations in the original planned system, depends on the organizational and institutional resources that have 75 Li

et al. (2005).

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been accumulated over a long period of time, steadily drives the organizational and institutional changes and innovations through the orderly marginal organizational innovations, and results in the organizational and institutional changes and innovations based on the path dependency. Looking back the historical process of China’s reforms and changes over these years, most of newborn economic organizations are directly and indirectly dependent on the transformation, extension, grafting and shelling of the original state-owned and rural collective enterprises. The traces of the behavioral pattern and orientation of the original state-owned enterprises can still be clearly seen in many large-scale private enterprises that grow up later. Some major executives of these enterprises are, in many cases, are the dual leaders of the organizational transformation. In the early stages of the reform, this situation is particularly evident. During that period, the behavioral pattern and orientations of leaders in state-owned enterprises are the important reference for those of private enterprises. Consequently, it is not difficult for us to understand the path dependency in enterprise behaviors.76 Meanwhile, for a long period of time, a lot of market-oriented organizations that are emerging because of the transition, once reaching a certain scale, must rely on or seek the protection of the government and get close to the original organization. The reform depending on existing economic organizations can minimize frictions and resistance, reduce the risk of institutional innovations and make use of traditional organizational and institutional resources at a low cost. In China, a country where the market economy is built on a weak foundation, with an indifferent social and legal system and bad credit relations, low individual endurance and seriously underdeveloped civilian organizations, only depending on the party and government organizations at all levels as well as state-owned and collective economic units that have formed and occupy an absolute control position, can avoid major shocks and steadily deepen the reform.77

6.3.3 Ideology: The Social Process of the Relationship Change While reviewing the social process of changes in the government-enterprise relations since the founding of new China, it can be clearly sensed that either the embeddedness or the imitation of past experience, besides the conscious learning by the government and enterprises, reflects their recognition and acceptance of this experience. That is to say, the social process of such embeddedness and changes is achieved and completed in an ideological way. It is impossible to realize efficient embedding and changes without the socializing influence of the ideology on the government and enterprises. According to Giddens, the ideology mainly has three functions to (1) present sectional interests as universal, (2) transmute or deny contradictions, and (3) naturalize 76 Li

et al. (2005); Li (2006a, p. 216). (2003).

77 Chen

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the present through reification. Giddens argues that the ideology is a tool to legitimize the ruling structure and a medium for exercising power to safeguard and cover up sectional interests.78 In other words, the ideology provides a context of meaning conducive to certain groups, while simultaneously masking the ruling nature of the system of meaning. In the process of institutional and organizational changes, the ideology plays a major role in the following aspects.79 The social process of organizational and institutional changes and innovations always manifests itself as new institutional arrangements that gradually replace the old institutional arrangements and new kind of behavioral rules gradually replace old ones. In such a social process, the first problem encountered is to convincingly explain why the new institutional arrangements replace the old arrangements and why the new behavioral rules replace the rules. If this problem cannot be reasonably explained, these new institutional arrangements and behavioral rules will not be fundamentally accepted by people. The ideology plays an important role in explaining this problem. Through the ideological propaganda, people are convincingly told how the old institutional arrangements seriously hinder the realization of their interests, while the new institutional arrangements can certainly bring more and wider range of benefits to more groups and individuals. When people can know and recognize from the heart that the new ones should indeed replace the old ones, this will greatly reduce the resistance against changes and innovations, thereby successfully realizing the smooth transition from the old institutional arrangement and behavioral rules to new ones. To replace old institutional arrangements and behavioral rules, the legitimacy of such replacement must be demonstrated. Only when people are convincingly persuaded, they can fundamentally agree with these new institutional arrangements and behavioral rules. The power of ideology must be relied upon for explaining the legitimacy of such changes and innovations. Ideology, as a well-constructed system of beliefs and worldviews, can use its inherent logical force to demonstrate the legitimacy of such changes and innovations in a powerful way and conquer the mind by the logic of language and the propaganda of public opinions, so that people are touched and begin to believe the legitimacy of new institutional arrangements and behavioral rules. The process of accepting new institutional arrangements and behavioral rules is also a process of internalizing and socializing them. Good institutional arrangements and design provide people with not just a series of behavioral rules, but also values hidden behind these rules. Only by allowing people to accept such values in the process of socialization and consciously change the behavioral rules designed by the institution to be their own code of conduct and part of their behaviors, this institutional innovation can be truly integrated into people’s social behavioral structure and embedded into our social structure. Here, it is particularly important to persuade people to believe and accept the rationality, legitimacy and superiority of new institutional arrangements. Ideology, especially in that period, can play a very important 78 Giddens 79 Li

(1979). et al. (2005); Li (2006a, pp. 220–226).

