Transforming Post-Communist Political Economies (1998) / Chapter Skim
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17 The State as an Ensemble of Economic Actors: Some Inferences from China's Trajectory of Change
17 The State as an Ensemble of Economic Actors: Some Inferences from China's Trajectory of Change
Pages 432-452
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From page 432... ...
Serious reform initiatives had been blocked by political considerations since the 1950s in the Soviet Union and most other communist regimes. Even in regimes such as Janos Kadar's Hungary, which had gone the furthest in attempting to insinuate market mechanisms and free enterprise, efforts at partial reform were consistently undercut by the stubborn reality of soft budget constraints and bureaucratic bargaining inherent in state ownership of industrial assets (Kornai, 1990a)
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From page 433... ...
This explains why impulses for economic reform were perennially so weak, and why regimes that did try reforms always pulled back from the brink. Even in economies that underwent partial market reform, officials benefited disproportionately from markets because of their control of valuable assets, contracts, and licenses (Szelenyi and Manchin,1987~.
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From page 434... ...
To Kornai and other early reformers, the only remedy for these defects of central planning was to introduce market mechanisms: evaluate managers and allocate investment according to profit criteria, not plan fulfillment; make them find their own customers and compete for sales; and allow prices for products to fluctuate so they would better reflect relative scarcities. After more than a decade of experimentation in Kadar's Hungary, however, Kornai had concluded that such partial reform was doomed to failure; a market economy could not be grafted successfully onto socialist stock (Kornai,199Oa)
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From page 435... ...
It permitted the preferences of planners to reign over aggregate demand; the vast surpluses accumulated at the center were the foundation for bailouts and soft budget constraints. But for the reasons we have just seen, the fiscal structure supported a system of industrial administration that stifled innovation and productivity growth, causing these economies to fall further behind the market economies.
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From page 436... ...
Market reform cannot succeed under a fiscal structure that concentrates capital in the hands of government bureaucrats. Despite these persuasive arguments, however, the Chinese communist party has presided over a strategy of partial reform that has produced extraordinarily rapid economic growth.
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Hundreds of subnational governments were to a considerable extent "redistributive economies" on a scale similar to that of Hungary. By 1985, there were over 100,000 state industrial enterprises in China, only 3,835 of which were under central government planning, contributing revenues directly to the center.
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From page 438... ...
Would not the result of this fiscal decentralization simply be a hierarchy of thousands of smaller redistributive economies, each of which would replicate the fundamental problems of soft budget constraints that plague all public industry administered by economic bureaucracies? The answer to that question is a qualified, but firm, no.
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From page 439... ...
The nonfinancial interests of the state in public firms prevent the imposition of hard budget constraints and therefore lead partial reforms into an impasse of constant bargaining, with concealment of financial resources as the central strategy a reproduction of the central flaws of the system. If we conceive of the state not as a single redistributive system (a not unreasonable assumption for Hungary)
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From page 440... ...
Below the rural counties were 91,000 townships and towns with an average of fewer than 2 public enterprises each, and below these townships were another 80,000 villages with less than 1 enterprise on average. The fiscal reforms of the 1980s gave each of the 93,000 government jurisdictions above the village level clearer residual rights to increases in revenues (Walder, 1995a:275~.
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From page 441... ...
In the small jurisdictions where one or two firms might contribute well over half of local revenues, there quite literally is no other source of revenue to compensate. The losses of the firm create havoc with local government finances, and government spending must be slashed immediately.
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From page 442... ...
True, public officials intervene deeply in the main business decisions of firms to start new product lines, invest in one plant or another, or assemble capital and loans for one venture while deciding against another. But if local industry fails to thrive, local government revenues stagnate.
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From page 443... ...
The center's share of total government revenue shrank from an average of 50 percent in the decade prior to 1978 to an average of only 28 percent in the decade after (Wang, 1995:104~. The growing evidence of budgetary shortfalls at the center and the steady drop in the profitability of the large state enterprises has set alarm bells ringing among conservative national politicians and has been cited by some scholars as evidence that China's strategy of partial reform is failing.
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From page 444... ...
Moreover, they illustrate the ways in which government officials in this transitional economy are themselves pivotal economic actors. Officials as Entrepreneurs In many of the smaller rural jurisdictions in which there are only a few public enterprises in a village or township, or in which there is one that is much larger in scale than others, village heads or party secretaries will directly manage the firm that supplies them with their main source of revenue.
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From page 445... ...
After a relatively slow start, these nonpublic enterprises have grown very rapidly since 1990, often with the active encouragement and concrete assistance of local government (Walder, 1998~. Local government officials travel far outside their jurisdictions to gather technical information to assist the development of local firms with regard to both manufacturing technology and especially product specifications.
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From page 446... ...
The state security agency, for example, is part owner of a luxury hotel in Beijing, having created a partnership with one of Hong Kong's wealthiest real estate tycoons. The private companies spun off from China's military establishment have become actively involved in the export of arms and in the import of sensitive military-related technology both of which have created highly publicized strains in U.S.-Chinese relations.
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From page 447... ...
Partial reforms have created a dynamic process of change and of rapid economic growth that earlier models of the state would not have deemed possible (see especially Nee and Lian, 1994~. Indeed, the above discussion implies that this continuing economic transformation is naturally transforming the state itself.
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From page 448... ...
Local government officials who manage a portfolio of marketonented public enterprises have come to see the less profitable or loss-making enterprises as troublesome burdens, not worth the scarce time and resources they want to devote to their successful ventures (Kung, 1996; Ruf, 1996; Whiting, 1996; Walder, 1998~. Far from wanting to preserve these public enterprises at all costs, they now actively seek to divest themselves of these dead assets by leasing them or selling them off at a discount.
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From page 449... ...
Paper presented at the conference Property Rights in China's Transitional Economy, June 13-15, Hong Kong University of Science and Technology. Division of Social Science, Hong Kong University of Science and Technology.
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Pp. 27-52 in Changing Political Economies: Privatization in Post-Communist and Reforming Communist States, V
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From page 451... ...
1995a Local governments as industrial firms: An organizational analysis of China's transitional economy. American Journal of Sociology 101(September)
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From page 452... ...
452 THE STATE AS AN ENSEMBLE OF ECONOMIC ACTORS Wong, C.P.W. 1986 Ownership and control in Chinese industry: The Maoist legacy and prospects for the 1980s.
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