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Governing China's Transition to the Market: Institutional Incentives, Politicians' Choices, and Unintended Outcomes

Published online by Cambridge University Press:  13 June 2011

Dali L. Yang
Dali L. Yang
Affiliation:
University of Chicago
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Abstract

This essay reviews two books that seek to account for China's success in making economic reforms and sustaining rapid growth. One perspective explains China's reformist approach in terms of politicians making choices under certain institutional rules. The other sees an economic logic of market transition and emphasizes policymakers' limited abilities in governing the economy. The essay assesses the merits of these competing claims. It calls for better specification of the causal linkages between institutional rules and politicians' choices and concludes that both the dynamics and dilemmas of China's political economy are explained in terms of increasing market competition. Finally the essay evaluates the argument that decentralization leads to market segmentation and points to the Chinese government's evolving role in dealing with the economy.

Type
Review Article
Information
World Politics , Volume 48 , Issue 3 , April 1996 , pp. 424 - 452
Copyright
Copyright © Trustees of Princeton University 1996

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References

1 See, e.g., Kristof, Nicholas and WuDunn, Sheryl, China Wakes: The Struggle for the Soul of a Rising Power (New York: Times Books, 1994)Google Scholar; Overholt, William, The Rise of China: How Economic Reform Is Creating a New Superpower (New York: W. W. Norton, 1993).Google Scholar

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3 For a neoclassical perspective on rent seeking, see Krueger, Anne O., “The Political Economy of the Rent-Seeking Society,” American Economic Review 64 (June 1974).Google Scholar For one widely reported proposal to surmount the problem, see Winiecki, Jan, “Buying Out Property Rights to the Economy from the Ruling Stratum: The Case of Soviet-Type States,” International Review of Law and Economics 9 (June 1989).CrossRefGoogle Scholar Winiecki's other works have emphasized elite resistance to reforms.

4 Whereas Naughton makes the rise of nonstate enterprises a crucial component of his analysis, Shirk (p. 20) chooses to concentrate on state-owned enterprises, on the grounds that they generate a large share of China's output value and financial revenue. Neither pays much attention to the more successful reforms in agriculture and foreign trade, although Shirk has since extended her study to foreign trade; see Shirk, , How China Opened Its Door: The Political Success of the PRC's Foreign Trade and Investment Reforms (Washington, D.C.: Brookings Institution, 1994).Google Scholar

5 The term “political bureau” is used here instead of “politburo” because the former is the standard translation used by the Chinese since the 1980s.

6 Shirk claims that the selection of top leaders follows certain formal as well as tacit rules and norms but admits at the end of the book that much remains to be learned about the choice rule by which the selectorate operates (p. 339).

7 It should be pointed out that Shirk is aware that her approach has limitations. In the conclusion (p. 339), she frankly admits that “we are still a long way from a genuine model of communist political institutions and policy-making. In studying the Chinese reform, I often found myself unable to explain changes in policies by the institutional context and fell back on ad hoc explanations instead."

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9 Shirk notes that the percentage of provincial officials plus regional military officers was more than 50% of the total Central Committee membership in 1987. It should also be noted, however, that counting only provincial party secretaries, while the percentage for 1987 (38%) was higher than in 1982 (34%), both were actually lower than in 1977 (43%). Moreover, the Central Committee should not be confused with the selectorate; the CC is only part of the selectorate and it is not clear what proportion of the selectorate these officials constitute.

10 Shirk uses the word “surprisingly” to describe this move.

11 Tseng, WandaKhor, Hoe EeKochhar, KalpanaMihaljek, Dubravko, and Burton, David, Economic Reform in China: A New Phase (Washington, D.C.: International Monetary Fund, 1994), 34–35.Google Scholar The conservative policies for localities stipulate that the center will no longer make transfers to cover local fiscal deficits. Neither can the local deficits be financed with bond issues or bank borrowing.