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role. People always have faith. When people can believe through the ideology that a new institutional structure is more reasonable, legitimate, fairer and more just, they gradually accept that the new institutional structure can bring more benefits to themselves and others under the premise of fairness and justness. In other words, if this kind of norms and beliefs are eventually penetrated habitually into their life and behaviors bit by bit, people will strive and engender enormous enthusiasm and benefits. In this sense, the ideology is embodied as a special productive force that can motivate people to create and reduce the cost of institutional innovations. Moreover, the ideology becomes an important prerequisite for successful organizational and institutional innovations and changes. From another perspective, the new institution is legitimized through the process of ideology, which transformed into a part of the structure within certain organizations through the institution. To some extent, institutional regulated behaviors are achieved through the function of ideology. People also achieve the internalization and socialization of new institutional arrangements and new rules with the help of ideological propaganda. The process of structural embedding is precisely realized by the role of ideology in organizations. Having understood the role of ideology, we can deeply recognize that the ideology is of a pivotal significance for shaping behaviors of the government and enterprises in all aspects. Before the reform and opening up, when taking the Soviet Union and socialist countries in the Eastern Europe as the main reference groups for our behaviors, we embed their behavioral pattern and conceptions into our own behaviors and mind and become a part of ourselves through the process of socialization and relearning by using the power of ideology. After the reform and opening up, we also accept the behaviors and conceptions of economic development in the West by virtue of the ideology and through the socialization and relearning, and under this principle, handle the government-enterprise relations. In fact, without the role of ideology, the behaviors and demonstration effects of the reference groups cannot be internalized into our own behaviors and conceptions. If the socialist public ownership is deemed as the expression of ideology on ownership, changes in the public ownership and the ways of realization before and after the reform in China are also one of the internal logic for the changes in the government-enterprise relations. As is known to us, after 1949, China implements the socialist system. According to the understanding at that time, the superiority of socialism lies in its public ownership. Therefore, in rural areas, people’s communes are established in accordance with the principle of “being large in size and collective in nature”; in cities, the “public-private partnership” is carried out to gradually eliminate private ownership. After the completion of the socialist transformation, the public ownership is basically accomplished in the cities and rural areas of China. After the reform, although enterprises of various ownership types compete for development, the dominant position of public ownership and the state control of key industries and important areas are never relaxed. This is also an embodiment of the socialist ideological guideline.

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6.3.4 Unintended Consequences of Institutional Arrangements As stated above, the transformation of the government-enterprise relations is government-centered, and unintended consequences accompany the government’s pursuit of its dominant goals. These consequences are “interstitial” in relation to the institutionalized government-enterprise relations. The “interstices” and institutionalized relations jointly constitute an important motivation and a structural environment for the subsequent evolution of the government-enterprise relations. Intended social actions of human beings can lead to unanticipated social consequences, which are called “unanticipated consequences of purposive social action” by related sociologists. This research perspective is applied to our analysis of the relations between the government and rural collective enterprises. The unintended nature of institutional arrangements is different from the path dependency of the institution. If the path dependency deals with the government-enterprise relations along some established institutional trajectory, due to the variability and uncontrollability of the structural environment, when the government handles its relations with enterprises, the preliminary institutional arrangements cannot follow the established goals, not necessarily achieve intended goals, or even hinder the achievement of government goals. However, such unintended nature is so uncontrollable and random either in results or in functions that we can only describe the changing process of unintended consequences caused by institutional arrangements from an ex-post perspective. If the path dependency can be used for explaining similarities in the government-enterprise relations before and after the reform, unintended nature of institutional arrangements can answer the differences occurring with changes in the external environment. Michael Mann’s view is quoted that unintended consequences create new relations and institution in the interstices and at the edge of the institution.80 These institutional interstices and edges become key entry points for our discovery and demonstration of the changes in the relations between the government and rural collective enterprises. The development of rural collective enterprises is summarized academically to be the “four waves of ups and downs”,81 in which each transition is accompanied by a series of unintended consequences. Different from the rational design and the natural process of growth, commune and brigade enterprises emerge as a supplement to rural collectives. Their development benefits from the decentralization during the “Great Leap Forward” and “People’s Commune” movements carried out by the central government to change the social structure at the grassroots level. However, local governments develop commune and brigade enterprises not out of economic returns and community welfare, but the mobilization of irrational political movements under a high degree of ideology. For the “rebirth” of rural collective enterprises after the Cultural Revolution, in addition to the positive promotion effect brought about by the loosening of the central policies and the shift of rural development goals, the 80 Mann 81 Zhang

(1986). and Zhang (2001).

