New York: Oxford University Press, 2017. x, 272 pp. (Tables, graphs, maps.) US$29.95, paper. ISBN 978-0-19-068283-5.
Professor Yi-min Lin’s earlier monography Between Politics and Markets (Cambridge University Press, 2001) remains one of the best analyses of China’s first decade of enterprise reform. This new book is not so much a sequel as an expanded interpretation that covers another decade of reform, bringing us to the critical junction of global financial and economic crisis of 2008. Whereas his earlier book discussed the breakdown of the Soviet planned economy and pathways for converting state-owned productive assets into private legal entities, this book focuses on the enabling conditions for “the role of entrepreneurs and citizens-at-large in overcoming the obstacles to private ownership…” (4). These conditions have roots in structural trends in China’s demographic profile and fiscal federalism, and created constraints under the complex logic and unintended consequences of the expansion of market forces. The central agency in this book is subnational officials and state-appointed managers, as they take politically risky, private boundary-pushing initiatives “against the political will of the CCP leadership” (5).
Lin adopts an eclectic perspective that draws on the main variants of institutional analysis. Against path-dependency in historical institutionalism, his account introduces a diversity of outcomes and convincingly shows that both compliant and noncompliant actions from local agents can destabilize institutional order. From sociological institutionalism, Lin restates the core imperative of legitimation in terms of non-material cost to local agents in justifying rule-bending or rule-breaking. Lin’s analysis also casts critical insights into new institutional economics’ basic logic of a tradeoff between growth and revenue maximization. Lin argues that the Chinese state has been compelled to protect the private sector in order to meet employment and revenue objectives, which the state sector has increasingly failed to deliver. Political risk is discussed extensively in the empirical chapters, but the notion is under-defined and not strictly tied to the principal-agent theory. Competition between public and private enterprises within the same sector is the core logic of market expansion. However, a boundary-blurring perspective might emphasize the formation of a new social network and exchange relations between the two realms.
Chapter 4 examines careerism and moral hazard at the height of output expansion for a decade starting in the late 1980s. Blurred organizational and financial boundaries in government-business relations fuelled a mutually exploitative relationship that perpetuated the soft-budget constraint on one hand and over-extraction that reduced profitability on the other. As of the mid-1990s, SOEs were latecomers and had no obvious competitive advantage over TVEs and private firms, except in industries of natural monopolies. Marketization was proceeding in variegated pathways geographically and sectorally, and demographic and fiscal constraints on capacity expansion were fairly lax.
Chapter 5 analyzes the enabling conditions for local officials to initiate rule-bending in the implementation of privatization. In his case studies of several Wenzhou townships Lin demonstrates that a contentious and fragmented local political elite opened the door for self-promoting officials and private entrepreneurs to risk noncompliance with central guidelines on fiscal spending and privatization. Mapping out four pathways toward privatization, Lin shows how private firms had developed alongside the SOEs rather than taking over a declining public sector. In fact, strong SOEs invited competition and offered downstream supply chain opportunities for private firms. It would have been helpful to incorporate an explicit dimension of labour market and employment relations, in reference to the demographic factors in chapter 3.
The theme of rule-bending continues in chapter 6 with the analysis of bargaining relations in FDI. Local governments who were mandated to act as gatekeepers against incoming foreign investment and firms had sought short-term local economic benefits and particularistic rent-seeking opportunities, resulting in their neglect of ownership and regulatory controls which allowed over time the dominance of wholly foreign-owned enterprises over joint ventures. An interesting observation is that since the 1994 tax reform, localities that were either heavily dependent on central transfers and those that were strong fiscal contributors were in better positions to bargain with Beijing for flexibility in policy implementation, whereas those that were breaking even were expected to comply. I wonder if this is a causal relationship (running in what direction?), or if there are intervening or confounding variables such as factionalism that determine this curvilinear correlation between fiscal resources and propensity for rule-bending.
The year 1997 marked a critical juncture—Lin provocatively calls it the “end game”—for state divestiture. Other scholars have recognized the employment and financial pressures at this time, but equally important are exogenous shocks such as the flood of cheap imports from struggling neighbours in the aftermath of the Asian financial crisis. There were parallel movements of Beijing shedding SOEs via the “grasping the large and letting go of the small” campaign, and local officials dumping TVE liabilities en masse. Chapter 6 focuses on the latter group, but arguably central and local state strategic considerations are significantly different and at times are at loggerheads. I would have liked to hear more on whether rapid privatization actually alleviated the pressure of nonfarm employment, rather than contributing to it, even as it helped Beijing and centrally owned SOEs to cast off significant social service and welfare obligations—in the process causing more headaches for local officials.
The chapter offers two stand-alone analyses: one of insider privatization, in which Lin suggests that managers in collusion manipulated the debt-to-asset ratio upwards to justify insider privatization. This hypothesis deserves to be verified through case studies or additional datasets. The relatively light treatment of state ownership through asset management companies should be grafted onto the more extensive analyses by Barry Naughton and Margaret Pearson, who have injected a more critical view of the efficacy of State-owned Assets Supervision and Administration Commission in corporate governance and in the broader context of changing inter-ministerial relations and governance demands in specific strategic industries.
I would have preferred to see in the conclusion an extended analysis of structural changes since 2008. The phenomenon of “the state enterprises advance, the private sectors retreat” in the Chinese economy has been reinforced by President Xi Jinping’s recent political commitment to and policy protection for the SOEs. China has also seen an alarming drop in birth rates since 2016, one year after the lifting of the one-child policy, contributing to the rapid aging of the Chinese population. Fiscally, Beijing may have over-extended its ability to implement large stimulus packages to buffer the SOEs and financial markets from market shocks. Lastly, the big story of Chinese economic success has moved from foreign direct investment in China to one of overseas Chinese direct investment and the promise of external markets for growing Chinese firms. I am eager to hear Lin’s views on these new trends.
Kun-Chin Lin
University of Cambridge, Cambridge, United Kingdom