12 Deng turned eighty-nine in 1993. The life expectancy at birth in China as of 1991 was sixty-nine. A number of important party elders, including Chen Yun, Wang Zhen, Deng Yingchao, and Yao Yilin, died in recent years.

13 Shirk points out that through the 1980s the Ministry of Finance either supported fiscal contracting or was lukewarm about pushing for sweeping changes in the fiscal system. It is thus hard to imagine that central leaders would want to push for drastic reforms.

14 This argument is made in Yang, Dali L., “Reform and the Restructuring of Central-Local Relations,” in Goodman, David S. G. and Segal, Gerald, eds., China Deconstructs: Politics, Trade and Regionalism (London and New York: Routledge, 1994).Google Scholar

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16 On p. 171 Shirk says that the three metropolises were “the only” provincial units dissatisfied, but in light of the other comments cited here, this was clearly not the case.

17 Shirk (p. 151) recognizes the differential impact of fiscal decentralization on the provinces by saying that “this fiscal reform formula did not make the local governments as a whole better off.”

18 Revenue balance (RB) = revenue — expenditure. If RB > 0, then the province sent money to the center; if RB < 0, then the province received a central subsidy. The index of provincial representation on the Central Committee is compiled by assigning a different value to each level. These values range from 1 for a Central Committee alternate member to 5 for a member of the Political Bureau Standing Committee. I am grateful to Zhiyue Bo of Roosevelt University for supplying me with these numbers from a database he has compiled. The figures for population and level of economic development come from State Statistical Bureau, Zhongguo tongfi nianjian (Statistical yearbook of China) (Beijing: Zhongguo tongji chubanshe, 1988–89).Google Scholar

19 N = 29, F(l, 27) = 4.73, Coefficient = 5.800625, Standard Error = 2.666862, t = 2.175, significant at the 0.05 level, Adjusted R2 = 0.1176.

20 Bruce Jacobs and Lijian Hong, “Shanghai and the Lower Yangzi Valley,” in Goodman and Segal (fn. 14), 224–52.

21 Xiaoping, Deng, “Emancipate the Mind, Seek Truth from Facts and Unite as One in Looking to the Future (December 13, 1978),” in Selected Works of Deng Xiaoping (1975–1982) (Beijing: Foreign Languages Press, 1984), 157.Google Scholar

22 Shirk, 202; Naughton, Barry, “False Starts and Second Wind: Financial Reforms in China's Industrial System,” in Perry, Elizabeth and Wong, Christine, eds., The Political Economy of Reform in PostMao China (Cambridge: Harvard University Council on East Asian Studies, 1985).Google Scholar

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24 Shirk (pp. 225—26) draws on her interviews to suggest that the strength of the conservatives influenced Deng Xiaoping to back Zhao's tax-for-profit approach. Yet there is evidence indicating that Deng, like Hu, promoted the paradigm of contracting outside agriculture once the rural reforms had been deemed successful in the early 1980s. On June 18,1983, Deng said that, while industry and agriculture differed, “the basic principle [of reform] should be based on the responsibility system; and this must be affirmed.” Deng Xiaoping wenxuan (Selected writings of Deng Xiaoping) (Beijing: Renmin chubanshe, 1993), 3:29, also 78, 81–82.Google Scholar

25 Shirk writes: “As a longtime provincial leader newly arrived in the capital, Zhao presumably already had the support of many fellow locals in the Central Committee, although they did not constitute a personal following comparable to Hu's” (p. 222).

26 Fewsmith, Joseph, Dilemmas of Reform in China: Political Conflict and Economic Debate (Armonk, N.Y.: M. E. Sharpe, 1994), 234 n. 34.Google Scholar On Hu's resignation, see Baum, Richard, Burying Mao: Chinese Politics in the Age of Deng Xiaoping (Princeton: Princeton University Press, 1994), 205–7.Google Scholar

27 Baum (fn. 26), 207.

28 Ibid., 208. Baum points out that Party Central Document no. 3 (1987), which justified the ouster of Hu Yaobang, also “provided the rationale for allowing retired party elders to override younger leaders in time of crisis.”