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unintended consequences of a series of institutional arrangements concerning other issues play a role of “thruster”. These unintended consequences are vividly expressed as resource advantage + labor advantage + technological strength + market needs. After the reform, the development and expansion of rural collective enterprises have been described as “unexpected”. The internal mechanism, the “dual track” system that lasts for decades, the decentralization and centralization of powers within the government and the land right reform are the key factors for the development of rural collective enterprises. The decentralization of powers by the central government is “tonic” for the operation of enterprises by local governments at the grassroots level, thus providing various preferential treatments and protection for the development of rural collective enterprises. Meanwhile, the path dependency on the commune and brigade enterprise formed before the reform becomes a structural condition for the subsequent development and operation of rural collective enterprises. They grow rapidly and occupy “one-third of the national economy”, but then undergo the large-scale property right reform. Of course, besides institutional arrangements of the central government, they are adversely affected by the “triangle debt” as a consequence of the closing, suspension of operation, merge with others, and shift to different lines of production or selling of state-owned enterprises. At the same time, the tax-sharing reform also dampens the enthusiasm and increase risks of local governments for operating enterprises. All these factors are combined together to accelerate the decline of rural collective enterprises.

6.4 Brief Conclusions The interactions of and changes in the government-enterprise relations are a historic topic for academic studies with numerous achievements. The abundance of related studies and the heterogeneity of viewpoints are beyond our expectation. Under this academic and realistic background, it is undoubtedly very difficult to propose a new analytical perspective to this historical practice that has lasted for more than 60 years. It is even harder to give a satisfactory explanation. As pointed out in the introduction part, the study in this book is not intended to establish a completely new theory for analyzing the government-enterprise relations or building a formal model. Instead, based on previous studies, from the sociological analysis point of view, a holistic analysis framework is constructed on historical intersections and focuses on how the concrete and continuous interactions of entities shape the pattern and form of such relations. First of all, starting from the logical relationship between “change” and “changelessness”, China’s government-enterprise relations are considered as essentially the power relations in which the government is in a dominant and controlling position. These power relations are reflected mainly in three aspects: economic income, political control and ideology. That is to say, the interactions between the government and enterprises revolve around how the government makes institutional arrangements to achieve the three goals. This is only one facet of the issue. To thoroughly under-

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stand the government-enterprise relations with Chinese characteristics, the structural environments in which entities are embedded cannot be ignored. These structural environments include the macro-historical tradition, the legitimacy level of the government, the international market, the institutional environment constructed by the government’s institutional arrangements and also the relationship structure formed between the government and enterprise entities. The above three aspects as structural factors directly or indirectly influence and restrict the behavior orientation and interactions of government and enterprises alone or in combination. According to our historical experience, the changes of the government-enterprise relations are seldom predetermined by the regulative structural environments or the dominant government goals, but characterized by “nonlinearity”. These changes gradually develop with the passage of history under the synergy of the government’s motivation of pursuing the dominant goals and the constraints of the structural environments. As a matter of fact, when the government makes various institutional arrangements to achieve the dominant goals and adapt to the structural environments, the development of the government-enterprise relations depends on the concrete and sustained interactions between the two types of entities. Consequently, such relations are characterized by mess or form various “impossibly possible” results. From the historical experience, the interactions between the government and enterprises distinctly feature historical stages. A historical stage is called as an intersection, so changes in the government-enterprise relations can be seen as an empirical intersection model. These intersections are divided into several historical stages, namely the planned economic system between the founding of new China and the reform and opening up, the dual track system formed after the reform, the market-oriented economic system established in the early 1990s and the integration of China into the global market order since the 21st century. Through an analysis of state-owned enterprises, rural collective enterprises and private enterprises, we make clear changes in the behavioral interactions and the relationship model between the government and different types of enterprises in the above historical stages. In our analysis of the interactions between the government-dominated goals and the structural environments and the interactions between the government and enterprise entities in the specific historical situations, the institutional arrangements of the government are considered to be a bridge guiding the government-enterprise relations and adjusting the government-dominated goals and the pressure from the structural environments. The roles played by institutional arrangements, which are the internal mechanism for changes in the government-enterprise relations, can be summarized as embeddedness, path dependency of institutional arrangements, unintended consequences of institutional arrangements, and socialization of ideology. Our recognition and understanding of these aspects becomes the key to our comprehension of changes in the government-enterprise relations on a macroscopic basis. If some elements with Chinese characteristics or Chinese experiences can be abstracted from the changes in the government-enterprise relations, the following points keep a certain degree of stability and particularity at least in the past sixty years.

