Cambridge, MA: Harvard University Press, 2012. xv, 431 pp. (Maps, graphs, tables, illus.) US$45.00, cloth. ISBN 978-0-674-05020-4.
In the book Capitalism from Below, Victor Nee and Sonja Opper ask what drove China’s post-Maoist economic transformation from a command economy to an emerging capitalist society. This ambitious study questions how the private sector was able to flourish throughout the transformative years when the government failed to provide entrepreneurs with economic resources or protection of property rights.
Nee and Opper’s impressive study offers a compelling account of how China’s emerging entrepreneurial class was able to decouple from the state-centric business model by developing a competitive market economy based on informal networks, social learning and the innovation of production models. Capitalism from Below takes the reader through the vast and complex world of informal networks and succeeds in showing the connection between the socio-economic importance of guanxi (relationships) and China’s modern economy.
The study begins by acknowledging the importance of China’s early economic reforms, which allowed for shifts in market allocation. Yet they suggest that a bottoms-up entrepreneurial spirit enabled the development of capitalist economic institutions. They focus on informal networks that self-organized and created clusters of producers, suppliers and distributors. For Nee and Opper, these networks are the origin of China’s competitive market economy as they developed information flows and cooperation between independent economic actors.
To show this the authors offer a useful Schelling diagram that outlines their theory of a multi-level causal model of institutional change. This is developed through a mixed-method research design that involved interviews, surveys and extensive fieldwork. The study’s findings are partially derived from a remarkable 711 interviews held in seven municipalities throughout the Yangzi Delta region. The authors worked with the Shanghai-based Market Survey Research Institute to identify interviewees in the manufacturing technology sector who were then selected using a stratified simple random sample.
Nee and Opper then build upon new institutionalism theory to explain China’s economic transformation. The authors draw on the work of Josef Schumpeter and Max Weber to highlight the social construction of bottoms-up capitalism. To survive China’s dysfunctional market economy, they argue that the private sector needed to “decouple” from state policy while maintaining legitimacy in the eyes of the Chinese Communist Party. They pay close attention to relationship-based lending that involved small loans between family and friends that allowed them to operate outside the state’s purview.
The sociological concept of isomorphism is then introduced as a pragmatic tool for explaining how entrepreneurs were able to adapt to China’s hostile economic environment. They write, “‘The dominant strategy throughout the reform period was to mimic already existing organizational forms generally perceived as legitimate, in order to limit the social and economic costs associated with decoupling from the established social and legal structure” (131). By mimicking the structure of established state-approved firms, private entrepreneurs became indistinguishable from public companies. This allowed the private sector to rapidly expand with tacit approval from the state.
The book then offers a perceptive account of the rise of industrial clusters that brought trust and cooperation between diverse entrepreneurs that enabled them to refine the region’s comparative advantage. Networks of trust along with an endless supply of migrant labour to the Yangzi delta region developed into a core economic institution that strengthened private enterprise. Pressures to innovate and stay competitive also encouraged private enterprise to develop human resource policies and an opportunity to break away from the traditional household business model. For Nee and Opper, China’s expansive labour market has thus emerged as a mainstay economic institution developed exclusively by the entrepreneurial class.
The final few chapters of the book are devoted to reinforcing the authors’ hypothesis. They write, “In sum, our evidence strongly supports our hypothesis that the effectiveness of social norms, beyond the shadow of the law … can provide robust mechanisms explaining cooperation within large social groups, thereby enabling dynamic economic development” (225). China’s entrepreneurial class has thus developed an endogenous competitive market built around a self-enforcing social structure that promotes economic innovation.
While the authors implicitly suggest that modern capitalism was an “unintended” outcome of the economic reforms instituted by the Party, they argue the government had no option but to later pursue wide economic accommodation and policy to accommodate private entrepreneurs. The government dependency on the private sector to provide economic growth has thus spurred deep relationships between officials and entrepreneurs. However, Nee and Opper are quick to clarify that while rent-seeking does occur on some level, the majority of private-sector actors do not receive long-term financial benefits from having relationships with the Party officials.
Although Nee and Opper provide an exceptional account on the role of entrepreneurism in post-Maoist China, the book is not without shortcomings. First and most strikingly, they glance over the role of the state and Deng Xiaoping’s economic reforms that set the economic conditions for entrepreneurs. Without the top-down motivation for decentralization and Beijing’s directive to empower local authorities, China’s entrepreneurial class may not have been able to develop competitive markets.
Second, the overtly positive image of China’s entrepreneurs detracts from many of the controversies associated with economies in transition. There is a substantial body of literature suggesting that China’s private sector is endemically corrupt while guanxi networks have become outlets of patronage. The reader is left wondering if such networks can also damage the entrepreneurial spirit.
Finally, the reader may ask what social and environmental impact entrepreneurs have when operating outside any regulatory framework. Interestingly, the study does suggest that entrepreneurs often do not follow state regulations such as the Labour Law. Of course, the long-term social costs are beyond the scope of this study yet acknowledging the controversy may have balanced the seemingly favourable opinions the authors hold towards the entrepreneurial class.
Capitalism from Below should be considered mandatory reading not only for China specialists but also those looking to understand how the private sector complements innovation in transition economies. Nee and Opper convincingly show how personal networks and a critical mass of resilient entrepreneurs can bring about policy shifts in emerging markets. This book is not to be missed.
Robert J. Hanlon
Thompson Rivers University, Kamloops, Canada