Where's the Government?
This is one of five essays in the book review roundtable on Nicholas R. Lardy’s Markets over Mao: The Rise of Private Business in China.
Joseph Fewsmith is Professor of Political Science and International Relations at the Frederick S. Pardee School of Global Studies at Boston University. His most recent book is The Logic and Limits of Political Reform in China (2013).
This is one of six essays in the book review roundtable on Nicholas R. Lardy’s Markets over Mao: The Rise of Private Business in China.
In his new book, Markets over Mao: The Rise of Private Business in China, Nicholas Lardy takes on those who argue that China has developed a form of state capitalism that is directing and steering Chinese development. To the contrary, Lardy argues that Chinese development has been market-driven, not only in the 1980s as rural and urban markets were liberated from the restrictive policies of the Maoist era but also during the Hu Jintao and Wen Jiabao era when the creation of the State-owned Assets Supervision and Administration Commission (SASAC) and the high profitability state-owned enterprises (SOE) enjoyed in the early 2000s brought cries of “the state advances as the market retreats” (guojin mintui). Lardy argues the obverse: namely, that markets have continued to expand and the state has retreated. Today, SOEs account for about a quarter of industrial production and only 13% of urban employment (pp. 76 and 82). Lardy estimates that private enterprises employ 183 million urban workers, about two-thirds of all urban employment (pp. 83–84).
Much of Lardy’s argument is convincing (and I am not going to argue economics with him), but it is less so when he discusses the role of the government. He disagrees with Steven Green’s assessment that “China has a large and powerful government sector” (p. 138). Interestingly, Wang Jianlin, China’s richest entrepreneur, agrees with Green. A recent article in the New York Times quotes Wang as saying, “It’s a fact that China’s economy is government-led, and the real estate industry depends on approvals, so if you say you can ignore the government in this business, I’d say it’s impossible.” 
In looking at the role of the party-state, it is useful to start with the definition of “private.” As an economist, Lardy is primarily interested in whether the dominant ownership of enterprises is state or private. By this measure, Lardy estimates that the private sector, including privately owned foreign firms, generates about 60% of China’s industrial output. He recognizes that this figure may overestimate the role of the private sector somewhat because “there must be some firms where the extent of the government’s de facto control exceeds its ownership share” (p. 71). He also regards all agricultural production as private (p. 62). Although these assumptions seem reasonable, it is not clear how “private” private is. For instance, in the agricultural sector, the lack of private land ownership means not only that farmers cannot buy and sell land but also that they cannot mortgage their land to raise capital to start urban businesses. More important, local authorities often feel free to requisition land, giving farmers minimal compensation, in order to attract investment. So there are real limitations on the ability of farmers to control their supposedly private farms. 
Moreover, in the manufacturing sector, large private firms now often have party branches, and the party secretary, usually hired from outside the firm, is generally well-paid and often sits on the board of directors. This seemingly odd arrangement often works to the advantage of both the state and the enterprise. Party secretaries, many of whom worked previously in the government, can lobby the government for necessary permissions. In a polity in which the approval process remains extremely important (as Wang Jianlin, above, reminds us), this relationship is critical for the development of private enterprises. For the government, the expansion of the party into the private realm reflects a continued refusal to acknowledge a legitimate line dividing state and society as well as a continuing distrust of the private sector, despite all the studies that have shown that private entrepreneurs would rather be close to government than push for political change. 
Moreover, the government has been important in both stimulating and retarding economic development over the years. It was a government rethink of rural policy that brought about the household responsibility system in the late 1970s and early 1980s, and the annual Document No. 1 on rural policy that pushed those developments forward. Although land remained collectively owned (a largely ideological impediment to thoroughgoing privatization), these policies freed millions of peasants from the constraints of the old commune system (as Lardy recognizes, p. 60). Labor flowed into new township industries, local transportation, and long-distance peddling as peasants scoured out cheap products that they could sell for a profit in other markets. These were the results not simply of the market pushing against the state, but rather of the state promoting marketization. Similarly, the expansion of markets in the urban, industrial areas was not a given but was something fought for, often by drawing in foreign expertise, over many years. 
One reason the state, particularly the local state, pushed economic reform was because the development of markets and private enterprises—or market-oriented government-owned enterprises such as the township and village enterprises (TVE) of Sunan (southern Jiangsu Province)—boosted the local economy, provided jobs for workers (preserving social stability), and, lest we forget, boosted income, both licit and illicit, for local officials. The word “corruption” is not listed in the index to Markets over Mao, but it is clearly a part of the story. I would argue that it played a positive role in those first few years of reform and an increasingly negative role as the years have gone by.
The importance of government support for marketization was reflected when that support was removed briefly following Hu Yaobang’s ouster in 1987 and again after the Tiananmen crackdown in 1989. Local economic growth in Wenzhou, the hotbed of the private economy, fell to zero in 1989. Premier Li Peng was highly skeptical of TVE development and that skepticism was reflected in lower growth rates for TVEs and private business in the following months. Conversely, it was after Deng Xiaoping’s tour of the south in early 1992 when privatization really took off. 
