State Capitalism, Institutional Adaptation, and the ...

3 downloads 67 Views 2MB Size Report
Library of Congress Cataloging in Publication Data. State capitalism, institutional adaptation, and the Chinese miracle I [edited by]. Barry Naughton, Kellee S.
COMPARATIVE PERSPECTIVES IN BUSINESS HISTORY China's on-going transition to a new form of capitalism dominates the attention of the world economy in the twenty-first century. Rightly so. Since the late 19705, China's growth rate has been phenomenal and has moved the society from the fringes to a leading role in global output, finance~ and political economy. State Capitalism, Institutional Adaptation, and the Chinese Miracle, edited by Barry Naughton and Kellee S. Tsai, analyzes the rise and remaking of state-owned businesses in the People's Republic of China during this enormous experiment in social, political, and economic reconstruction. "State capitalism" captures China's unique blend of markets, finance, government-owned corporations, and central control. The volume's analytic framework is explicitly interdisciplinary combining original studies by leading China scholars in history, economics, politics, and sociology. To clarify the contents and the implications of state capitalism, the editors have organized the essays into three sections: the evolution of the state sectorj outcomes and processes; and the grand perspective on historical, social, and systematic change in China. We trust that these subjects will interest all those readers - scholars and general readers alike - who have an interest in the stunning evolution of what is currently the world's second largest economy.

State Capitalism, Institutional Adaptation, and the Chinese Miracle

Edited by BARRY NAUGHTON University of California, San Diego

KELLEE S. TSAI Hong Kong University of Science and Technology, Kowloon Johns Hopkins University, Baltimore, Maryland

Series Editors Franco Amatori, Bocconi University Louis Galambos, Johns Hopkins University Sponsors Associazione per gli Studi Storici sull'Impresa (ASSI), Milan Istituto di. Storia Economica, Bocconi University, Milan The Institute for Applied Economics, Global Health, and the Study of Business Enterprise, Johns Hopkins University PJ'eviously Published The Rise and Fall of State-Owned Enterprise in the Western World, edited by Pier Angelo Toninelli Business History around the World, edited by Franco Amatori and Geoffrey Jones The Cooperative Business A1ovement~ I950 to the Present, edited by Patrizia Battilani and Harm G. Schroter The Third Industrial Revolution in Global Business, edited by Giovanni Dosi and Louis Galambos The Global Chemical Industry in the Age of the Petrochemical Revolution, edited by Louis Galambos, Takashi Hikino, and Vera Zamagni

CAMBRIDGE UNIVERSITY PRESS

To the memory of Maria Weber

CAMBRIDGE UNIVERSITY PRESS 32 Avenue of the Americas, New York,

NY

10013-2473,

USA

Cambridge University Press is part of the University of Cambridge. It furthers the University's mission by disseminating knowledge in the pursuit of education, learning, and research at the highest internationalleve1s of excellence.

www.cambridge.org Information on this title: www,cambriclge,org!978II07081062 © Barry Naughton and Kellee S. Tsai

20I5

This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published

2015

Printed in the United States of America

A catalog record for this publication is available from the British Library. Library of Congress Cataloging in Publication Data State capitalism, institutional adaptation, and the Chinese miracle I [edited by] Barry Naughton, Kellee S. Tsai. pages cm. - (Comparative perspectives in business history) ISBN 978-I-I07-o8I06-2 (Hardback) I. Capitalism-China. 2. China-Economic POliCY-2000- 3. China-Economic conditions-20ooI. Naughton, Barry. n. Tsai, Kellee S. HC427.95.S73 2015 330.951-dc23 20I4050302 ISBN

978-1-1°7-08106-2 Hardback

Cambridge University Press has no responsibility for the persistence or accuracy of for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate.

URLS

I

Introduction

State Capitalism and the Chinese Economic Miracle Kellee S. Tsai and Barry Naughton

A driver circling central Beijing on the Second or Third Ring Roads today passes scores of shiny modern towers, twenty or thirty stories high. The earliest of these towers, built in the 1980s and 1990S, were international hotels and foreign company offices. Since 2000, however, the bulk of the prestige projects and glass towers on the inner ring roads have been built by Chinese stateowned corporations. They stand like the ramparts of a mighty modern fortress where the ancient city walls once stood. To the east, they are mainly industrial companies, and to the west, predominantly financial. On the east side, when the sun is going down, you can see through the multistory glass atrium connecting

the two halves of the China National Petroleum Corporation building, and see employees in the upper floor basketball court, seemingly playing in mid-air. For sheer display, though, nothing can match the towers of China Central Television, which bring a note of brutal elegance to the city. These buildings testify to the continuing, indeed increased, importance of state-owned enter-

prises in the Chinese economic model. The physical shape of Beijing increasingly exhibits the configuration of economic power in China, even as it asserts China's economic importance and modernity.

The prominence of state business in what is overwhelmingly a market economy inevitably raises questions about the nature of China's system. Among the global spectrum of political and economic models, which are most relevant to China's future? Is China following in the footsteps of its developmental state neighbors in East Asia? Or is the socialist rhetoric a fa,ade for a reality more similar to the oligarchic capitalism seen in some other postsocialist

countries? Or could it be that, as Chinese "New Left" intellectuals hope, a more equitable mode of government-shaped capitalism is going to be fashioned out of socialist values and institutions? To even begin to address these big questions, we need to understand much better the current configuration of government and business in China. This volume is based on the proposition that a reasonably stable and mutually reinforcing arrangement of political and economic institutions has now emerged in China, after almost fifty years of I

2

State Capitalism and the Chinese Miracle

constant change in both Maoist and reformist China. Of course the sustainability of China's economic achievements under state capitalis:U cannot be

Introduction

3

it most certainly is not. China is not transitioning teleologically from state socialism to market capitalism. Instead, reform-era China has developed a

assumed. However, taday's configuration has been sufficiently consistent since

distinctive form of state capitalism in which state-owned enterprises remain

the early 2000S that a provisional assessment of some of the key aspects of the system can be attempted. This volume focuses on the rise and remaking of Chinese state-owned businesses. State-owned businesses have always played an important role in the People's Republic of China, but since about 2004 there has been a renewed emphasis on the desirability of maintaining a strong and robust state sector for the long term. We provisionally call this system "state capitalism." No label

central to its evolving model of political economy. The state retains direct control of strategic sectors, engages in industrial policy, and holds a dominant position in the banking sector and equity markets. At the same time, Chinese state capitalism emerged in the contemporary era of globalization, and it incorporates significant elements of today's globalized and financialized capitalism. Integration into global production networks, adoption of contemporary capitalist incentive systems such as stock options, and the widespread use of

is perfect, but the term "state capitalism" captures China's combination of a

corporate restructuring techniques pioneered by American investment banks

predominantly market economy, emerging capital markets, and large and

and buy-out funds all characterize China's system today. It is a twenty-first-

Important government-owned corporations. Moreover, "state capitalism" has

century version of state capitalism, with similarities to systems in contemporary

a nationalistic connotation, which we believe is appropriate in the current

Brazil or Russia; different as these three countries are, they all have elements

Chinese political environment. The position of Chinese state capitalism in the spectrum of possible political-economic systems is discussed later in this intro~u~tion: The volume maintains an explicitly interdisciplinary perspective, combmmg hIstory, economics, politics, and sociology. The context throughout IS the Chmese economic growth miracle that followed 1978. Our overarching analytlc task IS clanfymg the contents and implications of state capitalism in China's contemporary political economy.

that can be labeled "contemporary state capitalist." Given this context, contrasting perspectives on China's state sector today

usually derive from different conceptions (or preconceptions) about the evolutionary process driving the state sector. Those who overestimate the prevalence of private firms often see ownership transformation as just one component of

an inevitable march toward a market economy. This view is mordantly criticized by Yasheng Huang (2008) who points to the reality of government control in a number of businesses often mistakenly viewed as private, and the reinforcement of government ownership in some sectors in recent years. Each of

1. THE EVOLUTIONARY TRAJECTORY OF THE STATE SECTOR

Until very recently, state-owned enterprises (SOEs) in China have been viewed primarily as an economic burden: How do we reform these inefficient dinosaurs? How can the financial system withstand their nonperforming loans? By contra~t, thIS volume treats state-owned enterprises as an enduring feature

the chapters of this volume contributes to a concrete understanding of the evolution of the state sector. None of our authors have a grand overarching theory of the evolutionary process, but all agree that it is not unidirectional and is composed of many intersecting political and economic factors.