29 An alternative explanation is that both Hu and Zhao were doing Deng's bidding in promoting reforms. Both were sacrificed by Deng and blamed for problems in reform.

30 China Daily, June 20, 1995, p. 4.

31 Joffe, Ellis, The Chinese Army after Mao (London: Weidenfeld and Nicolson, 1987).Google Scholar

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33 Earlier and important contributions to the study of bureaucratic decision making in China include Lieberthal, Kenneth and Oksenberg, Michel, Policy Making in China: Leaders, Structures, and Processes (Princeton: Princeton University Press, 1988)Google Scholar; Lieberthal, Kenneth and Lampton, David, eds., Bureaucracy, Politics, and Decision Making in Post-Mao China (Berkeley: University of California Press, 1992)Google Scholar; and Bachman, David, Bureaucracy, Economy, and Leadership in China (Cambridge: Cambridge University Press, 1991).CrossRefGoogle Scholar For an argument that there was less real bargaining over the interests involved, see Hamrin, Carol Lee and Zhao, Suisheng, eds., Decision Making in Deng's China: Perspectives from Insiders (Armonk, N.Y.: M. E. Sharpe, 1995)Google Scholar, xxxv.

34 Path-dependent processes demand historical analysis of the causal chains that lead from the past to the present. In the words of Paul David, “It is sometimes not possible to uncover the logic (or illogic) of the world around us except by understanding how it got that way. A path-dependent sequence of economic changes is one in which important influences upon the eventual outcome can be exerted by temporally remote events, including happenings dominated by chance elements rather than systematic forces”; David, “Understanding the Economics of QWERTY: The Necessity of History,” in Parker, William N., ed., Economic History and the Modern Economist (Oxford: Blackwell, 1986), 30.Google Scholar

35 This sketch of an argument is fleshed out in Yang, Dali L., Calamity and Reform in China: State, Rural Society, and Institutional Change since the Great Leap Famine (Stanford, Calif.: Stanford University Press, 1996).Google Scholar

36 Solinger, Dorothy, From Lathes to Looms: China's Industrial Policy in Comparative Perspective, 1979–1982 (Stanford, Calif.: Stanford University Press, 1991).Google Scholar

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38 An interesting look into this aspect of post-Mao China is Hamrin, Carol Lee, China and the Challenge of the Future (Boulder, Colo.: Westview Press, 1990).Google Scholar

39 Naughton points out bluntly that one major reason for the adoption of the gradual approach was “simply because so much time was wasted pursuing dead ends and even regressive policies” (p. 22).

40 Naughton first told of this story and explored its implications in truncated form in “Implications of the State Monopoly over Industry and Its Relaxation,” Modern China 18 (January 1992).Google Scholar

41 While private and foreign-funded firms have become more important over time, most firms in the so-called nonstate sector are public enterprises funded by local community governments. See Walder, Andrew G., “Local Governments as Industrial Firms: An Organizational Analysis of China's Transitional Economy,” American Journal of Sociology 101 (September 1995).CrossRefGoogle Scholar

42 For a sampling of the debate, see Hsu, Robert C., Economic Theories in China, 1979–1988 (Cambridge: Cambridge University Press, 1991), 125–30.Google Scholar

43 Qian, Yingyi and Xu, Chenggang, “Why China's Economic Reforms Differ: The M-Form Hierarchy and Entry/Expansion of the Non-State Sector,” Economics of Transition 1 (June 1993).CrossRefGoogle Scholar

44 Yang (fn. 35), chap. 8.

45 For distinctions between two different types of decentralization (firm versus local government), see Schurmann, Franz, Ideology and Organization in Communist China (Berkeley: University of California Press, 1968), 175–78Google Scholar, 196–99.

