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Fiscal Reform and the Economic Foundations of Local State Corporatism in China

Published online by Cambridge University Press:  13 June 2011

Jean C. Oi
Jean C. Oi
Affiliation:
Harvard University
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Abstract

In the 1980s fiscal reform in China provided localities with strong incentives and a heightened capacity to pursue industrial growth. As a result, local governments have responded vigorously to economic reform, managing rural collective-owned enterprises as diversified corporations, with local officials performing the role of a board of directors. This article analyzes the incentives that have led to the development of this form of local state corporatism and rapid rural industrialization, and it describes the ways in which local governments coordinate economic activity and reallocate revenues from industrial production. These developments are important for two reasons: they show that local government involvement in the economy does not necessarily decline with the expansion of market coordination; and they offer a successful model of reform that serves as a counterpoint to privatization proposals.

Type
Research Article
Information
World Politics , Volume 45 , Issue 1 , October 1992 , pp. 99 - 126
Copyright
Copyright © Trustees of Princeton University 1992

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References

1 Chen, Kang, Jefferson, Gary, and Singh, Inderjit, “Lessons from China's Economic Reform,” Journal of Comparative Economics 16 (June 1992).CrossRefGoogle Scholar

2 Hongyu, Zhang, “China's Land System Transformation and Adjustment of Agricultural Structure: Reviewing China's Rural Reform and Development since 1978,” Liaowang Overseas Edition 47 (November 25, 1991), 16–17Google Scholar, translated in FBIS-CHI-91–241, December 16, 1991, pp. 52–54. The most impressive growth in agriculture was prior to 1985. For a useful economic overview of the impact of the reforms on agriculture, see Terry Sicular, “China's Agricultural Policy during the Reform Period,” in Joint Economic Committee, Congress of the United States, China's Economic Dilemmas in the 1990s: The Problems of Reforms, Modernization, and Interdependence (Washington, D.C.: Government Printing Office, 1991), 1:340—64.Google Scholar After 1985 the most dynamic growth was in rural industry.

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6 I present a preliminary version of this argument in Oi, “The Chinese Village, Inc.,” in Reynolds, Bruce, ed., Chinese Economic Policy (New York: Paragon House Press, 1988).Google Scholar Others have drawn a similar analogy between local government and business entities. See, e.g., articles in Byrd, William and Qingsong, Lin, eds., China's Rural Industry: Structure, Development, and Reform (New York: Oxford University Press, 1990).Google Scholar

7 Schmitter, for example, defines corporatism “as a system of interest representation in which the constituent units are organized into a limited number of singular, compulsory, noncompetitive, hierarchically ordered and functionally differentiated categories, recognized or licensed (if not created) by the state and granted a deliberate representational monopoly within their respective categories in exchange for observing certain controls on their selections of leaders and articulation of demands and supports” (pp. 94–95). See Schmitter, Philippe C., “Still the Century of Corporatism?” reprinted in Pike, Fredrick B. and Strich, Thomas, eds., The New Corporatism: Social-Political Structures in the Iberian World (Notre Dame, Ind.: University of Notre Dame Press, 1974).Google Scholar Joseph Fewsmith uses a version of Schmitter's understanding of corporatism to describe China during the Republican period. See Fewsmith, , Party, State, and Local Elites in Republican China: Merchant Organizations and Politics in Shanghai, 1890–1930 (Honolulu: University of Hawaii Press, 1985).Google Scholar Alfred Stepan provides one of the most useful general treatments of corporatism. See Stepan, , The State and Society: Peru in Comparative Perspective (Princeton: Princeton University Press, 1978)Google Scholar, esp. pt. 1. Stepan uses corporatism to refer to “a particular set of policies and institutional arrangements for structuring interest representation. … In return for such prerogatives and monopolies the state claims the right to monitor representational groups by a variety of mechanisms so as to discourage the expression of ‘narrow’ class-based, conflictual demands. Many…have used such corporatist policies for structuring interest representation” (p. 46).