The following sections thus highlight the key dimensions of this evolving

of the Chinese economy, whose interests, evolution, and impact merit both

complexity. First, at the macro level, considerable sectoral variation in state

micro- and macrolevel analysis. After 2003, the position and role of state firms stabilized, and, crucially, profitability soared. Central government control was rationalized for the largest and most important state firms while smaller state

control and regulation can be observed. This differential management of industrial and commercial sectors reflects in part the government's pragmatic approach toward competition, as private and foreign businesses have been allowed to enter areas in which they have a comparative advantage. This pragmatism has also given rise to new patterns in the corporate governance of state firms with more technocratic managers and greater clarity in ownership rights. Ultimately, however, transparent governance is mediated by adaptive expansion of the purposes of public ownership, and enduring political and ideological factors. Taken together, these characteristics of the evolutionary process in public ownership present a stable yet politically constrained form of state capitalism that may yield decreasing economic returns over time.

firms continued on the "restructuring" path of

commer~ialization

and, for

ma~y, outri?ht ~rivatization. Today, understanding state firms is important

for mte;pretmg VIrtually every aspect of China's economy and politics. The Importance of state enterprises in China is not universally recognized. Manypeople prefer to treat state firms as if they had already become predominantly mdependent commercia~ entities, indistinguishable from profit-oriented firms m a capltabst economy. For some purposes, that may be appropriate. However, for understanding the defining features of China's political economy,

Sectoral Effects on Evolntion I

Co~sider, 'for example, ,Sull (2005), which discusses cases drawn from both state and private busmess but never mentwns the potential differences between the two classes.

The evolutionary path of state firms has a very strong sectoral component. SOEs control most of what used to be labeled the "commanding heights" of the

4

State Capitalism and the Chinese Miracle

economy_ That is to say, SOEs dominate sectors that are either strategic, or not

"naturally" competitive - meaning sectors frequently characterized by regulated monopolies or state ownership in many countries in tbe world. State ownership has been consciously and unconsciously adopted as an alternative to governn1ent

regulation by Chinese policymakers. Pearson, in Chapter 2, shows that ownership and regulation have co-evolved, and that as a result, regulation and government-business relations botb differ systematically according to economic sector. Pearson describes three "tiers" of the overall economy, each characterized

by a distinctive patrern of regulatory institutions. The top tier, consisting of natural monopoly sectors and other strategic industries, has pervasive state ownership and weak and redundant regulatory institutions. Moreover, the state

firms in the top tier are typically managed directly by the central government. The concentration of centrally managed state firms in top-tier sectors is to some extent the direct result of the central government's policy in the late 1990S of "grasping the large and releasing the small" (zhuada fangxiao). All but the largest SOEs were restructured, merged, or shut down, but the largest firms were given renewed attention and tbeir capabilities reinforced. Subsequently, the establishment of tbe State Asset Supervision and Administrative Commission (SASAC) in 2003 represented an important movement toward an "ownership agency" and further condensed tbe number of centrally owned state enterprises that constitute the Chinese economy's "commanding heights." Naughton, in Chapter 3, describes the creation of this important central government "ownership agency" and describes the concentration of its firms in Pearson's "top tier" of the Chinese economy. On establishment, more than

two-tbirds of SASAC's assets were in four sectors: oil and petrochemicals; electricity; telecommunications; and military industry. Since tben, SASAC has sought to focus its large enterprises even more closely on their primary businesses. Given the volume's focus on the state sector, most of the following chapters analyze businesses in the top and middle tiers of the Chinese economy. Top-tier firms are also typically the firms that inspire international anxiety about China's growing economic prowess and geostrategic intentions. In Pearson's "middle tier," where there are no natural monopolies and few strategic concerns, regulation is light and regulatory institutions close to nonexistent. State ownership has become much less prominent in those sectors in

which production is efficient at a less than gigantic scale; in which entry barriers are modest; and in which no immediate national strategic interest is at stake. Middle-tier firms operate in important sectors, such as machinery and autos,

chemicals, and pharmaceuticals, which are less immediately strategic or entwined with regulatory issues tban are top-tier sectors. Middle-tier firms are exposed to global competition and, at tbe same time, these are sectors in which technological dynamism and relations with foreign firms are critical to China's future. As a result, tbe government tends to treat them with a light touch. Chapter 6 covers three middle-tier sectors - autos, construction machinery, and machine

tools - and each shows dynamism and a mixture of ownership forms, including botb national and foreign actors. Despite tbe state's relatively light touch,

Introduction

5

state ownership is by no means absent in these dynamic middle-tier sectors. The state firms in the middle tier are much more likely to be owned by subnational levels of government, such as provinces and municipalities. Individual state firms that have shown themselves able to survive competitive pressures, and which are viewed as having accumulated significant specialized expertise, are preferentially supported as potential national champions. Brandt and Thun, whose emphasis is on performance outcomes, show that in many cases these champions have achieved substantial medium-term success. The "middle tier" is also where we see China's recent experiments in reviving

"industrial policy." Industrial policies have less direct relevance in the top tier, where they are just one set of instruments that compete (and sometimes conflict) with hierarchically exercised control, budgeting and financial tools, and occasional ambitious planning targets. But in the middle tier, where local state firms mix and compete witb private firms, China increasingly seeks to shape development and accelerate technologic improvement through industrial policies. The track record of those policies - such as the automobile industry mentioned by Pearson - has so far been extremely mixed, and the policies are controversial. Since 2009, when China stepped up support to state firms in response to tbe global financial crisis, there has been debate inside China about whetber "the state is advancing at the expense of tbe private sector" (guojin mintui) since preferential government policies have given state firms apparent competitive advantages

that private firms do not have. Also since 2009, China has launched a program of across-tbe-board support for tbe so-called strategic emerging industries, a list of cutting edge sectors - environmental, new energy, electronics, and machinery-

that would make tbe most advanced economy proud. These are virtually all middle-tier sectors. If China were to attempt to implement the strategic emerging industries program predominantly through reliance on state firms, there would surely be many more failures than successes. However, Chinese policymakers try to combine selective reliance on large state firms witb support for marketdriven emerging private firms, and tbey have a chance of making good on a portion of their ambitious agenda. For now, the middle tier is strongly characterized by light regulation, competitive markets with an important role for state firms, and a nascent effort at governmental steerage through industrial policy. State firms have largely retreated from Pearson's "bottom tier." The preponderance of businesses in China - small and medium enterprises - are in this bottom tier, which dominates the consumer-oriented, light manufacturing, and export-oriented sectors. The rise of private business in China is extremely important and in some respects even more compelling than the consolidation

of state business. Private firms have developed new management systems and already have global impact in a number of areas (Tsui, Bian and Cheng 2006; Wagle, Gregory, and Tenev 2000). Moreover, the rise of private business and private wealth has created some pressures - but little actual mobilization - for political and social liberalization (Chen and Dickson 2010; Dickson 2008; Tsai

6

State Capitalism and the Chinese Miracle

2007; Krug 2004). Since the existing literature treats private business in China

extensively, and from a variety of disciplinary perspectives, we feel free to focus this volume on state firms, without thereby implying that any comprehensive perspective on China's economy, politics, and society can neglect the vibrant

Introduction

7

out that worldwide, no effective alternative to the model of the independent regulatory agency has emerged. Thus, it seems unlikely that China will be able to avoid reviving the earlier movement toward regulatory mdependence, probably in response to the inevitable scandals and accidents.

private sector.

