Uneven Paces of Early Privatization

Before the precipitous decline of public ownership in the late 1990s, gradual erosion had already taken place despite the initially predominant tendency of local governments to promote the growth of public enterprises. The erosion began right after the start of economic reforms. As shown in table 1.7 in chapter 1, from 1980 to 1995 the share of the public sector in the total nonfarm workforce declined from 99.4% to 64.2%. The decline occurred earlier and trended down to lower levels in rural areas than in urban areas. From 1985 to 1998 the share of the public sector in the rural nonfarm workforce went down from 60% to 38%, whereas that in the urban workforce dropped from 96% to 51% (table 1.8). There was also increasing variation over time, and the variability in the rural sector was greater than that in the urban sector among different provinces, as indicated by the coefficients of variation.

There are three major explanations for what led to early privatization in some locales of the country. The first one emphasizes the role of entrepreneurship. The central argument is that private entrepreneurs defied the restrictions imposed by the state and created new economic realities that the central leadership subsequently had to reckon with (e.g., Huang 2008; Nee and Opper 2012; Tsai 2002). A factor that facilitated this is that some local authorities bent the rules where the growth of private business could help boost local economic growth, though sometimes private entrepreneurs pressed ahead even without the acquiescence of local officials (Tsai 2002).

throughout the political system, and there is no clear evidence of significant variations across jurisdictions and administrative levels. For understanding the spatial variations in early privatization, therefore, one can hardly derive much additional explanatory power by looking at collusive dealings of political actors. Moreover, private exchange relations in the political process were often bundled with public policy issues and disguised as “normal” types of interaction. For this to be sustained, justifications had to be fabricated to contain the political risk involved, which is the focal issue here.

The second explanation focuses on the lasting impact of history on the composition and behavior of the local political elite. In Wenzhou of Zhejiang province, for example, Liu (1992) finds a close relationship between a thriving private sector in the early years of reform and a permissive policy environment for private business. She attributes this to the potent influence of native officials in the local party-state apparatus and traces the origin of such influence to the fact that the region was “self-liberated” by native-led guerrillas during the communist revolution rather than taken over by the regular armed forces of the CCP. With deep social and family ties in local communities, guerrillas-turned-officials shared a political culture that tolerated petty private economic elements during the Mao era. The supportive policy toward private business in the reform era was an outgrowth of that long-standing tradition, which was further reinforced by various personal benefits from collusive ties with private business people. Zhang (2011) echoes this view in a broader study on the evolution of the private sector in Zhejiang but adds that factional power struggles between native cadres and outside appointees solidified the alliance of the former with the local grassroots, thereby opening up more space for the growth of private business.

The third explanation is that early privatization was a second-best choice for some local governments. As noted in chapter 4, Whiting (2000) argues that locales with a weak presence of nonfarm public enterprises in the Mao era were in a disadvantageous position to compete with those with strong organizational legacies. In face of growing difficulties in relying on the expansion of local public enterprises for addressing their career and revenue concerns, officials in locales with poor organizational endowment in the public sector tended to hold a more tolerant or even supportive attitude toward private business. The initial weakness of public enterprises thus helps explain the strength of the private sector during the early years of reform, and vice versa.

All these explanations are useful but need to be further developed. The entrepreneurship argument points to a fundamentally important driving force of private economic activities. But it leaves open the question of why the degree of privatization varied across space. This question cannot be adequately explained by looking at the resilient behavior of entrepreneurs only, as the entrepreneurial spirit could be dampened or enhanced by the local institutional environment.[1] Political actors, who played an important part in shaping the constraints and incentives faced by private business people, need to be brought into the picture. And, as I have argued in the introductory chapter, because of the political costs (risks) associated with different policies, the benefit embedded in mutual dependence between these two groups of actors is insufficient to explain the varying attitudes and behavior of local officials toward private business. Furthermore, entrepreneurship involves not only the propensity to innovate and take risk for profit making, but the ability to do so. Among the factors affecting such ability is the precommunist local business culture—that is, the stock of cumulative knowledge, understanding, experiences, strategies, and behavioral norms shared among locals in regard to the internal and external organization of private business. Both the level of development before the communist revolution and the depth of the socialist transformation afterward could have a major impact on the strength of the entrepreneurial forces in the local economy after the start of reforms.

This brings up the role of local history. The causal linkage emphasized by the argument about the composition of the local elite is that the tolerance or protection by native cadres kept prerevolution local business traditions alive, which in turn provided a launch pad for more intense synergetic interactions that propelled the growth of the local private sector after the start of reform. The gist of the story is that there was a symbiosis between local political actors and socioeconomic forces. To reveal the mechanisms of this possibility, three questions need to be further considered. First, why were petty private economic elements tolerated or even protected by local cadres to a greater extent in some locales than others before the reform, when different locales faced similarly strong structural constraints on petty corruption? Liu (1992) attributes this to a shared local political culture dating back to the prerevolution era but offers no further explanation. Second, were native cadres in local governments a homogenous group? This seems to be a key assumption of the thesis. If it does not hold, however, what explains the observed uneven distribution of remnant private elements ? Third, regardless of the validity of this assumption, how did the sympathizers of private business defuse or fend off the ideologically legitimate and politically menacing challenges from their opponents (as individual or factional rivals) in the local political establishment? This question is important in that without a certain degree of acquiescence from the latter, the observed policy outcome could not have been sustained. Again there is a major gap in the analysis.

Local history is also a major concern of the organizational legacy argument. But its focus is on the implications of uneven postrevolution economic buildup for subsequent policy orientations in the reform era. Unlike the local elite composition thesis, it explicitly argues that the preferences of local officials were closely linked to their self-interest calculus with regard to career movement and resource control, which varied under different structural conditions. Such variation is then used to explain why in locales where prerevolution business traditions were similarly strong (i.e., Shanghai, Wuxi, and Wenzhou) there were different policy outcomes in regard to private ownership. As pointed out in the preceding chapter, this account helps illuminate the varying abilities of local authorities to sustain the sales expansion strategy through local public enterprises after the reform. But it is not sufficient to explain the varying paces of early privatization among locales experiencing early slowdowns of expansion among local public enterprises. Again, how local officials justified their toleration or support for private business beyond centrally set limits needs to be considered.

Indeed I argue that political risk management holds a key to understanding the focal issues in all three arguments and to enhancing their explanatory power. I illustrate this by taking a close look at the case of Wenzhou, which has been analyzed to support or derive these arguments. The missing link I seek to add back to the story is the fabrication and sustainability of justifications for deviant administrative behavior of local political actors, which is an undertaking conditioned by local history and geography. The peculiar circumstances under which local entrepreneurial forces survived socialism— partly due to the damaging effects of highly divisive politics on local state capacity rather than “benevolence” of indigenous officials—and developed into a strong driving force of early privatization make Wenzhou an “aberration” among locales facing difficulties in sustaining the initially dominant strategy of promoting sales growth in the public sector. This peculiarity nevertheless provides a useful benchmark for understanding the different gradations of early privatization before the mid-1990s.

  • [1] Ningbo and Hangzhou, for example, are two regions in Zhejiang province with long-standing entrepreneurial traditions. But their local economies were mainly driven by public enterprises until the mid-1990s. See the discussion below.
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