46 Muqiao, Xue, Bashi niandai de zhongguo jingji (The Chinese economy in the 1980s) (Beijing: Jingji guanli chubanshe, 1992), 24–26Google Scholar; Liren, Shen and Yuanchen, Dai, “Woguo ‘zhuhou jingji’ de xingcheng jiqi biduan he genyuan” (The formation, adverse consequences, and roots of “duke-style economies” in our country), Jingji yanjiu (Economic research), no. 3 (1990), 12—20.Google Scholar

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48 For one interesting discussion of the difference size makes, see Lewis, John P., “Some Consequences of Giantism: The Case of India,” World Politics 43 (April 1991).CrossRefGoogle Scholar

49 The dynamics of local government competition and emulation is discussed in Yang, Dali, “Policy Credibility and Macroeconomic Control in China” (Paper delivered at the annual meeting of the American Political Science Association, Washington, D.C., September 1993).Google Scholar Personal interviews with municipal planning officials convey a palpable sense of competition. Planning officials often stressed to me that their planned projects should not be revealed publicly for fear that other localities might use such information to get ahead of them.

50 Zhongguo fangzbi gongye nainjian (China textile industry yearbook) (Beijing: Fangzhi gongye chubanshe, 1986–1991).Google Scholar

51 For an interesting case study, see Watson, AndrewFindlay, Christopher, and Yintang, Du, “Who Won the ‘Wool War’?” China Quarterly, no. 118 (June 1989)Google Scholar; for a regional perspective, see Yang, Dali, “Reforms, Resources, and Regional Cleavages: The Political Economy of Coast-Interior Cleavages in China,” Issues and Studies 27 (September 1991).Google Scholar

52 Polanyi, Karl, The Great Transformation (Boston: Beacon Press, 1957).Google Scholar

53 Renmin ribao (People's daily), overseas ed., September 30, 1995, p. 2.

54 For an overview of various types of interregional cooperation, see Yang, Dali L. and Wei, Houkai, “Rising Sectionalism in China?” Journal of International Affairs 49 (Winter 1996).Google Scholar

55 Anjali Kumar, “Economic Reform and the Internal Division of Labor in China: Production, Trade and Marketing,” in Goodman and Segal (fn. 14), 99–130, esp. 113, 125.

56 Wall Street Journal, September 12, 1995, pp. 1, 6.

57 The amount of foreign investment is not a good indicator of foreign penetration of the Chinese market, however. Just under two-thirds of the foreign investment in China comes from Hong Kong and will therefore no longer be “foreign” by 1997; a substantial amount of this is also believed to be original mainland capital being funneled back into China via Hong Kong to take advantage of preferential policies for foreign investment. For the same reason, China's export figures should be viewed with caution because they report total value only. This grossly overstates Chinese export prowess in the case of products assembled from imported parts.

58 For a provocative discussion of this topic, see Bernard, Mitchell and Ravenhill, John, “Beyond Product Cycles and Flying Geese: Regionalization, Hierarchy, and the Industrialization of East Asia,” World Politics 47 (January 1995).CrossRefGoogle Scholar

59 Economist, June 24, 1995, p. 16.

60 Ibid.

61 Wade, Robert, “East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence,” World Politics 44 (January 1992), 285.CrossRefGoogle Scholar

62 Yang, Dali, “From Command to Guidance: China's Turn to New Industrial Policies,” Journal of Asian Business 11, no. 2 (1995).Google Scholar

63 China Daily (Business Weekly), May 22, 1995, p. 6.

64 An optimistic assessment is provided by Tisdell, who argues that “by having an appropriate policy for international cooperation and technology transfer, it should be possible for China to develop rather than ‘de-develop’—that is, to avoid becoming trapped in a center-periphery situation.” Tisdell, Clement, Economic Development in the Context of China: Policy Issues and Analysis (London: Macmillan, 1993), 42.CrossRefGoogle Scholar