Pearson shows that the bottom tier is predominantly private and that it has distinctive institutions of "social regulation," particularly those involved with health and food safety. Like the regulatory institutions iu the upper tiers, bottom-tier regulatory bodies have a troubled history in China, but the context and challenges are quite different. The problem for bottom tier social regulatory bodies is their short histories, weak powers and information-gathering ability, and limited credibility. Moreover, the existing local power-holders compete for resources with new institutions, a situation that sometimes leads to "regulatory chaos" as new regulatory agencies have been layered on old supervisory bodies - which have not been dismantled. Local protectionism poses further challenges because subnational governments have economic incentives to be more lax in the area of social regulation (e.g., consumer protection and worker safety), given that local businesses generate local revenue. Scandals and tragic accidents carry more weight in disrupting local resistance by making social regulation a short-term political priority. This ongoing competition between local interests and broader social needs is also a major theme of Chapter 8 on nascent welfare institutions. This sector-specific analysis disrupts expectations of another unidirectional trajectory, which was the hope that China would move steadily toward a "regulatory state." Dali Yang (2006) described the promising initial steps in this direction. The outcome has been rather different, and quite varied by sector (Hsueh 20II). State ownership has emerged as the most common alternative to regulation in the Chinese context, at least in the top tier. The airline regulator, for example, has achieved substantial improvement in airline safety, but by being a tough and authoritative "boss" rather than by establishing an arms-length relationship with the airlines. The financial sector regulators are by far the most competent and serious in the economy, and even here Pearson demonstrates substantial differences in capability and effectiveness. To a certain extent, the record on regulation represents the costs of China's otherwise fairly effective approach of gradualist reforms. Typically, existing organizations have been treated as bodies of expertise and have been repurposed to achieve new tasks. But in the field of regulation, this means old management bodies crowd the field and make it more difficult for new and independent regulatory bodies to establish themselves. This outcome may reflect pervasive short-termism, in which a short-run effective method of achieving one of the government's interests is utilized, at the expense of putting in place the institutions that would be much more effective in the long run. The lack of regulatory independence is certainly a characteristic of the Chinese system. In earlier work, Pearson (2005) pointed

Competition and Pragmatism Tbe sectoral structure of ownership and regulatory institutions reflects the interaction between government efforts at control and the forces of market competition. Government firms were driven out of the bottom tier by the forces of competition. Before the epochal downsizing of the state sector m the late 1990s, the losses of loss-making state firms were predommantly mcurred by small firms, most of which were in the consumer goods and light manufacturmg sectors. Once the state "let go," those state firms were virtually eliminated by more competitive private firms. Conversely, in the top tier, the state never eliminated the entry barriers that protect incumbent state firms. This is most obvious in sectors like telecom operations and petroleum and gas extractIOn, where the state's monopoly is absolute, but it is also true to a lesser or greater extent in other sectors. In these top-tier sectors, state firms have been restrucrured and subjected to market competition, but only from a small nnmber of other state firms, and in a carefully controlled manner. In the middle tier the interplay between market competition and government control is mo:e subtle and complex. Brandt and Thun make clear in Chapter 6 the exact processes through which market competition is driving technological dynamism, which in turn is transforming Chinese industry. In sectors where government policy is more open to different forms of ownership, it becomes apparent that the size of China's domestic ~~rket creat~s considerable advantages for Chinese firms, and the competitIOn for thiS market drives the creation of capabilities within the Chinese economy: Chinese firms (both state and private) must upgrade their capabilities in order to escape the intense competition in low-end segme~ts, and forei~n firms must localize activities and transfer technology to Chmese partners m order to be cost competitive. In the competitive middle-tier sectors, we see a concentrated version of a more general observation about the evolution of Chinese industry: much of China's economic dynamism comes from the pragmatic way in which different ownership forms are deployed in different economiC sectors. China certainly seeks to support state firms, but it wtll accept, at times reluctantly, the dominance of private, including foreign, firms. when the benefits are greater, and where the costs of supporting state firms is high. Corporate Governance

The position of state enterprises in China's economy today reflects substantial improvements in their corporate governance. In its minimum form, this assertion should be unexceptionable. The fact that China's state enterprises have

.. 8

State Capitalism and the Chinese Miracle

survived, and converted a condition of essentially zero aggregate profitability in the mid-1990S into large profits in the mid-20oos, indicates that corporate governance has become less inadequate, where it was once deeply inadequate. Even after taking account of the remaining market barriers and government

preferences that tilt the playing field in favor of state-owned firms, there is no doubt that the remaining firms are far better managed than they were twenty years ago. Ownership rights are more clearly specified than before, and incentive systems have been clarified and rationalized. Managers are better educated than before and are much more familiar with the needs of a market economy. As Chapter 3 shows, the creation of SASAC at the central level was part of a drive to create better corporate governance institutions at all levels of the hierarchy. Guthrie, Xiao, and Wang, in Chapter 4, go far beyond the minimum assertions about improving business management and argue that improved

Introduction

9

pyramidal business group?" In other words, who are the insiders? Should these be analyzed in terms of the Communist Party managed hierarchy, or should they be conceptualized in terms of interest groups that work through the party/government structure? The improvement in Chinese corporate governance coincided with a wave of

disillusionment with the U.S. model of corporate governance following the global financial crisis of 2008-9. Developing country policymakers are now willing to give further scrutiny to the experience of state-owned firms, particularly in China, and analysts in developed countries are less dismissive. The world is watching China to see how successful its unique institutions can be. Since the governance system shapes incentives, behavior, and productivity

in complex ways, it will be crucial in determining the sustainability of the Chinese economic miracle and the level of performance and productivity that the system can support.

performance is being driven by a sea change in the overall philosophy of enterprise management in China's state sector. In their sanguine view, China's

state firms have shifted from business management to asset management. As the government has comprehensively stepped back into the role of asset holder for the public, corporate managers have been given more freedom and also clearer direction about how to maximize value. The Chinese government seeks to maintain and increase the value of a range of public assets. It is not just SASAC: there are many organizations in China that serve as asset managers, including

sovereign wealth funds and the public pension fund. For Guthrie, Xiao, and Wang, this is the fundamental shift that unites many specific improvements in corporate governance. They show, moreover, that this shift has an impact on the bottom line of performance, which improves when the asset manager's

responsibilities are formalized. Corporate governance reform is ongoing, though, and far from perfect. In some respects, corporate governance reform has been painfully slow (as Naughton shows in his discussion of SASAC's agenda). In a different sense, the governance of SOEs has evolved precisely to fit the interests of the "principals," the party-state hierarchy that rules China. While those "principals" prioritized economic reform in the

I

990s, they have begun to ask

different things from state firms in recent years (see following section). One simple generalization might be that the governance system protects the interests of "insiders" while providing points of access and influence for outsiders

(without, however, giving outsiders legally defensible rights). Dylan Sutherland and Lutao Ning, in their extremely innovative analysis, describe the emergence of pyramidal business groups with multiple tiers of listed companies. fn these

pyramIds, the state retains majority ownership at the apex of the pyramid, whIle mmorIty shareholders provide the bulk of financing for lower-tier subsidiaries. While this system of pyramidal control has many parallels in the structure of private business groups throughout the capitalist world, it is also unique 111

th~ sense that the controlling interest in China is "the state." An interesting

questIOn for future research is, "Who exercises the state's control in a typical

The Purposes of Public Ownership: Is there "Mission Creep"? We argued earlier that the position of state enterprises has stabilized, and the role that state firms play in the overall economy has changed in important ways. An essential corollary of this view is that the purposes of public ownership have also changed. For decades, the justification for public ownership was essentially "stability." That is, state firms were only slowly privatized and restructured because the public ownership form provided a way to buffer urban workers from the deleterious effects of overly rapid change. The justification for state firms was that their excessively rapid disappearance would leave workers unemployed and unprotected by a social safety net during a period of disruptive change. Some argued that public ownership combined the productive enterprise with a social welfare function in a way that suited China's transitional needs (Lin, Cai, and Li 1998). This justification made sense during the 1990S, but now that social welfare institutions are being put in place (see Chapter 8), and their responsibilities hived off from enterprises, this justification is irrelevant. Moreover, today's state firms employ a small proportion of the urban labor force, and overall unemployment is low. What, then, is the point of having state-owned firms? In fact, political leaders have developed new justifications for state firms, which have been emphasized with increasing vehemence in recent years. Security - including traditional national defense and now "economic security" as well- is increasingly invoked as a rationale for public ownership. Government control of telecommunications is routinely justified on these grounds. More broadly, China's state-owned resource giants have been drafted into service in supporting China's energy and resource security. The state oil companies seek to diversify China's petroleum resources. Of course, this is not

inconsistent with their goals as profit-oriented corporations. Diverse forms of security are now a crucial part of the justification for public ownership.