8 This link is explicit in David Ost's treatment of Solidarity as an example of societal corporatism. See Ost, , “Towards a Corporatist Solution in Eastern Europe: The Case of Poland,” Eastern European Politics and Societies 3 (Winter 1989).Google Scholar A similar link to civil society is pursued in the writings on China, although with many more reservations. See, e.g., Chan, Anita, “Revolution or Corporatism? Chinese Workers in Search of a Solution” (Paper presented at the conference Toward the Year 2000: Socioeconomic Trends and Consequences in China, Asia Research Centre, Murdoch University, Western Australia, January 29–31, 1992)Google Scholar; Yang, Mayfair, “Between State and Society: The Construction of Corporateness in a Chinese Socialist Factory,” Australian Journal of Chinese Affairs 22 (July 1989)CrossRefGoogle Scholar; Lee, Peter, “The Chinese Industrial State in Historical Perspective: From Totalitarianism to Corpora tism,” in Womack, Brantly, ed., Contemporary Chinese Politics in Historical Perspective (Cambridge: Cambridge University Press, 1991)Google Scholar; and Pearson, Margaret, “The Janus Face of Business Associations in China: Socialist Corporatism in Foreign Enterprises” (Manuscript, Dartmouth College, 1992).Google Scholar

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11 The interviews were done in 1986, 1988, 1990, and 1991. I conducted fieldwork in three primary research sites: two counties in Shandong province and one county outside Tianjin. I also conducted interviews in a few counties and villages in Liaoning and Sichuan provinces. Most interviews lasted two to three hours. A few of the interviews were with scholars working on related topics at various research institutes and with national-level officials in Beijing.

12 For a useful summary of the evolution of fiscal policies and variations in the formal system, see Oksenberg, Michel and Tong, James, “The Evolution of Central-Provincial Fiscal Relations in China, 1971–1984: The Formal System,” China Quarterly 125 (March 1991)CrossRefGoogle Scholar; and Tong, James, “Fiscal Reform, Elite Turnover and Central-Provincial Relations in Post-Mao China,” in Australian Journal of Chinese Affairs 22 (July 1989)CrossRefGoogle Scholar; Wong, Christine, “Fiscal Reform and Local Industrialization: The Problematic Sequencing of Reform in Post-Mao China,” Modem China 18 (April 1992)Google Scholar; and idem, “Central-Local Relations in an Era of Fiscal Decline: The Paradox of Fiscal Decentralization in Post-Mao China,” China Quarterly 128 (December 1991). See also Donnithorne, Audrey, Centre-Provincial Economic Relations in China (Canberra: Contemporary China Centre, Australian National University, 1981).Google Scholar Formore specific treatment of the tax reform in Shanghai, see White, Lynn T. III, Shanghai Shanghaied? Uneven Taxes in Reform China, Centre of Asian Studies Occasional Papers and Monographs, no. 84 (Hong Kong: University of Hong Kong, 1989).Google Scholar See also Wang, Shaoguang, “From Revolution to Involution: State Capacity, Local Power, and [Un]governability in China” (Manuscript, Yale University, n.d.).Google Scholar

13 The changes during the prereform fiscal system are numerous. On the early periods up until 1960, see Donnithorne, Audrey, China's Economic System (London: George Allen and Unwin, 1967)Google Scholar; on the later period, see Wong (fn. 12, 1992).

14 Tong (fn. 12) notes in his survey of the tax reforms that there is tremendous variation. Not all areas have instituted the tax responsibility system to the township. The specifics of the tax responsibility system are too diverse and complex to detail here in full.

15 Some cadres who work for local government are not considered state cadres. They are paid not from the official budget but from extrabudgetary funds.

16 Based on a report by China's minister of finance, Wong (fn. 12, 1991) writes that in 1989 localities remitted a total of 44.7 billion yuan to the central budget while receiving central subsidies of 56.3 billion yuan (p. 698).

17 China Interview 52290.

18 The other major items that make up the within-budget revenues include the agricultural tax and the profits from state-run enterprises within the locality. China Interview 8891.

19 In addition, there are some taxes designated as “central” taxes. These similarly are not subject to revenue sharing. Central taxes are the sole property of the central state. Localities collect but receive nothing from central taxes, such as those on government commercial agencies like banks and the post office.

20 For the details, see Oi, , “Private and Local State Entrepreneurship: The Shandong Case” (Paper presented at the annual meeting of the Association for Asian Studies, Washington, D.C., April 2–5, 1992).Google Scholar

21 China Interview 81391.

22 Wong (fn. 12, 1992), 205.

23 Tam, On Kit, “Fiscal Policy Issues in China” (Manuscript, University of New South Wales, Canberra, July 1990).Google Scholar

24 China Statistical Yearbook 1990 (New York: Praeger, 1991), 223.

25 See Wong (fri. 12, 1991); and Naughton, Barry, “Implications of the State Monopoly over Industry and Its Relaxation,” Modern China 18 (January 1992).CrossRefGoogle Scholar

26 In 1988 it was 25.3% of total industrial taxes. Zhongguo tongji nianjian 1989 (Beijing: Zhongguo tongji chubanshe, 1989), 240.