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1. In China, the government has the strong ability of resource mobilization and organization. After the founding of new China, depending on such ability and “concentrating our forces on major tasks”, the government lays a solid foundation for the industrialization of new China under the conditions of the socialist planned economy, coordinates the government-enterprise relations by planning and accumulates experience for organizing the socialist economic construction. After the reform and opening up, the government still depends on such ability to guide, realize and promote the behavioral interaction with enterprise organizations through the induced and forced institutional arrangements and under the logic of the state marketism. 2. The changes in the organization and institution of Chinese enterprises are all realized under the powerful influence of government behaviors during their interaction with the government. Through institutional arrangements and the power of resource allocation, the government gradually influences and changes the behaviors of enterprise organizations by changing policies, behaviors and regulations; brings about changes of enterprises’ organizational behaviors in the socialization process by virtue of ideology; and keeps itself in a dominant position in the course of organizational and institutional changes of enterprises through the political, economic, organizational and social embeddedness. Therefore, when we analyze the government-enterprise relations in China, they should not be understood in a general sense, but analyzed in the specific political, economic and social environments of China, thereby we can fundamentally grasp such unique relations based on their social and realistic significance in China. 3. In a general sense, Chinese enterprises, especially state-owned ones, are not purely economic organizations in economics, but more or less carry out political and ideological structures and functions. Without knowledge of this point, we cannot fundamentally understand Chinese enterprises. 4. In China, there are at least two core values in adhering to the socialist system with Chinese characteristics: one is to uphold the leadership of the communist party and the other is to keep the public ownership as the mainstay. This kind of political perseverance and aspiration are the same as some basic features of the work unit society and our state-owned enterprises, which include the state ownership, the appointment of leaders by superiors and “building party branch at the company level”. Despite the reform for more than 30 years and experiencing decades of ups and downs, the core elements of our institution are still deeply embedded in various unit organizations, including enterprises. The core of this socialist system undergoes no fundamental change. The communist party in China is not an abstract concept and objective existence, but exercises the will of rule by its organization as the carrier. Although the future development of Chinese unit organizations, including state-owned enterprises, may be changed, alienated and weakened, as long as these fundamental elements of our institution are not abandoned, in the current Chinese society, the work unit system, including enterprises, will not be completely abolished. It will still function as an institution, a form of rule and a specific social structure of China and fundamentally affect China’s government-enterprise relations, thus shaping the Chinese characteristics and features of such relations.

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5. How to organically combine the state-owned institution with the free market economy is an important proposition in the process of institutional innovations, changes and development of today’s China, which seems to find an answer in the economic development process since the reform. If one concept is used to define this, the “state marketism” is very appropriate. The “state marketism” integrates the mutually confrontational domains of state and market and implies a wealth of practical significance, especially insightful for explaining the sustained and rapid economic development and the government-enterprise relations of China. The economic development since the mid-1990s (especially after the 16th CPC National Congress) achieves an economic leap-forward under the state domination of the market with the public ownership as the mainstay and non-public sector developing side by side. State-owned enterprises become primary entities of the state marketism. In the theoretical domain of the state marketism, the state is dominant, but the market autonomy is equally important. Through the introduction and domination of the market, the state has found an effective path to link public and private sectors and maintain the balance of state power and market interests between the government regulation and the resource allocation by the market. This path depends heavily on state-owned enterprises. During the large-scale property right reform of state-owned enterprises in the middle and late 1990s or in the process of “growing bigger and stronger” state-owned enterprises since the new century, we unswervingly persist in the dominant position of the public sector and the domination of state-owned assets in important industries and key areas that are vital to national security and are the lifeblood of the economy. Encouraging, supporting and guiding the development of the non-public sector are economic adjustments on the periphery of the “concentric circle”. Rather than putting forward our analysis views and perspectives, this book can be considered as an exploration and a literature review of previous studies. Although we try to construct a holistic analysis framework, there are still a lot of deficiencies in the academic inheritance and innovation of the framework and the summary of historical facts, which need further improvements in future studies. In our opinion, it is appropriate to come to an end by modifying the quote from Claude Lévi-Strauss. Our explanation consists not in moving from the complex to the simple but in the replacement of a less intelligible complexity by one which is more so.

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