10

State Capitalism and the Chinese Miracle

. In general, it seems that China's leaders are happy to use state firms as mstruments for a variety of policy goals (as Naughton argues). This may reflect a. certain "mission creep," as leaders assign new missions to existing agents, given that they are already on the ground in any case. Most obviously, China's state-owned firms are being ordered to become technologically dynamic, foster ~he adoption of "indigenous innovation," and lead China on its way to becommg an innovative society. Are SOEs well suited to this task? Few people actually thmk so. But SOEs are there, they have resources, and they have organizations III place. So It is not surprising that leaders use them as convenient instruments to achieve political goals, particularly given that they assign enormous long-run social and economic importance to those goals. Political and Ideological Factors Each of our authors acknowledges the importance of purely political factors, a~d in partl~ula~ the continuing importance of the Communist Party, its history, and its hierarchy intertwined with the government and business hierarchies. Chapter 7 points out that state firms have deep roots in China's histoncal experience, and that the pre-I949 Nationalist government on the mamland was nearly as cornm~tted to state enterprise and national planning as was the post-I949 Communist government. Bian reminds us that state firms can draw on some reservoir of goodwill among the Chinese population because of a tendenc! to. see them. as part of a national response to crisis over the past century. Unlike m the Umted States, where there is an instinctive antipathy to government firms, SOEs m Chma are widely seen as having a legitimate place in the Chinese economy. Exactly what that place should be - and how large a ~hare .of the total economy those firms should have - remains highly contested In Chma. But no matter what direction economic policy takes over the next few deca~es, a significant state firm presence will almost certainly continue to be a definmg feature of China's political economy. Today,. although the state sector has undergone substantial organizational restructurmg and downsIzmg, the party-state continues to view state enterprises as t?ols of not only government policy but, arguably, regime identity and legitimacy. State firms remam at the core of what Beijing officially calls "market sociahsI? WIth ~hmese characteristics." In other words, the emerging Chinese system IS not SImply "state capitalism"; it is a peculiar strain of COffilllunist Party-managed state capitalism (d. Lin 20II). To be sure the Chinese Communist Pa~ty has discarded most (but not all) of the Marxis; and Maoist dogma to which. it once adhered. The Communist Party hierarchy has not merely endured: it has been reVitalized and m some ways strengthened as it remakes itself into a "governing party" and steward of the nation's assets. The Communist Party has managed an astonishing comeback as it remolds itself into a professionalized h~an resources department of the economy. David Shamb~ugh (2009) outlmes many of the steps of this painstaking reinvention. From thIS standpOInt, state-owned firms have emerged as a crucial component of a

Introduction

II

revitalized Communist Party system, and SOEs are looked on with renewed favor as one of the pillars of this revitalized but still authoritarian and hierarchical system. According to well-informed Beijing sources, there was a behind-thescenes discussion during 2004 about the importance of preserving the largest state-owned enterprises because of their importance as a source of employment and patronage for the Communist Party. Indeed, in 20IO, the head of the Board of Supervisors of SASAC, Ji Xiaonan, explicitly stated that "state-owned enterprises are one of the important bases of the Communist Party's ability to govern .... At the end of June 2008, central SASAC enterprises had 3.9 million Party members" (Ji Xiaonan 20IO, 8). Allowing for 1.3 million retired party members (SASAC Yearbook 2007, p. 79), this means that the 2.6 million working party members account for 23 percent of the total 11.4 million employees in central SASAC firms. As both a bastion of party members and as a key steppingstone in the careers of the upwardly mobile leaders, state firms have found renewed favor in the Communist Party. The increased willingness to promote public ownership has been accompanied by an increasingly dismissive view of privatization. In late 2009, the Fifth Party plenum instructed party members to "draw four dividing lines," one of which was the dividing line benveen "wholesale privatization" on the one hand, and "a multi-ownership system with public ownership as the key form" on the other. In March 20II, NPC Standing Committee chairman Wu Bangguo, in the midst of his report on the construction of a socialist legal system, "solemnly declared" that China "would not carry out privatization" (Wu 2OII). These statements seem peculiar, since China has in fact carried out a massive amount of privatization since the mid-I990S, but in fact there is no official Chinese document that explicitly accepts "privatization" (siyouhua), and policymakers prefer to talk about "restructuring" or "ownership diversification." In fact, in official rhetoric the term "privatization" has become increasingly 2 pejorative, imbued with an implication of illicit behavior. There is now no precise, explicit, and neutral term for privatization in official Chinese rhetoric. It seems self-evident that these self-imposed ideological limitations will also distort the evolution of state ownership in contemporary China. The Adaptive Policy Process We have described some of the most important factors shaping the evolution of state firms in China. China's distinctive approach to the policy process is also a factor in the broader evolutionary process. Policymakers stretch the

2

For example, the definition of "privatization" in the Chinese quasi-official Baidu Online Encyclopedia specifies "the process by which ... owners of public property or their agents exceeding their authority legally or illegally convert it into the property of individual private parties." http:// baike.baidu.comlviewh96s62.htm, accessed August 20, 20II. In principle, Baidu Encyclopedia posts user-generated content on the Wikipedia model, but in politically sensitive areas, its entries are closely monitored by Communist Party propaganda officials.

I2

State Capitalism and the Chinese Miracle

institutional and ideological limits of what is already in place. They show a preference for using existing organizations and expertise - if necessary repur-

posing them rather than introducing completely new institutions. Marginal reforms are inse.rted in an incremental manner. After this process has proceeded

for a while, piecemeal modifications begin to transform the system as a whole. At that point, policymakers either confirm the change or draw back sharply. This gives the political economy of Chinese policy a history of adaptation, and a commitment to experimentation, which has served it well over three decades of reform. At the same time, the limitations of this cautiously adaptive process are now

very much in evidence. For example, the relative lack of success in establishing new regulatory institutions can be blamed precisely on this preference for incremental reform, allowing the survival of legacy organizations, which may leave too much scope for the maneuvering of interest groups. Stalled reforms in the financial system may reflect a similar dynamic. China may belatedly fall into a kind of partial reform equilibrium trap, long after the concept was introduced to describe problems with other reforming socialist economies (Hellman I998). When it comes to state enterprises, there are serious questions about the extent to which the system is attaining levels of performance of which it is capable. State firms have introduced important corporate governance reforms, but have they really exhausted the productivity improvements that could be achieved through more thorough restructuring and, yes, privatization? Wbile China tried hard to promote its large SOEs as global corporations, and trumpets the entry into the. Fortune Global 500 of forty-five SASAC firms, it is notable that these firms stdl fall well short of the standards of a true global corporation. There is no doubt that state firms have been a crucial part of the Chinese economic miracle. But state firms may also constrain China's economic

potential, preventing the emergence of mOre dynamic firms that in the absence of state dominance might now be reaching the global frontiers of technology and performance. II. STATE CAPITALISM IN CHINA: THE SYSTEM IN COMPARATIVE CONTEXT

The preceding discussion provides a basis for outlining the main characteristics of state capitalism in contemporary China. In this way, we also seek to place our definition within the Context of two strands of literature: the so-called varieties of capitalism approach and the East Asian developmental state. We conclude that while both these frameworks shed light on the Chinese system, neIther adequately encompasses it, and we should retain a separate label, which we suggest must be "state capitalism."

