Ithaca; London: Cornell University Press, 2012. xviii, 212 pp. (Figures, tables.) US$39.95, cloth. ISBN 978-0-8014-5062-4.
This work adds to a handful of political science studies on China’s rural credit and fiscal systems, a crucial but under-researched area. In highlighting the significance of the subject, scholarly characterization of rural China goes from that of a prime example of rapid industrialization and affluence (largely up until the mid-1990s) to an area of myriad socioeconomic malaises that have aggravated systemic instability in recent years. In both scenarios, the rural credit system and financial institutions play an indispensable role. The volume’s two main research questions examine their roles under two distinct causal designations. Focusing on the peculiar pattern of loan allocation by rural credit cooperatives and rural cooperative foundations (RCCs/RCFs), the leading rural financial institutions, chapters 2 to 4 explore how various political institutional factors along a specific historical path interact to favour allocations to local government enterprises and projects instead of to agricultural development programs—which are supposed to be RCCs/RCFs’ chief beneficiaries. Alternatively, chapters 5 and 6 treat rural financial institutions mainly as a background factor in an attempt to answer why rural industrialization succeeds in certain locales but not in others. These two inferences lead to useful findings that also generate vital theoretical dialogues, while leaving some other key issues unaddressed.
The inference about the first research question revolves around the institutions shaping the incentives of local governments in China. Chief among them, as the book argues persuasively, are the cadre evaluation system, which prioritizes indicators reflective of economic growth, and the central-provincial fiscal scheme, which since 1994 has augmented the coffers of the centre at the cost of the provinces. To take a broader look beyond the scope of this book, this logic of institutional incentive makes sense not only for RCCs/RCFs in China, but also their counterparts elsewhere. For instance, the savings and credit department of farmers’ associations in Taiwan, a democratic system, is also strongly driven by political considerations in credit supply; during both local and national elections, they are often the most reliable institutional provider for campaign funding accessible to particular candidates. During other periods, however, they remain devoted primarily to agricultural development and farmers’ needs, while RCCs/RCFs in China do not.
Hence, explaining why RCCs/RCFs, established in the first place to serve their depositors, do not do so is perhaps even more consequential than explicating what they actually do. Specifically, at least three puzzles stand out in this regard: why has the centre remained unable to rectify RCCs/RCFs and harden their soft budget constraint, as well as alter their credit allocation, despite its repeated bailouts intended to induce local governments’ compliance? Why have RCCs/RCFs been immune from privatization and thus running until now without an effective structure of corporate governance, while most SOEs and TVEs in the nation have undergone varying degrees of privatization since the mid-1990s? And most importantly, why have peasants adhered to RCCs/RCFs as the main depository, despite waves of crises that explicitly revealed the risks? To be sure, these queries point not only to the complexities beyond the book’s diagnosis of RCCs/RCFs’ pathology of being “too big to fail,” but also to the roots of that pathology.
The analysis for answering the second research question concentrates on the effects of two independent variables: whether local industrialization is led by local government or by the private sector and a given locale’s proximity to urban markets and transportation linkages. By comparing five locales scattered among coastal and inland regions, Ong discovers that the locales close to urban centres, whether driven by the government or private sector, attain prosperity. Yet the locales without such an advantageous geographical location, all of which happen to be government-led cases, perform poorly (chapters 5 and 6, and figure 1.7).
This research finding seems to lend more support to a market-driven growth model counting on private firms than otherwise. It also provides critical qualifications for the validity of local state corporatism in China, a theoretical perspective stressing the merits of government-led developmental strategy. By and large, the comparative methodology strengthens the case for a more general application of the findings, compared to the bulk of extant literature debating the developmental role of local government in China.
The overall consistency and rigour of the findings, however, warrant reassessment. The mobilization of rural financial resources through RCCs/RCFs serves analytically, as mentioned above, as a common background in comparing the locales, instead of as a factor with variances among them leading to diverse pathways and outcomes for local industrialization. The case studies do not really exhibit how the government-led and market-driven allocation of rural credits for firms operates in divergent ways to affect economic performance. This renders the entire analysis on the book’s second research question without a meaningful correlation to that of the first one. The two development models, in addition, are in fact not logically and empirically mutually exclusive. The two models appear to conflate government intervention with public ownership, and market mechanisms with private ownership. Yet private vs. public ownership and government intervention vs. market coordination correspond to two distinct dimensions in property rights. The conceptual matrix stemming from the two dimensions gives rise to four possible models. For example, government-led local development may thus arise in conjunction with principally private ownership, such as the model in Guangdong’s Shunde following sweeping local privatization in the mid-1990s, which is not included among this book’s cases.
This brings us to the next issue. To sort out the causality of the two independent variables—local development model and geographical location—it is necessary to look into four types of cases in the 2´2 matrix. Yet the study covers only three of them and misses the private firm domination distant from urban centres, without telling us why. This shortage leaves in question the internal validity of the present finding, where all the locales marked by private firms prosper, and geographical location determines whether a locale marked by government ownership thrives or perishes. If the locales from the missing category are predominantly wealthy, then the development model overrides causally geographical location, with greater causal assuredness than the findings show. Otherwise, it is only the location rather than the development model—and thus the pattern of rural credit allocation—that matters.
S. Philip Hsu
National Taiwan University, Taipei, Taiwan
pp. 843-845