The importance of government has also been reflected in who has been purged during the ongoing campaign against corruption. Of the 61 ministerial-level cadres detained for investigation as of March 1, 2015, 17 worked in the National Development and Reform Commission (NDRC) or its provincial-level counterparts. The most prominent of these targets was Li Tienan, who was deputy head of the NDRC and concurrently served as head of its Energy Bureau. Five of his co-workers in the Energy Bureau were subsequently detained. Five others who were investigated for corruption worked in the Price Bureau. Though it may be that most prices follow the market, the government retains control over important prices such as water and electricity, giving enormous incentive to would-be bribers. As Liu Tienan said himself after he was detained, the enormous concentration of power in the hands of those with authority to approve projects provided a hotbed for corruption.  This cleaning out of the NDRC may well be a prelude to another round of marketization, as called for by the Third Plenum in 2013, but the need to clean up the NDRC and its counterparts at the local level suggests that the government has, at least until the present, continued to play an important role in directing development.
It is, of course, not only the NDRC that has proved corrupt but also the government at all levels. As one former official said, “Become a small section chief, without spending money? Show me. If he really has that ability, I’ll call him my daddy.”  And because government officials have needed to purchase promotions, the money has had to come from private enterprise. In return, the government provides permits and favorable policies. This close relationship between the party-state and enterprise has been particularly on display in Shanxi Province, where mine owners regularly gave generous gifts to local officials, many of whom have since been detained in the crackdown on corruption. 
It has been suggested that in places where law is weak, corruption arises to provide predictability. No doubt that predictability has underlain the marketization and privatization that Lardy discusses, but corruption in the long run is more expensive and less certain than law. At this year’s National People’s Congress, one person confessed that he had offered the former vice chair of the Central Military Commission, Xu Caihou, 10 million renminbi for a promotion, but someone else had secured the promotion with 20 million renminbi.  No doubt the same thing happens in the economy. One person wants a particular piece of land or approval for a project, but somebody else wins the approval not through market competition but rather through personal connections or a higher bribe. Such uncertainty ultimately undermines the legitimacy of the political system, which is one reason Xi Jinping is carrying out his campaign against corruption.
Interestingly enough, a whole body of literature, both in Chinese and in English, is based on the notion that government can be effective in stimulating the economy. According to this literature, officials are evaluated on the basis of how they will develop the economy they are in charge of. If it is really just market forces driving development, then this whole body of literature needs to be rethought.
Another measure of the strength of government is the weakness of the NGO sector. China has some 280,000 officially registered NGOs and probably many times that number of unofficial NGOs. No doubt Chinese society benefits from these NGOs in a variety of ways, but they have not developed into the sort of independent civil society that many hoped for. This is largely because the party-state remains strong, and any efforts to move beyond the permissible parameters as defined by the state are met with repression. The NGO sphere may be a long way from the economy, but its weakness suggests that the scope of the “private” remains largely defined by the state. 
I have no doubt that Lardy’s data is correct. But without the politics, the implications of this data for understanding how China’s political economy works are less clear.
 Wang Jianlin, quoted in Michael Forsythe, “Wang Jianlin, a Billionaire at the Intersection of Business and Power in China,” New York Time, April 28, 2015, http://www.nytimes.com/2015/04/29/world/asia/wang-jianlin-abillionaire-at-the-intersection-of-business-and-power-in-china.html?_r=0.
 Barry Naughton has noted that the government recently introduced a third category of rural rights, “land management rights,” that may ameliorate some of these problems. See Barry Naughton, “Is There a ‘Xi Model’ of Economic Reform? Acceleration of Economic Reform since Fall 2014,” Hoover Institution, China Leadership Monitor, no. 46, Winter 2015, http://www.hoover.org/sites/default/files/research/docs/clm46bn.pdf.
 Joseph Fewsmith, “China’s Political Ecology and the Fight against Corruption,” Hoover Institution, China Leadership Monitor, no. 46, Winter 2015 u http://www.hoover.org/sites/default/files/research/docs/clm46jf.pdf.
 “Tanguan leiren yanlun: Buhuaqian nengdang xiaokezhang, neibenshi wohanta daye” [“Corrupt Official’s Thunderous Words: Be a Small Section Chief without Spending Money, If He Has That Ability, I’ll Call Him My Daddy”], Ifeng, July 6, 2011 u http://finance.ifeng.com/news/pic/detail_2011_06/07/6862510_0.shtml.
About Asia Policy
Asia Policy is a peer-reviewed scholarly journal presenting policy-relevant academic research on the Asia-Pacific that draws clear and concise conclusions useful to today’s policymakers. Asia Policy is published quarterly in January, April, July, and October. Learn more