Before proceeding, we should acknowledge the downside of using this term. First, we acknowledge that the term is ideologically charged, as state capitalism has been used in a derogatory manner by Marxists as well as neo-liberals. The term originated with Lenin, who acknowledged it as a description of his

Introduction

I3

New Economic Policy. It was soon taken over by socialist critics of the Soviet Union under Stalinist rule. C. L. R. James popularized the term in I950, contending that SOEs in the Soviet Union were functionally similar to capitalist firms because they exploited and extracted surplus value from workers. In this vein Resnick and Wolff (2002) describe state capitalism as a form of capitalism whe~ein the firm is an integral part of the state bureaucracy and the appropriators of surplus value are state-appointed functionaries, which seems to us to be

too loaded with judgments to serve as a useful definition. In the China case, observers have typically posited a stark contrast with "free market" systems. Bremmer (2009, 4I) calls state capitalism "a system in which the state functions as the leading economic actor and uses markets primarily for political gain," and views its ascendance among developing countries as constituting a challenge to developed countries. McGregor (20I2) uses "state capitalism" to designate what he sees as the unfair and anti-competitive (but largely successful) Chinese practices that challenge u.s. policymakers. More generally, those opposed to government involvement in the economy deride state capitalism as market-distorting. "State capitalism" even emerged in the

20I2

U.S.

presidential election, when Barack Obama was charged with practicing state capitalism for allegedly channeling stimulus funds to favored sectors or companies. In all these cases, state capitalism is used in a primarily pejorative sense. However, most social scientists would acknowledge that there is a place for state capitalism in a descriptive, less value-laden, typology. This provides an opportunity to contrast the Chinese system not just with the "liberal capitalism" found in Britain and the United States, but with other systems in which the state plays a more active role. Within this more ideologically neutral approach, we can situate China's system within the context of two broad strands of literature. The first derives primarily from the experience of advanced industrialized economics in the West, while the second was inspired by the newly industrializing economies (NIEs) in East Asia: both are useful for framing China. The comparative capitalism literature, which includes a research agenda more recently called "varieties of capitalism," has its intellectual roots in postwar analyses by economic historians snch as Alexander Gerschenkron (I962), Karl de Schweinitz (I964), and Andrew Shonfield (I965), and can arguably be traced back to Friedrich List (I84I). These comparative studies of modern capitalism grew from the observation that development patterns in later-developing economies diverged significantly from those in eighteenthcentury England. Notwithstanding differences in emphasis and interpretation, there is broad consensus that the first industrial revolution in England evolved over the course of a century, had limited financial needs that were supplied primarily by retained funds and private commercial banks, and occurred under relatively decentralized, laissez-faire conditions. Industrialization in the United States followed a similar pattern during the nineteenth century, so this is sometimes called the Anglo-American mode of capitalist development. In contrast, a more dirigiste form of political economy emerged in continental Europe.

State CajJitaiism and the Chinese Miracle

By the twentieth century, the state played a more activist role in macroeconomic planning, investment, regulation, industrial policy, and societal repression. Shonfield, in 1965, expected Western economies to converge toward a statist model of "modern capitalism," as embodied by French "indicative planning." By contrast, Vivien Schmidt (2003) emphasized divergence, as she discussed France's evolution from state-led capitalism to "state enhanced capitalism," in contrast to both "market capitalisln" in Britain and "managed capitalism" in Germany. De Schweinitz and Gerschenkron both saw the experience of the Soviet Union as a logical extension of this "latecomer" pattern. The logic of "catchup" development tended toward large-scale finance combined with massive state support. Indeed, they posited that in the underdeveloped societies or "late, late developers" of the twentieth centnry, the state would continue to monopolize economic production. Overall, this prediction was not borne out. However, China's highly interventionist form of state capitalism certainly accords with the general spirit of a Gerschenkronian world, in which massive investments in modern infrastructure, mobilized through a state-run banking system, serve to catapult a formerly poor country into the ranks of mediumdeveloped economies. Within this overall intellectual tradition, the "varieties of capitalism" (VOC) approach (Hall and Soskice 2001) distinguished between two broad types of capitalism: liberal market economies (LMEs) and coordinated market economies (CMEs). Unlike earlier studies of comparative capitalism, which emphasized state policies and state-society relations, the VOC approach analyzed "institutional complementarities" in which institutions in different parts of the economy and government reinforced each other and tended to create stable clusters, or institutional types. The VOC approach focused on how larger institutional constraints shape the strategic interaction of firms to resolve coordination problems in five key areas - industrial relations, education and training, corporate finance, interfirm relations, and corporate governance. In LMEs such as the United States and Great Britain, firms coordinate activities through internal hierarchies and competitive market arrangements, which encourage radical innovation but are also associated with higher rates of unemployment. Firms in CMEs such as Germany and Japan engage in more extensive, nonmarket contracting relationships, which facilitate greater investment in sector-specific training, lower rates of unemployment, and incremental innovation. Each of the related institutions displays increasing returns in the presence of the others; these complementarities reinforce the survival of institutional clusters and ensure long-standing differences between LMEs and CMEs. In other words, particular models of capitalism exhibit path dependency. The VOC approach can provide a rough starting point for thinking about the nature of institutional complementarities in China's state capitalist system. There are a number of caveats, however. As various critics have pointed out, the binary LME/CME typology elides considerable within-type variation,

Introduction

I5

particularly given the diverse forms of coordinated capitalism within the CME category (Allen 2oo4;Jackson and Deeg 2006; Jessop 20II; Streek 2OIO). Smce liberal capitalism is found in essentially only two Anglo-Amencan counwes, It is not meaningful to imply that the rest of the capltah~t world consIsts of coordinated market economies.' Relatedly, the root logIC of VOC IS based on comparative statics of particular national economies rather than ~nalysls of how dynamics internal to the system might redefine the functlOns of formal institutions over time; as such, the VOC framework lacks the analytIC apparatus to account for endogenously generated institutional change (Howell 200 3). . .. II I . In addition to these conceptual limits, at a more basIC empmca eve, trymg to determine whether China is moving toward a well-defined model of LME versus CME obscures the defining role of the state in China's reform p~o~ess because the logic of VOC is fundamentally firm-centric. 4 In VOC, d~clslOns about corporate governance, vocational training, fin~n~e, and ~ndust~'lal relations are made by individual corporations in strategIC mteractIOn with. other actors. In China however, the state continues to constrain and self-conscIOusly shape the envir;nmental parameters of those choices. Thus, institutional c~~­ plementarities are important in the Chinese case, but those. complementantl~s run through the actions of state actors. For example,Jean 01 (20II) observes m her volume on corporate restructuring that as Chma has nnpo~ted market institutions to its transitional economy, "the state attempts to mtervene to either attenuate the problems or to pay the costs of the inefficiencies created by the lack of institutional complementarities" (p. 9). Moreover, when It comes to SOE reform the decision to initiate "restructuring" (or privatization) rarely comes from the public firm itself. Instead, the overarching policy decision emanates from the central government, and local governments are m turn tasked with implementing reform of public enterprises. There clearly are complementarities among China's institutions - for example, the affinItIes between SOEs and state-run banks - but these have not been systematically analyzed, and we do not attempt it here. Rather, because so many of the key institutional interactions and complementarities are run through government ag~nC1.es, we conclude that China's system is neither LME nor CME, but state capltahst. The second broad strand of literature is that related to the so-called developmental states of East Asia. In reflecting on the broader implications of Japan's "economic miracle" (1925-1975), Chalmers Johnson (1982) observed, A state attempting to match the economic achievements of Japan must adopt the same priorities as Japan. It must first of all be a developmental state - and only then a 3 T be fair the original framework in Hall and Soskice (20or) also referred to a third "Mediterra-

4

n;an" ty;e of capitalism. But it appears as a residual category for economies that do not fit the . particular description of CMEs. Indeed, attempts to shoehorn China into the VOC typology by che~klllg off each o~. the five institutional check boxes from Hall and Soskice have not been persuaSIve (Ahrens and Junemann 2006; Witt 2010).

po

16

State Capitalism and the Chinese Miracle

regulatory.state, a we~fare state, an equality state, or whatever other kind of functional state a socIety may WIsh to adopt. (p. 3 06 )