27 Xian, He, “Woguo xiangzhen qiye shouru fenpei wenti,” Zhongguo nongcun jingji 3 (March 21, 1988), 34.Google Scholar

28 See Xiangzhen qiye nianjian 1978–1987 (Beijing: Nongye chubanshe, 1989), 270, for an official list of exemptions. Setting up factories for the disabled and therefore earning tax-free status was pursued in two of the Shandong villages that I investigated.

29 Zhongguo tongji nianjian 1989 (fn. 26), 240. These proportions were similarly reflected in my field research. China Interview 6688. Andrew Walder also found that second category taxes on state-owned enterprises located at the county level contributed more to the local treasury than did the income tax. See Walder, , “County Finance and Local Industry: A View from Zouping County, Shandong” (Paper presented at the Jackson School of International Studies, University of Washington, Seattle, February 15, 1990).Google Scholar

30 China Interview 21688.

31 He Xian (fn. 27).

32 On the state urban sector, see Walder, Andrew, “Local Bargaining Relationships and Urban Industrial Finance,” in Lieberthal, Kenneth G. and Lampton, David M., eds., Bureaucracy, Politics, and Decision Making in Post-Mao China (Berkeley: University of California Press, 1992).Google Scholar

33 China Interview 8888.

34 China Interviews 52290 and 81391.

35 Margaret Levi, among others who have highlighted the predatory nature of states, tends to focus on taxation policies. See Levi, , Of Rule and Revenue (Berkeley: University of California Press, 1988).Google Scholar

36 Again, there seem to be regional variations. But in the majority of my cases profits are paid to the economic commission.

37 He Xian (fn. 27) provided no details, but I assume that the sidelines refer to such activities as pig raising done by households. Around Shanghai, this is an additional 10%. In the same region there is yet a third levy, this one on workers in the enterprises, that goes toward the “aid agriculture, aid sidelines fund.” He Xian (fn. 27).

38 This also varies. In one county, which contains one of the richest and one of the most industrialized villages in China, the economic commission took only .6% of sales as a management fee.

39 There are indications that this amount is not always forwarded.

40 China Interview 8688. As a result of national regulations the amount taken by some economic commissions has apparently been reduced in the last couple of years. According to one county official of a township enterprise management bureau in Shandong, before 1985 the township economic commission took as much as 40–50% of total after tax-profits. China Interview 53188.

41 China Interview 71988.

42 China Interview 6488.

43 For further documentation on this, see Oi, , “The Fate of the Collective after the Commune,” in Davis, Deborah and Vogel, Ezra, eds., Chinese Society on the Eve of Tiananmen: The Impact of Reform, Contemporary China Series, no. 7 (Cambridge: Council on East Asian Studies, Harvard University, 1990).Google Scholar

44 For the purposes of this analysis I am assuming that cadres are noncorrupt. Obviously, some are. But corruption is not a very useful explanation and would leave unexplained the impressive growth that has taken place in China's rural economy. Moreover, rapid economic growth does not preclude the improved well-being of those local officials. One must also keep in mind that the new budget constraints imposed by the fiscal reforms compel localofficials to keep their own greed in check and use the profits and revenues from local enter prises to fund local expenditures and for reinvestment. The rapid growth in China's rural economy, particularly the 25-plus percent growth rate in rural industrial output, suggests that officials have used these funds to promote further growth, not just to line their pockets.

45 On the growth of local governments, see White, Tyrene, “Political Reform and Rural Government,” in Davis and Vogel (fn. 43)Google Scholar; and idem, “Below Bureaucracy: The Burden of Being a Village under the Local State” (Paper presented at the annual meeting of the Association for Asian Studies, Chicago, April 5–8, 1990).

