China’s bureaucratic capitalism: creating the corporate steel sector
By the 1980s the flaws of Soviet-style central planning, and in particular the problems of the state socialist firm, were already clear.1 The remedy also seemed clear. First, a procurement system that guaranteed sales of all output must be jettisoned in favor of a system of market allocation, which would put competitive pressures on firms for the first time. Second, firms should be given an incentive to produce efficiently (rather than hoard labor and supplies) by permitting them to retain profits. These retained profits-and not state subsidies-would become the source of wages, executive compensation, and welfare expenditures. Third, the “paternalistic” relationships between the state and the firm must be ended. The “regime of bargaining” whereby the bureaucrats who ran large state firms extracted concessions from planners in terms of taxes, investment, and concessionary loans, largely through lobbying in the halls of power, must be ended (Kornai 1980, 1992). This last crucial condition was the most difficult of all. It was widely recognized that state firms and their government minders were in a situation of “dual dependence”—the state depended on the firms for output, revenues, employment, and welfare provisions, while the firms depended on the regulatory and tax concessions and financing that permitted them to succeed. One school of thought-represented by the architects of Hungary’s “New Economic Mechanism” of the 1970s, and China’s enterprise reforms of the 1980s which were deeply influenced by the Hungarian experience-was to gradually unleash market forces, but retain state ownership of firms. A second school of thoughtarticulated first by the influential Hungarian economist Janos Kornai and later by many Western economists who advised post-communist governments after 1989-insisted that the “mutual dependence” and “regime of bargaining” that undermined firm efficiency could not be changed significantly so long as state ownership was maintained (Kornai 1990). Early reforms in China in the 1980s, which were closely patterned after the Hungarian model, exhibited many of the same problems (Steinfeld 1998; Walder 1992a). Kornai argued persuasively that so long as the state owned the firm, government officials would always feel pressured to bail them out, or provide favorable circumstances to permit them to succeed. This, he argued famously, was a “soft budget constraint” that would eventually undermine any effort to place market pressures on firms. He spoke
with great authority, because he could point to the ultimate failure of such reform in Hungary in the last years of communist rule (Kornai 1986). The question, then, became privatization. Was it really necessary, and if so, how should it be carried out? In the years since 1989 there have been three broad approaches to the problem. The first is the post-Soviet experience. In former Soviet republics, especially Russia and Ukraine, the collapse of the Soviet partystate and its ensuing administrative disarray permitted incumbent state enterprise managers and planning officials to consolidate control over their enterprises. As the structures of the Soviet party-state collapsed, Russian managers seized de facto control over their firms, and in a process described as “spontaneous privatization,” aided by the distribution of majority shares to employees, were able to assert control over the vast majority of state assets and resist control by outsiders who might restructure and downsize their operations (Åslund 2007; Blasi, et al. 1997; McFaul 1995; Shleifer and Treisman 2001). A second approach is the one taken in Poland and other post-communist electoral democracies on the borders of Central Europe. State enterprises were more slowly and systematically restructured and privatized by state agencies in conformity with prevailing international standards. This was part of an explicit aim of post-communist leaders to follow a model that provided prosperity and security in the European Union (Appel 2004; Hanley, et al. 2002; King and Sznajder 2006; Sachs 1993). Neither course was followed in China, where the leadership of an intact party dictatorship, committed both to its own survival and the revitalization of its economy, explicitly rejected the privatization of large state firms and maintained a rhetorical commitment to socialism in the context of market transition. China’s approach to this question since 1990 has revealed dimensions of reform that were scarcely considered in the 1980s. China no longer follows the same course pursued in Hungary in the last decades of communism. Instead, on the one hand, thousands of smaller state enterprises have been closed, merged, or privatized. On the other hand, the larger firms have been retained under state ownership, in many cases merged into even larger corporations, but restructured in other ways that are quite radical (Leng 2009; Oi 2011; Oi and Han 2011; Jung 2011; Walter 2011). These restructurings alter the boundaries of the traditional state socialist firm, indeed its very definition. Discussions about reform in the 1980s took for granted that the “firm,” or “enterprise” had to be granted greater autonomy. But what, after all, is the “firm”? Should the “firm” have the same boundaries as the companies that existed under state socialism? Should the independent plants of the socialist era maintain their identity and autonomy, or should they be merged into even larger corporations or “groups”? Should the boundaries of the “firm” include the housing estates, schools, clinics, and day-care centers of years past, or should these be carved out and put under the jurisdiction of local governments? Should the accumulated pension obligations, formerly funded directly out of current sales revenues, be shifted to other entities, and taken off the books of a restructured corporation? The Chinese approach has raised all of these issues, which were not even on the radar of the early reform agenda.