His conception of the developmental state emphasized an elite state bureaucracy staffed by the best and the brightest in the country. Japan's Ministry of InternatlOnal Trade and Industry (MITI) was central in determining which sector~ would be promoted through investment in research and development, subSidized credlt, fiscal mcentives, and trade policies. MIT! had considerable autonomy from a,ther b:~nches of government; hence, it was relatively insulated from both ehte politics and societal pressures. A distinguishing characteriStic of the developmental state is the commitment to employing "market cO~f?rmlDg methods of state intervention" to encourage innovation and competitIOn. The operational spirit of the developmental state is thus promotion of ex~ernal competItIveness and economic growth through administrative gUldance rather than regulatory rigidity or state ownership. Subsequent extenslOns of Johnson's original developmental state model to postwar South Kor~a and Taiwan (and in Some cases, Hong Kong and Singapore) identified Similar market-conforming modes of state engagement with the nati~nal economy: bu::eaucratic disciplme~ embedded autonomy in state-society relatIOns, selec~lOn of mdu~tnal Vvlllners, directed credit to the private sector, and exp?rt-promotmg strategies (e.g., Amsden I992, Evans I995, Wade 199 0 ). Vanous scholars have als? noted the historical conditions surrounding and perhaps facilItatmg, the nse of the East Asian developmental state model: l~nd reform, ~olorua.ll~ve~tment i.n educational infrastructure, state prioritization of (late) mdustnalIzation, socral stability under authoritarian rule and the U.S. secnrity umbrella during the Cold War (e.g., Haggard "992, Onis 199 I ). Several of these contextual factors supporting the East Asian developmental state had disappeared by the late twentieth century. In the meantime th A· /in·I .. f h l ,eSian anCIa CfISIS 0 t e ~te 1990S ~aised concerns about the sustainability of the developmental state s extlaordmary economic performance, while scholars speCIalIzIng. In vanous East ~slan newly industrialized countries questioned the centrality of the state m promotmg economic development through the parncular pohcy levers of the archetypal developmental state.' In any case, by the turn of the century, many of the (originally classified) developmental states mov:d away from various statist instruments, opening their economies and .. d adoptmg . some elements of a liberal market economy . The ongms an economiC SUCcess of the East Asian developmental state thus appear to be :llstoncally c?ntIngent; even so, it is apparent that the same states in the reglOn have retamed their "developmental" approach, even while rising labor

5

Various scholars have questioned . b ureaucra. t h .the strategic coherence of the state and j·ts pIannmg CIes, e apparent wc~kness of SOCIety, as well as the policy tools ascribed to the developmental states dunng the rapId ~rowth periods of Japan and the NICs. For Japan, see Calder (I993), Samue1~ (I9 8 7), and OkImoto (I989). On Taiwan, see Wu (2004). For Korea see Kang (2002) and Chibber (2003). '

Introduction

"7

costs, shifts toward technology-intensive industries, political democratization, and of course, China's economic take-off, have transformed the terms of their developmentalism, both endogenously and exogenously (pempel 2004; Wong 2004). How, then, does China's form of state capitalism compare with the East Asian development model? Before going into specific institutions, we can note one unambiguous overall similarity and two unambiguous overall differences. First, China's state capitalism has become the dominant institutional system that has propelled China through its "growth miracle" phase, just as the developmental state in Japan, Korea, and Taiwan was dominant during the "growth miracle" phase in those economies. As Boltho and Weber's analysis in this volume makes clear, on indicators such as GDP growth, export success, and savings rates, China during the I980-2005 period has been highly comparable to Japan, South Korea, and Taiwan during their respective twenty-five-year high-growth periods, although a little faster (and far faster than other major developing countries such as Brazil, India, Mexico, and Turkey). Thus, in terms of stages of development, we suggest that China's state capitalism has played the same functional role as the "developmental state" in Asian fore-runner economies: raising investment and accelerating structural change during the period when the economy has the highest growth potential. The first unambiguons difference between China and the East Asian developmental states is size. At their peak, each of the East Asian developmental states relied on informal coordination between a small group of elite bureaucrats and a relatively small number of corporate leaders. Coordination sometimes broke down (most famously in MIT!'s effort to force consolidation through merger of the Japanese automobile industry), but there was generally face-to-face coordination in a situation where bureaucrats had multiple tools that could affect a corporation's future profitability. Under such (repeated game) conditions, quiet persuasion was quite effective. China's economy is larger by an order of magnitude, in terms of geographic expanse and number of actors (if not quite yet in terms of gross domestic product, or GDP). This type of quiet coordination is simply not possible. Thus, the Chinese system is characterized both by more frequent direct command relationships and also by a larger area of the economy that escapes from government control. Not surprisingly, different institutions have evolved to manage this more complex physical, economic, and administrative space. The second nnambiguous difference is China's openness to foreign direct investment (FDI) relative to its East Asian neighbors during comparable stages of development. As pointed out in Chapter 9, Japan, Taiwan, and Korea "were broadly hostile to most FDI," while China encouraged it, especially starting in the early I990S. The contrasting stance toward foreign capital is reflected in the percentage of FDI in total fixed investment, which reached 7 percent in China during 1980-2005, but ranged from only 0.2 percent in Japan (I950-52) to 2.4 and 1.6 percent in Taiwan (1960-85) and Korea (I965-90). China's greater

F State Capitalism and the Chinese Miracle liberalization of FDI has been attributed to the state's strategy to gain access to foreign technology in key sectors (Hsueh 2DIl). By contrast, the East Asian NIEs restricted FDI to promote developmeut of the domestic private sector. China's mode of state capitalism is thus sufficiently distinct from the East ASIan developmental model to warrant fuller analysis of its defining features. A hst of seven defimng characteristics of Chinese state capitalism as it has emerged in the early twenty-first-century includes the following:

Direct central state contr?l of strategic sectors. Even though state ownership receded dramatIcally durmg the I990S, the central state maintained its direct owne~s~ip control over key sectors, including telecommunications, electrICIty, petroleum and defense industries, as well as finance. In this sense

we agree with Nan Lin's 20I1 term, "centrally managed capitalism." As Li~ (p: 7 0 ) also describes: control is exercised through ownership and over cfltlc~l perso?nel decIsIOns, not through traditional command economy plannmg, whIch has now completely disappeared. Party control over personnel. Personnel control is exercised by the Commumst Party and not by the government per se. Thus, a central priuciple of Chmese state capitahsm IS that "state" control is in fact exercised by the dual mtertwmed hIerarchIes of state and party. Personnel control in this sense extends well beyond the core sectors controlled by the central government and gIves the natlOnal leadership an additional lever to induce compliance m noncore . areas of the economy. This relates directly to the following charactenstics. - Market foundation. Large swaths of the economy operate on a predominantly. market basis, and foreign-invested corporations have a large and promment role m many sectors of the economy. This is a form of capitalism not a disguised form of a planned economy. Most of the economy runs o~ market pnnciples. The most direct instrument that national leadership has over thIS ~art of the economy comes from its personnel control over government offiCIals at all levels of local government. Local government officials in turn, dispose of multiple tools to shape, steer, invest in, and profit from ~he local economy. Thus, ,:"hen national officials prioritize a certain type of actlVlty,. they can often mduce local officials to provide implementation. - IndustrIal poltey. The government engages in extensive "industrial policy" formulatlOn, WIth hIghly uneven and variable implementation. In contrast to the smaller developmental states, which often had a relatively narrow and focused theme for mdustrial policy, China engages in a kind of pervasive mdustnal pohcy formulatlOn, such that it is generally impossible to determme what the hIghest priority policy actually is. Instead, industrial policy rep~esents a, ~md of mteractive developmentalisrn, communicating to decentralIZed deCISIOn makers some of their options and constraints. State control over finance. Despite progress toward marketization and opening of finance, and the ongoing reality of shadow banking, on balance,