46 Byrd and Lin (fn. 6) examine reasons why some areas have not successfully developedrural industry.

47 China Interview 52290.

48 For an elaboration of this point, see Oi, , State and Peasant in Contemporary China: The Political Economy of Village Government (Berkeley: University of California Press, 1989).Google Scholar

49 Scott, James C., The Moral Economy of the Peasant: Rebellion and Subsistence in Southeast Asia (New Haven: Yale University Press, 1976).Google Scholar

50 China Interview 21688.

51 I discuss how this tension was resolved by Maoist cadres in Oi (fn. 48).

52 For a more detailed discussion of the diverse effects of the fiscal reforms on agriculture, see Oi, , “Chinese Agriculture: Modernization, But at What Costs?” in Robinson, Thomas and Lin, Zhiling, eds., The Chinese and Their Future: Beijing, Taipei, and Hong Kong (Lanham, Md.: University Press of America, 1992).Google Scholar

53 I examine this option in Oi (fn. 20).

54 The exception is in places like Wenzhou, which is famous for its private businesses.

55 The term rural enterprises includes various types of ventures, from factories to food stalls, that range from collective to private owned. The largest and economically most significant of the enterprises in terms of output value, number of people employed, and taxes paid are those owned by local government, either the township or village. Unless otherwise noted, the discussion in this article is limited to collectively owned enterprises.

56 The percentage of the rural labor force engaged in all types of rural enterprises rose from 9.5% in 1978 to 22.1% in 1990. The proportion is even higher in areas with developed rural industries. Zhang Hongyu (fn. 2).

57 See Byrd and Lin (fn. 6) for detailed studies of rural enterprises based on survey data. See also Wong, Christine P. W., “Interpreting Rural Industrial Growth in the Post-Mao Period,” Modern China 14 (January 1988)CrossRefGoogle Scholar; and Oi (fn. 43).

58 Zhongguo tongji nianjian 1988 (Beijing: Zhongguo tongji chubanshe, 1988), 214.

59 Zhang Hongyu (fn. 2).

60 Zhongguo nongye nianjian 1989 (Beijing: Nongye chubanshe, 1989), 20.

61 The others are private or joint-stock enterprises.

62 He Xian (fn. 27).

63 Ibid.

64 Xiangzhen qiye nianjian 1978–1987 (fn. 28), 270.

65 See Oi (fn. 43) for a more detailed discussion of how this income keeps the village together as a “collective” by providing the necessary funds to pay for welfare and public services and to support agriculture, as well as for reinvestment in industry.

66 An exception seems to be Fujian, where Nee and Su indicate that they were sold. See Nee, Victor and Sijin, Su, “Institutional Change and Economic Growth in China: The View from the Villages,” Journal of Asian Studies 49 (February 1990).CrossRefGoogle Scholar

67 The corporate good is defined more broadly than narrow economic interest and profits. It may include social as well as ideological interests.

68 Johnson, Chalmers A., MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanfordy, Calif.: Stanford University Press, 1982).Google Scholar

69 Some factories regularly work in the middle of the night when the supply of electricity is more reliable

70 See Oi, , “Fiscal Reform, Central Directives, and Local Autonomy in Rural China” (Paper presented at the annual meeting of the American Political Science Association, Washington, D.C., August 29-September 1, 1991).Google Scholar

71 For a more detailed discussion of bank reforms, see On Tam, Kit, “Prospects for Reforming China' Financial System” (Paper presented at the Conference on China's Reforms and Economic Growth, Australian National University, Canberra, November 11–14, 1991).Google Scholar

72 Oi (fn. 70).

73 See Wong (fn. 12, 1991 and 1992).

74 Walder (fn. 29) has found the same phenomena operating with regard to the stateowned factories at the county level.

75 Chen, Jefferson, and Singh (fn. 1).

76 See Naughton (fn. 25).

77 Compare Nee (fn. 9) with Nee, Victor, “Organizational Dynamics of Market Transition: Hybrid Forms, Property Rights, and Mixed Economy in China,” Administrative Science Quarterly 37 (March 1992).CrossRefGoogle Scholar

78 Writing shortly after the reforms started, Kathleen Hartford points to the general need for cadres to increase their control over finances if they are to keep the collective alive and their power strong. See Hartford, , “Socialist Agricultural Is Dead: Long Live Socialist Agriculture! Organizational Transformations in Rural China,” in Perry, Elizabeth J. and Wong, Christine, eds., The Political Economy of Reform in Post-Mao China, Contemporary China Series, no. 2 (Cambridge: Council on East Asian Studies, Harvard University, 1985).Google Scholar

79 Oi (fn. 43).

80 China Interview 8691.

81 See Oi (fn. 70).