Introduction

I9

state control over finance remains considerable. This is evident both in the banking system and in equity markets: A. Bank system: the dominance of state-owned banks has remained. Perhaps ironically, the creation of "policy banks" like the China Development Bank, which was intended to remove policy considerations from the commercial state banks, has simply euded up creating one more state-run giant. Government priorities for the other commercial banks sometimes swing widely, as macroeconomic conditions change, but on balance, state control remains a defining characteristic. B. Equity markets: State firms have maintained their dominance of the Shanghai stock market. While this dominance is less evident in the Shenzhen market, or the newer over-the-counter markets for start-up firms, overall, capital markets have grown in the shadow of state ownership. Regulatory fragmentation and layering. Despite substantial progress in the creation of regulatory agencies, most agencies are still weak and have poorly defined mandates. Fragmentation and layering define some problems; lack of independent legal recourse by the regulator; and lack of powerful top-level political patrons are also critical problems. These shortcomings reinforce the importance of direct ownership and personnel control in determining the nature of the overall system. _ Dualistic welfare regime. Partly due to historical legacies, and partly due to continuing disparities in political influence, the Chinese social welfare system continues to be divided into two (or more) very different sections. Despite substantial progress in recent years in extending a basic health care system to rural residents and rural-to-urban migrants, the system remains vastly more generous to fully vested urban residents, and especially to employees in state firms. The welfare system thus reinforces the differences between the government-linked and independent sectors, a distinctive feature of Chinese state capitalism. These observations have analytical implications for situating Chiua's political economy comparatively. Beyond the parsimonious frameworks of VOC and the twentieth-century developmental state model, recent efforts to frame the case of China in the study of comparative capitalism tend to search for 6 similarities with other national economies that have state capitalist features. For example, French dirigisme has been cited as a better fit for describing China's economy than the German or Japanese models given France's combination of public ownership of large firms in key industries, substantial public sector employment, and relatively low rates of unionization (Fligstein and Zhang 2010). Another approach places China in a cluster of Asian capitalism

6

One notable exception is Lee, Hahn, and Lin (2002), which argues that China is converging toward the Anglo-Saxon model of liberal capitalism rather than the East Asian one.

20

State Capitalism and the Chinese Miracle

that includes Malaysia and Thailand, based on comparable levels of economic development, expenditures on education, and dependence on world trade (Boyer 2OII; Harada and Toyama 20II). Such comparative studies are helpful III accenting dimensions of China's political economy that are observable in other countries. But ultimately, analysis by analogy provides an incomplete depiction of the particular expression of state capitalism in China. Christopher McNally observes that China's "new form of capitalism ... draws on Western, Asian, socialist, and historical and modern Chinese elements," and he labels it "Sino-capitalism" (McNally 2012, 748). Ultimately, China's form of state capitalism rests on a dual structUl'e. In this structUl'e, top-down state-guided initiatives and governance are tempered and balanced by bottom-up (often private) entrepreneUl'ial forces. Tobias ten Brink calls this hybrid arrangement "Chinese market-liberal state capitalism" (ten Brink 20II). The realiry ?f ins~itutional dualism means that incentives are not necessarily aligned m a smgle system; and it would be misleading to assume that reinforcing institutional complementarities will necessarily improve performance or inter-

national competitiveness (as Cl'Ouch

2005

and McNally

2012

point out).

III. CONCLUSION: STATE CAPITALISM AND THE CHINESE

ECONOMIC MIRACLE

Will Chinese state capitalism tUl'n out to be an enduring cluster of institutions or merely another transitional phase in Chinese development? It is simply too early to judge. In support of the former, we clearly observe that the key 'institutlOns have achieved a basic stability that is unprecedented in the Chinese economic reform era. Since the late

19908

decisions to release most small firms

from government ownership - but to retain the largest firms, particularly in strategIC sectors - the fundamental ownership structUl'e of the economy has been stable. After fifteen years of basic stability, there is little prospect of quick, radICal change. To be sure, smce the leadership turnover of 2012 there has been increasing discussion of the Chinese model and of the need to resume a broadbased reform program, which might include further ownership reform. But these discussions have so far fallen far short of even a provisional commitment

to serious system change. For better or worse, the current Chinese system appears to have created a panoply of mutually dependent institutions. It may be harder to introduce dramatic institutional changes because each depends on the others for its functioning. The system appears to be entrenched at least provisionally. ' On the other side, we observe clearly that in the cases of Japan, Korea, and TaIwan, theIr "developmental state" institutions were fully in place for only the thIrty years or so during which their economies were undergoing their growth mIracles. While China's state capitalist system was not in place at the beginning of ChIna's growth miracle, it developed in tandem with the acceleration of growth, and it was shaped by the desire of China's leaders to facilitate rapid

Introduction

21

growth. Thus, the association between China's state capitalism and rapid economic growth is strong, with causality running in both directions. As described, the institutional set-up has evolved in tandem with the development of the economy, and has been prodded by the actions of politicians seeking to foster (and profit from) high investment and rapid growth. At the same tIme, rapid gl'Owth has generated the resources needed to support the polItIcal class, spread benefits - both private and social welfare - to a broader swath of the population, and smooth over some of the inefficiencies in the system. DUl'lng the period of rapid structural change and peak economic growth, state capItalism is reasonably well suited for economic success, and economIC success III turn makes the state capitalist system look good. Today, there is substantial evidence that China is beginning to confront the gradual winding down of its own miraculous growth phase. From about 201 5, China's labor force gl'Owth will dl'Op to zero; its rapid structural change from an agricultural to an industrial economy will have beeu completed; export market growth will almost certainly slow from the torrid pace set in the past; and China is under financial and budgetary pressure to bring its investment rate down. All these factors are associated with much lower growth rates. Chinese planners and policymakers have anticipated this new reality since at least 2005 and began calling for a new, smarter "gl'Owth model" that was less dependent on heavy investment in industry and more reliant on educat~on and hum~n capital, which they hoped, and still hope, would produce a verSlOn of economIC growth that was more environmentally sustainable and more compatIble WIth an innovative society. While policymakers have repeatedly emphaSIzed these points for the past seven years, the actual change in the gl'Owth model, and in the growth-supporting institutions, has been imperceptible. This suggests considerable inertia in the institutional set-up, and inertia that might well trace to the institutional complementarities among different parts of the system of Chinese state capitalism. . Institutional inertia, in the face of rapid change in fundamental economlC conditions does not seem like a prescription for success. More specifically, the needs of a'middle income country, including greater reliance on innovation in technology and business models, and an increasingly diverse and sophisticated consumption demand, seem ill-suited for the still fairly centralized model of Chinese state capitalism. Under these circumstances, the future of Chinese state capitalism can hardly be confidently projected. Still, with its remarkable ability to reshape institutions, to experiment, and to use its size and diversity to its advantage, China has surprised us many times before. The only way to understand China's future is by deepening our understanding of China's present. It is to this project that each of Oul' individual authors has made a contribution.

f 22

State Capitalism and the Chinese Miracle

References Ahrens, ]. ~~d P. Jiinemann.. 2006. "Transitional Institutions, Institutional Comple~ mentantlcs" and Ec~nomlC Performance in China: A 'Varieties of Capitalism' Approach. UnpublIshed Conference Paper. International Society for New Insti~ tutional Economics. Boulder, CO. Allen, M. 2004· "The Varieties of Capitalism Paradigm: Not Enough Variety?" SocioEconomic Review 2: 87-108. Amsden, A. 1992. Asia's Next Giant: South Korea and Late Industrialization. New York: Oxford University Press. Boyer, ~. ~OII. "A Ne:v Epoch but Still Diversity within and between Capita.[isms: C~ma ,m Comp~ratl~e Pe~spective." In C. Lane and G. T. Wood, cds., Capitalist DlVerslty and Dwerslty within Capitalism. London: Routledge. Bremmer,. I. 200~. "State Capitalism Comes of Age: The End of the Free Market." ForeIgn Affairs (May), 40-55. Calder, K. E. I993 .. Str~tegic Ca~italism: Private Business and Public Purpose in Japanese Industnal Fmance. Prmceton, NJ: Princeton University Press. Chang, H. ~005. Kicking Away the Ladder: Development Strategy in Historical Perspectzve. London: Anthem Press. Chen, J. and B., J. ?ickson. 20IO., Allies of the State: China's Private Entrepreneurs and . Democrattc Change. CambrIdge, MA: Harvard University Press. Clllbb~r, V. 2003. LO,cked in Place: State BUilding and Late Industrialization in India. PrInceton, NJ: PrInceton University Press. Crouch, C. 2005· "Three Meanings of Complementarity." Socia-Economic Review 3(2)' 359-363. de Schw.e~nitz, K. ,1~~~. Industrialization and Democracy: Economic Necessities and , Polttlcal Posslbtlmes. New York: Free Press of Glencoe. Dlckso~, B. J. 2008. Wealth into Power: The Communist Party's Embrace of China's Prtvate Sector. New Yark: Cambridge University Press. Evans, P. I:95. Embedded Autonomy: States and Industrial Transformation. Princeton, NJ: PrInceton University Press. Fligstei~, N. and). ~ha~g, 2011. "A New Agenda for Research on the Trajectory of Chinese CapItalIsm. Mana~ement and Organization Review 7(1): 39- 62 . Gerschenkron, A. 196~. EC,onom1c Backwardness in Historical Perspective. Cambridge, MA: Harvard Umverslty Press. Haggard, S. M. I992. Pathways from the Periphery: The Politics of Growth in the Newly Industna!tzt~g Countries. Ithaca, NY: Cornell University Press. Hall, P. ,A. and D. SoskIc~, eds. 2001. Varieties of Capitalism: The Institutional FoundatIOns of ComparatIVe Advantage. New York: Oxford University Press. Harada, Y. and H. Toyam~ 20I1. "The Asian Capitalisms: Contrasted Configurations." In ~. Boy~r, ~. Isogal, and H. Uemura, eds., Diversity and Transformations of ASIan Capttaltsms. London: Routledge. Hellm~n, J. S. ~~98~, "Winners Take All: The Politics of Partial Reform in Postcommumst TransItIon. World Politics 50(2): 20 3- 2 34. Howpell'l'~' 2003· "Varieties of Capitalism: And Then There Was One?" Comparative o tUcs 36: 103-124. Hsueh, R. 201 I. Ch~na's. Regulatory State: A New Strategy for Globalization. Ithaca, NY: Cornell Umverslty Press.

Introduction

23

Huang, Y. 2008. Capitalism with Chinese Characteristics: Entrepreneurship and the State. New York: Cambridge University Press. Jackson, G. and R. Deeg. 2006. "How Many Varieties of Capitalism? Comparing the Comparative Institutional Analyses of Capitalist Diversity." MPIfG Discussion Paper 0612. Cologne: Max Planck Institute for the Study of Societies. Jessop, B. 2011. "Rethinking the Diversity and Variability of Capitalism: On Variegated Capitalism in the World Market." In C. Lane and G. T. Wood, eds., Capitalist Diversity and Diversity within Capitalism. London: Routledge, pp. 209-236. Ji, X. 20IO. "Correctly Understand the Current Discussion about the State Advancing at the Expense of the Private Sector [in Chinese]," August 9, 2010, posted at http:// www.xinguozi.com.cn/article/show/ I 30/01 I. Johnson, C. I982. MITI and the Japanese Miracl., The Growth of Industrial Policy, 1925-1975. Stanford, CA: Stanford University Press. Kang, D. 2002. Crony Capitalism: Corruption and Development in South Korea and the Philippines. New York: Cambridge University Press. Krug, B. 2004. China's Rational Entrepreneurs: The Development of the New Private Sector. Routledge Studies on China in Transition. New York: Routledge. Lee, K., D. Hahn, and J. Y. Lin, 2002. "Is China Following the East Asian Model? A 'Comparative Institutional Analysis' Perspective." China Review 2(1): 85-120 . Lin, Y. F., F. Cai, and Z. Li. 1998. "Competition, Policy Burdens, and State-Owned Enterprise Reform." American Economic Review 88(2): 422-427. Lin, N. 2011. "Capitalism in China: A Centrally Managed Capitalism (CMC) and Its Future." Management and Organization Review 7(1): 63-96. List, F. I856 (I84')' The National System of Political Economy. Translated by G. Matile. Philadelphia, PA, J.B. Lippincott. McGregor, J. 2012. No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism. Westport, CT: Prospecta. McNally, C. A. 2011. "China's Changing Guanxi Capitalism: Private Entrepreneurs between Leninist Control and Relentless Accumulation." Business and Politics I3(2): 131. 2012. "Sino-Capitalism: China's Reemergence and the International Political Economy." World Politics 64(4)' 74I-776. Oi, J. c., ed. 20I1. Going Private in China: The Politics of Corporate Restructuring and System Reform. Washington, DC: Brookings Institution. Okimoto, D. 1989. Between MITI and the Market. Stanford, CA: Stanford University Press. Onis, Z. 1991. "The Logic of the Developmental State." Comparative Politics 24(1): 109-I26.

Pearson, M. 2005. "The Business of Governing Business in China." World Politics 57 (January), 296-322. Pempel, T. J. 2004- "Revisiting the Japanese Economic Model." In S. Pekkanen and K. Tsai, eds., Japan and China in the World Political Economy. London: Routledge. Polanyi, K. 2001 (1944). The Great Transformation: The Political and Economic Origins of Our Time. Boston, 1\1A: Beacon Press. Resnick, S. A. and R. D. Wolff. 2002. Class Theory and History, Capitalism and Communism in the USSR. New York: Routledge. Samuels, R. J. 1987. The Business of the Japanese State: Energy Markets in Comparative and Historical Perspective. Ithaca, NY: Cornell University Press. Schmidt, V. A. 2003. "French Capitalism Transformed, Yet Still a Third Variety of Capitalism." Economy and Society 32(4)' 526-554-

24

,i

State Capitalism and the Chinese Miracle

ShonJield, A. 1965. Modern Capitalism. Oxford: Oxford University Press. Streeck, W. 2010. "E Pluribus Unum? Varieties and Commonalities of Capitalism. " MPlfG Discussion Paper IO!I2. Cologne: Max-Planck-Insotut rur Gesellschaftsforschung. Suli, D. 2005. Made in China: What Western Managers Can Learn from Trailblazing Chinese Entrepreneurs. Cambridge, .MA: Harvard Business School Press. ten Brink, T. 2011. "Institutional Change in Market-Liberal State Capitalism: An Integrative Perspective on the Development of the Private Business Sector in China." MPIfG Discussion Paper 1112. Cologne: Max-Planck-Institu! rur Gesellschaftsforschung. Tsai, K. S. 2007. Capitalism without Democracy: The Private Sector in Contemporary China. Ithaca, NY: Cornell University Press. Tsui, A.S., Y. Bian, a,nd L. Cheng, eds. 2008. China's Domestic Private Firms: Multidisciplinary Perspectives on Management and Performance. Armonk: M.E. Sharpe. Wade, R. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton, NJ: Princeton University Press. Wagle, D.M., N. F. Gregory, and S. Tenev. 2000. China's Emerging Private Enterprises: Prospects for the New Century. Washington, DC: International Finance Corporation. Witt, M. A. 2010. "China: What Variety of Capitalism?" INSEAD Working Paper. 2010/88IEPS. Wong, J. 2004. "The Adaptive Developmental State in East Asia." Journal of East Asian Studies 4: 345-362. Wu, B. 2011. "Report on the Work of the Standing Committee of the National People's Congress." Fourth Session of the Eleventh National People's Congress, March 10. Accessed at http://www.gov.cnlenglish/officialho I I-031r 8lcontenC1 827230_5 .hun Wu, Y. 2004. "Rethinking the Taiwanese Developmental State." China Quarterly 117 (March): 91-II4Yang, D. 2006. Remaking the Chinese Leviathan: lVIarket Transition and the Politics of Governance in China. Stanford, CA: Stanford University Press.

SECTION I

EVOLUTION OF THE STATE SECTOR